Council opinion of 21 January 2003 on the updated Stability Programme of France, 2004-2006
Date: 2003-01-21
Institutions: Council of the European Union
Subjects: France, budget policy, economic policy, gross domestic product, public finance, stability programme

4.2.2003

EN

Official Journal of the European Union

C 26/5

reduction in the debt ratio prior to the budgetary impact of
ageing populations taking hold. The Council considers that
further reforms are required to the pension system to avoid
an unsustainable increase in public spending. Furthermore, the

encourages

the Greek

to promote
Council
supplementary privately-funded pension schemes and to take
measures
the
evolution of age related expenditures.

to raise participation rates and to control

authorities

COUNCIL OPINION

of 21 January 2003

on the updated Stability Programme of France, 2004-2006

(2003/C 26/04)

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European
Community,

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

Having regard to the recommendation of the Commission,
after consulting the Economic and Financial Committee,

HAS DELIVERED THIS OPINION:

On 21 January 2003 the Council examined the updated
stability programme of France which covers the period 2003
to 2006. This update is the first programme prepared by the
new Government, which took office in June 2002; it provides a
budgetary strategy designed to support a strong and lasting
in economic and employment growth. The
improvement
programme complies with the requirements of
the revised
Code of Conduct on the content and format of stability and
convergence programmes. The Council considers that
the
programme complies partly with the recommendations of the
2002 Broad Economic Policy Guidelines.

The Council, having identified a significant divergence in 2002
budgetary developments from the projections of
the 2001
update of the stability programme, and considering that this
divergence is not corrected in the plans for 2003, adopted on
21 January 2003 a recommendation with a view to giving
early warning to France in order to prevent the occurrence
of an excessive deficit. According to this recommendation: (i)
the appropriate
The French Government
measures in order to ensure that
the general Government
deficit does not breach the 3 % of GDP threshold in 2003;

should take all

(ii) Adopting measures apt to improve the cyclically-adjusted
budgetary position by at least 0,5 percentage point of GDP
would not only reduce the risk for the general government
deficit to breach the 3 % of GDP threshold in 2003, but also
contribute to resuming a budgetary consolidation path towards
a close to balance position as from 2003;
(iii) Continuous
adjustment in the underlying budgetary position by at least
0,5 % of GDP per year should be pursued also in subsequent
years in order to achieve the medium-term budgetary position
of close to balance or in surplus by 2006.

General government finances deteriorated markedly in 2002.
The updated stability programme estimates the 2002 general
government deficit at 2,8 % of GDP, a level higher than that
recommended in the early warning and well above the 1,4 % of
GDP planned in the previous update. The Council notes that a
large part of the slippage in 2002 is due to a deterioration in
the underlying balance, which mainly reflects an overrun in
expenditures. The budget
the general
this projection is
government deficit at 2,6 % of GDP;
consistent with a decrease in the cyclically-adjusted by 0,2 %
of GDP in 2003 to 2,6 % of GDP (2).

for 2003 projects

The macroeconomic assumption underlying the budget of an
increase in real GDP by 2,5 % in 2003 is to be considered as
optimistic. Therefore, there is a danger for the government
deficit to breach the reference value in 2003. A further deterio-
ration in the 2002 position, which cannot be excluded, or an
eventual slippage in the 2003 budget could also bring the
general government deficit above 3 % of GDP in 2003. In its
Autumn forecast, the Commission projected an increase in the
government deficit by 0,2 percentage point between 2002 and
2003 under the assumption of real GDP growth at 2,0 %.
Finally, a risk exists that the government debt breaches the
60 % of GDP reference value in 2003.

For the period 2004 to 2006, the macroeconomic projections
of the 2002 update are based on two scenarios: a ‘cautious’
scenario, with real GDP growth at 2,5 % a year over the period,
and a ‘favourable’ scenario where real GDP growth reaches 3 %

(1) OJ L 209, 2.8.1997.

(2) These calculations are based on the production function method

approved by the Council.

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Official Journal of the European Union

4.2.2003

the

‘favourable’

year. The projections of

scenario
per
encompass downside risks, and the ‘cautious’ scenario should
be taken as the reference one for assessing budgetary devel-
opments. In the ‘cautious’ scenario, the government deficit is
projected to decline by 0,5 percentage point of GDP per year
as from 2004 to reach 1,0 % of GDP in 2006, which implies
that
the medium-term objective of close to balance or in
surplus would not be reached in the programme period. In
the ‘favourable’ scenario, the government deficit would reach
a close to balance position in 2006.

The Council notes that the budgetary consolidation mainly
takes place from 2004 onwards. The effort planned for 2003
reaches 0,2 percentage point of GDP, and between 2004 and
2006,
the underlying budgetary position improves by 0,5
percentage point a year. The Council urges the French auth-
orities to seek an improvement in the underlying budgetary
position of at least 0,5 % each year in order to reduce the
risk for the general government deficit to breach the 3 % of
GDP threshold and to reach a close to balance position by
2006.

The slow budgetary adjustment is partly due to the implemen-
tation of tax cuts from 2003 worth 0,2/0,3 percentage point of
GDP per year, in a context where expenditures are projected to
increase at the same rate as in the 2001 update. Although
considering that a reduction in the tax burden is to be
welcomed in so far as it contributes to strengthen potential
output growth, the Council regrets that the current update
does not confirm that any reduction in the tax burden after
2003 is conditional on the attainment of a close to balance
budgetary position.

strategy of

the 2002 updated stability
The budgetary
programme remains based on defining norms for general
government expenditure increases in real terms. This strategy
has already been commended by the Council in its opinions on
the previous updated programmes. Over the period 2004 to
2006, real expenditures are planned to increase by 3,9 % in
real terms. The Council considers,
in particular in view of
recent economic and budgetary developments, that ambitious
reforms should be rapidly implemented in order to ensure that
this objective is achieved. The Council welcomes the structural
measures designed to curb expenditures in the health sector
taken recently and the actions aiming at improving the control
of budgetary execution in the State sector. It also welcomes the
commitment to implement corrective infra-annual measures in
the social security sector in the event of an evidence of over-
spending. The Council considers that these reforms should lead
to a better adherence to the ex ante defined pluri-annual
expenditure norms.

On the basis of current policies,
the risk of unsustainable
public finances in light of ageing populations cannot be
excluded. If debt reduction is to make a noticeable contribution
towards meeting the budgetary cost of ageing populations,
then reaching a balanced budget position by 2006 is essential;
this should be part of an ambitious three-pronged strategy to
meet the long-term budgetary consequences of ageing and may
have to include the running of surpluses. Running sound
public finances over the long run will allow to achieve a
significant reduction in the debt ratio prior to the budgetary
impact of ageing populations
taking hold. The Council
welcomes the intentions of the French authorities to reform
pension and health-care systems in light of ageing populations
and urges them to proceed rapidly with these reforms given
the limited window of opportunity.