COMMISSION STAFF WORKING DOCUMENT Analysis by the Commission services of the budgetary situation in France following the adoption of the COUNCIL RECOMMENDATION to France on 21 June 2013 with a view to bringing an end to the situation of an excessive government deficit Accompanying the document Recommendation for a COUNCIL RECOMMENDATION with a view to bringing an end to the situation of an excessive government deficit in France
Date: 2015-02-27
Institutions: European Commission
Subjects: France, budget deficit, budgetary control, economic consequence, economic forecasting, employment statistics, gross domestic product, inflation, price of energy, public administration, public debt, structural adjustment













EUR-Lex - 52015SC0019 - EN











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52015SC0019

COMMISSION STAFF WORKING DOCUMENT Analysis by the Commission services of the budgetary situation in France following the adoption of the COUNCIL RECOMMENDATION to France on 21 June 2013 with a view to bringing an end to the situation of an excessive government deficit Accompanying the document Recommendation for a COUNCIL RECOMMENDATION with a view to bringing an end to the situation of an excessive government deficit in France /* SWD/2015/0019 final */









1.     
Introduction 
On
21 June 2013, the Council decided, in accordance with Article 126(7) TFEU, that
although effective action had been taken by the French authorities, unexpected
adverse economic events with major unfavourable consequences for government finances
had occurred after the adoption of the Council recommendation of 2 December
2009. As a consequence, the Council recommended that France correct its
excessive deficit by 2015 at the latest. In order to bring the general
government deficit below 3 % of GDP in a credible and sustainable manner,
France was recommended to (a) reach a headline deficit of 3.9 % of GDP in
2013, 3.6 % in 2014 and 2.8 % in 2015, which was considered
consistent with delivering an improvement in the structural balance of
1.3 % of GDP in 2013, 0.8 % in 2014 and 0.8 % in 2015, based on
the extended Commission 2013 spring forecast; (b) fully implement the already
adopted measures for 2013 (1½% of GDP) and specify, adopt and implement rapidly
the necessary consolidation measures for 2014 and 2015 to achieve the
recommended improvement in the structural balance, while proceeding as
currently planned with a thorough review of spending categories across all
sub-sectors of general government, including at social security and local government
level; (c) use all windfall gains for deficit reduction. The Council also
recommended to ensure that budgetary consolidation measures result in a lasting
improvement in the general government structural balance in a growth-friendly
manner. In its recommendations, the Council established the deadline of 1
October 2013 for France to take effective action and, in accordance with
Article 3(4a) of Council Regulation (EC) No 1467/97, to report in detail on the
consolidation strategy envisaged to achieve the targets. 
On
15 November 2013, the Commission concluded that based on the Commission 2013
autumn forecast, France had taken effective action in compliance with the
Council recommendation of 21 June 2013 to bring its general government deficit
below the 3 % of GDP reference value and considered that no additional
step in the excessive deficit procedure was therefore necessary.
On
5 March 2014, the Commission issued a recommendation regarding measures to be
taken by France in order to ensure a timely correction of its excessive
deficit. In its recommendation, the Commission considered that France had to
make further efforts to ensure full compliance with the Council recommendation
under the EDP. In its stability programme submitted on 7 May 2014, France outlined
a number of additional measures for 2014. Also taking into account the fact
that the fiscal effort achieved in 2013 was higher than expected at the time of
the Commission recommendation, it was considered that the stability programme
broadly responded to the Commission recommendation. 
On 13 January 2015, the Commission
presented a Communication on Flexibility, providing new guidance on how to
apply the existing rules of the Stability and Growth Pact, in order to
strengthen the link between effective implementation of structural reforms,
investment, and fiscal responsibility in support of jobs and growth. The
Communication does not amend any provision of the Pact, but aims to further
reinforce the effectiveness and understanding of its rules and to develop a
more growth-friendly fiscal stance in the euro area by ensuring the best use of
the flexibility enshrined within the Pact while preserving its credibility and
effectiveness in upholding fiscal responsibility. 
According
to the Commission 2015 winter forecast published on 5 February 2015, the
general government deficit is projected to reach 4.3 % of GDP in 2014 and
4.1 % of GDP in 2015. The headline deficit for 2015 is thus expected to
remain well above the 2.8 % of GDP level recommended by the Council on 21
June 2013 and also above the 3 % of GDP benchmark. 
Based
on the 2015 winter forecast of the Commission, this document provides an
assessment of whether France has taken effective action towards correcting its
excessive deficit and suggests a new adjustment path that would durably bring
the general government deficit below the 3 % of GDP threshold. In
particular, the document examines the budgetary developments since the
Commission communication of 15 November 2013 to the Council on action taken.
2.     
Recent macro-economic and budgetary developments 
In 2013, GDP
growth in France remained sluggish on the back of rising unemployment and still
weak domestic demand. The unemployment rate rose to 10.3 %
from 9.8 % a
year earlier and the number of registered unemployed exceeded 3 million people.
The weakness of domestic demand translated into a decrease in business
investment while enabling some slight positive contribution in net exports.
Inflation decreased to 1.0 % against a
background of sluggish economic growth and declining energy prices.
Nevertheless, economic developments in 2013 turned out slightly more positive
than expected in the Commission 2013 spring forecast, which projected -0.1 % GDP
growth for 2013, as lower-than-expected consumer prices and higher wages
supported private consumption. 
According to the Commission 2015 winter forecast,
GDP growth is projected to remain subdued in 2014 at 0.4 %. In
2014, as in 2013, sluggish activity growth is estimated to have been mainly
driven by public and private consumption, while investment is expected to have
decreased, on the back of weak aggregate demand and falling business
confidence. While net exports have slightly contributed to GDP growth in 2013,
a new fall in export market share is set to have translated into a negative
contribution in 2014 (-0.3pp), offset by a turnaround in inventories (+0.3pp).
Total employment is estimated to have increased in 2014, due notably to
subsidised employment and more marginally to the introduction of the tax
credit on competitiveness and employment (CICE). However, the higher
employment is
expected to be
only sufficient to absorb the increase in the labour force, leaving the
unemployment rate unchanged at 10.3 %. Consumer prices are estimated to
have slowed down from 1.0 % in 2013 to 0.6 % in 2014, in line with
oil prices (in euros), which decreased by 9 % on average in 2014 after
6 % in 2013. 
While
GDP growth turned out higher in 2013 than projected in the baseline scenario
underpinning the Council recommendation of 21 June 2013 (0.3 % vs.
-0.1 %), the growth and inflation projections for 2014 included in the
Commission 2015 winter forecast are significantly lower than foreseen in the
baseline.
The baseline scenario underpinning the Council recommendation expected the economy
to recover markedly in 2014 and GDP was expected to grow by 1.1 %.
Assuming that the structural balance improved by 0.8 % of GDP, the EDP
scenario underpinning the Council recommendation of 21 June 2013 projected GDP
growth to reach 0.6 %. Based on the Commission 2015 winter forecast, GDP
growth is now forecast to be significantly lower than expected both by the
baseline and the EDP scenarios set in June 2013. The main
difference between these two forecast exercises stem from downward revisions in
external demand, but also in investment which is now set to remain subdued
against a background of contained profit margins and further drops in business
confidence. In the baseline scenario underpinning the Council recommendation,
the GDP deflator was expected to increase by 1.7 % in 2014. In line with
the strong decrease in oil prices in 2014, the Commission 2015 winter forecast
now expects the increase in the GDP deflator to be 0.9 pp lower. 
Table 1 – Comparison of macroeconomic
developments and forecasts
Despite
better-than-expected GDP growth, the general government deficit reached
4.1 % of GDP in 2013, above the 3.9 %
of GDP
recommended by the Council on 21 June 2013. Despite a
large amount of new discretionary measures, public revenue growth proved disappointing.
Tax revenues, excluding discretionary revenue measures, grew at a considerably
slower pace than GDP, with an elasticity of only 0.4 according to the
Commission.[1]
The Commission 2013 spring forecast already assumed that the elasticity of tax
revenues to GDP would be lower than unity, at 0.9, and warned that, given the
cyclical position, an even lower figure could not be discarded. The negative
impact of low public revenue growth on the general government deficit was,
however, partly compensated by a slowdown in public expenditures. The latter
increased by 2.0 % in nominal terms, excluding the impact of tax credits,
a significant slowdown compared to the growth in 2012 (+3.0 %). In
particular, the EUR 5.6 billion (0.3 % of GDP) reduction in interest paid
on public debt reduced public expenditure growth by 0.5 pp. 
Based
on the Commission 2015 winter forecast, the headline deficit is set to have
increased to 4.3 % of GDP in 2014, on the back of a still increasing
output gap and low inflation. The amount of discretionary measures on
the revenue side would remain sizeable, representing 0.6 % of GDP.
Meanwhile, due notably to GDP growth composition, the spontaneous elasticity of
tax revenues is expected to stand at 0.7, which is significantly below the standard
value of 1.0. The low elasticity and the slowdown in inflation are both set to
weigh on public revenues and on the general government deficit. On the
expenditure side, measures were taken to curb public expenditures which, net of
tax credits, are expected to grow by 1.3 % in nominal terms. However, the
CICE, which is accounted for as an additional expenditure in ESA 2010, is
estimated to partly offset these efforts and is expected to increase the
general government deficit by 0.5 pp of GDP. 
In
2015, the general government is expected to recede to 4.1 % of GDP. New
discretionary measures on the revenue side are expected to have an overall
neutral impact on the general government balance, while the tax revenues
elasticity is projected to increase to 0.8.
Risks to
the budgetary outlook appear balanced.
While no major expenditure slippages are expected at this stage, the economic
recovery remains fragile and an even lower than currently
forecast tax content of economic activity cannot be discarded. In particular,
the drop in oil prices since autumn 2014 could have a stronger than expected
impact on consumer prices, which are notably the bases for the VAT, with a
potential negative impact on government revenues. On the positive side, the
recent announcement of the European Central Bank could lead to a further easing
of interest rates in the coming month, with a positive impact on the general
government balance. 
The
debt ratio, which stood at 92.2 % of GDP in 2013, is projected to keep on
rising in 2014 and 2015. The debt ratio is expected to reach 95.3 % of GDP
in 2014 and 97.1 % in 2015 due to the still relatively high general
government deficits and subdued nominal GDP growth. Stock-flow adjustments are
expected to contribute to stabilising public debt. 
3.      Budgetary
implementation over 2013-2015 
This section
provides a detailed analysis of budgetary developments over 2013-2015. It
notably discusses the main discretionary measures adopted on the revenue side
and the expenditure cuts implemented. 
3.1.   Budgetary
implementation in 2013
The headline deficit in 2013 is
estimated by the statistical office INSEE at 4.1 % of GDP, thus falling
short of the 3.9 % of GDP target set by the Council on 21 June 2013. The
lower-than-expected elasticity of tax revenues contributed to this deviation,
although GDP growth proved slightly stronger than expected at the time of the
recommendation. Altogether, the fiscal effort as estimated by the Commission
appears slightly below the effort recommended by the Council. 
On the revenue side, a large amount of
discretionary measures were adopted, representing 1.3 % of GDP according
to the Commission. The main measures with an impact on
public revenues were enacted as part of the supplementary budget for 2012
adopted on 16 August 2012 as well as in the initial budget law for 2013.
Additional revenues compared with 2012 came mainly from reductions in corporate
income tax expenditures with measures enacted in the initial budget for 2013
amounting to 0.4 % of GDP. In addition, hikes in social security
contributions contributed to the increase in the tax burden. These included in
particular the abolition of the exemptions of social charges for over-time work
adopted in 2012. Measures were also taken to increase personal income taxes
such as the absence of indexation on inflation of the tax brackets for personal
income tax and for the tax on wealth as well as a reform of the taxation on
capital gains. A number of measures, representing 0.2 pp of GDP, have had
only a one-off budgetary impact meaning that they were not taken into account
in the calculation of the fiscal effort achieved. Therefore, discretionary
measures on the revenue side net of temporary measures and one-offs are
estimated to have yielded 1.1 % of GDP, slightly below the 1.3 % of
GDP projected in the baseline scenario underpinning the recommendation. 
Table 2 – Composition of budgetary adjustment 
Public
expenditures slowed down significantly in 2013 due to specific expenditure cuts
as well as to the impact of spending norms in a context of decreasing interest
rates.
The expenditure review process (révision générale des politiques publiques, replaced
by the modernisation de l'action publique since mid-2012) has yielded
savings at central government level in 2013. Moreover, the freeze in public
sector wages was maintained with compensation of employees increasing by only
1.7 % in nominal terms compared to above 3 % on average over
2000-2008. The spending norm for the central government in nominal terms also
contributed to the restrained expenditure growth, although the norm was not
strictly achieved, notably due to an unexpected increase in the contribution to
the EU budget towards the end of the year. On social security, healthcare
spending turned out lower than the target set in the budget. In addition, the
2010 pension reform continued to provide additional savings along with the
gradual increase in the minimum retirement age, despite a partial rollback of
the reform for workers with long careers. Conversely, investment at the local government
level proved dynamic, in line with the usually observed trends in the last year
preceding a municipal election. Finally, due to the decreasing interest rates,
the cost of debt decreased by 0.2 pp of GDP in 2013 although public debt itself
continued to increase. On the whole, general government expenditure increased
by 1.9 % in nominal terms (2.0 % excluding tax credits), the second
lowest growth rate recorded in the last 20 years. Expenditures under the
control of the government, adjusting for interest and developments in the
number of unemployed, increased by 1.2 pp of GDP, 0.1 pp below the
increase expected in the baseline scenario outlined in June 2013. 
Table 3 – Main
budgetary measures over 2013-2015 (excluding one-offs) 
 Revenue || Expenditure 
 2013 
 Increase in indirect taxation (+0.2% of GDP) Increase in income taxation/reduction in income tax expenditures (+0.3% of GDP) No indexation of tax brackets of personal income tax and tax on wealth (+0.1 of GDP) Higher social levies on capital income and gains and on employee savings schemes (+0.2% of GDP) Increase in social contributions/reduction in social security exemptions (+0.3% of GDP) || Freeze in base wages of civil servants (-0.1% of GDP) Savings stemming from the RGPP spending review at central government level (-0.1% of GDP) 2010 pension reform (-0.1% of GDP) Savings in healthcare expenditure (-0.1% of GDP) Investissements d'avenir programme (+0.1% of GDP) Other measures (+0.1% of GDP) 
 2014 
 Reducing various personal income tax exemptions (+0.2% of GDP) Increase in social contributions (rate) (+0.1% of GDP) Temporary 5% increase in corporate income tax for companies with turnover exceeding EUR 250 million (+0.1% of GDP) Increase in VAT rates (+0.3% of GDP) Reduction in personal income tax for low-earning households (-0.05% of GDP) || Freeze in base wages of civil servants (-0.1% of GDP) Savings in healthcare expenditure (-0.1% of GDP) Savings stemming from the RGPP spending review at central government level (-0.1% of GDP) 2010 pension reform (-0.1% of GDP) Introduction of the tax credit on competitiveness and employment (+0.5 % of GDP) 
 2015 
 Additional reduction in personal income tax for low-earning households (-0.05% of GDP) Reduction in employer's social contributions for employees paid between 1 and 1.6 time the minimum wage (0.2 % of GDP) || 2010 pension reform (-0.2% of GDP) Savings in healthcare expenditure (-0.2% of GDP) Freeze in base wages of civil servants (-0.1% of GDP) Postponed indexation of social transfers (-0.1% of GDP) Ramp-up of the tax credit on competitiveness and employment (+0.3 % of GDP)   
 Note: A positive sign implies that revenue / expenditure increases as a consequence of this measure. Annual budgetary impacts are estimated by the Commission services. Measures with a budget impact of at least 0.1% of GDP are listed. 
3.2.   Budgetary
developments in 2014
According to the Commission 2015 winter
forecast, the headline deficit in 2014 is expected to reach 4.3 % of GDP,
thus falling short of the 3.6 % of GDP target set by the Council on 21
June 2013.
Besides a negative base effect resulting from 2013, the lower-than-expected
nominal GDP growth accounts for most of the deviation. Meanwhile, the amount of
discretionary measures taken on the revenue side and expenditure developments
appears broadly in line with the Council recommendation of 21 June 2013. 
On the revenue side, discretionary
measures are expected to amount to 0.5 % of GDP according to the
Commission 2015 winter forecast. The main measures with an impact
on public revenues adopted in 2014 include the reshuffling of VAT rates as of 1
January 2014, the doubling of the exceptional tax on corporate income for large
companies and the increase in the contribution for old-age which was adopted as
part of the 2013 pension reform. As part of the reform of VAT rates, the
standard rate was increased from 19.6 % to 20 % and the intermediary
rate from 8 % to 10 %. The minimum rate remained unchanged at
5.5 % and became applicable for work to increase the energy efficiency of
dwellings built for more than two years. This measure, which is expected to
yield additional revenues of 0.3 pp of GDP, was notably adopted to partly
compensate for the negative impact on public finances of the newly introduced
CICE. The exceptional tax on corporate income for large companies, which was
initially introduced in 2011, was increased from 5 % to 10.7 %,
yielding close to 0.1 pp of GDP. Based on the Commission 2015 winter
forecast, the elasticity of tax revenues is expected to recover in 2014, although
it is set to remain significantly below 1.0, bringing current revenues to
53.1 % of GDP. One-off and temporary measures, including judicial disputes
and the exceptional reduction in the contribution to the EU budget recorded in
2014, almost offset each other and are therefore set to have only a marginal
impact on the discretionary measures.
Public
expenditures are expected to continue slowing down in 2014 in spite of the
rising cost of the CICE, which is accounted for as public expenditure under ESA
2010.
Efforts conducted by the government to curb expenditure growth would be
supported by the continued decrease in interest rates and to a fall in local
investment in line with the electoral cycle. The freeze in public sector wages
has been maintained with compensation of public sector employees expected to
increase again by 1.7 % in nominal terms. The spending norm on central
government expenditures in nominal terms is expected to be respected. On social
security, the healthcare spending growth objective was set at 2.3 %, after
a 2.4 % growth rate was achieved in 2013. Investment at the local
government level is also expected to contract starkly, in line with the trend
usually observed in the year of a municipal election. While interest rates are
expected to continue decreasing, the impact would be somewhat weaker than in
2013 (-0.1 pp of GDP). Meanwhile, the CICE, which was adopted in 2012 and
will ramp up over 2014-2015, is expected to increase public expenditures in
2014 by 0.5 pp of GDP. Overall, general government expenditures are
expected to increase by 2.2 % in nominal terms (1.3 % excluding the
impact of tax credits). Including the impact of the tax credits on public
expenditures in ESA 2010, expenditures under the control of the government are
set to increase by 1.3 pp of GDP, 0.1 pp below the increase expected
in the baseline scenario outlined in June 2013.
3.3.   Budgetary
developments in 2015
According
to the Commission 2015 winter forecast, the headline deficit in 2015 is
expected to reach 4.1 % of GDP, much above the 3 % of GDP benchmark and of
the 2.8 % of GDP target set by the Council on 21 June 2013. Besides
a negative base effect resulting from 2014, the lower-than-expected nominal GDP
growth account for most of the deviation. According to the Commission 2015
winter forecast, the structural balance is expected to improve by 0.3 % of GDP
in 2015. 
On
the revenue side, discretionary measures are expected to represent 0.1 %
of GDP as revenue-increasing measures are almost entirely offset by the
implementation of the Responsibility and Solidarity Pact.
Indeed, the reduction in employers' social security contributions which was
adopted in a supplementary budget for 2014 will be effective on 1 January 2015
and is expected to reduce public revenues by 0.2 pp of GDP. The planned
reduction in personal income tax for low earning households is set to further
reduce the tax burden by 0.1 pp of GDP. The impact of these measures on
tax revenues will be offset notably by an increase in indirect taxation and by
the extension by one year of the exceptional tax on large companies which was
supposed to expire in 2015. Based on the Commission 2015 winter forecast, the
elasticity of tax revenues is expected to come close to 0.8 in 2015, with
current revenues remaining stable at 53.1 % of GDP. Due to the extinction of
one-off measures expected in 2014, the 2013 spring forecast expected one-off
measures to increase by 0.1 pp of GDP the overall amount of discretionary
measures in 2015. By comparison, the 2015 winter forecast expects one-off and
temporary measures, which result from judicial disputes, to decrease the amount
of discretionary measures by 0.1 pp of GDP. 
On
the expenditure side, the government plans a EUR 21 bn reduction in public
expenditure, in line with the objective to achieve a EUR 50 billion savings
target over 2015-2017. Savings expected form the central
government would amount to close to EUR 8 bn. In particular, the government
plans to contain the wage bill and other operating costs by maintaining the
freeze in base wages. Efforts are also planned to achieve efficiency gains and
rationalise public sector real estate. State-controlled agencies (the organismes
divers d'administration centrale) will be financially incentivised to
reduce their own spending. The grant paid by the State to local government will
be cut by EUR 3.7 billion. Finally, savings in social security are expected to
come close to EUR 9 billion on the back of a further reduction in the
healthcare spending objective and to a one-year nominal freeze in social benefits.
The methodology used by the authorities to quantify these savings does not
appear to be fully consistent. Regarding the State, efforts have been made to
estimate a trend increase in expenditure against which savings are quantified.
By contrast, part of the decrease in local investment expected in 2015 is
linked to the electoral cycle and should not be considered as actual savings
while local taxes are also expected to increase, notably due to measures
announced to the Commission on 27 October and adopted as part of the second
supplementary budget for 2014 in December. Overall, based on the Commission
2015 winter forecast, general government expenditures are
expected to increase by 1.5 % in nominal terms (1.0 % excluding the
impact of tax credits). Including tax credits, expenditures
under the control of government are expected to increase by 0.8 pp of GDP,
much below the 1.3 pp growth expected in June 2013. 
4.     
Effective action in 2013-14 
4.1.   Background
information
The
current assessment of effective action is based on the Commission 2015 winter
forecast. It takes into account the economic and budgetary developments since
the last Council recommendation under Article 126(7) TFEU of 21 June 2013. The
methodology for assessing effective action is the one endorsed by the Council
in June 2014. The assessment starts by comparing the headline deficit target
and the recommended improvement in the structural balance in the Council
recommendation with the headline deficit and the apparent fiscal effort,
measured by the change in structural budget balance. If not achieved, a careful
analysis based on (i) the adjusted change of the structural balance and (ii) a
bottom-up assessment of the consolidation measures undertaken by the French
authorities in 2013 and 2014 is carried out. 
The
adjustment of the structural balance takes into account (i) the impact of
revisions in potential output growth compared with the growth scenario
underpinning the Council recommendation, (ii) the impact of revenue
windfalls/shortfalls relative to the ones used in the baseline scenario, and
(iii) the negative impact of the changeover to ESA 2010 on the cost of tax
credits. 
4.2.   Headline
targets and adjustment in the structural balance 
The
general government deficit is estimated to have remained above the level
recommended in 2013 and 2014. In its recommendation of 21 June
2013, the Council recommended France to achieve headline targets of 3.9 %
of GDP in 2013 and 3.6 % in 2014. In 2013, the general government deficit
has actually reached 4.1 % of GDP. Based on the Commission 2015 winter
forecast, it is expected to increase further to 4.3 % of GDP in 2014. 
In
its recommendation of 21 June 2013, the Council recommended France to improve
its structural balance by 1.3 pp of GDP in 2013 and 0.8 pp in 2014 and 2015.
Based on the Commission 2015 winter forecast, the structural deficit is
estimated to fall to 3.3% of GDP in 2013 from 4.3% of GDP in 2012 and to
continue decreasing to 2.9% of GDP in 2014 and 2.6 % in 2015. This implies
an annual fiscal effort of 1.0 % of GDP in 2013, 0.4% in 2014 and
0.3 % in 2015, below the targets in each year. 
Altogether,
the fact that both the headline targets and the structural deficit targets have
been missed in 2013 and 2014 warrants a careful analysis. 
Table 4: Comparison of budgetary
projections
4.3.   Careful
analysis 
Top down assessment
The correction for revisions in
potential growth since June 2013 have a marginal impact on the estimated
improvement in the structural balance in 2013 and 2014. At
the time of the Council recommendation of 21 June 2013, potential output growth
was estimated to stand at 0.9 % in 2013 and 1.0 % in 2014. Based on
its 2015 winter forecast, the Commission estimates that potential growth
reached 1.0 % both in 2013 and 2014. All other things being equal, an
upward revision of potential growth increases the output gap and reduces the
estimated structural deficit. Correcting for this development has, however, a
non-significant impact for 2013 and 2014.
Compared to the baseline, the 2015 winter forecast
shows revenue shortfalls of 0.2 pp of GDP in 2013 and 2014. In a
context where real GDP growth was expected to be negative in 2013, the
Commission 2013 spring forecast projected revenue to grow at a faster rate than
what standard elasticities of public revenues to GDP would suggest both in 2013
and 2014. By contrast, the Commission 2015 winter forecast now expects revenue
shortfalls, meaning that current revenues increase at a slower pace than
nominal GDP in both years. By comparison to the baseline scenario, correcting
the Commission 2015 winter forecast for revenue shortfalls and windfalls
therefore leads to an increase in current revenues in 2013 and 2014. 
Adjusting
for the negative impact of the changeover to ESA 2010 increases by 0.1 pp
of GDP the improvement in the structural balance in 2014. In
2014, the European System of Account (ESA) experienced a number of
methodological changes on the occasion of the changeover from ESA 1995 to ESA
2010. In particular, payable tax credits, which were accounted for as negative
measures on the revenue side in ESA 1995 are now recorded as expenditures. In
addition, while such tax credits, including notably the CICE and the tax credit
on research, were formerly recorded at the time the related amounts were claimed,
the additional expenditure is now taken into account as soon as a tax liability
is recorded. This methodological change, which was not foreseen at the time of
the Council recommendation and can be considered outside the control of
government, increases the total cost of these measures by 0.1 pp of GDP in
2014. They therefore reduce the improvement in the structural balance by
0.1 pp of GDP. 
Taking
into account the relevant adjustment, the cumulated improvement in the
structural balance over 2013-2014 is expected to fall short of the level
recommended by the Council. Correcting for downward revisions in
potential output growth and revenue shortfalls/windfalls compared with the time
the Council recommendation was issued as well as for the negative impact of the
changeover to ESA 2010, the improvement in the structural balance effort comes
in at 1.2 % of GDP in 2013 and 0.7 % in 2014. The cumulated effort
over 2013-2014 therefore falls short by 0.2 pp of the 2.1 % of GDP
recommended by the Council.
Table 5 – Adjusted change in the
structural balance (top-down) and fiscal effort (bottom-up)
Bottom-up
assessment 
In its recommendation of 21 June 2013, the Council
deemed that in order to be consistent with the adjustment in the structural
balance recommended, measures for an amount of 0.0 % of GDP in 2013 and
above 1.0 % in 2014 were needed on top of the baseline scenario
underpinning the recommendation. Accordingly, the bottom-up
assessment of budgetary developments compares the baseline scenario underpinning
the Council Recommendation of 21 June 2013 with (i) the discretionary measures,
net of one-off and temporary measures, adopted on the revenue side and (ii)
developments in expenditures under the control of the government.[2] 
For 2013, the bottom-up assessment of the effort
amounts to -0.1 % of GDP compared to the baseline scenario. On
the revenue side, based on measures specified at the time of the Council
Recommendation, the baseline scenario expected discretionary measures to amount
to 1.3 % of GDP in 2013, while expenditures under the control of the
government were expected to increase by 1.3 pp of GDP. Estimates by the
Commission of the discretionary measures actually implemented in 2013 amount to
only 1.1 % of GDP (see table 3 for details). Meanwhile, expenditures under
the control of the government proved less dynamic than expected in the baseline
scenario (+1.2 pp of GDP). 
In 2014, based on the Commission 2015 winter
forecast, a bottom-up effort representing 1.1 % of GDP has been
implemented on top of the baseline scenario, corrected for the negative impact
of the changeover to ESA2010. The baseline scenario underpinning the
Council Recommendation of 21 June 2013 expected measures on the revenue side
for 2014 to amount to -0.2 % of GDP, while expenditures under the control
of the government were expected to increase by 1.4 pp of GDP. The Council
recommendation of 21 June 2013 considered that, compared to that scenario,
additional measures of above 1 % of GDP were necessary for the budgetary
targets to be reached. Based on the Commission 2015 winter forecast, additional
revenues yielded by discretionary measures for 2014 are actually expected to
amount to 0.7 % of GDP. On the expenditure side, expenditures under the
control of the government are projected to increase by 1.2 pp in 2014 once the
impact of the changeover to ESA 2010 on the cost of payable tax credits is
adjusted for.
The cumulated effort over 2013 and 2014 is estimated
to stand just above 1 % of GDP, in line with the level deemed necessary by
the Council on 21 June 2013. The effort for 2013 shows a shortfall of
0.1 % GDP compared to the level deemed consistent with the variation in
the structural balance recommended by the Council. This shortfall is, however,
compensated by a bottom up effort of 1.1 % of GDP in 2014, which is above
1 %, the level deemed necessary by the Council for that year. In terms of
composition, the additional effort compared to the baseline has mainly
consisted in revenue measures while expenditures developments have remained
close to those considered in the baseline scenario underpinning the Council
Recommendation. 
Conclusion of the careful analysis
The downward revision in inflation recorded in 2014
has had a negative impact on the general government deficit. In
2014, inflation turned out to be significantly lower than expected. While
the scenario underpinning the Council recommendation expected inflation to
reach 1.4 % in 2013 and 1.7 % in 2014 (based on the GDP deflator), the 2015
winter forecast estimates that it reached only 0.8 % in both years. Such a
negative inflation shock has an adverse impact on tax bases and leads to
downward revisions in tax revenues. By comparison, expenditures are less
sensitive to inflation revisions, especially in France where public expenditures
are partly guided by norms set in nominal terms. In addition, a number of
expenditures, notably public wages and social transfers related to pensions and
housing, were frozen in nominal terms in 2014, making the achievement of
further savings more difficult.
The difference between the top-down and bottom-up
indicators in 2014 mainly comes from this large downward revision in inflation:
the top-down assessment is strongly impacted by the inflation shock, unlike the
bottom-up assessment. The deterioration in the headline
deficit leads to a worsening of the structural balance, thus leading to an
estimated lower effort according to the top-down assessment. This is because
the output gap, which is used to estimate the cyclical part of the deficit, is computed
in volume terms and is hence not impacted by inflation. In turn, the cyclical
part of the headline deficit is not affected by the downward revision in
inflation, and hence all the inflation-related deterioration in the headline
deficit results in a similar deterioration of the structural balance. 
By contrast, the bottom-up assessment appears less
sensitive to inflation revisions than the top-down assessment. The
direct quantification of the discretionary revenue measures adopted in 2014 has
been only marginally impacted by the lower-than-expected inflation. In
addition, as already indicated, expenditure targets are generally set in
nominal terms, implying that a large part of expenditures do not adjust to
lower inflation. The overall impact of the downward revision in inflation on
the bottom-up effort is thus likely to have been limited. More specifically, as
some public expenditures are sensitive to inflation and could have been revised
somewhat downwards, the bottom-up indicator could have been affected positively
but, in any case, much less than the top-down in the specific case of France.
The gap between the top-down assessment - which
shows a shortfall of 0.2 % of GDP compared to the recommendation – and the
bottom up effort – which is in line with the recommendation - is mostly due to
the downward revision in inflation. The lower
inflation reduced the top-down effort by around 0.6 % of GDP. Conversely, the
lower-than-expected interest payments, which are not taken into account in the
bottom-up approach, increased the top-down effort by 0.4 % of GDP. The
conjunction of the two effects, which partly offset one another, explains the
0.2 % of GDP shortfall in the top-down effort.
Overall, on the basis of the 2015 Commission winter
forecast, the information available does not allow to conclude that the
recommended effort has not been delivered in 2013-2014. 
5.     
Proposed new adjustment path
According
to the Commission 2015 winter forecast, France is not expected to correct its
excessive deficit by the deadline established in the Council recommendation of
21 June 2013 although the cumulated fiscal effort for 2013-2014, as measured by
discretionary measures adopted on the revenue side and expenditure
developments, is in line with the level indicated by the Council.
Indeed, while the macroeconomic scenario underpinning the recommendation
assumed that the output gap would gradually narrow, GDP is actually expected to
grow below potential, although the estimated potential growth itself was
revised down since the 2013 spring forecast. Although additional measures
amounting to "above 1 % of GDP" were taken since June 2013, the
lower-than-expected economic growth has had a negative impact on the headline
budget balance. In addition, while the cumulated adjustment in the structural
effort appears lower than the level recommended by the Council in June 2013, it
seems to be mainly due to lower inflation estimated in the Commission 2015
winter forecast than at the time of the recommendation. It therefore appears
justified to issue a revised recommendation and to extend the deadline for
correction of the excessive deficit.
5.1.  
Expected
impact of structural reforms
The
2015 Country Report concluded that France is experiencing excessive
macroeconomic imbalances requiring specific monitoring and continued determined
policy action, as reflected in persistently low external competitiveness and
high public sector indebtedness. The deterioration in the trade
balance and in competitiveness deserves continued policy attention. In particular,
in a context of low growth and low inflation and given the insufficient policy
response so far, risks stemming from weak competitiveness and the high public
debt are significant. The need for action so as to reduce the risk of adverse
effects on the French economy and, given the size of the French economy, of
spillovers to the economic and monetary union, is particularly important.
In
its Communication of 13 January 2015, the Commission strengthened the link
between effective implementation of structural reforms, investment, and fiscal
responsibility in support of jobs and growth, within the existing rules of the
Stability and Growth Pact. The Communication clarified that
structural reforms will be taken into account when recommending the length of
the extension of the deadline to correct the excessive deficit. As part of this
Communication, the Commission indicated that it will also take account of
reforms that have not yet been implemented, provided that they have been
clearly specified - with a credible timetable for adoption - in a structural
reform plan that has to be adopted by the Member State in question.
In
a letter sent to the Commission in November 2014, the French authorities
committed to a number of structural reforms implementing the 2014 country-specific
recommendations issued by the Council in July 2014. On 12 December
2014, the government published a reform agenda outlining reform priorities
until 2017. This reform agenda was confirmed in a communication on the National
Reform Programme presented by the Prime Minister to the "Conseil des
Ministres" on 18 February 2015. The measures presented by the French
authorities are expected to have a positive impact on growth and therefore on
the sustainability of public finances. The French authorities estimate the
overall impact of all reforms implemented or initiated since 2012, regardless
of their current state of implementation, at 3.3 pp of GDP by 2020. 
The
most important reform steps taken since the Council recommendation of 21 June
2013 notably include the reductions in the cost of labour as well as the
pension reform enacted in January 2014. The reductions
in the cost of labour include the CICE as well as the pacte de
responsabilité et de solidarité (PRS). The CICE reduces the labour
cost for wages up to 2.5 times the minimum wage for a total amount of EUR 20
billion. The PRS includes a number of additional reductions in the cost of
labour amounting to EUR 10 billion. In 2015, employers' social security
contributions will be reduced for wages up to 1.6 times the minimum wage at a
cost of EUR 4.5 billion and independent workers' contributions will be
decreased for a cost of EUR 1 billion. In 2016, a further reduction in
employer's social security contributions is foreseen of EUR 4.5 billion for wages
between 2.5 and 3.5 times the minimum wage. These measures are expected to
close about half of the gap in terms of tax wedge between France and the euro
area average. The 2014 reform of the pension system seeks to improve the
long-term sustainability of the system. Up to 2020, revenue measures, mostly
higher social contributions, account for the bulk of the adjustment.
Thereafter, the minimum number of years an employee must pay into the system
before he/she qualifies for a full pension will gradually rise to 43 years by
2035 from 41¾ projected in 2020. Overall, the reform proposal would halve the
deficit of the pension system by 2020, and will contribute to increasing the
active population from 2020 on. 
Other
reform plans include, inter alia, measures to reform local authorities, to
improve the business environment, and to increase competition in services. In
particular, the reform of local authorities and a draft Law on Economic
Activity are currently under discussion in Parliament. The reform of local
authorities aims to reduce administrative fragmentation and to avoid
overlapping competences. This reform can increase the efficiency and
productivity of local authorities and should translate into public expenditure
savings in the medium term. Measures to improve the business environment
include an on-going simplification agenda but also the planned revision of the
labour regulations that are associated with specific-size thresholds that may
hamper the growth of French firms. The draft Law on Economic Activity reduces
the administrative burden, notably for the construction sector, and addresses
competition concerns for legal professions, opens up the coach transport
sector, reduces entry barriers for the retail trade and relaxes rules for
Sunday work. Moreover, it also foresees a reform of the procedures for
individual dismissal disputes. 
Overall,
these reforms are expected to increase the growth potential of the French
economy, although the quantification of their impact by the authorities seems
over-estimated. In particular, the French authorities expect the
reductions in the tax burden on labour to increase GDP by 1.7 pp by 2020.
This estimate does not take into account the cost of financing of the labour
cost reductions. Simulations done by the European Commission using the QUEST
III model taking into account a full ex-ante financing of the reforms concludes
that the CICE and the PRS would have a significant though much smaller impact
on GDP by 2020. Moreover, as pointed out in the Commission 2015 Country Report
on France, the impact of the reduction in the cost of labour could be offset by
dynamic wage growth. In addition, the quantification of the shocks is in some
cases not sufficiently specified and seems generous, as evidenced by the large
magnitude of the shocks that would be necessary in the Commission model (QUEST)
to produce comparable results. This is notably the case for the impact expected
by the authorities from the law on energy policy (+0.8 pp of GDP by 2020).
Finally, the estimates include the quantified impact of legislation which has
not yet been adopted. This is notably the case of the draft law on growth and
activity which is currently being discussed in Parliament and whose impact on
GDP could potentially be reduced by changes introduced during the legislative
process. 
Overall,
while the reform agenda set by the French authorities goes in the right
direction, limited progress has been made in implementing the Council
recommendation of 8 July 2014. In light of the remaining
challenges in the policy areas identified in the 2015 Country Report and the
fact that the measures enacted so far have not yet resulted in a significant
correction of France's macroeconomic imbalances, continued commitment to swift
adoption and full implementation of structural reforms covering all
country-specific recommendations is essential. Against this background France
has been invited to announce further details on structural reforms in its
National Reform Plan, which the Commission will keep on closely monitoring. As
mentioned in its Communication "'2015 European Semester: Assessment of
growth challenges, prevention and correction of macroeconomic imbalances, and
results of in-depth reviews under Regulation (EU) No 1176/2011", the
Commission will consider in May, taking into account the level of ambition of
the National Reform Programme and other commitments presented by that date
whether to recommend to the Council to adopt recommendations, pursuant to
Article 7(2) of Regulation 1176/2011, establishing the existence of an
excessive imbalance and recommending that France take corrective action to be
set out in a Corrective Action Plan. 
5.2.  
Baseline
scenario
In
order to define the effort required by France, the Commission 2015 winter
forecast was extended. For 2015 and 2016, the baseline scenario
is identical to the Commission 2015 winter forecast. More specifically, the
recovery is
expected to gradually become firmer as the falling inflation and
still sustained wage growth are expected to support consumer spending. GDP
growth is thus projected to reach 1.0 % in 2015 and, in a
no-policy-change scenario, 1.8 % in 2016. In 2015,
inflation is projected at 0.0 %, due notably to the recent sharp decrease
in oil prices and to the still large economic slack. Inflation would rebound
somewhat to 1.0 % in 2016. For 2017, in the baseline
scenario, it is assumed that, in the absence of any policy measures, the output
gap would close in five years' time. Measures already adopted which are
expected to have a significant impact on the general government deficit beyond
2015 have also been taken into account in the baseline scenario. Measures
included in the baseline for 2016 notably include, based on the 2015 winter
forecast, the planned decrease in employers' social security contributions
(-0.2 % of GDP) as well as the planned reduction in the contribution
sociale de solidarité des sociétés (C3S) (-0.05 % of GDP) and the
increase in environmental taxation (0.1 % of GDP). For 2017, revenue
measures taken into account in the extended forecast increase the general
government deficit by 0.2 % of GDP. They notably include the announced
extinction of the C3S (0.1 % of GDP) and the planned reduction in the
general rate for corporate income tax (0.05 % of GDP). In addition, the structural
balance is considered to deteriorate by close to ¼ pp of GDP due to
expenditure spontaneously growing faster than potential GDP.
The
extended forecast assumes that, under a no-policy-change scenario, GDP growth
would reach 1.8 % in 2017. GDP growth would therefore be
higher than potential growth (estimated at 1.2 % in 2017). The assumptions
underpinning the baseline scenario, as described above, imply a stabilisation
of the headline deficit in 2015-2017.
Table 6 – Forecast of
key macroeconomic and budgetary variables under the baseline scenario
5.3.  
Proposed
extension of the deadline
The
proposed deadline for correcting the excessive deficit situation notably takes
into account the economic conditions together with other relevant factors. Based
on the baseline scenario outlined above, the second-round effects of the
additional consolidation efforts required to bring an end to the excessive
deficit situation are assessed. Apart from this, also other relevant factors,
in particular the implementation of structural reforms in line with the
provisions of the Commission Communication of 13 January 2015 on "Making
the best use of the flexibility within the existing rules of the Stability and
Growth Pact", are considered. In any case, the annual adjustment in the structural
balance considered is at least equal to the minimum benchmark of 0.5 % of GDP
set by the Stability and Growth Pact.
Building
on this, different scenarios have been considered in order to assess the time
needed for France to correct its excessive deficit. Based on the
Commission 2015 winter forecast, an extension of the deadline by one year would
require a cumulated adjustment in the structural balance over 2015 and 2016
representing at least 2.2 % of GDP. This would bring the average effort
required for those two years above the average annual effort recommended in
2013-2015 in the Council recommendation of 21 June 2013. Given the size of the
cumulated fiscal effort required, the negative impact on GDP growth would be
significant.
The
new deadline of two years, i.e. by 2017, would allow bringing the headline
deficit below 3 % while allowing GDP growth to reach to 0.8 % in
2017.
In order to define the adjustment path for 2015 and further, it is assumed that
additional measures needed have a negative second-round impact on GDP growth
through a multiplier effect which is close to 0.7 for revenue-increasing
measures and 1.0 for expenditure cuts. In terms of composition of the
additional measures, it is assumed that the authorities would make additional
expenditure cuts on top of those already included in the baseline scenario
(amounting to close to EUR 25 billion over 2015-2017) to reach an overall
amount of EUR 50 billion over 2015-2017, as mentioned in the programming law on
public finances. Beyond that amount, it is assumed that the additional effort
needed would be split evenly between revenue-increasing measures and
expenditure cuts. Based on these assumptions, the general government deficit
should reach 4.0 % of GDP in 2015, 3.4 % of GDP in 2016 and
2.8 % of GDP in 2017. Such a budgetary path is consistent with an
adjustment in the structural balance of 0.5 % of GDP in 2015, 0.8 %
of GDP in 2016 and 0.9% in 2017. Compared to the baseline scenario outlined
above, additional measures should be taken representing 0.2 % of GDP in
2015, 1.2 % in 2016 and 1.3% in 2017. Taking into account the second-round
effects on economic growth of the additional consolidation measures needed, GDP
growth would reach 0.8 % in 2015, 0.7 % in 2016 and 0.8 % in
2017. 
Table 7 – Forecast of key macroeconomic
and budgetary variables under the EDP scenario
6.     
Conclusions
Based
on current information, the cumulated adjustment in the structural balance over
2013-2014 is estimated to amount to 1.9% of GDP. This falls short of the
cumulated adjustment in the structural balance of 2.1 % of GDP recommended
by the Council in June 2013. However, the bottom-up approach estimates that the
fiscal effort would amount to -0.1 % in 2013 and 1.1 % in 2014 with
the cumulated effort being in line with the "above 1.0 % of GDP"
indicated by the Council. 
As
the gap between the top-down and the bottom-up indicator mainly stems from
revisions in inflation since spring 2013, the careful analysis concludes that
the bottom-up approach should be given a prominent role in the assessment of
budgetary developments over 2013-2014. Overall the available evidence does not
allow concluding that the recommended effort has not been
delivered in 2013-2014.
The
deficit is expected to remain well above the 3% of GDP reference value in 2015.
The substantial cyclical deterioration in the budgetary position resulting from
the weaker overall position of the economy relative to the macroeconomic
scenario underlying the 2013 Council recommendation and medium-term growth
prospects, together with the first steps towards an ambitious structural reform
agenda that need to be further complemented as indicated in the Communication
from the Commission "'2015 European Semester: Assessment of growth
challenges, prevention and correction of macroeconomic imbalances, and results
of in-depth reviews under Regulation (EU) No 1176/2011, suggest that
extending the deadline for correction of the excessive deficit to 2017 at the
latest is appropriate also in the light of the Commission Communication No (2015)12
of 13 January 2015 on "Making the best use of the flexibility within the
existing rules of the Stability and Growth Pact". 
Setting
a new two-year deadline for France to correct its excessive deficit appears
commensurate with headline deficit targets of 4.0 % of GDP in 2015,
3.4 % of GDP in 2016 and 2.8 % of GDP in 2017. The underlying
improvement in the structural budget balance would be 0.5 % of GDP in
2015, 0.8 % in 2016 and 0.9% in 2017. In cumulated terms, the effort should
therefore reach 0.5 % in 2015, 1.3 % in 2016 and 2.2 % in 2017.
To that avail, additional measures beyond the baseline scenario outlined in the
present staff working document should be taken, which should amount to
0.2 % of GDP in 2015, 1.2 % of GDP in 2016 and 1.3% of GDP in 2017.
In cumulated terms, additional measures needed should therefore amount to
0.2 % in 2015, 1.4 % in 2016 and 2.7 % of GDP in 2017. 
Annex – Standard tables 
Table 8 – Adjustment of apparent
structural effort for the revision in potential growth - details of
calculations
Table 9 – Adjustment of apparent
structural effort for the expected revenue windfalls/shortfalls - details of
calculations
Table 10 – Forecast
of key variables for the computation of the fiscal effort under the baseline
scenario
[1] The elasticity of tax
revenues was even lower (0.2) according to the government due to a
significantly larger estimated yield of the adopted discretionary measures
compared to the Commission 2015 winter forecast. 
[2] Excluding the cost of interest and the impact on public finances of
developments in the number of unemployed people.