IMF Urges French Fiscal Consolidation

by Mike Godfrey, Tax-News.com, Washington

02 August 2010

In its Article IV consultation with France, the International Monetary Fund (IMF) approved of the fiscal stimulus given in 2009-10 with a special mention of the abolition of the local business tax. However with sharply increased public debt, it thought the focus should now be on a significant and credible fiscal consolidation.

The IMF described French government's suppression of the controversial local business tax (taxe professionnelle, TP), as part of the stimulus measures targeted at boosting competitiveness and growth, especially for SMEs. The TP used to be levied on the value of the fixed asset base of companies, namely property (that would still be taxed but under a different name) and capital equipment (abolished).

The IMF said the result was that investment suffered, especially in the industry, energy and transport sectors, which contributed about two-thirds of the total revenues generated by the tax. Over the past years, France had already made some concessions to certain types of business, exempting artisans, farmers as well as rural and urban development zones, had introduced an exemption for new capital investment, and had added a cap on tax increases for larger companies.

TP was one of three local taxes that fund local government services in France. In 2007, TP amounted to 1.5% of GDP, as compared to the respective revenues of 1.1% and 0.8% of GDP from the property tax (the taxe foncière, TF) and the residence tax (the the taxe d’habitation, TH).

The proceeds from TP were split between local governments (0.9% of GDP, of which about 0.3% came from the central government to substitute for TP exonerations), departments (0.45% of GDP), and regions (the remaining 0.1% of GDP), said the IMF.

The IMF said central government had pledged to shelter the local governments from any revenue loss due to TP reform. After being compensated in 2010, local authorities would be assigned revenues from several other taxes, many with a less volatile base than provided by capital investment under TP.

The IMF expected TP revenue loss to be offset by a combination of quotas from the property tax on enterprises (cotisation foncière des enterprises, CFE) and VAT (cotisation sur la valeur ajoutée des enterprises, CVAE). The CVAE progressive rates will range from zero to 1.5%, depending on turnover.

Large energy, telecommunications, and railway companies will pay an additional lump-sum levy. For the central government, losses are projected to phase out gradually, according to the IMF, in line with the widening tax base for the corporate income tax.

The IMF commended plans to reduce the overall fiscal deficit to 3% of GDP by 2013 and welcomed the continued spending restraint by central government and the nominal freeze of transfers to local governments.

However, the IMF thought France’s consolidation program was based on the overly optimistic assumption that annual growth would increase to 2.5% in 2011–13, an assumption that France will revise in upcoming growth projections. The IMF's own baseline scenario, excluding measures that still need to be legislated, show an appropriate decline of the overall deficit to about 6% of GDP in 2011, but that it will remain at about 4% of GDP by 2013.

The IMF thought additional efforts to reduce the overall deficit to the target of 3% of GDP by 2013 should aim to limit detrimental effects on growth and include implementation of the announced reform of the pension system; implementation of effective spending ceilings in health care; and strict containment of local government spending.

In parallel, the IMF stressed the importance of broadening the VAT and the corporate income tax bases as well as the introduction of a carbon tax coordinated at the European level.

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