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IMF Recommends No More French Tax Hikes

by Ulrika Lomas,, Brussels

08 August 2013

Following the conclusion of its Article IV consultation by the International Monetary Fund (IMF), it was recommended that France should concentrate all of its fiscal consolidation in 2014 on spending cuts, and not on any further increases to taxation.

It was pointed out that the pace of fiscal consolidation in France was accelerated further in 2013, with a structural adjustment equivalent to 1.8 percent of gross domestic product (GDP), which comes after an adjustment of 2.2 percent of GDP over the previous two years. The IMF has projected that France's fiscal deficit will decline to 3.9 percent of GDP in 2013, from 4.8 percent in 2012.

However, it was also noted that about 90 percent of the adjustment to date has been realized through measures to increase revenue, whereas IMF staff had previously suggested a more balanced distribution of the effort. Tax measures have, in fact, raised the overall tax burden in France to 46 percent of GDP, one of the highest levels in Europe.

While the Stability Program of April 2013 has targeted an easing of the pace of adjustment starting in 2014 and a rebalancing of fiscal adjustment efforts toward expenditure containment measures, the IMF again stressed that, with tax burdens already at such a very high level, such a rebalancing is critical, particularly in social security and local spending where there appears to be room for improved efficiency.

Under the 2013 Budget, tax measures were expected to contribute 1.4 percent out of a 1.8 percent fiscal deficit reduction, with spending cuts supplying the remainder. In all, the rapid fiscal consolidation of 2011-13 has relied heavily on revenue measures, with a projected increase in the tax-to-GDP ratio of 3.7 percent over the three years. Over the same period, expenditure growth was also reduced considerably, but the ratio of structural spending to GDP has declined by only 0.3 percent.

Under the new Stability Program, the expected 1 percent structural adjustment in 2014 would remain substantial, with a proposed 70 percent contribution from expenditure containment and 30 percent from revenue measures. The IMF felt, however, that a perceived risk that taxation will increase further appeared to be one of the factors holding back spending by households and enterprises.

Therefore, the IMF recommended an easing of the pace of that fiscal consolidation next year relative to the Stability Program, in order to support the uncertain economic recovery. It suggests that only the 70 percent expenditure containment is retained, and any tax increases eliminated. The foregone adjustment in 2014 (0.3 percent of GDP) would be "relatively small and would be recovered by maintaining a steady pace of structural adjustment over a longer period of time than envisaged under the Stability Program."

TAGS: tax | economics | fiscal policy | budget | International Monetary Fund (IMF) | social security | France | Europe

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