Recommendation for a COUNCIL RECOMMENDATION with a view to bringing an end to the excessive government deficit in France
Date: 2015-02-27
Institutions: European Commission
Subjects: France, budget deficit, economic consequence, economic forecasting, economic reform, economic stabilisation, public administration, public debt, stability pact













EUR-Lex - 52015PC0115 - EN











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52015PC0115

Recommendation for a COUNCIL RECOMMENDATION with a view to bringing an end to the excessive government deficit in France /* COM/2015/0115 final - 2015/ () */









Recommendation for a
COUNCIL RECOMMENDATION
with a view to bringing an end to the
excessive government deficit in France
THE COUNCIL OF THE EUROPEAN UNION,
Having regard to the Treaty on the
Functioning of the European Union, and in particular Article 126(7) thereof,
Having regard to the recommendation from
the European Commission,
Whereas:
(1)       According to Article 126
of the Treaty on the Functioning of the European Union (TFEU), Member States
shall avoid excessive government deficits.
(2)       The Stability and Growth
Pact is based on the objective of sound government finances as a means of
strengthening the conditions for price stability and for strong sustainable
growth conducive to employment creation.
(3)       On 27 April 2009, the
Council decided, in accordance with Article 104(6) of the Treaty establishing
the European Community (TEC), that an excessive deficit existed in France and
issued recommendations to correct the excessive deficit by 2012 at the latest[1], in accordance with
Article 104(7) TEC and Article 3 of Council Regulation (EC) No 1467/97 of 7
July 1997 on speeding up and clarifying the implementation of the excessive
deficit procedure[2].

(4)       On 2 December 2009, 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 27 April 2009.
As a consequence, the Council recommended that France correct its excessive
deficit by 2013 at the latest. 
(5)       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 to be 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. It was
further recommended that budgetary consolidation measures secure 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. 
(6)       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.
(7)       In accordance with
Articles 9(1) and 17(2) of Regulation (EU) No 473/2013, France presented an
Economic Partnership Programme to the Commission and to the Council on 1
October 2013. The Council considered in its opinion adopted on 10 December that
the Economic Partnership Programme of France included a set of
fiscal-structural reforms that were partly adequate to support an effective and
lasting correction of the excessive deficit. 
(8)       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 of 21 June
2013. 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. 
(9)       On 13 January 2015, the
Commission presented a Communication on "Making the best use of the
flexibility within the existing rules of the Stability and Growth Pact"
(COM(2015) 12). The Communication clarifies that the
Commission will take into account the existence of a dedicated structural
reform plan, providing detailed and verifiable information, as well as credible
timelines for adoption and delivery, when recommending a deadline for the
correction of the excessive deficit or the length of any extension to that
deadline. The Commission will closely monitor the implementation of the
reforms. In case of failure to implement, the Commission will consider it an
aggravating factor when assessing effective action in response to the Excessive
Deficit Procedure recommendation and when setting a new deadline for the
correction of the excessive deficit. Lack of effective action will lead to a
stepping up of the procedure and the possible suspension of European Structural
and Investment Funds. For euro area Member States, this means that the
Commission will recommend to the Council the imposition of a fine.  
(10)     According to Article 3(5)
of Regulation (EC) No 1467/97, the Council may decide, on a recommendation from
the Commission, to adopt a revised recommendation under Article 126(7) TFEU, if
effective action has been taken and unexpected adverse economic events with
major unfavourable consequences for government finances occur after the
adoption of that recommendation. The occurrence of unexpected adverse economic
events with major unfavourable budgetary effects shall be assessed against the
economic forecast underlying the Council recommendation.
(11)     In accordance with Article
126(7) TFEU and Article 3 of Council Regulation (EC) No 1467/97, the Council is
required to make recommendations to the Member State concerned with a view to
bringing the situation of an excessive deficit to an end within a given period.
The recommendation has to establish a maximum deadline of six months for effective
action to be taken by the Member State concerned to correct the excessive
deficit which can be reduced to three months. Furthermore, in a recommendation
to correct an excessive deficit the Council should request the achievement of
annual budgetary targets which, on the basis of the forecast underpinning the
recommendation, are consistent with a minimum annual improvement in the
structural balance, i.e. the cyclically-adjusted balance excluding one-off and
other temporary measures, of at least 0.5% of GDP as a benchmark. 
(12)     In the Commission staff
working document of 29 May 2013, the Commission services projected that the
French economy would contract by 0.1% in 2013 and would then expand by
0.6 % and 1.1 % in 2014 and 2015, respectively. In addition, the
Commission 2013 spring forecast, which underpinned the scenario laid down in
the staff working document of 29 May 2013, expected the harmonised index of
consumer prices (HICP) to increase by 1.2 % in 2013 and 1.7 % in
2014. These growth and inflation forecasts were used as a basis for the Council
recommendation under Article 126(7) TFEU of 21 June 2013. In 2013, GDP growth
actually turned out to be slightly higher than expected by the Commission as
GDP grew by 0.3 %. On the other hand, the HICP increased by only
1.0 %.
(13)     The Commission 2015 winter
forecast projects GDP to have increased by 0.4 % in 2014, 0.2 pp. below
what was foreseen in the baseline scenario underpinning the EDP recommendation.
GDP growth is estimated to have been driven mainly by
an increase in inventories, public and private consumption, while investment
and net exports are expected to have decreased. By comparison, at the time of
the recommendation, investment was expected to increase in 2014 on the back of
improving business confidence, while external demand was projected to be much
stronger. Meanwhile, falling energy prices and weak
activity have offset the impact on prices of the VAT reshuffling introduced in
January 2014. As a consequence, HICP inflation is set to have slowed down to
0.6 % in 2014. Inflation in 2013 and 2014 thus turned out markedly lower
than projected in spring 2013. In 2015, GDP is projected to increase by
1.0 % while the HICP is expected to remain flat (0.0% inflation). 
(14)     In 2013, the general
government deficit amounted to 4.1 % of GDP, above the 3.9 % of GDP
objective set in the recommendation of 21 June 2013. In particular, public
revenues were negatively impacted by the much lower-than-expected elasticity of
tax revenues, in spite of discretionary measures representing EUR 27 billion
(1.3 % of GDP) according to the Commission. The fiscal effort as measured
by the change in the structural balance was 1.0% of GDP. Correcting for
revisions in potential growth and revenue shortfalls (0.2 pp of GDP), the
change in the structural balance for 2013 stood at 1.2 % of GDP. This
falls short of the 1.3 % of GDP improvement recommended by the Council on
21 June 2013, albeit by a narrow margin. Based on discretionary measures
adopted on the revenue side and on developments in total expenditures compared
to the scenario set forth in the Council recommendation of 21 June 2013, the
bottom-up assessment of the fiscal effort stands at -0.1 % of GDP, here
again slightly below the 0.0 % of GDP of additional measures deemed necessary
to reach the budgetary targets set in the Council recommendation. 
(15)     According to the Commission
2015 winter forecast, the headline deficit is set to have increased further in
2014 despite significant efforts to rein in the increase in public expenditures.
Indeed, savings are expected from the continuation of a public sector wage
freeze, the impact of pension reforms, and lower expenditure at the local
level. However, these are expected to have been outweighed by the ramp-up of
the tax credit for competitiveness and employment (CICE), which under ESA 2010
rules is accounted for as public expenditure and whose cost is estimated to
amount to EUR 11 billion (0.4 % of GDP) in 2014. On the revenue side, the
reshuffling of VAT rates implemented on 1 January and the doubling of the
exceptional corporate income tax paid by large companies had a positive impact
on tax revenues. However, lower-than-expected real GDP growth and inflation,
together with a still low elasticity of tax revenues to GDP, have weighed on
fiscal revenues. 
(16)     The structural deficit,
based on the Commission 2015 winter forecast, is estimated to decrease from
3.3 % of GDP in 2013 to 2.9 % in 2014. When taking into account the
corrections for downward revisions in potential output growth (+0.0 pp of
GDP) and revenue windfalls (+0.2 pp of GDP) compared with the forecast
made at the time the Council recommendation was issued, the annual fiscal
effort for 2014 comes in at 0.6 % of GDP. Correcting
for the negative impact of the changeover to ESA 2010 on the cost of payable
tax credits, a development considered outside the scope of government control,
brings the top-down assessment of the fiscal effort to 0.7 % of GDP thus falling slightly short of the recommended effort of 0.8 %
of GDP. Compared to the economic scenario underpinning
the Council Recommendation of 21 June 2013, additional revenue measures
implemented, together with developments on the expenditure side adjusted for
ESA 2010, amount to 1.1 % of GDP, in line with the level deeemed necessary
by the Council on 21 June 2013 ('above 1% of GDP') . The cumulated effort over
2013-2014 therefore stands at 1.9 % of GDP based on the corrected change
in the structural balance, falling short of the 2.1 % of GDP recommended
by the Council. Based on the bottom-up assessment, the cumulated effort stands
marginally above 1.0 %, in line with the level deemed necessary by the
Council. 
(17)     The gap between the
top-down and bottom-up assessment of the fiscal effort stems mainly from the
downward revision in inflation since June 2013. In particular, for 2014, the
GDP deflator growth forecast was revised down by 0.9 pp between the Council
recommendation of 21 June 2013 and the Commission 2015 winter forecast. Tax
revenues are strongly impacted by downward revisions in inflation. By
comparison, public expenditures, which in France are often driven by norms
adopted in nominal terms, are less impacted by in-year revisions in inflation.
The resulting deterioration in the headline balance is not corrected for in the
calculation of the structural balance, which only takes into account the output
gap in volume terms. The top-down assessment of the fiscal effort is therefore
sensitive to revisions in inflation. Regarding the
bottom-up indicator, the yield of discretionary measures adopted in 2014 can be
considered to have been only marginally impacted by the lower-than-expected
inflation. To the extent that some public expenditure items under the control
of the government adjusted to the lower inflation, the bottom-up indicator
could have been positively affected. However, due notably to freezes
implemented on a number of public expenditures in 2014, the overall impact of
the downward revision in inflation on the bottom-up is likely to have been
limited. 
(18)     Overall, in light of the
above, the available evidence does not allow to conclude on no effective
action. 
(19)     The ratio of public debt to
GDP, which represented 78.8 % in 2009 increased rapidly since then to
92.2 % in 2013. According to the Commission 2015 winter forecast, the debt
ratio will continue to rise over the forecast horizon, to 95.3 % in 2014,
97.1 % in 2015 and 98.2 % in 2016 on the back of still relatively
high general government deficits and subdued nominal GDP growth. Stock-flow adjustments
are expected to contribute negatively to debt developments over the forecast
horizon. 
(20)     Based on the Commission
2015 winter forecast, the headline deficit is expected to reach 4.1 % of
GDP in 2015, substantially above the 2.8 % of GDP target set in the Council
recommendation of 21 June 2013 and the 3 % of GDP benchmark. The
considerable deterioration in the budgetary position resulting from the weaker
overall position of the economy relative to the one underlying the Council
recommendation of 21 June 2013 suggests that a revised recommendation under
Article 126(7) TFEU for France, setting a new deadline to correct the excessive
deficit is justified, in line with the rules of the Stability and Growth Pact. 
(21)     On 21 November 2014, the
French authorities submitted a letter to the Commission in which France
committed to a number of structural reforms implementing the 2014
country-specific recommendations issued by the Council on 8 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 made public on 18 February 2015. The authorities
also provided a quantification of the expected macroeconomic impact of the main
structural reforms initiated since 2012. The main reforms outlined notably
include a reduction in the cost of labour through the CICE and additional
reductions in employer's social security contributions through the pacte de
responsabilité et de solidarité. These measures are expected to contribute
to boosting growth and improving the sustainability of public finances and
should therefore not be rolled back. However, the full impact of the reductions
in the cost of labour would require complementary labour market reforms to
reduce wage rigidities. Additional reforms outlined by the government include,
inter alia, the 2014 pension reform, measures to reform local authorities, to
improve the business environment, and to increase competition in services. In
particular, the draft Law on Growth and Economic Activity addresses competition
concerns for legal professions, opens up the sector of coach transport, reduces
entry barriers in the retail trade and relaxes rules for Sunday work. Moreover,
it also foresees a reform of the procedures for individual dismissal disputes.
Altogether, structural reforms initiated since 2013 are expected to contribute
to economic growth and to the long-term sustainability of public finances.
However, the quantification by the authorities that these reforms will boost
GDP by 3.3 pp by 2020 seems over-estimated.
(22)     The information and
commitments provided by the French authorities regarding structural reforms go
in the right direction in the light of the requirements outlined in the
Commission Communication COM(2015) 12 of 13 January 2015 on "Making the
best use of the flexibility within the existing rules of the Stability and
Growth Pact" in order for France to be able to benefit from an extension
of the deadline for the correction of the excessive deficit by more than one
year. However, 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
pointed to the limited response by France to previous recommendations in the
light of the macroeconomic imbalances, and concluded that France has excessive
imbalances requiring specific monitoring and decisive policy action. 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 (EC) No 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. Structural reforms are not only essential to address the excessive
imbalances and strengthen potential growth but also to ensure the
sustainability of public finances. 
(23)     Granting France one
additional year, which is the rule according to Council Regulation (EC) No
1467/97, would be too demanding in the current weak economic environment as it
would require an average annual improvement in the structural balance in 2015
and 2016 of more than 1.0 % of GDP, above the annual average effort
recommended by the Council on 21 June 2013 for 2013-2015. On the basis of the
Commission 2015 winter forecast, such an adjustment would have a very negative
impact on growth both in 2015 and 2016. Therefore, and taking into account the
structural reform plans announced by France and the still expected National
Reform Programme, in line with the above-mentioned communication of 13 January
2015, it seems adequate to extend the deadline for France to bring an end to
its excessive deficit situation by two years. The French authorities should
make sure that both the adopted reforms and those planned will be fully
implemented and, where needed, reinforced. In line with the above-mentioned
communication of 13 January 2015, in case France fails to implement an
ambitious reform agenda, the Commission will consider it an aggravating factor
when assessing effective action in response to this recommendation. 
(24)     Granting France two
additional years would imply 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 annual improvement in the structural budget balance would be
0.5 % of GDP in 2015, 0.8 % of GDP in 2016 and 0.9% in 2017. For
2015, the adjustment would thus be 0.2 pp higher than the 0.3 % of
GDP improvement in the structural balance expected based on the Commission 2015
winter forecast. In the baseline scenario for 2015 and 2016, based on the
Commission 2015 winter forecast, measures taken into account on the revenue
side are estimated to amount to 0.1 % and -0.1 % of GDP respectively.
For 2017, discretionary measures included in the extended forecast amount to
-0.2 % of GDP. These include the announced abolishment of the contribution
sociale de solidarité des sociétés as well as the gradual reduction in the
statutory rate of the corporate income tax. 
(25)     In order to achieve the
budgetary targets, it is crucial that the authorities fully implement the
already announced measures for 2015 and specify, adopt and implement rapidly
additional measures needed to achieve the budgetary targets in 2015, 2016 and
2017. In particular, most of the measures underpinning the commitment taken by
France to reduce the projected trend in public expenditures by EUR 50 billion
by 2017 remain to be specified for 2016 and 2017. Overall, the situation will
have to be monitored closely and the authorities should stand ready to take
corrective action in the event of expenditure slippages or lower-than-expected
yield from discretionary revenue measures,
HAS ADOPTED THIS RECOMMENDATION: 
(1)                   
France should put an end to the present
excessive deficit situation by 2017 at the latest.
(2)                   
France should reach a headline deficit of
4.0 % of GDP in 2015, 3.4 % of GDP in 2016 and 2.8 % of GDP in
2017, which is consistent with delivering an improvement in the structural
balance of 0.5 % of GDP in 2015, 0.8 % of GDP in 2016 and 0.9% of GDP
in 2017. This would require additional measures of 0.2 % of GDP in 2015, 1.2 %
of GDP in 2016 and 1.3% of GDP in 2017 based on the extended Commission 2015
winter forecast.
(3)                   
France should fully implement the already
adopted measures for 2015 and ensure, by end April 2015, an additional fiscal effort
as stipulated in paragraph (2). This would require the specification, adoption
and implementation of additional structural discretionary measures equivalent
to 0.2% of GDP to close the gap with the recommended improvement in the
structural balance of 0.5 % of GDP for 2015.
(4)                   
France should step up efforts to identify
savings opportunities across all sub-sectors of general government, including
at social security and local government level and use all windfall gains for
deficit reduction. Budgetary consolidation measures should secure a lasting
improvement in the general government structural balance and should not be
detrimental to the improvement of the competitiveness of the French economy. 
(5)                   
The Council establishes the deadline of 10 June
2015 for France to take effective action and, in accordance with Article 3(4a)
of Council Regulation (EC) No 1467/97, to report in detail the consolidation
strategy that is envisaged to achieve the targets. France should report in
detail on (i) the additional structural discretionary measures, representing
0.2% of GDP, adopted to ensure the achievement of the recommended improvement
in the structural balance in 2015; and (ii) the outlined key budgetary measures
for reaching the targets in 2016 and 2017. The "Loi de Programmation des
Finances Publiques" should be updated to reflect the new adjustment path.
Ex-ante independent evaluation of the key measures underpinning the adjustment
for 2016 and 2017 should be provided by the FR authorities ahead of the
deadline.
(6)                   
France should report to the Commission and the
Economic and Financial Committee as required under Article 10 of Council
Regulation EU No 473/2013 in accordance with the specifications laid down in
Commission Delegated Regulation (EU) No 877/2013. The report should be
submitted for the first time by 10 December 2015 and on a six-monthly basis
thereafter. The reports submitted on 10 December should report on the updated
draft budget in response to the Commission opinion on the Draft Budgetary Plan
for 2016. The report by 10 June should update and further specify the detailed
information on the specific budgetary measures planned or already taken to
achieve the recommended improvements in the structural balance of the following
year and to ensure a timely and sustainable correction of the excessive deficit
by the deadline. 
France shall report on the reform plan
presented in the communication made public on 18 February 2015 and to be
subsequently further complemented in the National Reform Programme which shall
be strictly implemented so as to improve the growth outlook and contribute to
the long-term sustainability of public finances. 
It will be important to back the fiscal
consolidation by the implementation of comprehensive and ambitious structural
reforms, in line with the Council recommendations addressed to France in the
context of the European Semester and in particular those related to the
Macroeconomic Imbalance Procedure. 
This recommendation is addressed to the
Republic of France.
Done at Brussels,
                                                                       For
the Council
                                                                       The
President
[1]               All documents related to the excessive deficit
procedure of France can be found at: http://ec.europa.eu/economy_finance/economic_governance/sgp/deficit/countries/france_en.htm.
[2]               OJ L 209, 2.8.1997, p. 6.