FRANCE: Clean break needed to stop worsening public finances

 

By OECD authors Peter Jarrett, Hervé Boulhol and Balázs Égert, for Bloomberg


11-04-2011 - A new OECD report on France argues that, despite a pick-up in growth to 2% or more in 2011, the recent recession is likely to leave lasting traces on public finances and employment, accentuating existing structural weaknesses. Ever since 1980 the government debt-to-GDP ratio has trended upwards. The government’s fiscal consolidation plan will stabilise debt (Maastricht definition) at below 90% of GDP by bringing the deficit down steadily to 2.0% in 2014. But the deficit should be eliminated entirely in the medium term to ensure a sustained decrease in the debt to GDP ratio. In any case, the government should now announce specifically how it intends to achieve its medium term objectives. The report argues that structural reforms are key for successful consolidation and hikes in growth potential.

Figure 1. A persistent budget deficit and steadily rising government debt


First, the budgetary framework should be strengthened as the current set-up (including spending rules for central government and social security) did not prevent persistent deficits in the past. A cyclically-adjusted deficit rule, a more detailed multi-year budgeting framework and an independent fiscal council would improve fiscal discipline.

Second, deficit reduction should focus primarily on the spending side. Boosting government efficiency by and reconsidering spending programmes that are not cost effective can yield substantial savings. While the 2010 pension reform is a serious step forward, further changes are needed to maintain the system’s long-term sustainability. For example, the contribution period should be linked automatically to life-expectancy gains, and the complexity of the system should be streamlined and transparency enhanced. Even if the quality of the French health-care system is good, substantial savings could be made without impairing performance, such as by reducing hospitalisation and administrative costs and expanding use of generic drugs and capitation-based physician compensation.

Third, the tax structure should be rendered more conducive to growth. Priority should be given to environmental taxes and levies that minimise tax-induced distortions, including property taxes and VAT. Tax bases should be expanded and inefficient tax expenditures (including reduced VAT rates) scaled back.
Better employment outcomes would greatly ease the pressure on public finances by lowering unemployment benefits and raising tax revenues. Compared to the average OECD country France lacks 1.5 million jobs for its under 25s and over 55s. The main labour market weaknesses are: an onerous level of labour taxation, a high minimum wage; substantial segmentation of employment contracts, which hampers the economy’s ability to adapt to shocks and spreads the burden of necessary adjustments unevenly; the poor quality of labour/management dialogue and inadequate trade union representativeness; and still underdeveloped active labour-market measures. France could continue to draw inspiration from Denmark’s experience with “flexicurity”, which combines generous unemployment benefits and greater access to training and job search support in exchange for limited employment protection (few barriers to lay offs) and a strict obligation to accept job offers.

Besides labour-market reforms the government is right to be putting the accent on the supply of output. It should go further by further freeing up education and eliminating barriers to the regulated professions, to SME growth and business entry in the distribution sector.

Figure 2. Main weaknesses of the French labour market

Economic Survey of France 2011

 

 

 

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