Council Opinion of  14 March 2006  on the updated stability programme of France, 2005-2009
Date: 2006-03-14
Institutions: Council of the European Union
Subjects: France, budget estimate, economic forecasting, public finance, stability programme

C 82/14

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Official Journal of the European Union

5.4.2006

COUNCIL OPINION

of 14 March 2006

on the updated stability programme of France, 2005-2009

(2006/C 82/04)

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community,

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

Having regard to the recommendation of the Commission,

After consulting the Economic and Financial Committee,

HAS DELIVERED THIS OPINION:

(1)

(2)

(3)

(4)

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

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

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

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

(1) OJ L 209, 2.8.1997, p. 1. Regulation as amended by Regulation (EC) No 1055/2005 (OJ L 174, 7.7.2005, p. 1). The

documents referred to in this text can be found at the following website:
http://europa.eu.int/comm/economy_finance/about/activities/sgp/main_en.htm

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(5)

(6)

(7)

(8)

(9)

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

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

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

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

The budgetary outcome could be worse than projected in the programme. Concerning 2006, the
downside risks stem from the macroeconomic scenario and from the fact that revenues could be
lower and expenditures in the areas of local administration and healthcare higher. For the rest of the
period, the ambitious targets set in the update are welcome. The enhancement of expenditure-
growth rules at the different levels of the general government will improve the oversight of public
finance and raise the accountability of all public stakeholders for spending control. The strong grip
on state expenditure and the recent enhancement of the enforcement mechanisms on health expen-
diture are welcome, such as the creation of a permanent committee gathering all stakeholders of
public finances, which would be responsible for drafting proposals for public expenditure control

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

(2) Report from an independent committee appointed by the French government to analyse the public debt and to deter-

mine debt-reduction possibilities, published in mid-December 2005.

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and debt reduction. However, expenditure control will have to be strictly implemented, given the
track record related to the achievement of overall budget balance objectives. The new targets imply
a drastic expenditure restraint compared to previous targets, which will require large structural
reforms to be further detailed, especially concerning local authorities.

(10)

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

(11)

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

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

(13)

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

(14)

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

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C 82/17

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

— Ensure the necessary structural adjustment to bring the general government deficit below 3 % of GDP

in 2006 in a credible and sustainable manner;

— Take the necessary measures to ensure the planned fiscal consolidation towards the medium-term

objective and improve long-term sustainability; and

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

Comparison of key macroeconomic and budgetary projections

Real GDP
(% change)

HICP inflation
(%)

2004

2005

2006

2007

2008

2009

SP Jan 2006 (2)

2,3

1,5–2,0

2,0–2,5

2,25

2,25

2,25

COM Nov 2005 (8)

SP Dec 2004

SP Jan 2006 (1)

COM Nov 2005

SP Dec 2004 (7)

2,3

2,5

2,3

2,3

2,2

1,5

2,5

1,9

2,0

1,8

1,8

2,5

2,3

2,5

n.a.

n.a.

2,5

n.a.

1,8

1,75

1,75

1,75

2,1

1,5

1,9

1,5

n.a.

n.a.

1,5

n.a.

Output gap
(% of potential GDP)

SP Jan 2006 (2)

– 0,3

– 0,5

– 0,4

– 0,6

– 0,8

– 0,9

COM Nov 2005 (6)

– 0,2

– 0,5

– 0,9

– 1,0

n.a.

n.a.

General government
balance
(% of GDP)

SP Dec 2004

– 0,5

– 0,4

– 0,4

– 0,4

– 0,4

n.a.

SP Jan 2006

– 3,7

– 3,0

– 2,9

– 2,6

– 1,9

– 1,0

COM Nov 2005

– 3,7

– 3,2

– 3,5

– 3,5

n.a.

n.a.

SP Dec 2004

– 3,6

– 2,9

– 2,2

– 1,6

– 0,9

n.a.

Primary balance
(% of GDP)

SP Jan 2006

– 0,8

– 0,3

– 0,3

0,0

0,6

1,6

COM Nov 2005

– 0,8

– 0,5

– 0,7

– 0,7

n.a.

n.a.

Cyclically-adjusted
balance
(% of GDP)

SP Dec 2004

– 0,7

0,1

0,8

1,5

2,2

n.a.

SP Jan 2006 (2)

– 3,5

– 2,8

– 2,7

– 2,3

– 1,5

– 0,6

COM Nov 2005

– 3,6

– 3,0

– 3,0

– 3,1

n.a.

n.a.

SP Dec 2004 (3)

– 3,4

– 2,7

– 2,0

– 1,4

– 0,7

n.a.

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2004

2005

2006

2007

2008

2009

Structural balance (2)
(% of GDP)

Government gross debt
(% of GDP)

SP Jan 2006 (4)

– 3,5

– 3,3

– 2,9

– 2,3

– 1,5

– 0,6

COM Nov 2005 (5)

– 3,6

– 3,5

– 3,3

– 3,1

SP Dec 2004

SP Jan 2006

COM Nov 2005

SP Dec 2004

n.a.

65,1

65,1

64,8

n.a.

65,8

66,5

65,0

n.a.

66,0

67,1

64,6

n.a.

65,6

68,0

63,6

n.a.

n.a.

64,6

n.a.

62,0

n.a.

n.a.

62,8

n.a.

n.a.

Notes:
(1) For further calculations, the corresponding point estimate has been used.
(2) Commission services' calculations on the basis of the information in the programme.
(3) Cyclically-adjusted balance (as in the previous rows) excluding one-off and other temporary measures.
(4) One-off and other temporary measures as calculated by the Commission services (0.6% of GDP in 2005 (the apparent smaller differ-

ence between the structural and the cyclically-adjusted is due to rounding effect), 0.2% of GDP in 2006; all deficit-reducing).

(5) One-off and other temporary measures taken from the Commission services' autumn 2005 forecast (0.5% of GDP in 2005 and 0.2%

in 2006; all deficit-reducing).

(6) Based on estimated potential growth of 2.3% in 2004, 1.9% in 2005, 2.2% in 2006 and 2.4% for the period 2007-2009.
(7) CPI change instead of HICP.
(8) According to first estimates, growth was 1.4% in 2005. The Commission services' interim forecast of 21 February 2006 projects

growth of 1.9% in 2006.

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