COUNCIL OPINION

of 14 March 2006

on the updated stability programme of France, 2005-2009

(2006/C 82/04)

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community,

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies(1), and in particular Article 5(3) thereof,

Having regard to the recommendation of the Commission,

After consulting the Economic and Financial Committee,

HAS DELIVERED THIS OPINION:

(1) On 14 March 2006 the Council examined the updated stability programme of France, which covers the period 2005 to 2009.

(2) French GDP growth was over the last 10 years close to the euro-area average at 2,3 %. Since 1998 it was about half a percentage point higher, sustained by relatively buoyant domestic demand. Despite the relatively good performance over this period, the employment rate increased only slightly and the unemployment rate remained high, although it recently diminished, from 10,2 % in March 2005 to 9,5 % in January 2006. Following a record deficit level of 6 % of GDP in 1993, the budgetary situation improved and the 3 % of GDP Treaty reference value was respected from 1997 onwards. However, the reference value was breached again from 2002 onwards as the budgetary situation deteriorated, which was partly due to the slowdown in growth. Since 2004, the deficit ratio has been declining.

(3) On 3 June 2003, the Council decided that France was in excessive deficit and recommended based on Article 104(7) that the excessive deficit be corrected by 2004. In its Communication to the Council of December 2004 on ‘the situation of Germany and France in relation to their obligations under the excessive deficit procedure following the judgement of the Court of Justice’, the Commission concluded that 2005 should be considered as the relevant deadline for the correction. In January 2005, the Council concurred with this view. In its opinion of 17 February 2005 on the December 2004 update of the stability programme, covering the period 2004-2008, the Council invited France to do the necessary to ensure the correction of the excessive deficit in 2005 and the continued budgetary consolidation thereafter and to implement structural reforms and control expenditure in order to secure the respect of the multi-annual expenditure targets.

(4) As regards budgetary implementation in 2005, the general government deficit was estimated at 3,2 % of GDP in the Commission services' autumn 2005 forecast, against a target of 2,9 % of GDP set in the previous update and 3 % of GDP in this update. Despite less favourable macroeconomic conditions compared to the previous programme, recent partial information suggests that the deficit in 2005 is likely to have been reduced to around 3 % of GDP notably thanks to better control of public expenditure, a strong performance of non-fiscal receipts and taxes based on asset prices, and additional revenues in end-December linked to a change in the corporate tax legislation. It should also be noted that the deficit reduction in 2005 included substantial one-offs.

(5) The programme broadly follows the model structure and data provision requirements for stability and convergence programmes specified in the new code of conduct(2). The update was submitted 6 weeks beyond the 1 December deadline set in the code of conduct, reflecting the authorities' wish to incorporate some of the ‘Pébereau report’(3) proposals for debt-reduction in their intensified debt-reduction strategy.

(6) The programme contains two different scenarios for the macroeconomic and budgetary projections: a ‘low growth’ scenario and a ‘high growth’ scenario. The ‘low growth’ scenario is considered as the reference scenario for assessing budgetary projections because, considered against currently available information, it appears to be based on plausible growth assumptions. It envisages that real GDP growth will pick up from 1,5 % –2,0 % in 2005 and to 2,25 % on average over the rest of the programme period. The programme's projections for inflation also appear realistic.

(7) The update aims at bringing the public accounts back to balance and reducing the public debt-to-GDP ratio below the 60 % reference value by 2010. It also confirms that the deficit should be brought back to the 3 % reference value in 2005 and below it from 2006 onwards. Over the programme period, a reduction by 2 percentage points of GDP in the general government deficit to 1,0 % of GDP in 2009 is foreseen. A primary surplus would be restored from 2007 onwards. As in previous updates, the planned consolidation is expenditure-driven. The medium-term strategy is based on multi-annual targets for the increase in government expenditures in real terms that imply a reduction of the expenditure-to-GDP ratio. Compared with the previous programme, the planned deficit reduction has been postponed in the new update, partly reflecting a less favourable macroeconomic scenario and frontloaded tax reductions. One-off measures will still have a deficit-reducing effect in 2006, but to a lesser extent than in 2005.

(8) Over the programme period, the structural balance (i.e. the cyclically-adjusted balance net of one-off and other temporary measures) calculated according to the commonly agreed methodology is planned to improve on average by 0,6 % of GDP per year. The authorities set the medium-term objective (MTO) for the budgetary position at a structural balance, which they do not aim to achieve within the programme period but by 2010. As it is more demanding than the minimum benchmark (estimated at a deficit of around 1,5 % of GDP), its achievement should fulfil the aim of providing a safety margin against the occurrence of an excessive deficit. The programme's MTO lies within the range indicated for euro area and ERM II Member States in the Stability and Growth Pact and the code of conduct and adequately reflects the debt ratio and average potential output growth in the long term.

(9) The budgetary outcome could be worse than projected in the programme. Concerning 2006, the downside risks stem from the macroeconomic scenario and from the fact that revenues could be lower and expenditures in the areas of local administration and healthcare higher. For the rest of the period, the ambitious targets set in the update are welcome. The enhancement of expenditure-growth rules at the different levels of the general government will improve the oversight of public finance and raise the accountability of all public stakeholders for spending control. The strong grip on state expenditure and the recent enhancement of the enforcement mechanisms on health expenditure are welcome, such as the creation of a permanent committee gathering all stakeholders of public finances, which would be responsible for drafting proposals for public expenditure control and debt reduction. However, expenditure control will have to be strictly implemented, given the track record related to the achievement of overall budget balance objectives. The new targets imply a drastic expenditure restraint compared to previous targets, which will require large structural reforms to be further detailed, especially concerning local authorities.

(10) If the risks mentioned above were to materialise, a permanent and sustainable reduction of the deficit below 3 % of GDP would require additional measures in 2006. The planned structural adjustment in 2006 is slightly below 0,5 % of GDP in structural terms. Thereafter, the pace of the adjustment towards the MTO implied by the programme is in line with the Stability and Growth Pact, which specifies that, for euro area and ERM II Member States, the annual improvement in the structural balance should be 0,5 % of GDP as a benchmark. Nevertheless, if the above risks materialise, reaching the MTO by 2010 is not ensured. The budgetary stance in the programme seems to provide a sufficient safety margin against breaching the 3 % of GDP deficit threshold with normal macroeconomic fluctuations at the end of the programme period.

(11) The debt ratio is estimated to have reached 66 % of GDP in 2005, above the 60 % of GDP Treaty reference value. The programme projects the debt ratio to decline by 3 percentage points over the programme period. The evolution of the debt ratio might be less favourable than projected in the programme, notably given the risks to the budgetary targets mentioned above. In view of this risk assessment, the debt ratio may not be sufficiently diminishing towards the reference value. However, the government recently announced that any extra tax receipts related to growth would be devoted to the deficit reduction, which is welcome.

(12) With regard to the sustainability of public finances, France appears to be at medium risk on grounds of the projected budgetary costs of ageing populations. Recent reforms, notably the 2003 pension reform, have substantially helped to contain future rise in public expenditure and their full implementation will be crucial to ensure the expected results. The current level of government gross debt is above the Treaty value of 60 % of GDP, and the currently high structural deficit, if unchanged, will prevent the necessary reduction of debt in view of the future cost of ageing. Therefore, in the absence of additional reforms, strong budgetary consolidation is needed in order to reduce the risks to long-term sustainability.

(13) The envisaged measures in the area of public finances are broadly consistent with the broad economic policy guidelines included in the integrated guidelines for the period 2005-2008. In particular, France plans to implement a number of structural reforms in order to secure the deceleration in government expenditures and improve the sustainability of government finances in the medium to long run, while the correction of the excessive deficit may require additional measures.

(14) France's National Reform Programme (NRP), submitted on 7 November 2005 within the context of the renewed Lisbon strategy for growth and jobs, identifies three main priorities: (a) to create the necessary conditions for strong economic growth including sustainable public finances, (b) to reduce unemployment and increase employment and (c) to build a knowledge-based economy. Similarly, the improvement of potential output — notably thanks to the so-called emergency plan for employment and other labour market reforms — is one of the three pillars of the French budgetary strategy mentioned in the update. Overall, the measures in the area of public finances envisaged in the stability programme are broadly in line with the actions foreseen in the National Reform Programme. The stability programme complements these measures with changes in the institutional features of the public finances, namely a definition and enhancement of expenditure-growth rules to all levels of the sub-sectors of the general government and the set-up of a basis of a better coordination among stakeholders. However, not all budgetary implications of the actions outlined in the NRP are sufficiently detailed in the budgetary projections of the stability programme.

In view of the above assessment, the Council welcomes the priority given to debt reduction in the French stability programme but notes that there are risks linked to the achievement of the budgetary targets and to long-term sustainability of public finances. Also in the light of the Commission's communication of December 2004 endorsed by the Council in January 2005, the Council invites France to:

— Ensure the necessary structural adjustment to bring the general government deficit below 3 % of GDP in 2006 in a credible and sustainable manner;

— Take the necessary measures to ensure the planned fiscal consolidation towards the medium-term objective and improve long-term sustainability; and

— Strengthen the monitoring and enforcement of expenditure rules defined for the sub-sectors of the general government so as to ensure the respect of the ambitious multi-annual expenditure ceilings.

Comparison of key macroeconomic and budgetary projections

		2004	2005	2006	2007	2008	2009
Real GDP (% change)	SP Jan 2006(5)	2,3	1,5–2,0	2,0–2,5	2,25	2,25	2,25
	COM Nov 2005(11)	2,3	1,5	1,8	2,3	n.a.	n.a.
	SP Dec 2004	2,5	2,5	2,5	2,5	2,5	n.a.
HICP inflation (%)	SP Jan 2006(4)	2,3	1,9	1,8	1,75	1,75	1,75
	COM Nov 2005	2,3	2,0	2,1	1,9	n.a.	n.a.
	SP Dec 2004(10)	2,2	1,8	1,5	1,5	1,5	n.a.
Output gap (% of potential GDP)	SP Jan 2006(5)	– 0,3	– 0,5	– 0,4	– 0,6	– 0,8	– 0,9
	COM Nov 2005(9)	– 0,2	– 0,5	– 0,9	– 1,0	n.a.	n.a.
	SP Dec 2004	– 0,5	– 0,4	– 0,4	– 0,4	– 0,4	n.a.
General government balance (% of GDP)	SP Jan 2006	– 3,7	– 3,0	– 2,9	– 2,6	– 1,9	– 1,0
	COM Nov 2005	– 3,7	– 3,2	– 3,5	– 3,5	n.a.	n.a.
	SP Dec 2004	– 3,6	– 2,9	– 2,2	– 1,6	– 0,9	n.a.
Primary balance (% of GDP)	SP Jan 2006	– 0,8	– 0,3	– 0,3	0,0	0,6	1,6
	COM Nov 2005	– 0,8	– 0,5	– 0,7	– 0,7	n.a.	n.a.
	SP Dec 2004	– 0,7	0,1	0,8	1,5	2,2	n.a.
Cyclically-adjusted balance (% of GDP)	SP Jan 2006(5)	– 3,5	– 2,8	– 2,7	– 2,3	– 1,5	– 0,6
	COM Nov 2005	– 3,6	– 3,0	– 3,0	– 3,1	n.a.	n.a.
	SP Dec 2004(6)	– 3,4	– 2,7	– 2,0	– 1,4	– 0,7	n.a.
Structural balance(5) (% of GDP)	SP Jan 2006(7)	– 3,5	– 3,3	– 2,9	– 2,3	– 1,5	– 0,6
	COM Nov 2005(8)	– 3,6	– 3,5	– 3,3	– 3,1	n.a.	n.a.
	SP Dec 2004	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.
Government gross debt (% of GDP)	SP Jan 2006	65,1	65,8	66,0	65,6	64,6	62,8
	COM Nov 2005	65,1	66,5	67,1	68,0	n.a.	n.a.
	SP Dec 2004	64,8	65,0	64,6	63,6	62,0	n.a.
Stability programme (SP); Commission services' autumn 2005 economic forecasts (COM); Commission services' calculations.

(1)

OJ L 209, 2.8.1997, p. 1

. Regulation as amended by Regulation (EC) No 1055/2005 (

OJ L 174, 7.7.2005, p. 1

). The documents referred to in this text can be found at the following website:

http://europa.eu.int/comm/economy_finance/about/activities/sgp/main_en.htm

(2) The programme has gaps in the compulsory data, and optional data prescribed by the new code of conduct are missing. Missing compulsory data mainly concern short and long-term interest rate assumptions. Missing optional data mainly concern the general government expenditure by function and data on long-term sustainability of public finance as well as labour market developments.

(3) Report from an independent committee appointed by the French government to analyse the public debt and to determine debt-reduction possibilities, published in mid-December 2005.

(4) For further calculations, the corresponding point estimate has been used.

(5) Commission services' calculations on the basis of the information in the programme.

(6) Cyclically-adjusted balance (as in the previous rows) excluding one-off and other temporary measures.

(7) One-off and other temporary measures as calculated by the Commission services (0.6% of GDP in 2005 (the apparent smaller difference between the structural and the cyclically-adjusted is due to rounding effect), 0.2% of GDP in 2006; all deficit-reducing).

(8) One-off and other temporary measures taken from the Commission services' autumn 2005 forecast (0.5% of GDP in 2005 and 0.2% in 2006; all deficit-reducing).

(9) Based on estimated potential growth of 2.3% in 2004, 1.9% in 2005, 2.2% in 2006 and 2.4% for the period 2007-2009.

(10) CPI change instead of HICP.

(11) According to first estimates, growth was 1.4% in 2005. The Commission services' interim forecast of 21 February 2006 projects growth of 1.9% in 2006.

Source:

Stability programme (SP); Commission services' autumn 2005 economic forecasts (COM); Commission services' calculations.