Council opinion of 10 February 2004 on the updated stability programme of France, 2003-2007
Date: 2004-02-10
Institutions: Council of the European Union
Subjects: France, stability programme

19.2.2004

EN

Official Journal of the European Union

C 43/5

The economic policies as reflected in the updated programme
are broadly consistent with the recommendations in the Broad
Economic Policy Guidelines, specifically those with budgetary
system of multi-annual
implications.

In particular,

the

the
budgeting has been extended to all capital spending,
reform of health care system should address value for money
concerns and further progress is being made with the roll-out
of the National Development Plan.

COUNCIL OPINION

of 10 February 2004

on the updated stability programme of France, 2003-2007

(2004/C 43/04)

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 co-ordination 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 10 February 2004, the Council examined the 2003 update
of the stability programme of France which covers the period
2003 to 2007. The updated programme largely complies with
the requirements of
the revised ‘code of conduct’ on the
content and format of stability and convergence programmes.
Even if it is not compulsorily required in the code of conduct,
the presence in the programme of explicit projections for
general government revenues and expenditures categories on
a national accounting basis would have allowed a deeper
analysis of the quality of the projected budgetary adjustment.

On 3 June 2003, on the basis of a Commission Recommen-
dation the Council decided in accordance with Article 104(6)
EC that an excessive deficit existed in France and issued a
recommendation based on article 104(7) EC requesting
the
France to bring this situation to an end by 2004 at
latest. On 8 and 21 October 2003 respectively,
the
Commission adopted two recommendations on the basis of
Article 104(8) and 104(9) respectively for the Council
to
decide 1. that no effective action had been taken by France
in response to the recommendation of 3 June and 2. to give
notice to France to take the necessary measures to bring the
government deficit below 3 % of GDP in 2005 at the latest. On

(1) OJ L 209, 2.8.1997.

the Council did not adopt

25 November 2003,
the two
Commission recommendations but adopted instead a set of
conclusions endorsing, among other things, the commitments
made by France to reduce the cyclically-adjusted deficit by 0,8
per cent of GDP in 2004, and by 0,6 per cent of GDP or a
larger amount
the general
government deficit is brought below 3 per cent of GDP in
2005.

in 2005 so as to ensure that

The medium-term projections of the 2003 updated programme
are based on the same budgetary strategy already adopted in
previous updates. The cornerstone of this strategy is the setting
of multi-annual targets for the increase in real government
expenditures, implying a fall of the expenditure to GDP ratio
and a decline in the general government deficit. In the 2003
update, this strategy is complemented by two new budgetary
rules: 1. any higher-than-expected revenue stemming from
more favourable cyclical developments will be allocated to
deficit
reduction; and 2. any budgetary margin stemming
from a slower-than-planned increase in expenditures will be
allocated to tax relief.

A strategy based on clear norms for expenditure growth is
appropriate as it supports a transparent budgetary adjustment.
In this respect, the ability to contain state expenditure demon-
strated in 2003 is positive but the previously set expenditure
targets for general government as a whole, in particular social
security, were missed by a large margin. Appropriate measures
should be taken in order to improve the compliance with the
expenditure targets. Beyond the impact on deficit outcomes,
the non respect of expenditure ceilings could,
if repeated,
damage the overall credibility of the budgetary strategy, given
the relevance of these norms as an anchor. In order to secure
the French authorities should
the attainment of objectives,
introduce a mechanism ensuring automatic compensation
across years of eventual overspending in the government
sector. Concerning the first of the new budgetary rules,
in
the event of more favourable cyclical developments, it would
be appropriate to accelerate the reduction in the cyclically-
adjusted deficit
through the implementation of additional
measures. Concerning the second rule and taking the need to
accelerate the deficit reduction into account, any budgetary
margin stemming from a slower-than-planned increase in

C 43/6

EN

Official Journal of the European Union

19.2.2004

expenditures should be allocated to deficit reduction. The 2003
update projects
real GDP growth to accelerate from an
estimated 0,5 % in 2003 to 1,7 % in 2004. For the period
from 2005 to 2007,
the macroeconomic projections are
based on the same two scenarios as in previous updates: a
‘cautious’ scenario, in which real GDP growth averages 2,5 %
a year over the period, and a ‘favourable’ scenario where real
GDP growth reaches 3 % per year. Consumer price inflation is
expected to remain moderate at 1,5 % throughout the time
the update. The growth assumption for 2003 is
span of
outdated: the Commission forecast of real GDP increasing by
0,1 % appears more plausible. The forecast for 2004 appears
plausible. Concerning the years 2005-2007, the projections of
the ‘cautious’
scenario was
scenario seem realistic. This
therefore considered as the reference scenario for assessing
budgetary projections.

The update targets a general government deficit of 3,6 % of
GDP in 2004 compared to an expected deficit of 4,0 % of GDP
in 2003. For 2005, 2006 and 2007, the projections are for
headline deficits of 2,9 %, 2,2 % and 1,5 % of GDP respectively.
The primary balance is projected to improve from 0,6 % of
GDP in 2004 to 1,6 % of GDP in 2007. In cyclically-adjusted
terms, based on Commission calculations according to the
commonly agreed methodology, there is an improvement by
0,6 percentage points to 3,2 % of GDP in 2004. In 2005, 2006
and 2007,
to 2,6 %,
the cyclically-adjusted deficits amount
1,9 % and 1,3 % of GDP respectively.

the

the

target

Indeed,

in 2005.

expenditure

excessive deficit

Under plausible macroeconomic and budgetary assumptions,
the adjustment path in the programme seems to be insufficient
to eliminate
the
achievement of this objective is surrounded by several risks:
1. real GDP growth in 2003 was probably lower than assumed
and the 2003 government deficit may
in the update,
consequently turn out
the
to be higher than expected; 2.
achievement of
for 2004 is
set
implementation and efficiency of
uncertain and requires full
the measures introduced; 3. the improvement in the cyclically-
adjusted balance planned for 2005 relies on measures which
still have to be designed and implemented, particularly the
reform of the health insurance system. Because the deficit is
planned to be reduced only marginally below 3 % in 2005, the
materialisation of only one of the above-mentioned risks, if not
compensated, would compromise the reduction of the deficit
below 3 % of GDP in 2005. In such a case, the implementation
of additional measures would be necessary to secure the
correction of the excessive deficit situation in 2005 at the
latest. France should implement all necessary measures in line
with Council conclusions of 25 November 2003, in particular
to ensure that the deficit will be below 3 % of GDP in 2005 at
the latest.

to ensure that

Based on Commission calculations according to the commonly
agreed methodology, the budgetary stance in the update is
insufficient
the Stability and Growth Pact's
medium-term objective of a budgetary position of close to
in surplus is achieved within the programme
balance or
period. In addition, with the same methodology, a budgetary
position providing a sufficient safety margin to avoid in the
future breaching the 3 % of GDP deficit
threshold under
normal macroeconomic conditions would not be reached
before 2007.

The debt ratio is projected to start declining only in 2006, and
to remain above the 60 % reference value of
the Treaty
throughout
the period covered by the programme. The
the debt ratio might be less favourable than
evolution of
projected given the risks to the deficit outcomes mentioned
above.

France has recently passed a comprehensive pension reform
that increases the number of contribution years for entitlement
to a full pension, raises the financial incentives to remain active
until and after the legal retirement age, and changes the
reference for the indexation of pensions in the public sector
from wages to prices. While France is in a considerably better
position than before the reform to meet the budgetary costs of
ageing population, risks of unbalances in the long term cannot
be ruled out. Securing an adequate primary surplus will be
essential to ensure that the public finances are on a sustainable
footing. This should be complemented, particularly in the
context of the reform of the health insurance system to be
designed and implemented in the
course of 2004, by
measures aimed at controlling the evolution of spending.

by

the

in the

recommended

the Council,

The economic policies as reflected in the 2003 update are
partly consistent with the recommendations in the Broad
Economic Policy Guidelines, specifically those with budgetary
implications. Indeed, even if the budgetary plans for 2004 and
cyclically-adjusted
2005 include an improvement
balance higher than the minimum of 0,5 percentage point of
GDP
cumulative
improvement
in the cyclically-adjusted balance under way
may be insufficient to bring the nominal deficit below 3 % of
GDP even in 2005. In addition, the 2003 update does not
foresee the attainment of a budgetary position close to
the programme.
balance or in surplus in the horizon of
France should therefore ensure that
the budgetary consoli-
dation continues in the years after 2005, namely through a
steady reduction in the cyclically-adjusted budgetary deficit by
at least 0,5 percentage points of GDP per year or more if
necessary to achieve the medium-term position of government
finances close to balance or in surplus and bring back the debt
ratio to a declining path.