France: Staff Concluding Statement of the 2019 Article IV Mission
IMF News, June 3, 2019
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- Published: June 3, 2019
Key messages and overview
- France’s growth has slowed but remains resilient and job rich, in part reflecting important labor-market and tax reforms implemented in recent years.
- Structural challenges persist: high public and private debt, still high structural unemployment, sluggish productivity growth, and inequality of opportunity.
- Building on the government’s agenda, reforms must continue to address long-term challenges and bolster resilience to shocks; social consensus around reform priorities is essential.
Context and macro outlook
- Recent reforms: important labor-market and tax reforms legislated to support investment, jobs, and growth.
- Labor market outcomes:
- Employment rate reached a ten-year high.
- Permanent work contracts increased.
- Unemployment rate declined to 8.7 percent at end-March 2019.
- Growth projections and risks:
- Growth is expected to reach 1.3 percent this year and stabilize at around 1.5 percent in the medium term.
- Risks have increased: trade tensions, an uncertain Brexit outcome, possible renewed tensions inside the Euro Area, weaker-than-expected growth in Europe, and erosion of public support for reforms in France.
- Fiscal and social context:
- Fiscal deficit declined to 2.5 percent of GDP last year.
- Public spending relative to GDP is the highest in Europe.
- Public debt has risen from around 20 to close to 100 percent of GDP.
- Private debt has also risen in recent years.
- Persistent concerns: elevated structural unemployment—especially for the youth, low-skilled, and non-EU immigrants—unequal educational and training opportunities, and inequality of opportunity.
Safeguarding fiscal sustainability and public-sector efficiency
- Current fiscal assessment:
- While low interest rates reduce immediate risk, the elevated debt level provides little comfort for the medium and long term.
- France’s public debt trend: increasing since the 1980s from around 20 to close to 100 percent of GDP today.
- Required consolidation:
- An ambitious structural consolidation effort is needed to place debt on a firm downward path.
- A structural primary fiscal effort of some ½ percent of GDP per year during 2020-23 could reduce debt by close to 10 percent and bring the structural fiscal balance to its medium-term objective by 2023.
- For next year’s budget, consolidation measures should both offset the April relaxation measures and materially reduce the deficit.
- Spending-side priorities to reconcile priorities with debt reduction:
- Rationalize public spending and increase efficiency to finance planned tax reductions and targeted investment (skills, environment, digitalization, innovation).
- 2018 spending containment is noted as a welcome step.
- Specific reform measures to underpin consolidation and efficiency:
- Civil-service reform: streamline and improve flexibility and efficiency; target an ambitious decline in the workforce through attrition, especially at the local government level, to generate medium-term savings.
- Pension reform: unify existing pension systems under one scheme with common rules; consider accelerating the planned increase in the effective retirement age and linking it to life expectancy to safeguard long-term sustainability, improve intergenerational equity, boost labor-force participation, and generate fiscal savings.
- Unemployment-benefit reform: revise rules to calculate and cumulate benefits and reduce the maximum benefit level to generate fiscal savings, improve fairness, and incentivize work.
- Additional reform areas where spending is high relative to peers:
- Further rationalize tax expenditures and subsidies in selected areas (transport, housing).
- Streamline health costs (medical products, hospitals, outpatient centers) while protecting public health services and R&D spending.
- Improve allocation of educational spending among different levels (from secondary to primary and tertiary).
- Better target social benefits and streamline administrative costs (family, housing).
- Merge small municipalities and eliminate overlaps between local and central government functions to generate efficiency gains.
Supporting inclusive growth: employment and productivity
- Problem statement:
- High structural unemployment and inequality of opportunity weigh on living standards and create societal disparities across regions and vulnerable groups.
- Policy focus:
- Full implementation of recent and planned labor-market reforms is crucial.
- Recent legislation: labor-code, apprenticeship, and professional-training reforms to increase labor market flexibility and opportunities for vulnerable groups.
- Implementation priorities: facilitate decision-making on extensions of branch agreements, finalize the electronic training app, and regulate training centers.
- Monitor reform effects and be ready to adjust if outcomes fall short.
- Product and service market liberalization:
- Implementation of recent railway reform, the PACTE law, and upcoming measures to liberalize personal transport (auto schools, parts) and online sales of medicines will spur competition, entrepreneurship, and innovation.
- Further efforts to foster competition in regulated professions (accountants, lawyers, architects), sales (pharmacies), and retail distribution (authorization and registration requirements) would support lower prices and higher productivity.
- The combination of labor and product market reforms can create virtuous synergies to boost living standards.
Bolstering the financial system’s resilience
- FSAP findings and progress:
- Important progress made: unification of supervision and resolution under the European framework, establishment of the High Council for Financial Stability, implementation of the Banking Resolution and Restructuring Directive and Solvency II.
- Banks have improved capital positions and asset quality; banks and insurers’ balance sheets are presently resilient to simulated stress scenarios.
- Three policy priorities identified:
- Further integration of conglomerate-level monitoring and oversight:
- France’s key banks are systemic, globally active, and interlinked with insurance and asset management institutions via financial-conglomerate structures.
- Common guidance, reporting, and stress testing at the conglomerate level can help ensure risks are identified and addressed.
- Preemptive management of cyclical risks:
- To address rising private debt, particularly by corporates, authorities have reduced the large exposure limit to indebted corporates and increased the countercyclical capital buffer (CCyB).
- Authorities should evaluate the effectiveness of these measures, continue to monitor risks closely, and be ready to further use macro and micro-prudential policies if needed (including a systemic risk buffer, other capital measures calibrated to corporate exposure, or adjusting the CCyB).
- Further reducing the tax bias favoring debt rather than equity financing could help limit leverage.
- Maintaining adequate liquidity management and buffers:
- Aggregate bank liquidity buffers appear adequate, but authorities could consider additional liquidity buffers in all currencies to minimize risks from potential disruptions in wholesale funding during severe shocks.
- Bancassurance liquidity-risk management requirements could be strengthened.
- Common supervisory guidance on liquidity-risk management within financial conglomerates is desirable, including for asset-management operations.
Conclusions
- Continued reform momentum is needed across fiscal policy, labor markets, product and service markets, and the financial sector to address structural challenges and bolster resilience.
- Social consensus on reform priorities is essential to ensure success and to benefit all citizens and future generations.
- The mission thanks the authorities for their constructive policy dialogue and kind hospitality.
France: Staff Concluding Statement of the 2019 Article IV Mission — IMF Communications Department, June 3, 2019.