EUROPEAN COMMISSION Brussels, 27.2.2019 SWD(2019) 1009 final COMMISSION STAFF WORKING DOCUMENT Country Report France 2019









Including an In-Depth Review on the prevention and correction of macroeconomic imbalances Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE EUROPEAN COUNCIL, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROGROUP 2019 European Semester: Assessment of progress on structural reforms, prevention and correction of macroeconomic imbalances, and results of in-depth reviews under Regulation (EU) No 1176/2011 {COM(2019) 150 final}



Contents Executive summary 1.Economic situation and outlook 2.Progress with country-specific recommendations 3.Summary of the main findings from the MIP in-depth review 4.Reform priorities 4.1.Public finances and taxation 4.2.Financial sector 4.3.Labour market, education and social policies 4.4.Competitiveness reforms and investment Annex A: Overview Table Annex B: Commission Debt Sustainability Analysis and fiscal risks Annex C: Standard Tables Annex D: Investment Guidance on Cohesion Policy Funding 2021-2027 for France References LIST OF Tables Table 1.1:Non-cost competitiveness of the largest export sectors for France Table 1.2:Key economic and financial indicators

Table 2.1:Assessment of 2018 CSR implementation Table 3.1:Outward spill-over heat map for France Table 3.2:MIP Assessment Matrix (*) – France 2019 Table 1:Spillover effects of structural reforms — France closing half of the structural reform gaps Table 4.2.1:Financial soundness indicators – all banks in France Table 4.3.1:Employment growth by sector Table C.1:Financial market indicators Table C.2:Headline Social Scoreboard indicators Table C.3:Labour market and education indicators Table C.4:Social inclusion and health indicators Table C.5:Product market performance and policy indicators Table C.6:Green growth LIST OF Graphs Graph 1.1: Contributions to GDP growth (2011-2020) Graph 1.2: Potential GDP growth breakdown Graph 1.3: Trade balance breakdown Graph 1.4: Net lending/borrowing by sector Graph 1.5: Breakdown of unit labour cost rate of change Graph 1.6: French export potential by sectors

Graph 1.7: Non-financial corporations' debt and benchmarks Graph 1.8: Housing —- Valuation gaps Graph 1.9: Change in GDP per head (percentage points), France 2007-2016 – Regional convergence Graph 2.1: Overall multiannual implementation of 2011-2018 CSRs to date Graph 4.1.1: Composition of government expenditure (% of total expenditure, 2017) Graph 4.1.2: Contributions to the change in the public debt ratio in France Graph 4.1.3: Projections of French public debt over the medium term under alternative scenarios Graph 4.1.4: Impact of the reclassification of SNCF of public debt projections Graph 4.1.5: Tax wedge on labour, single earner, average wage (2017) (in % of labour cost) Graph 4.2.1: Annual growth rate of loans Graph 4.3.1: Trends in self-employment, part-time and temporary employment Graph 4.3.2: Beveridge curve: 2003Q2-2018Q2 Graph 4.3.3: Wage benchmark Graph 4.3.4: Nominal unit labour cost dynamics Graph 4.4.1: Public, corporate and foreign investment in France Graph 4.4.2: Investment rate by firms Graph 4.4.3: Business investment prospects in France Graph 4.4.4: Total factor productivity (TFP) growth decomposition Graph 4.4.5: France: targets and emissions under the effort-sharing legislation (percentage change from 2005) Graph 4.4.6: Evolution of Électricité de France S.A. (EdF) indebtedness from 2005 to 2017

Graph 4.4.7: Regional expenditure for R&D in France Graph 4.4.8: France: SBA performance, state of play and development from 2008 to 2018 LIST OF Boxes Box 2.1: EU funds and programmes contribute to addressing structural challenges and to fostering growth and competitiveness in France Box 3.1: Spillovers of structural reforms — the case of France Box 4.1.1: Assessing the budgetary and distributional effects of alternative scenarios to reform the immovable property tax in France Box 4.3.1: Monitoring performance in light of the European Pillar of Social Rights Box 4.4.1: The Investment Plan for Europe - in France Box 4.4.2: Investment challenges and reforms in France Executive summary While economic activity slowed down in France, the reform process continued (). After a year of strong economic growth in 2017, temporary factors weighed on economic activity at the beginning of 2018 and social protests at the end of 2018 hindered the economic recovery that occurred over the summer. At the same time, policy actions that had been undertaken are expected to improve the performance of the French economy by better linking the education and training system to labour market needs and by reducing red tape for firms. Measures to simplify the tax system are ongoing and systemic reforms of the healthcare and pension system have been announced for 2019. Planned savings on government spending including through the new spending review process launched in October 2017 (Action Publique 2022) still have to be implemented. The labour market remains fragmented, impeding a faster improvement in labour market conditions for all categories of workers. Barriers to competition in the services sector continue to hamper its performance and high taxes on production remain. The efficiency of public support to innovation could be further improved. Economic growth is forecast to moderate, while remaining above potential. After expanding at 2.2 % in 2017, GDP growth decreased to 1.5 % in 2018 and is forecast to expand by 1.3 % in 2019 and by 1.5 % in 2020. The GDP growth rate would still remain above its potential, which is gradually recovering after having dropped from an average of 1.8% from 2000 to 2008 to just 1.0% in 2009. Potential growth is now forecast to reach 1.3 % by 2020, driven by slowly improving productivity and robust investment. Labour market conditions continue to improve, although at a slower pace compared to the EU average. The employment rate continued to increase and reached 71.6 % in the third quarter of 2018. The unemployment rate continued to decline gradually, reaching 9.1 % in 2018. However, it remains well above the EU average (7.0 %) and the euro area average (8.2 %). Segmentation is entrenched in the French labour market. Almost 85 % of new hires are on temporary contracts and the transition rate to permanent contracts is among the lowest in the EU. Involuntary part-time work is also very high, at 43.2 % of total part-time work in 2017. Labour market slack (a measure of the underemployed that includes people available to work but not seeking, those seeking work but not immediately available and all involuntary part-time employed) coexists with a structural skills mismatch, as skills shortages are emerging, especially in some sectors. Growth in consumption is expected to recover gradually. In 2018, private consumption rebounded somewhat over the summer after three quarters of sluggish growth. Demonstrations at the end of 2018 had a negative impact on the economy, mitigating the positive effects on consumption of fiscal measures that had been adopted. Private consumption is set to continue its gradual recovery in 2019-2020 backed by improving labour market conditions. Investment remains at a high level, accompanied by the Great plan for investment 2018-2022. Investment represented 22.5 % of GDP in 2017. After several years of contraction, government investment increased again in 2016 and is expected to continue increasing up to 2020. Business investment should ease gradually while remaining dynamic. Housing investment, by contrast, slowed down markedly in 2018 and is set to remain subdued. Under the Great plan for investment 2018-2022 (Grand plan d’investissement 2018-2022), France has also planned measures for a total of EUR 57 billion to sustain the greening of the economy, address skills mismatch, foster innovation and digitise public services. Net exports contributed to growth over the last two years, but the net international investment position continued to deteriorate. In 2017, net exports contributed to growth for the first time since 2012. However, the value of trade balance slightly declined for two main reasons: (i) dragged by its energy component and (ii) worsened by the net export of manufactured goods. At the same time, the current account improved, but remained below the value needed to stabilise the net investment international position (that is the difference between external financial assets and liabilities) in 10 years. As a result, the net international investment position weakened by more than 5 percentage points and reached -20 % of GDP. In 2018, net exports also strongly contributed to growth. Exports remained robust albeit less dynamic than in 2017, while import growth decreased sharply. The value of the current account is set to stabilise. The picture on competitiveness is mixed. Export market shares increased in 2017 compared to 2012, as France has benefited from a more favourable geographical positioning of its exported goods: imports from France’s main trading partners grew faster than the world average. Nevertheless, in comparison with 2016, export market shares deteriorated by 3.2 % in value and 0.8 % in volume. In terms of cost competitiveness, unit labour cost increases have been contained by the moderation of wage developments. However, productivity dynamics remain sluggish. In addition, non-cost competitiveness indicators suggest that quality can still be improved in high revenue sectors.

General government debt remains high. At above 98 % of GDP in 2018, it reduces the room for fiscal manoeuvre in order to respond to future shocks. This combined with a high level of private debt (or debt accumulated by households or businesses) weighs on long-term growth prospects. Efforts to consolidate government finances have brought about an only modest reduction of the public expenditure ratio which, at 56 % in 2018, remained the highest in the EU. The government adopted some budgetary measures to increase low income households’ purchasing power in response to recent social protests. Despite a relatively positive evolution of the real disposable income in recent years for all segments of the income distribution, the government’s announcement to increase carbon and diesel taxes as of 2019 has triggered a movement of strong social protest (‘gilets jaunes’). In response to the movement and the ensuing unrest, the government decided to cancel the planned increase in fuel tax and adopt further measures to increase the purchasing power of low-income households. The authorities have estimated that introducing these measures in this year’s budget will lead the general government headline deficit to reach 3.2 % in 2019, thus reducing to zero the associated planned structural effort. Public and private investments need to prioritise actions to strengthen research and innovation, facilitate the energy and climate transition, improve skills, tackle unemployment, and adapt to the future of work, as well as to respond to inequalities within the country. Improving education, training and innovation performance could stimulate potential growth over the medium term. In a context of emerging skills mismatch, vocational training, together with appropriate employment support and active inclusion, can improve labour market conditions, especially for disadvantaged groups. At the same time, the French authorities have adopted plans to promote investment in the energy sector, which would also contribute to exploit the untapped potential for private investments that remains in renewable energy and buildings’ energy efficiency. Investments to improve connectivity, affordable housing, healthcare and transport, especially in more disadvantaged areas, would help to address inequalities within the country. Annex D identifies key priorities for support under the European Regional Development Fund and the European Social Fund Plus for the 2021-2027 period in France, building on the analysis of investment needs and challenges outlined in this report. Overall, France has made some progress in addressing the 2018 country-specific recommendations. There has been substantial progress in pursuing the reform of vocational education and training. There has been some progress in the following areas: ·moderating developments in the minimum wage; ·simplifying the tax system; and ·reducing red tape. There has been limited progress in the following areas: ·reforming the pension system; ·improving access and equal opportunities in the job market; ·increasing competition in services; and ·increasing efficiency of the innovation system. There has been no progress in further developing and implementing a spending review through the Public action 2022 programme. Regarding progress in reaching national targets under the Europe 2020 strategy, France is performing well in decreasing greenhouse gas emissions, increasing higher (tertiary) education attainment and reducing early school leaving. More action is still needed to reduce poverty, increase the employment rate, increase investment on R&D, use of renewable energy and improve energy efficiency. France performs relatively well on most of the indicators of the Social Scoreboard supporting the European Pillar of Social Rights. Overall, the social protection system is effective in reducing poverty and access and quality of services are good. Social transfers reduce monetary poverty and limit material deprivation. However, despite recent improvements, access to the labour market remains a challenge, in particular for disadvantaged groups, and pockets of poverty persist for some groups of the population. The main findings of the in-depth review contained in this report, and the related policy challenges, are as follows: ·A steady decrease in public debt will depend on the government’s ability to curb its spending. Since 2017, the government has rolled out a renewed fiscal consolidation strategy over the five-year presidential term. Its success will depend on meeting planned expenditure targets defined for the central and local governments and for the healthcare system. Implementing this strategy also requires the execution of the still not fully defined Public action 2022 programme, aimed at delivering substantial efficiency gains for government spending while improving the functioning of the national public administration. ·Sustainability risks for general government debt remain high in the medium term. The high general government debt and structural general government deficit pose sustainability challenges, especially in the medium term. A fiscal effort that translated into a decisive improvement in France’s structural primary balance would be essential to avert such risks. Reducing the general government debt ratio would also improve growth prospects and the resilience of the French economy. The planned pension and healthcare reforms could contribute to decreasing the general government debt over the medium term and therefore reducing debt sustainability risks.

·Continued effort is needed to simplify the tax system and lower taxes on production. Recent reforms aim to alleviate the tax burden on labour but taxes on production remain high. The complexity and lack of stability of the French tax system weighs on businesses and the economy as a whole. The number of tax expenditures remains high as do low-yield taxes. ·The solvency of French banks is stable and macro-prudential policies aim at addressing risks stemming from high private debt. Bank funding and credit quality ratios remain stable. Banks’ profitability remains modest in relation to their cost of capital. Macro-prudential policies (mitigating risks to the financial system as a whole) have been rolled out to prevent risks for the financial sector stemming from high private debt. ·Integrating the most vulnerable categories of workers into the labour market remains challenging. Several reforms have been adopted in recent years to reduce labour market fragmentation and favouring moves from temporary to permanent contracts. People with a migrant background still tend to be disadvantaged during the recruitment process and their geographical concentration in poor neighbourhoods is a matter of concern. Low skilled and young people also remain at a disadvantage in the labour market. ·Improvements in the business environment have been so far moderate, but the new PACTE law (projet de loi relatif à la croissance et la transformation des entreprises) should further reduce unnecessary red tape. Measures have been taken to improve the relations between public administration and businesses. The draft PACTE law aiming to overhaul red tape that hinders private initiative, improve the business environment, and help firms growth is currently under discussion in parliament. The Competition Authority’s opinions and recommendations have helped to improve the functioning of key markets in recent years. However, the level of regulatory restrictiveness remains higher in France than in other EU Member States, particularly for some services sectors. In professional services, the main barriers came from restrictive requirements for entering and carrying out a regulated profession (authorisation requirements, reserves of activities, shareholding, and voting rights requirements). Retailers also face restrictions on daily operations of shops. ·Despite recent initiatives, the gap with respect to EU innovation leaders is not closing. France is making artificial intelligence a national priority and is emerging as a major start-up hub notably for companies in the digital sector. However, private investment in research and development has remained stable since 2015 and new companies have difficulties to grow. In addition to the recent measures to facilitate the mobility of researchers to firms, furthering links between science and business could help to spread innovation. The efficiency of public schemes and tax incentives that sustain research, development and innovation could be further evaluated and improved. Other key structural issues analysed in this report, that point to other challenges for France’s economy, are the following: ·Differences in educational outcomes remain high at all levels of education. Measures have been taken to raise basic skills in primary education. Complementary reforms of upper secondary and tertiary education have been launched, while the 2018 reform of the vocational education and training system changed its governance and contributed to make the apprenticeship system more attractive and relevant for the labour market. These reforms are to be complemented by measures on school-based vocational education and improving teacher training to ensure that well-trained teachers are placed in disadvantaged schools. ·A socio-economic divide exists between some regions and the rest of the country. Only 3 regions are attracting skilled workers in sectors producing higher value added to the economy, while in the rest of the country — mainly the outermost regions — gains in employment are concentrated in sectors producing lower value added. Major differences among regions can be noted in terms of regional investment in research and development and innovation performance, as well as for energy consumption and waste management where outermost regions face specific challenges. 1. Economic situation and outlook Economic growth After a strong year in 2017, GDP growth in France moderated in 2018. GDP growth stood at 1.5 % in 2018, after registering 2.2 % in 2017 (). Temporary factors, such as strikes in the transport sector, school holidays or unusually warm weather, weighed on French activity at the beginning of 2018. Economic activity accelerated slightly in the second half of 2018, but was impacted by social protests at the end of the year. In this context, private consumption stagnated in the fourth quarter despite several fiscal measures favourable to purchasing power enacted before the social unrest (a decrease in social contributions, a cut in the housing tax and increases in social benefits). Investment remained dynamic overall, although less buoyant than in 2017. Housing investment slowed down markedly following very high growth in 2017, while corporate investment eased more gradually. Public investment eased somewhat. Import growth decreased sharply in 2018, while exports remained robust, though somewhat less so than in 2017. As a result, the contribution of net exports to GDP growth increased to 0.6 percentage point. Graph 1.1:Contributions to GDP growth (2011-2020) Source: European Commission, 2018 winter forecast GDP growth rate is set to decrease in the near future, while remaining above potential. Private consumption growth is forecast to slowly recover. Fiscal measures, including the new measures adopted at the end of 2018, should provide support to purchasing power. Nevertheless, their overall effect on private consumption could be limited in the first few months, translating instead into precautionary savings, in line with the persistence of low consumer confidence levels. Investment growth is set to cool down in 2019 and 2020, as spare capacities are gradually reabsorbed. Public investment is set to keep increasing. Corporate investment is forecast to cool down gradually although staying at a high level, while housing investment is expected to remain subdued. In addition, net exports are expected to be neutral in 2019 and 2020, in line with a rebound in imports. GDP growth is expected to reach 1.3 % in 2019 and 1.5 % in 2020 (see Graph 1.1). Inflation is forecast to reach 1.4 % in 2019 and 1.7 % in 2020, after registering 2.1 % in 2018, as a consequence of increases in oil price and in excise duties. Labour market conditions continue to improve, albeit slowly (see Section 4.3). In line with a relatively favourable cyclical position, the unemployment rate pursued its moderate decline, to 9.1 % in 2018, but it is still significantly higher than the EU average (7.0 %). The employment rate (20-64) rose in 2017 to 70.6 %, still slightly below the EU average (72.2 %). In 2017, the youth unemployment rate decreased to 22.3 % and the long-term unemployment rate decreased for the first time since 2008, at 4.2 % in annual terms. However, the unemployment rate of low-skilled young people (15-24) remains very high, at 37.8 %. In addition, the situation of people with a migrant background and from deprived urban areas continues to be marked by significant challenges. The employment rate for non-EU born, at 55.6 % in 2017, is one of the lowest in the EU. The labour market remains segmented, marked by a predominant share of recruitment and extensions on very short-term contracts, despite an increase of recruitment on permanent contracts since mid-2015. The transition rate between temporary and permanent contracts, at 11.7 %, is also one of the lowest in the EU. Although still high in comparison to the rest of the EU, the share of open-ended contracts has been eroding. While some slack in the labour market persists, indicators such as the labour shortage index and recruiting difficulties in several sectors point to the presence of skills shortages and skills mismatches. Risks are slightly titled to the downside. Persistent uncertainties on the external side (European Commission, 2018a) could weigh on export performance and investment. On the domestic side, the weakness of the consumer confidence indicator could translate into lower private consumption growth. On the other hand, the impact of the measures announced by the government at the end of 2018 could materialise faster than expected. Potential growth Potential growth has declined since the 2008 financial crisis. The annualised growth rate of potential GDP decreased from 1.8 % on average from 2000 to 2008 to just 1.1 % between 2009 and 2018. It is projected to recover gradually and to reach 1.3 % in 2020. But this is not specific to France. A slowdown of potential GDP has been observed in most major euro area economies. In the case of France, this slowdown can be attributed to a reduction in the contribution of total factor productivity (see Graph 1.2). Despite a gross investment rate of the non-financial corporations relatively resilient to the crisis (see Section 4.4), potential total factor productivity growth in France remains below potential total factor productivity growth in Germany and is now lower than in Spain (European Commission, 2018b). Graph 1.2:Potential GDP growth breakdown Source: European Commission, 2018 autumn forecast

The sluggish total factor productivity growth contributes to the weak competitiveness and exacerbates the challenges linked to high public debt. The slowdown of labour productivity, partly due to a deceleration of total factor productivity, prevents a faster recovery of cost competitiveness (see below). The deceleration in potential GDP also makes it more difficult for France to bring down its public debt without greater fiscal consolidation (see Section 4.1). Potential growth can be affected by a low responsiveness of labour and product markets. Promoting labour market mobility among sectors and regions may facilitate resource reallocation, with a positive impact on total factor productivity. Several indicators point to the presence of skills mismatches in France, suggesting the need of future investment for supporting the professional reskilling and upskilling of the workforce (see Section 4.3). Labour market segmentation may also have a negative effect on human capital accumulation (see Section 4.3). Inequality of opportunity, as seen through the strong dependence of educational and labour market outcomes on socio-economic and migration background (see Section 4.3), may be associated to suboptimal investment in human capital. Total factor productivity growth may also be hampered by tax complexity (see Section 4.1) and weaknesses in the business environment, which can weigh on firms’ growth, hinder innovation and internationalisation of firms (see Section 4.4). Measures to boost productivity and therefore potential growth have been adopted or announced. Those reforms encompass the labour law (‘ordonnances’), measures on vocational training, the skills investment plan, the educational system, as well as public service reforms. Measures to alleviate the burden of regulations on firms are also part of a draft PACTE law currently in discussion in parliament. However, time is needed to see the full effects of those reforms, especially those concerning the educational system. Their effects on productivity might also be difficult to quantify beforehand (see Section 4.4). External position A somewhat more favourable picture of the French external sector emerged as a result of the revision of the national accounts data (). A new methodology has been adopted, which better takes into account export and import of services, tourism expenditure from developing countries and property income. As a result, the trade deficit stood at -1.1 % of GDP in 2017, compared to -2.5 % using the previous base (base, 2010). Graph 1.3:Trade balance breakdown Source: Insee, national accounts The trade balance has been on a mild but protracted deteriorating trend and slightly deteriorated in 2017 (see Graph 1.3). The trade balance in goods started deteriorating again in 2016. The energy component always weighed on the trade balance and is subject to oil price volatility. Excluding energy products, the trade balance in goods has been on a slow but protracted deteriorating trend, only temporarily interrupted in earlier years of this decade. This trend is mostly explained by manufactured goods net exports (Insee, 2018b). Net exports of manufactured goods kept on deteriorating since the early 2000s and have switched from positive in the mid-1990s to negative in 2007. The year 2017 is no exception: the trade deficit in manufactured goods worsened by almost EUR 7 billion (). On the other hand, the trade balance in services slightly improved in 2017, for the first time since 2012, while remaining positive in 2000-2017. According to the 2018 autumn forecast, the trade balance should slightly improve in 2018, as imports grew at a slower pace than exports, especially in services. The current account marginally improved in 2017 and posted a small deficit. Compared to the previous year and the trough in 2011, the current account balance improved but remains negative, at -0.6 % of GDP in 2017, after having registered -0.8 % in 2016. This is mainly due to the growth of net income from abroad, as the trade balance deteriorated in 2017. The level of the current account balance in 2017 is essentially close to the cyclically-adjusted one. Nevertheless, it remains below the current account balance predicted by fundamentals, which is a surplus of around 0.5 % of GDP (). The current account balance is set to remain broadly unchanged according to the 2018 autumn forecast. The current account deficit results from saving and investment decisions at the sectoral level. Net borrowing by non-financial corporations and public sector remains too high to be fully financed by households’ net lending (see Graph 1.4). France is currently the only major EU economy in which non-financial corporations are net borrowers, while the net borrowing of the public sector is higher than the euro area average. Graph 1.4:Net lending/borrowing by sector Source: Eurostat The net international investment position remains negative and deteriorated in 2017. Government bonds account for most of the negative net international investment position (almost -50 % of GDP), while other financial institutions () show a strong positive position (more than 50 % of GDP). The net international investment position went from around -15 % to -20 % of GDP between 2016 and 2017, mostly due to valuation effects (). Therefore, it remains below the value that could be expected based on the fundamentals (around 9 % of GDP) but is not raising prudential concerns (). At the same time, and excluding valuation effects, the current account outcomes described above seem sufficient to stabilise the net international investment position at its current levels. Yet, they seem insufficient to bring it to its fundamentals, notably to halve the gap to fundamental in a decade. Competitiveness Export market shares increased over the five years to 2017 but decreased in 2017 on a year-on-year basis. In recent years, France has benefited from a more favourable geographical positioning: imports from its main trading partners grew faster than the world average. Nevertheless, despite a pick-up in export growth, France’s export market shares deteriorated by 3.2 % in 2017 on a year-on-year basis () (-0.8 % in volumes). Regarding the good sectors, France underperformed in 2017 and lost export market shares in sectors other than chemical products sector and vehicles, aircraft and vessels sector. In addition, cyclical conditions weighed on export market shares of goods within EU, especially in the vehicles, aircraft and vessels sector. Growth in unit labour costs remained moderate over the past years but is set to increase. Nominal unit labour costs grew by only 1.3 % over the 3 years to 2017. As a result, cost competitiveness has improved, thus helping to absorb part of the competitiveness losses accumulated over the past years towards the country’s main trading partners. However, unit labour costs in non-agricultural market sectors, which have been growing since the third quarter of 2016, are set to accelerate further (see Graph 1.5) (). This is the result of gross wages per person increasing, in response to a gradually improving labour market and higher inflation. In the meantime, labour productivity growth is expected to remain moderate, preventing a faster recovery of cost competitiveness. Graph 1.5:Breakdown of unit labour cost rate of change Source: European Commission, 2018 autumn forecast Wage growth is expected to gradually pick up as labour market slack decreases. Nominal wage expanded at a moderate pace between 2013 and 2016 and accelerated in 2017. It is set to further accelerate in the upcoming years, albeit moderately, in line with higher inflation. Nominal compensation per employee should broadly follow the same pattern and grow by 2.3 % in 2018. It would exceptionally decouple from wages evolution in 2019 due an accounting artefact (), growing at 0.4 %, before resuming an annual growth rate of 2.2 % in 2020. Minimum wage increases and real wage growth are expected to remain moderate. Labour productivity growth increased in 2017 but is set to remain below pre-crisis trend. Labour productivity rose steadily, by around 1.3 % per year on average, between 1990 and 2007 and slowed down to 0.9 % between 2010 and 2016. The contribution of the industrial branches accounts for almost 90 % of the slowdown in post-crisis labour productivity. In industrial branches, this decrease is mostly explained by the deceleration of total factor productivity and, to a lesser extent, by lower capital intensity. Construction and market services contributed only marginally to the overall post-crisis slowdown in labour productivity (Insee, 2018c). A less efficient allocation of capital weighed on labour productivity growth in market services (see Section 4.4). It was nevertheless compensated by a higher contribution of total factor productivity (Insee, 2018c). The increase in self-employed jobs in low pay sectors following the crisis (see Section 4.3) might also have contributed to the decrease in labour productivity in market services. Labour productivity picked up to 1.1 % in 2017, as economic activity remained buoyant during the whole year, while job creation progressed in the second part of 2017. Labour productivity growth is set to slightly decrease in the future and remain below its pre-crisis level. France ranks 6th among 39 advanced economies for the overall quality of exported goods in 2016 (). An in-house study to assess non-cost components of exports (‘quality’), comparable to the strategy applied by Bas et al. (2015) (), confirmed that French exports are globally of good quality. France ranks above average in almost every aggregated sector (as defined by the Harmonised System at 2-digit level), giving it a solid top 10 position in export quality in 70 % of these sectors. Although the global quality index deteriorates slightly in absolute value between 2003 and 2016, France’s overall position in relation to other countries is rather stable. Nonetheless, the country ranks consistently behind Japan, Germany, the US, Italy, and has been recently surpassed by China. Focusing on the most economically significant export sectors for France, quality is often lower than that of its main competitors. The 5 largest sectors (each representing more than 5 % of French export revenues), namely aeronautics, mechanical machinery, motor vehicles, electrical equipment, and pharmaceuticals together account for about 46.7 % of total French exports. In these key economic sectors, France outperforms its main competitors only in aeronautics in which it ranks second. In the other key sectors, France’s position in quality index of exports reaches between the 6th and 10th rank (among the 39 countries under review) (see Table 1.1), while its main competitors rank first, namely Germany and the US, as well as Switzerland in the case of pharmaceuticals. Moreover, the quality index of French exports in these sectors is declining over time, more strikingly in the case of pharmaceuticals and with the exception of motor vehicles that remain stable. France’s ranking in these sectors is also deteriorating over time due to some competitors’ improving their performance. Table 1.1:Non-cost competitiveness of the largest export sectors for France Source: BACI 2016 and European Commission

Traditional French specialisation products and specific high-tech niches continue nonetheless to be of very high quality. France specialises in 6 sectors (): (i) aeronautics, (ii) beverages, (iii) cosmetics, (iv) dairy products, (v) leathercraft and (vi) cereals. Except for cereals, the country ranks in the top 4 for the quality index of exports in these sectors that represent 22.5 % of French export revenues (only 10.9 % if aeronautics is excluded). Specifically, in the aeronautics and cosmetics sectors, France ranks 2nd and 4th in terms of the quality of exports. Both sectors are also associated to a high trade performance as France claims 21.5 % and 16.6 % of the world market share, respectively. At the product level, France ranks 1st for the quality of its perfumes and make-up products. The beverages sector, where France is by far the world’s leading exporter (17 % of the world exports), also shows a good quality performance overall (France ranks 3rd behind the US and Italy), with an outstanding 1st position for wines and mineral waters. In addition, France ranks 1st in other highly specialised sub-sectors such as cheese, musical instruments, rail locomotives, wagons, high-thrust turbojets, nuclear reactors and luxury leather articles. These French specialist products are notably associated to a low price elasticity, which makes them strong stands of French exports. Graph 1.6:French export potential by sectors Source: International Trade Centre Untapped export potential remains in French specialisation sectors (see Graph 1.6). Methodologies assessing export potential () reveal that France could still exploit an untapped export potential in several specialisation sectors. According to International Trade Centre estimates (), of the total export potential in aeronautics from France, 25 % is still to be exploited with a strong potential demand in Europe, the Middle East and Asia. There is also a strong worldwide potential demand for French cosmetics and beverages (with 40 % and 42 % of export potential). Nevertheless, the largest potentials could be in pharmaceuticals (61 %) and chemicals (39 %). The automotive (36 %) and machinery (31 %) sectors could also generate additional exports by focusing on the dynamic markets of North America, China, and India; given that the European market has reached full potential for these French products. French exports are concentrated in a limited number of firms. Exporting firms in France are mostly large or intermediate-sized firms, while the contribution of small and medium-sized enterprises to export is particularly low in France. Only 15 % of French small and medium-sized enterprises export against an average of 29 % in the 5 largest EU Member States (Bpifrance et al., 2018). When asked about the main export barriers (European Commission, 2015), French small and medium-sized enterprises primarily consider that the financial investment is too heavy and the administrative procedures too complex (61 % and 61 % of French small and medium-sized enterprises against 37 % and 32 % of EU small and medium-sized enterprises respectively). Representatives of small and medium-sized enterprises also point to the difficulty of finding staff with the suitable skills, including foreign languages, to develop exports. Measures have been adopted to increase the number of exporting firms in France. In February 2018, the French government presented a plan to improve the efficiency of policy schemes to support exports. It intends to do so by disseminating export culture among small and medium-sized enterprises, streamlining public support schemes for export and reforming financing for export. Private debt The level of private debt has steadily increased since 1998, reaching 148.2 % of GDP in 2017. Both the debt of households and non-financial corporations has continued to grow somewhat rapidly throughout the crisis and until now (European Commission, 2018c). By contrast, in the rest of the euro area, private debt has been falling since 2009. While households’ debt was slightly above the euro area average, the debt of French non-financial corporations exceeded the euro area average by 10 pps in 2017. Non-financial corporations’ increasing debt signals deleveraging needs and could become a potential source of concern, should the non-adjustment persist. France is among the countries with a positive debt gap and not adjusting (European Commission, 2018c). Credit growth further accelerated in 2017, outpacing nominal GDP in a context of very loose monetary conditions. At 89.7 % of GDP in 2017, non-financial corporations’ debt stood more than 17 pps above what fundamentals would suggest and above a level that justifies prudential concerns (see Graph 1.7) (). The additional increases in indebtedness of recent years have also been above what fundamentals would predict for that extra borrowing. However, non-financial corporations’ interest payments compared to value added are at their lowest in decades, even if they remain well above the euro area ratio. Risks tend also to be mitigated by the fact that the proportion of short-term debt over total debt () has decreased slowly but constantly since the start of the crisis, from 34.3 % in 2007 to 29.4 % in 2017. The High Council for Financial Stability (‘Haut Conseil de stabilité financière’) is monitoring the situation and introduced two new macroprudential measures given the sustained growth in private debt (see Section 4.2). Increasing households’ debt does not seem to be a source of concern in the near future. Since 1998, households’ debt-to-GDP has kept increasing, uninterrupted by the crisis. The net borrowing flows of recent years have often been in excess of what would be warranted by those fundamentals. Nevertheless, the current debt level (58.6 % of GDP) seems aligned with what fundamentals would suggest. Interest payments are also at a low level and in line with the euro area levels but they could increase in the future as a consequence of the possible monetary policy normalisation. However, the stock of credits is mostly signed with fixed interest rates, which should limit the impact of a potential rise in interest rates (see Section 4.2). Graph 1.7:Non-financial corporations' debt and benchmarks Source: European Commission Still, households’ private debt mostly consists in mortgage credits and the evolution of the housing market should be closely monitored. The growth of the mortgage stock was particularly rapid (above 5% over the previous year) in 2017 (European Commission, 2018c). As regards the cycle of investment in houses in volume, the gap compared to trend turns positive in 2017 and the first three quarters of 2018, recovering from a trough in 2015 (Bricongne and Pontuch, 2017). At the same time, according to the European Commission’s indicators, France presents convergent signs of overvaluation of house prices since 2005 (see Graph 1.8). Overvaluation gaps are on a downward trend since 2011 but slightly increased in 2017. Indeed, real house prices started to rise again in 2016 after 4 years of decline. Overall, according to the European Commission’s indicators, the house price gap signals a potential overvaluation of around 10 % in France in 2017 (see Graph 1.8). However, other analysis integrating the evolution of mortgage rates reach the opposite conclusion of no overvaluation (Lalliard, 2017). Heterogeneous developments in house prices can be observed across cities and property types, pointing to the need to monitor house prices at a regional level. Like in other European countries, real house prices in the capital have tended to grow faster than prices at the national level in recent years (ECB, 2017a, Box 3). For houses, cities such as Marseille, Lyon, Toulouse, Bordeaux and Montpellier seem to have higher price-to-income ratios and lower rental yields than the country as a whole in 2017. For apartments, Paris, Bordeaux and Strasbourg have the lowest rental yields (Durre, 2018). Graph 1.8:Housing —- Valuation gaps Source: European Commission Public finances The deficit fell below 3 % of GDP in 2017, but no improvement in the structural deficit is envisaged in the short term. According to the Commission 2018 autumn forecast, the general government deficit is expected to stand at 2.6 % of GDP in 2018, due to the envisaged lack of fiscal effort and the downward revision to growth projections. It is set to increase to 2.8 % of GDP in 2019 as a result of the one-off deficit-increasing impact of 0.9 % of GDP of the replacement of the tax credit for employment and competitiveness (Crédit d’Impôt pour la Compétitivité et l’Emploi, CICE) by a permanent cut in social security contributions, without which the deficit would be 1.9 % of GDP. However, the measures approved by the end of 2018 imply by themselves an upward revision of the deficit by around 0.3 % of GDP and a negative fiscal effort in 2019, which compares to the initially projected improvement by 0.2 % of GDP at the time of the autumn forecast. At unchanged policies, the deficit was projected to decline to 1.7 % of GDP in 2020, with almost no structural improvement. This forecast did not factor in the effects of the measures approved at the end of 2018. These should have no material impact on the projected change in the structural balance for 2020. Some reduction in the general government debt is envisaged by the end of 2020. After the reclassification of one division of the French National Railway Company (‘SNCF Réseau’) under the general government as of 2016, the public debt-to-GDP ratio reached 98.5 % of GDP in 2017, compared with 88.9 % for the euro area on average. This difference between France and the euro area average is expected to widen further in the coming years (see Section 4.1) as the French debt ratio will only start to decline in 2020 by around 1 % of GDP. The projected limited progress in public debt reduction by the end of 2020 is mainly due to the persistently high structural deficits and the lack of fiscal effort. However, sovereign yields remain very low thanks to the accommodative monetary policy of the European Central Bank. Social developments Social indicators are relatively good overall in comparison to the rest of the EU (see Section 4.3). In 2017, the share of people at-risk-of-poverty or social exclusion reached a historical low at 17.1 %, significantly below the EU average of 22.4 %. The impact of social transfers, in particular tax and benefits, on poverty reduction is one of the highest in the EU. However, between 2016 and 2017, the rate of severe material deprivation of people at risk of poverty increased from 19.1 % to 20.3 % (EU level 2017 at 23 %). Moreover, some groups face additional difficulties. For instance, single parents with dependent children, often women, face a 32.6 % poverty rate in 2017 (versus 35.2 % in 2016). Income inequality remained slightly below the EU average but well above pre-crisis levels with the Gini index at 29.3 % in 2017 and the S20/S80 ratio at 4.4. Socio-economic disparities in educational outcomes remain strong (see Section 4.3). Inter-generational social mobility is hampered by the strong influence of socio-economic and family background on educational outcomes. Educational outcomes are even less favourable for non-EU born pupils, in spite of slight improvements in recent years. Regional disparities Socio-economic regional disparities between the capital region and the rest of the country have widened over the past decade. In terms of GDP per head French regions are quite heterogeneous in level compared to the EU average, the capital region being the leader (see Graph 1.9). In 2016, the GDP per head ranges from 175 % in the capital region to 76 % in Languedoc-Roussillon. Only two regions (Ile-de-France and Auvergne-Rhône-Alpes) stand above the EU average. Over the period 2007-2016, except for Ile-de-France, Corsica and some outermost regions, all regions have seen their GDP per head decline significantly compared to the EU average. Employment, R&D investment rate and innovation performances are also quite heterogeneous among regions (see Section 4.4). Nevertheless, thanks to resilient investment, labour productivity remains 15 % above the EU average.

Graph 1.9:Change in GDP per head (percentage points), France 2007-2016 – Regional convergence Source: Eurostat, European Commission own calculations. At sub-regional level, territories show contrasting situations and face new challenges. Socio-economic disparities at sub-regional level remain a concern in new French regions such as Hauts-de-France, Occitanie, Auvergne-Rhône-Alpes and Grand Est (Antunez and al., 2017). Big agglomerations concentrate a large part of the growth but face higher prices, which exacerbate inequalities, especially in the city centre. This contributes to the persistence of pockets of poverty. Particular challenges affect the urban structure of small and medium-sized towns, which have been the backbone of a balanced territorial development. As employment now tends to concentrate in the major cities and as the population ages, urban centres of small and medium-sized towns chiefly located in an arch covering the North, East and Centre of France are experiencing reduced economic activity (small businesses and shops closures) and depopulation (increasing rates of housing vacancies). In the outermost regions, several vulnerabilities persist, despite some convergence in terms of GDP per head in Martinique, La Réunion and Mayotte. Nearly one quarter of the active population is unemployed. Unemployment is the highest among the young population, which also faces particular integration difficulties. Deteriorated living conditions, high number of occupants per dwelling and poorer health outcomes are characteristic of the outermost regions. Table 1.2:Key economic and financial indicators Source: Eurostat and ECB as of 25-1-2019, where available; European Commission for forecast figures (Winter forecast 2019 for real GDP and HICP, Autumn forecast 2018 otherwise). 2. Progress with country-specific recommendations Since the start of the European Semester in 2011, 69 % of all country-specific recommendations addressed to France have recorded at least ‘some progress” (). 31 % of these CSRs recorded ‘limited’ or ‘no progress’ (see Graph 2.1). Looking at the multiannual assessment of the implementation of the CSRs since these were first adopted, major reforms have been adopted in the field of taxation, as well as to improve the functioning of the labour market and the business environment. Graph 2.1:Overall multiannual implementation of 2011-2018 CSRs to date Source: European Commission Despite significant efforts to consolidate public finances, the level of public expenditure has remained very high and broadly stable compared to both the euro area and the EU as a whole. In 2017 France maintained the highest ratio of government expenditure in the EU at 56.5% of GDP, which is 9.4 pps higher than the average in the euro area (47.0 % of GDP) (). Such divergence increased by 2.4 pps between 2011 and 2017 as the French ratio slightly increased by 0.2 pps over the period, while resolute expenditure-based fiscal consolidation action by the other EU Member States brought the aggregate ratio for the euro area down by 2.2 pps (). Concrete measures under the new spending review (Action Publique 2022) still need to be fully identified and defined, while their quantification and monitoring will be essential to ensure that the objectives in terms of public expenditure reduction can be met. All expenditure items, except intermediate consumption and interest payments, contribute to increasing the expenditure-to-GDP ratio in France vis-à-vis the euro area. The difference is particularly significant for items such as social payments, compensation of employees and subsidies, with a ratio-to-GDP in 2017 higher than the euro area average by 3.0 pps, 2.8 pps and 1.1 pps. In addition, compared to other EU Member States, France has been characterised in the past by a low selectivity in the evolution of its public expenditure items (). This suggests the need for more prioritisation while seeking to increase public expenditure’s efficiency (see Section 4.1). In the field of taxation, a series of measures have been implemented to reduce the cost of labour. Reductions in employer's social security contributions were firstly focused on salaries close to the minimum wage level. Over time, magnitude and exit threshold of the exemptions in social security contributions were increased to extend labour cost reductions to exporting firms and therefore boost competitiveness. The adoption in 2013 of the tax credit for competitiveness and employment (CICE) tried to reflect this objective, permitting substantial tax savings on the payroll excluding salaries above 2.5 times the minimum wage. Available evaluations (Ducoudré and Yol, 2018, Bozio et al. 2018, INSEE 2018d) on its effects point to an impact on employment whose size varies across studies, but there is no visible impact on investment and exports yet (L'Horty, Martin, Mayer, 2019) (). The effects of the transformation of the CICE into a permanent reduction in employers’ social security contributions, as of 1 January 2019, are also currently debated (Ducoudré and Heyer, 2018). As this transformation would contribute to improve the legibility of the measure by firms, it may be better associated with a reduction in the cost of labour, thereby leading to a higher impact on employment in the short term. Meanwhile, its reinforcement for lower wages, which is expected to benefit more non-market services where those salary categories are concentrated, could translate into an indirect positive impact on competitiveness, through intermediate consumption of exporting firms. Action has been taken to improve the functioning of the labour market and its link with the vocational and training system. Collective bargaining, social dialogue and dismissal procedures have been revised through a series of reforms of the labour law in 2016 and 2017. Governance and financing of the vocational education, apprenticeship and training systems have been modified in 2018, notably to increase employment opportunities of young and low-skilled workers. Integration policies for newly arrived migrants have started to be strengthened, while measures aiming at improving opportunities for people with a migrant background are in an initial phase (see Section 4.3). A number of initiatives have been launched to improve firms' business environment, while room for improvement remains as far as competition in the services sector and public support schemes for innovation are concerned. Measures undertaken so far have sought to promote entrepreneurship, support firms' growth, and simplify complex regulatory and administrative requirements. A higher degree of competition in the services sector would help further improve its performance, beyond the measures introduced by the 2015 Macron law and the 2018 railway reform (see Section 4.4). New initiatives supporting research and innovation activities have also been launched, but there is still room to improve the efficiency of public support schemes. France has made some progress () in addressing the 2018 country-specific recommendations (see Table 2.1). Substantial progress has been made in pursuing the reforms of the vocational education and training system. Some progress has been made in simplifying the tax system, reducing the regulatory and administrative burden, and ensuring minimum wage developments consistent with job creation and competitiveness. Limited progress has been made in increasing the performance of the innovation system, improving access and equal opportunities in the labour market, and reforming the pension regime. No progress in further developing and implementing Public Action 2022.

Table 2.1:Assessment of 2018 CSR implementation Source: European Commission Box 2.1: EU funds and programmes contribute to addressing structural challenges and to fostering growth and competitiveness in France France is one of the largest beneficiaries of the European Structural and Investment Funds (ESI Funds). Financial allocation from the ESI Funds, aimed to support France in facing development challenges, amounts to up to EUR 27 billion in the current Multiannual financial framework, equivalent to around 0.1 % of the GDP annually or around 2.9 % of all public investment per year on average. As of the end of 2018, some EUR 15.6 billion (around 57 % of the total) has already been allocated to specific projects. Furthermore, numerous French research institutions, innovative firms and individual researchers benefited from other EU funding instruments, notably Horizon 2020 which provided EUR 4.14 billion. EU funding has helped to address policy challenges identified in the 2018 CSRs. EU Funds supported closer collaboration between business and research institutions, and R&D investments in the private sector. By the end of 2018, ESI Funds supported 3 171 enterprises working with Regional Innovation Strategies and 317 million private match investments were made. 17 383 start-up enterprises were supported. France is the 4th largest country for participations (10 042) to Horizon 2020, covering a very broad thematic spectrum of areas, from energy to smart, green and integrated transport. Close to EUR 6.5 billion from the European Social Fund and the Youth Employment Initiative (23 % of the ESIF budget in France) is notably used to improve employability of people furthest away from the labour market, in particular the young, and to help workers adapt to change, among others through a better training offer, improved access to apprenticeship or active inclusion support. By the end of 2017, over 2 million participants had benefitted from actions financed by the European Social Fund and the Youth Employment Initiative. EU funding contributes to mobilisation of private investment. ESI Funds alone mobilise additional private capital by allocating about EUR 647 million in the form of loans, guarantees and equity. This is expected to leverage additional private investment amounting to EUR 1.7 billion. In addition, structural funds have allocated EUR 16 billion to projects in France. Altogether, 4.3 % of the ESI Funds allocation was paid in the form of financial instruments. Around EUR 5.5 billion (21 % of the overall budget) will be allocated to investments needed for supporting the shift to a low-carbon economy, including in energy efficiency, the development of renewable energies and clean urban transport. In addition, about EUR 3 billion will help France to prevent and mitigate the effects of climate change. EU actions strengthen national, regional and local authorities and the civil society. EUR 20 million has been allocated for strengthening the capacity of public administrations at different levels by prompting close cooperation with stakeholders. The pilot project on industrial transition seeks to improve socio-economic and technological transformation processes in 3 French regions in particular on the impact of new technologies, decarbonisation, the promotion of inclusive growth and the adaptation of the labour forces in Hauts-de-France, Centre-Val-de-Loire and Grand-Est. The overall volume of approved operations by the European Investment Bank with EFSI backing amounts to EUR 11.6 billion, which is set to trigger a total of EUR 60.6 billion in additional private and public investments (December 2018). France has managed to mobilise EFSI on its priorities — innovation, digital, energy transition. France benefits the most in volume from the Fund, while it ranks 11th as to the overall volume of approved operations as a share of GDP. Three regions (Ile-de-France, Hauts-de-France and Grand-Est) represent more than half of the investments. For further details, see Box 4.4.1. https://cohesiondata.ec.europa.eu/countries/ FR 3. Summary of the main findings from the MIP in-depth review The 2019 Alert Mechanism Report concluded that a new in-depth review should be undertaken for France to assess the persistence or unwinding of the imbalances (European Commission, 2018d). In spring 2018, France was identified as having macroeconomic imbalances (European Commission, 2018l). The imbalances identified related in particular to high public debt and weak competitiveness dynamics in a context of low productivity growth. This chapter summarises the findings of the analyses in the context of the macroeconomic imbalance procedure (MIP) in-depth review that is contained in various sections in this report ()*. Imbalances and their gravity The picture on the evolution of competitiveness of French exports is mixed. The current account balance slightly improved in 2017, reaching −0.6 % of GDP (against −0.8 % in 2016) ().The net international investment position (NIIP) went on deteriorating to around -20% of GDP mainly on account of valuation effects. At the same time, the export market share deteriorated in 2017. As for the quality of exported goods, France has maintained the highest quality in its sectors of specialisation, while it remained lower than that of the main competitors in high-revenue sectors (Section 1). Unit labour cost increases continue to be moderate, in a context of low labour productivity growth. The evolution of the unit labour cost in 2017 was contained thanks to a moderation of wage developments, including the minimum wage. However, labour productivity growth remains sluggish and it is set to remain below its pre-crisis trend between 2018 and 2020. Low labour productivity growth appears to be structural and partly due to a deceleration in total factor productivity (see Section 1). Public debt remains at a high level combined with low potential GDP growth. The French debt-to-GDP ratio is above 98 % and its decrease planned for 2018 has been postponed by at least one year (see Section 4.1). High public debt reduces fiscal space to respond to future negative macroeconomic shocks, weighs on growth prospects, and is accompanied by a higher tax-to-GDP ratio. The very gradual and overall limited recovery in potential GDP growth (see Section 1) heightens the challenges linked to high public debt and decreases the room to reduce French public debt without a reinforced fiscal consolidation. The combination of high public and private debt (especially of non-financial corporations) represents an additional risk, increasing the potential vulnerability of the economy. The strong economic and financial integration of the French economy with the rest of the euro area can create spillovers for several other EU Member States. France shows particularly strong trade linkages with neighbouring euro area countries (see Table 3.1). Financial and banking links are also important. Box 3.1 illustrates how structural reform measures in France can carry both domestic and cross-border positive effects on GDP. The simulations presented therein can be considered in the context of the euro area recommendations ().

Evolution, prospects and policy responses A reform of the labour law and a revision of the vocational education and training system have accompanied tax measures reducing the cost of labour. Reforms adopted and announced in 2018, aimed to address the challenges faced by the vocational education and training systems, while a new reform of the unemployment benefit system is under discussion (see Section 4.3). These reforms follow the 2016 and 2017 labour market reforms, which revised the employment legislation framework and collective bargaining system, allowing social partners to negotiate working conditions better fitting the sectors’ or firms’ economic situation. A new type of collective agreement was introduced to allow companies to adapt wages, working time and mobility to meet their operational needs or develop employment. The first effects of all these reforms were already visible in 2018 and are expected to strengthen in 2019 (European Commission, 2019b). Table 3.1:Outward spill-over heat map for France Source: UN, OECD, WIOD, BIS and Commission services A series of initiatives have been undertaken to improve the business environment and R&D and innovation performance. A law to improve the interactions between the private sector and public administration was adopted in July 2018 (‘loi pour un État au service d'une société de confiance’). A draft law to support the growth and transformation of firms (‘projet de loi relatif à la croissance et la transformation des entreprises’, PACTE) is currently being debated in the parliament. This law aims at reducing the number of size-related legal, social and fiscal thresholds that hinder business’ growth. It also includes measures to better link R&D activities carried out by the public sector with the activities of the private sector (see Section 4.4). Measures to decrease public expenditures as planned by the government are still not sufficiently defined. In 2017, the government replaced previously existing spending reviews with Public Action 2022 (‘Action Publique 2022’), a new strategy with three objectives, namely (i) increasing the quality of public services provided, (ii) enhancing the working environment and performance of public officers, and (iii) contributing to the decrease in public spending. However, the relative importance of each of these objectives has not been defined and actions for reducing public spending have not been fully clarified yet. It remains to be seen to what extent actions planned under the umbrella of Public Action 2022 will translate into a fully-fledged spending review, while the bulk of the adjustment in terms of public spending tends to be left at the end of the government mandate when electoral considerations might make these objectives more difficult to be reached (see Section 4.1). Overall assessment Public debt remains high and competitiveness dynamics is weak. Export market share losses observed in the past have not been fully regained yet. Wage increases are moderate and the cost of labour is reduced by fiscal measures. Low labour productivity growth, however, prevents a faster recovery of competitiveness. General government debt continued to increase slightly, although its maturity structure and diversified investor base mitigate risks stemming from its high level. Coupled with high and increasing private debt, high public debt remains a source of concern and a potential source of vulnerability. Reforms have gained momentum, but their full implementation remains crucial and further reforms are warranted. Labour market reforms have been undertaken and are currently under implementation. Their effects are starting to materialise and are expected to become more prominent over time (see Section 4.3). Some additional reforms to improve the business environment, simplifying the regulatory environment and increasing the competition in the services sector, have been adopted (see Section 4.4). Other measures included in the French reform agenda could amplify their effect. Notably, meaningful actions continue to be warranted to ensure the timely implementation of planned expenditure savings in order to put public debt on a steady downward trajectory. Table 3.2:MIP Assessment Matrix (*) – France 2019 (Continued on the next page) Table (continued) Source: European Commission. Box 3.1: Spillovers of structural reforms — the case of France Based on the European Commission’s QUEST model ( I ), this box shows the effect of the full implementation of a comprehensive set of structural reforms on French GDP. In a model simulation exercise, the impact of the set of reforms is quantified in a harmonised way. This exercises constitutes an update of Varga and in ’t Veld (2014), including data up to 2016 ( II ). For a large set of structural indicators, a benchmark is constructed as the average of the three best performing countries. Gaps with respect to this hypothetical benchmark are closed by half for all indicators together. For France the largest ‘reform gaps’ identified are in the tax wedge (as captured by the relative share of labour tax revenues compared to consumption tax revenues) and lower labour force participation, in particular of low skilled and early retired. The set of reforms implemented do not exactly correspond to past country-specific recommendations, but illustrate the potential impact that this theoretical package of structural reforms covering different areas (product market regulation and entry, labour market participation, taxation structure and R&D subsidies) could have on the French economy. Altogether and assuming no budgetary impact, this ambitious reform package could boost GDP by 7 % after 10 years, rising to almost 13 % after 20 years. Structural reforms would also have a small but positive effect on the rest of the euro area. Spill-overs from structural (supply-side) reforms are generally found to be positive but limited. Indeed, the 2 dominant spillover channels, demand and competitiveness, are counterbalancing each other. Contrary to positive demand shocks, for which the domestic demand effect and real appreciation complement each other in the impact on import demand, supply shocks trigger offsetting effects, i.e. more imports due to higher domestic demand and less (net) imports due to increasing competitiveness of the domestic economy. The model also accounts for international financial flows and knowledge spillovers. Increasing the rate of return on capital can lead to capital inflows until rates of return are equalised internationally. Exchange rate changes associated with international capital flows can hence induce further trade flows. Knowledge spillovers resulting from the international diffusion of innovations can also lead to positive spillovers via intangible capital formation. Nevertheless, the spillovers effects stemming from those channels tend to be limited. Overall, the net spillover of the comprehensive set of reforms simulated in France to the rest of the euro area is small but positive, and total euro area GDP would increase by 0.5 % after 10 years. 4. Reform priorities 4.1.Public finances and taxation The general government deficit of France has steadily decreased over time although a temporary rebound is expected in 2019. In 2017, for the first time in 10 years, the general government deficit was brought back down under the threshold of 3 %, to 2.7 %. However, the structural deficit stood at 2.4 % of GDP, implying a considerable distance with respect to its Medium Term Objective of -0.4 % of GDP. The additional measures adopted late in the budgetary process by the government in urgent response to the social protests of the yellow vests (‘gilets jaunes’) movement are expected to lead public deficit again above the threshold of 3% of GDP in 2019. Yet, the breach is expected to be temporary, not least also because of the impact of the transformation of the tax credit for employment and competitiveness (CICE) into a permanent reduction in employers’ social contributions. The consolidation strategy up to 2017 has strongly relied on tax and revenue-increasing measures, declining interest payments associated with low interest rates and cuts in public investment. Between 2011 and 2017 the ratio of total government revenues over GDP increased by 2.7 pps, while the ratio of interest payments and of public investment declined by 0.8 pps and 0.6 pps, respectively. Over the same period the composition of public expenditure has remained relatively stable in particular for items that, provided a proper degree of efficiency, are important drivers for long-term growth (ECB, 2017b). Social protection remains the most important spending item, accounting in 2017 for more than 43% of total government expenditure (see Graph 4.1.1), up by 1 pp. compared to 2011. Expenditure on healthcare and education, which are important in order to raise the level of human capital, remained stable and account in 2017 for 14.2 % and 9.6 % of the total, respectively. Expenditure on general public services and on economic affairs recorded opposite trends, decreasing and increasing by almost 2 pps since 2011, respectively. The latter item includes expenditure on infrastructure, notably transport and energy, which is associated with the need for increasing the level of physical capital. The share of the two components of energy and transport over total expenditure increased between 2011 and 2017, although by less than 1 pp. altogether. The fiscal consolidation strategy rolled out by the government over the 5-year presidential term is likely to be adapted in light of renewed political priorities. The multiannual programming law for 2018-2022 quantifies four objectives in terms of GDP, namely: (i) cutting the general government deficit by more than 2 percentage points, (ii) reducing the government expenditure rate-to-GDP by more than 3 percentage points, (iii) cutting aggregate taxes and social security contributions by 1 percentage point, and (iv) reducing public debt by more than 5 percentage points. While the overall strategy is expected to be broadly maintained in terms of ultimate objectives and trends, the current strategy would possibly take into account the outcome of the national public consultation (‘Grand debat’) launched by the government between mid-January and March 2019, seeking to build public consensus on the economic and social priorities to address over the remainder of the presidential term.

Graph 4.1.1:Composition of government expenditure (% of total expenditure, 2017) Source: INSEE Compared to the initial approach presented in the 2019 Draft Budgetary Plan, the government might be called to strike a new balance between revenues and financing means. The outcome of the national public consultation cannot be anticipated at present. In January 2019 the French authorities confirmed the objective defined in the 2019 Draft Budgetary Plan to contain public expenditure growth in real terms to an average rate of 0.3 % per year over the five-year term. While this would be an unprecedented result compared to past efforts, the overall objective and the underlying yearly milestones will need to be assessed in light of the latest policy developments and the eventual adjustments to the fiscal strategy. Overall, adhering to the fiscal consolidation strategy will strongly depend on complying with the expenditure ceilings defined for the central government, the healthcare system and for the local level. In the latter case this implies the effective implementation and functioning of the new contractual approach introduced between the State and the 322 biggest local authorities. Not least, the announced reduction of 3 percentage points of the expenditure-to-GDP ratio by 2022 is also expected to be driven by the effective implementation of the Public Action 2022 initiative which following recent political and budgetary developments has become even more pressing (see below). Debt sustainability analysis and fiscal risks ()* General government debt continued to increase in 2017 and 2018, while it is projected to start decreasing only as of 2020. On 6 September 2018, the French national statistical institute (INSEE) revised the level of public debt in 2016 and 2017 following the reclassification of ‘SNCF Réseau’ into the general government. This implied an increase in the public debt ratio by 1.6 and 1.7 pps. in 2016 and 2017, to 98.2% and 98.5% of GDP, respectively compared to previous estimates. According to the Commission 2018 autumn forecast, the public debt ratio is projected to peak at 98.7 % of GDP in 2018 (see Graph 4.1.2). However, the measures put forward by the government in response to the ‘yellow vests’ movement will imply an upward revision to the general government deficit and public debt in 2019. Therefore, public debt should only start to decrease as of 2020. This trend keeps implying a widening gap with respect to the euro area, where overall public debt is projected to decline by some 6 pps to 82.8 % of GDP between 2018 and 2020. Such a difference is explained by the relatively high French primary deficits projected until 2019, whereas the declining interest burden is expected to stabilise as of 2019. Graph 4.1.2:Contributions to the change in the public debt ratio in France Source: European Commission There are no sustainability challenges in the short term in spite of the high public debt ratio. Short-term sustainability is assessed by the indicator S0 (). As in previous years, the short-term fiscal sub-index indicates some short-term vulnerabilities, notably driven by the cyclically-adjusted deficit and the high net government debt. However, the overall S0 indicator does not flag any significant risk. This low short-term risk is confirmed by the ‘AA stable’ rating given by the three major rating agencies to French government debt. The average maturity and the diversification of the investors’ base reduce the short-term risks linked to high public debt. As French debt is denominated in euro there is no currency risk. In turn, the average maturity of total outstanding debt has increased to almost 7.9 years in 2018 compared to 7.8 years in 2017 (average maturity is above 8 years for medium and long-term debt). Also, the French debt remains an investment sought for complying with capital and liquidity requirements as well as for diversification purposes, even if the share of non-resident holders of negotiable government debt has continued to decrease over time, to reach around 54 % in 2018, which is broadly evenly distributed between euro area and other countries. Graph 4.1.3:Projections of French public debt over the medium term under alternative scenarios Source: European Commission Sustainability risks remain high in the medium term. According to the baseline scenario in the debt sustainability analysis, at unchanged policies, the public debt ratio is projected to rise again to above 99.8 % of GDP in 2029, the last projection year (see Annex B). This increase in public debt stems from the projected high primary deficits aggravated by the increase in age-related expenditure. The favourable snowball effect (e.g. the difference between the implicit interest rate on government debt and the nominal growth rate of the economy) is expected to fade out in 2026 and would turn negative thereafter due to the rising interest rate burden. The S1 sustainability indicator, which measures sustainability risks over the medium term, indicates a high medium-term risk, mainly due to insufficient fiscal effort. This indicator implies that a cumulative gradual improvement in the French structural primary balance of 4.2 pps. of GDP, relative to the baseline scenario, would be required over 5 years (starting from 2021) to reduce the debt ratio to 60 % of GDP by 2033. Specifically, 2.8 pps of the required fiscal adjustment would be due to the debt ratio’s distance from the 60 % reference value, 1.0 pp. to the unfavourable initial budgetary position (defined as the gap to the debt-stabilising primary balance) and the remaining 0.4 pps. to the projected increase in age-related public spending. Public debt projections are especially sensitive to interest rate and growth developments. Higher interest rates or lower projected annual GDP growth would lead to significantly higher debt ratios after 10 years (see Graph 4.1.3). The reclassification of ‘SNCF Réseau’ into the general government had only a limited impact on fiscal sustainability. The increase in the public debt ratio by 1.7 pps. in 2017 and the projection of SNCF deficits up until 2029 entail an almost parallel trajectory of debt projections (see Graph 4.1.4) that imply a modest increase, by 0.2 pps, in the medium-term sustainability indicator. This deterioration is mainly due to the rise in the debt ratio's distance from the 60 % reference value by 0.1 pp. and by the slightly more unfavourable initial budgetary position by an additional 0.1 pp. However, over the long-term, France is deemed to be at medium fiscal sustainability risk. The long-term fiscal sustainability indicator S2 () shows that no improvement of the structural primary balance would be required to stabilise the debt-to-GDP ratio over the long-term (a slightly negative fiscal gap at -0.1 pp. of GDP). This result is due to the projected decrease of ageing costs (contribution of -1.5 pps. of GDP), mitigated by the unfavourable initial budgetary position (1.4 pps. of GDP). It is in particular the projected decrease of public pension expenditure that drives down ageing costs (contribution of -2.0 pps. of GDP) and is mainly due to the indexation of public pensions to inflation as measured by consumer prices, which means that pensions would grow more slowly than wages on average. Healthcare expenditure is not expected to contribute significantly to long-term fiscal risks, growing by 0.5 pps of GDP up to 2070 due to favourable demographic trends, below the EU average increase of 0.9. Notwithstanding the low S2 indicator, the implied fiscal adjustment might lead to debt stabilising at relatively high levels for which this indicator should be taken with some caution for high debt countries. Therefore, despite the slightly negative sustainability gap S2 indicator, the vulnerabilities linked to the high debt burden as captured by the debt sustainability risk assessment suggest that French public debt might be facing a medium sustainability risk over the long term. Moreover, under more adverse scenarios involving more dynamic healthcare and long-term care expenditures, the sustainability gap S2 indicator would increase to 1.9 pps. of GDP, thus pointing to higher long-term fiscal risks (). Graph 4.1.4:Impact of the reclassification of SNCF of public debt projections Source: European Commission Pension* The budgetary equilibrium of the pension system is highly dependent on macroeconomic assumptions. Pension expenditure situated at 13.8 % of GDP in 2017. According to the latest annual report by the Pensions Advisory Council (Conseil d’orientation des retraites, 2018), they are projected to reach 13.5 % in 2022, before remaining in a range between 11.6 % and 14.4 % by 2070 depending on the growth rate assumed for the evolution of GDP and employment over time. The balance of the system is expected to worsen up to 2022 reaching 0.2 % of GDP. On the longer term, the system could be in equilibrium in 2035 if the GDP growth rate will be equal to 1.8 %, while it would be in deficit in case the GDP growth rate is assumed to be equal the current potential GDP growth rate (1.3 %). A pension reform has been announced for 2019. More than 40 different pension schemes co-exist in France. These schemes apply to different groups of workers and function according to different sets of rules. A law is planned to be adopted in 2019 to progressively unify the rules of these schemes, with a view to simplifying the functioning of the pension system notably to improve its transparency, equity and efficiency. This comprehensive law would contain all details of the new pension system. According to the 10 principles announced by the High Commissioner for the pension reform on 10 October 2018, the new system would be points-based, take the whole career into account to define pension rights, include a reference age to ensure the adequacy of pension entitlements with respect to living conditions, and follow the golden rules to avoid any transfer of the current debt of the system to future generations. The new system will not apply to pensioners nor to workers retiring within the next 5 years. The transition will be progressive and preserve the rights acquired in the current system. Healthcare* Expenditure on healthcare has steadily increased over time. Total expenditure was estimated at 11.5 % of GDP in 2017, the highest level within the EU countries adhering to the OECD. In terms of per capita spending (about EUR 3 572) the country ranked only 8th in the EU, while spending on the governance of the system was 3 times higher than the average in the other EU countries. Healthcare expenditure financed by the government and compulsory schemes was estimated at 9.5 % of GDP in the same year, the highest along with Germany (9.6 %) (OECD, 2018). A new reform of the healthcare system has been announced in the autumn of 2018. The plan 'Ma santé 2022' represents an additional step to shift the traditionally hospital-centred healthcare systems towards strengthened primary care and to increase the quality of services (). It also aims at introducing a better cooperation among health professions and a smoother coordination among primary, outpatient specialist, hospital care, and long-term care. It should further facilitate the access to care in underserved regions (see Section 4.3) and takes account of the care needs of an ageing population, including the growing number of people living with chronic diseases. Success will depend on a clear legal and organisational framework to be set up, providing the right incentives and fostering collaboration between public and private actors. Hospitals in France will be classified in three categories: (i) local health care, (ii) specialized care and (iii) ultra-specialised care. Between 500 and 600 local hospitals (hôpitaux de proximité) should become operational, offering basic services in hospital care. Public local hospitals would continue to be integrated with the territorial hospital groups (groupements hôspitaliers de territoire) that were created by the 2016 law to improve the cooperation between hospitals within a defined geographic area. It is not clear if the new system of local hospitals will be coordinated with the existing private hospitals to facilitate access to healthcare while reducing the cost of the healthcare system.

The announced reform of the healthcare system does not include a revision of the growth norm for healthcare expenditure (Objectif National de Dépenses d'Assurance Maladie, ONDAM). This spending norm covers a third of social security spending. It is divided in 6 categories, but some of them are fungible (e.g. hospital care or primary care). Although this objective has been respected since 2010, the ONDAM target was already increased 3 times since 2017. Notably, it was made less demanding for the period 2018-2020, from an initial target of 2.1 % growth, to a revised target of 2.3% in budget law for 2018, which was further increased up to 2.5 % in the draft budgetary plan for 2019 (). This will reflect to some extent the additional expenses to be incurred by 'Ma santé 2022'. High cost originator medicines and the low use of generics remain a significant challenge, notwithstanding some achieved efficiency gains in pharmaceutical spending. Between 2006 and 2016, the generic market share in volume nearly doubled in France, rising from 14.5 % to 27.6 %. Relatively few categories of drugs have so far been opened to generic substitution and competition, so that the generic market share remains below the EU average. The law on the financing of social security for 2019 requires that, as of 2020, a substitutable originator medicine will be reimbursed only at the price of a generic, unless objective medical reasons exist. This may save up to EUR 100 million in the short term. Moreover, a working group will present its results in spring 2019 addressing the challenges deriving from the high cost of originator medicines. Housing* Public spending on housing amounts to 1.8% of GDP in 2017 (Comptes du logement, 2017). A recent reform changes housing policy to improve its efficiency. In 2017, EUR 23.3 billion have been spent on housing benefits in public housing or the private sector ("aides à la personne") and around EUR 19 billion on subsidised loans and tax incentives ("aides à la pierre"). Personalised housing allowances (Aide Personnalisé au Logement, APL) have decreased in 2018 in social housing, alongside a reduction of rents, and are planned to decrease in real terms (for all beneficiaries) in 2019 and 2020. The social security financing law for 2019 provides that personalised housing allowances (APL) allowances will be based on a household’s current income (last 12 months), and not on its income of the two previous years. This measure to be implemented in 2019 should generate EUR 700 million of savings this year. In parallel, since 2018 some of the tax expenditures that encourage rental housing investment have been reduced in non-tense areas, to target specific areas where housing supply is insufficient (e.g. the Paris area, cities with more than 250 000 inhabitants). This responds to the observations made by the French Court of Auditors on schemes supporting rental housing investment (worth EUR 1.7 billion in 2016) which are believed to have a limited impact on housing supply and in particular tense areas (Cour des Comptes, 2018a). Fiscal framework* The fiscal framework is centred on the public finance programming laws setting budgetary objectives over the medium term. The French Constitution was amended in 2008 to introduce the public finance programming laws (PFPL) and the overarching objective of a balanced budget of public administrations. The 2012 constitutional bylaw ‘Organic Law’- sets the principles of public finances governance and defines the content of the public finance programming laws. According to the Organic Law, annual budgets should be consistent with the multiannual budgeting approach of the public finance programming laws. The public finance programming law outlines the targets for general government balances for the 3 years ahead in structural and nominal terms and sets targets for the state budget in detail and for the social security administrations at aggregate level. The French fiscal framework is complemented by expenditure rules and supervised by the independent monitoring institution, the High Council for Public Finances (HCPF). Expenditure rules are in place at the state level and a cap on the growth of healthcare spending facilitates the respect of the social security spending targets. In addition, the public finance programming law provides indicative growth rates for expenditure by local governments. The French Court of Auditors issues reports on the situation and trends in public finances, including on state expenditure compared to the expenditure rules in force and an alert committee is in charge of monitoring the growth of healthcare expenditure. Enforcement is weaker at local government level and certain social security funds are less monitored. Established by the 2012 ‘Organic Law’, the High Council for Public Finances plays a central role in the oversight of the fiscal strategy as it monitors the respect of the numerical fiscal targets and assesses compliance of the budgetary objectives set in the annual budgets with the objectives of the programming laws. Nonetheless, in case the public finance programming law is amended by Parliament, the assessment of the High Council for Public Finances is made against the new objectives set in the programming law, which is a structural weakness of the French fiscal framework. In case of departure from the targets, it can trigger the correction mechanism. Finally, the High Council for Public Finances provides endorsement of the macroeconomic forecast underlying the budgetary documents. Local administration Local spending exceeded the planned growth target in 2017. Since 2014,he public expenditure of the local administration in France is guided by an expenditure norm indicating yearly non-binding growth targets for both operating public expenditure and financing needs at local level (‘Objectif d'évolution de la Dépense Locale’, ODEDEL). The link between local investments and the electoral cycle as well as the limited reduction in the number of municipalities, led the expenditure norm not to be respected in 2017. In 2018, this norm has been accompanied by legally binding contract agreements between the state and 71 % if the 322 biggest local authorities, valid in 2018-2020 (). While this contractual approach may help to better plan both operational and investment spending it is to be seen how this approach will help the rationalisation of the local administration started in 2014. Indeed, the territorial reform of 2014-2016 cut by half the number of regions but the number of communes only slightly decreased, which remains above 35 000 by far the highest in the EU (DG Trésor, 2015). In addition, systematic information on local investment projects may be still lacking, along with clear criteria guiding local authorities to select investment projects on the basis of their long-term impact (Cour des Comptes, 2015). Action Publique 2022 The implementation of the government's plan for transforming the public administration continues. In October 2017 the government launched the ‘Public Action 2022’ programme, aiming at an ambitious and coordinated overhaul of all public policies. The programme sets 3 main objectives, namely, the improvement of the quality of public services, the modernisation of public administration and the support to the reduction of the expenditure-to-GDP ratio by 3 percentage points by 2022. It also formally embeds and replaces the annual spending reviews introduced in 2014 which were officially terminated at the end of 2017. After a first preparatory phase (), the second half of 2018 was meant to give way to the definition and implementation of effective reform measures. This has taken the form of the conclusions of the second dedicated inter-ministerial committee (Comité interministériel de la transformation publique, CITP) in October 2018, which confirmed the strategy for transforming public action while providing more details on guiding principles, objectives and areas of intervention. Moreover, the inter-ministerial committee endorsed the transformation plans presented by each and every ministry. The structural nature of the process is consistent with transforming the public administration over the medium- to long-term but the expected results in terms of efficiency gains and expenditure savings are unclear. The government has given clear priority to methodological and process-related aspects rather than focusing on the ex-ante and across-the-board quantification of potential savings. While this could be consistent with a complex reform process and the need to smoothen the public debate over likely sensitive issues, it also makes the quantitative assessment of the overall strategy and of its contribution to fiscal consolidation difficult. In particular, it is not clear how exactly and with what timing the reform programme — including the transformation plans by ministries which embrace an extremely varied set of measures — would contribute to the very specific objective of reducing the expenditure-to-GDP ratio by 2022. Overall, available information shows partial adherence to the guidance for spending reviews agreed in 2016 at the level of the Eurogroup (). Moreover, implementation risks seem also high when looking at the track record of spending reviews in France and the relatively limited results produced. The assessment of the implementation and of the expected impacts of ‘Public Action 2022’ will continue in the following months on the basis of the quarterly state of advancement of the programme to be released by the authorities. General tax structure * France’s tax structure is skewed to labour and capital. The level of the tax-to-GDP ratio is one of the highest in the EU (46.5% of GDP in 2017 v. 39.1 % in EU on average) and more than half of total tax revenues comes from labour taxation (23.7% of GDP v. 19.3% in EU on average in 2016). The implicit tax rate on labour is one of the highest in the EU and exceeds the EU average (41.2 % compared to the EU-28 average of 36.1 % in 2016). Tax reforms are ongoing since 2017 to lower in particular taxes on labour. In addition, revenues from capital taxes, including recurrent property taxes, are among the highest in the EU (10.7 % of GDP v. 8.4 % in EU on average). Revenues from consumption taxes as % of GDP are close to the EU average. France’s tax structure is one of the topics being discussed during the national public consultation (‘Great debate’). Complexity of the tax system* The complexity and lack of stability of the French tax system weighs on business environment. The tax code encompasses multiple rates systems and tax expenditures. This complexity often aims at achieving specific policy goals, like alleviating the tax burden on the most vulnerable households and incentivising or correcting specific behaviours. However, it bears the risk of losing readability, thus increasing compliance costs and legal uncertainty detrimental to France’s attractiveness while creating loopholes. In addition, according to Eurobarometer survey, changes brought to the tax legislation are a major obstacle to investment by companies in France (European Commission, 2018c). Efforts are ongoing to reduce tax compliance costs. The ESSOC law (Loi pour un Etat au service d’une société de confiance) aims at simplifying administrative procedures and makes them more transparent. In tax matters, the law provides that tax rulings should become more systematic, their requests trackable by the tax payers and results should be published to serve as a reference. Similarly, tax audit should also deliver legally binding conclusions to provide legal certainty to the tax payer. Tax adjustments will be eased, penalties reduced and normalised for those tax payers willing to become compliant. In addition, companies liable to corporate tax could ask to have the compliance of their tax operations checked Specific support will focus on small and medium-sized enterprises as a first step. Overall, the law has been welcomed by businesses, especially the introduction of a single contact point responsible for the whole procedure. Making such support more continuous and targeting companies willing to export may be beneficial as they are more likely to face difficulties to comply with crossborder tax rules and new tax environment (see Chapter 1 and Section 4.4.4). The withholding of personal income tax is in force since January 2019. Tax payments are now better synchronised to earnings avoiding important collection time lags. Monthly payments from the tax payers will be taken over by companies, reducing the amount of transactions to the tax administration. This may however entail additional costs for companies, in particular for small businesses. Although not fully deployed (notably for private persons acting as employers), it provides some options to individualise the personal income tax (). Streamlining tax expenditures and reducing the number of small taxes could further help simplifying the tax system. Unlike the previous multiannual framework, this current budgetary framework (2018-2022) does not provide a spending limit for tax expenditures. It sets instead, a non-binding target of 28 % for the ratio of tax expenditures to the sum of net tax revenues and tax expenditures. This ratio will progressively decrease to reach 25 % in 2022. The 2019 budget tables a decrease of the overall amount of tax expenditures below EUR 100 billion, putting an end to a 5-year period of constant increase in volume. Total tax expenditure is estimated at 4 % of GDP in 2019. Between 2018 and 2019, the number of tax expenditures has however increased from 457 to 474. In 2018, the Court of Auditors recommended to streamline the existing tax expenditures and pointed their lack of control and evaluation. Furthermore efforts to discontinue taxes which bring limited revenue or that are inefficient have been amplifie