Council opinion of 27 February 2007 on the updated stability programme of France, 2006-2010
Date: 2007-02-27
Institutions: Council of the European Union
Subjects: France, budget estimate, economic forecasting, public finance, stability programme

27.3.2007

EN

Official Journal of the European Union

C 70/13

COUNCIL OPINION

of 27 February 2007

on the updated stability programme of France, 2006-2010

(2007/C 70/04)

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 particular
Article 5(3) thereof,

Having regard to the recommendation of the Commission,

After consulting the Economic and Financial Committee,

HAS DELIVERED THIS OPINION:

(1)

(2)

(3)

(4)

On 27 February 2007 the Council examined the updated stability programme of France, which
covers the period 2006 to 2010.

The programme contains two different scenarios for the macroeconomic and budgetary projections: a
‘low’ scenario and a ‘high’ scenario. The ‘low’ scenario, which is in line with the Commission services'
autumn 2006 forecast,
is considered the reference scenario for assessing budgetary projections.
Assessed against currently available information, it appears to be based on plausible assumptions,
although somewhat on the high side concerning 2006. It envisages that real GDP will grow by 2¼ %
per year over the programme period. The programme's projections for inflation also appear realistic.

For 2006, the general government deficit is estimated at 2,7 % of GDP in the Commission services'
autumn 2006 forecast, against a target of 2,9 % of GDP for 2006 set in the previous update of the
stability programme (and a deficit outturn of 2,9 % of GDP in 2005). Although the GDP growth
assumption is the same in the previous and current update, a range between 2 % and 2,5 %, the
composition of growth is more tax rich in the current update as it is based on higher private
consumption. The expected improvement in the deficit is supported by (a) an acceleration in GDP
growth (from 1,2 % to about 2 %) which boosts revenues (about EUR 5bn, i.e. 0,3 percentage point
of GDP), and (b) a slowdown in expenditure.

The programme is inscribed in the French authorities' overarching strategy of ‘national commitment
to debt reduction’ and is presented as a multi-annual programme for debt reduction targeting a zero
deficit and a debt level below 60 % of GDP by 2010. It foresees a continuous but back loaded
decrease in the headline deficit from 2,7 % of GDP in 2006 (2,5 % in 2007) to 0 % of GDP in 2010,
amounting to an overall reduction by 2,7 percentage points of GDP. The primary deficit, of 0,1 % of
GDP in 2006, would turn into a surplus from 2007 onwards and reach 2,5 % of GDP in 2010. The
planned fiscal consolidation is expenditure-driven: it is based on multi-annual targets for the increase
in the general government expenditures that imply a reduction in the (primary) expenditure-to-GDP
ratio by close to 3 percentage points of GDP over the period. Compared with the previous
programme,
the new update largely confirms the planned fiscal adjustment against a broadly
unchanged macroeconomic scenario.

(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

C 70/14

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Official Journal of the European Union

27.3.2007

(5)

(6)

(7)

(8)

(9)

the cyclically-adjusted balance net of one-off and other temporary
The structural balance (i.e.
measures) calculated according to the commonly agreed methodology is planned to improve from a
deficit of about 2½ % of GDP in 2006 to a surplus of about ¼ % at the end of the programme
period (2010). As in the previous update of the stability programme, the medium-term objective
(MTO) is a balanced position in structural terms, which the programme aims to achieve by 2010. As
the MTO is more demanding than the minimum benchmark (estimated at a deficit of around 1½ %
of GDP), achieving it should fulfil the aim of providing a safety margin against the occurrence of an
excessive deficit. The 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 risks to the budgetary projections in the programme appear broadly balanced in the near term
(until 2008) but budgetary outcomes could be worse than projected in the programme in the outer
years. Concerning the near term, the adjustment mainly relies on stronger expenditure control at the
State level, which is backed by the progressive implementation of the new Constitutional Bylaw on
Budget Bills (1) and the results of the modernisation audits and is plausible although local authorities'
expenditure trends are a risk factor. Regarding the outer years, there are risks to the full achievement
of the strong adjustment targeted. Indeed, the strong restraint envisaged is likely to call for additional
measures that are not spelled out in the programme, even if the track record of the compliance with
its expenditure norm at the State level is good. More generally, the track record related to the achieve-
ment of the overall general government expenditure ceilings, at the heart of the French budgetary
consolidation strategy, together with the lack of enforcement mechanisms notably for local authori-
ties, tilt the risks to the negative side. Mechanisms have been created to develop the dialogue among
public expenditure managers with a view to contributing to better control expenditure at all levels.

In view of this risk assessment, the budgetary stance in the programme may not be sufficient to
ensure that the MTO is achieved by 2010 as envisaged in the programme. However, it seems to
provide a sufficient safety margin against breaching the 3 % of GDP deficit threshold with normal
macroeconomic fluctuations towards the end of the programme period, most probably from 2009.
Except for 2007, the pace of the adjustment towards the MTO implied by the programme is broadly
in line with the Stability and Growth Pact, which specifies that, for euro-area and ERM II Member
States, the annual improvement in the structural balance should be 0,5 % of GDP as a benchmark
and that the adjustment should be higher in good economic times and could be lower in bad
economic times. Although France has only just corrected its excessive deficit, the envisaged adjust-
ment for 2007 would be limited to an estimated 0,3 percentage point of GDP, while the economic
situation cannot be assessed as ‘bad times’ and tax elasticities even point to ‘good times’.

Government gross debt is estimated to have reached 64,6 % of GDP in 2006, above the 60 % of
GDP Treaty reference value. The programme projects the debt-to GDP ratio to decline by 6½ percen-
tage points over the programme period. The evolution of the debt ratio might be less favourable than
projected in the outer years of the programme given (1) the risks to the budgetary targets mentioned
above, and (2) uncertainty about the materialization of non-strategic asset sales which tend to be
larger than the historical average. In view of this risk assessment, the debt ratio seems to be suffi-
ciently diminishing towards the reference value over the programme period.

The long-term budgetary impact of ageing in France is slightly lower than the EU average, with
pension expenditure showing a somewhat more limited increase than in many other countries, as a
result of
improved
the pension reforms already enacted. The initial budgetary position, albeit
compared with 2005, still constitutes a risk to sustainable public finances even before the long-term
budgetary impact of an ageing population is considered. Moreover, the current level of gross debt is
above the Treaty reference value. Further budgetary consolidation would contribute to reducing risks
to the sustainability of public finances, which would also benefit from preserving and possibly enhan-
cing the benefits of the pension reform. Overall, France appears to be at medium risk with regard to
the sustainability of public finances.

(1) The new Constitutional Bylaw on Budget Bills (LOLF), which has been implemented for the first time in 2006, aims at

more transparency and efficiency of public expenditure management.

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Official Journal of the European Union

C 70/15

(10)

The stability programme contains a qualitative assessment of the overall impact of France's October
2006 national reform programme within the medium-term fiscal strategy. However, although it
provides no systematic information on the direct budgetary costs or savings of the main reforms envi-
saged in the national reform programme, its budgetary projections seem to take into account the
public finance implications of the actions outlined in the national reform programme. The measures
in the area of public finances envisaged in the stability programme seem consistent with those fore-
seen in the national reform programme. In particular, the programme presents measures aiming at
increasing potential growth, which concern the modernisation of the labour market but also some
innovation in the area of industrial and research policies.

(11)

The budgetary strategy in the programme is broadly consistent with the broad economic policy
guidelines included in the integrated guidelines for the period 2005-2008.

(12) As regards the data requirements specified in the code of conduct for stability and convergence

programmes, the programme has some gaps in the required and optional data (1).

The Council welcomes that, after the correction of the excessive deficit and in a context of strong revenue
growth, the programme gives priority to debt reduction and envisages progress towards the MTO through
an expenditure-based adjustment. But it notes that the adjustment is somewhat back-loaded and that there
are risks to the achievement of the budgetary targets, especially in the outer years.

In view of the above assessment, the Council invites France to:

(i) exploit the robust growth prospects and the positive base effect from a stronger-than previously expected
2006 outturn to frontload the adjustment towards the MTO and pursue an ambitious structural adjust-
ment in the coming years with a view to achieving the MTO by 2010 as planned, thereby reducing the
level of the debt and improving the long-term sustainability of public finances. In particular, the 2007
budget should be fully and effectively implemented and any opportunity should be seized to step up the
structural adjustment.

(ii) strengthen the monitoring and enforcement of expenditure rules for all sub-sectors of the general

government so as to ensure the respect of the ambitious multi-annual expenditure ceilings.

Comparison of budgetary developments and projections

2005

2006

2007

2008

2009

2010

n.a.

n.a.

n.a.

n.a.

Real GDP
(% change)

SP Dec 2006

COM Nov 2006

1,2

1,2

2,0-2,5

2,0-2,5

2 ¼

2 ¼

2 ¼

2,2

2,3

2,1

n.a.

SP Jan 2006

1,5-2,0

2,0-2,5

2 ¼

2 ¼

2 ¼

HICP inflation
(%)

SP Dec 2006

COM Nov 2006

SP Jan 2006

1,9

1,9

1,9

2,0

2,0

1,8

1,9

1,8

1,9

n.a.

1 ¾

1 ¾

1 ¾

1 ¾

1 ¾

1 ¾

Output gap
(% of potential GDP)

SP Dec 2006 (1)

– 0,8

– 0,6

– 0,6

– 0,5

– 0,4

– 0,3

General government
balance
(% of GDP)

COM Nov 2006 (5)

– 0,8

– 0,8

– 0,7

– 0,9

n.a.

SP Jan 2006 (1)

– 0,5

– 0,4

– 0,6

– 0,8

– 0,9

SP Dec 2006

– 2,9

– 2,7

– 2,5

– 1,8

– 0,9

COM Nov 2006

– 2,9

– 2,7

– 2,6

– 2,2

n.a.

SP Jan 2006

– 3,0

– 2,9

– 2,6

– 1,9

– 1,0

n.a.

n.a.

0,0

n.a.

n.a.

(1) In particular, the data on collective consumption and short and long-term interest rates (for the years 2008 to 2010) are

not provided.

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Official Journal of the European Union

27.3.2007

2005

2006

2007

2008

2009

2010

Primary balance
(% of GDP)

SP Dec 2006

– 0,2

– 0,1

COM Nov 2006

– 0,2

– 0,1

SP Jan 2006

– 0,3

– 0,3

0,1

0,0

0,0

0,7

0,4

0,6

1,7

n.a.

1,6

Cyclically-adjusted
balance
(% of GDP)

Structural balance (2)
(% of GDP)

SP Dec 2006 (1)

– 2,5

– 2,4

– 2,2

– 1,6

– 0,7

COM Nov 2006

– 2,5

– 2,3

– 2,3

– 1,8

n.a.

SP Jan 2006 (1)

– 2,8

– 2,7

– 2,3

– 1,5

– 0,6

SP Dec 2006 (3)

– 3,0

– 2,5

– 2,2

– 1,6

– 0,7

COM Nov 2006 (4)

– 3,1

– 2,6

– 2,3

– 1,8

n.a.

Government gross debt
(% of GDP)

SP Jan 2006

SP Dec 2006

COM Nov 2006

SP Jan 2006

– 3,3

– 2,9

– 2,3

– 1,5

– 0,6

66,6

66,6

65,8

64,6

64,7

66,0

63,6

63,9

65,6

62,6

63,3

64,6

60,7

n.a.

62,8

2,5

n.a.

n.a.

0,2

n.a.

n.a.

0,2

n.a.

n.a.

58,0

n.a.

n.a.

Notes:
(1) Commission services calculations on the basis of the information in the programme.
(2) Cyclically-adjusted balance (as in the previous rows) excluding one-off and other temporary measures.
(3) One-off and other temporary measures taken from the programme (0,5 % of GDP in 2005 and 0,1 % in 2006; 0 % thereafter, all

deficit-reducing).

(4) One-off and other temporary measures taken from the Commission services' autumn 2006 forecast (0,6 % of GDP in 2005 and 0,2 %

in 2006; 0 % thereafter, all deficit-reducing).

(5) Based on estimated potential growth of 2,0 %, 2,2 %, 2,2 % and 2,3 % respectively in the period 2005-2008.

Source:
Stability programme (SP); Commission services' autumn 2006 economic forecasts (COM); Commission services' calculations