France: Selected Issues

January2023 FRANCE SELECTEDISSUES IMFCountryReportNo.23/57 ThispaperonFrancewaspreparedbyastaffteamoftheInternationalMonetaryFundasbackgrounddocumentationfortheperiodicconsultationwiththemembercountry.ItisbasedontheinformationavailableatthetimeitwascompletedonJanuary10,2023. Copiesofthisreportareavailabletothepublicfrom InternationalMonetaryFundPublicationServicesPOBox92780Washington,D.C.20090Telephone:(202)623-7430Fax:(202)623-7201 E-mail:publications@imf.orgWeb:http://www.imf.orgPrice:$18.00perprintedcopy InternationalMonetaryFundWashington,D.C. ©2023InternationalMonetaryFund January10,2023 FRANCE SELECTEDISSUES PreparedByIuliaRuxandraTeodoruandRuudVermeulen ApprovedBy EuropeanDepartment CONTENTS SPENDINGEFFICIENCYANDREFORMS2 A.Introduction2 B.SocialProtection4 C.Health10 D.Education12 E.PublicAdministration13 F.TaxExpenditures15 G.ConclusionsandPolicyRecommendations17References22 APPENDIX I.BenchmarkingMethodologyandResults24 SPENDINGEFFICIENCYANDREFORMS1 ThetrendincreaseinprimarycurrentspendingoverthelastthreedecadesleavesFrancewiththehighestspendingratioinEurope.Francewillneedtoreversethistrendthroughstructuralspending reformstorebuildfiscalbuffersthathavebeenfurthererodedbythelargefiscalresponsetosuccessiveshocksover2020–22.Thispaperidentifiesareaswherescopeforsavingsorefficiencygainsexistbasedonananalysisofpublicspendingonkeycategoriesandrelatedoutcomesrelativetopeers.Reformofsocialprotection,health,education,andcivilserviceshouldpreserveorimproveoutcomeswhilegeneratingsavingsthatwouldhelpmeetmedium-termadjustmentneeds.Inparallel,rationalizingcostly,distortive,orinefficienttaxexpenditureswouldallowforbasebroadeningandpartiallyoffsetpermanentrevenuelossesfromtherebalancingofrevenuesawayfromlaborandproductiontaxes. A.Introduction 1.Spendingreformsareneededtoreversethetrendincreaseinpublicspendingandrebuildfiscalbuffers.Annualrealprimaryspendinggrowthhasoutpacedoutputgrowthabouthalfofthetimeoverthepastthreedecades,averaging2and1.5percentover1990-2021respectively.ThisreflectsinpartthelimitedcountercyclicalityoffiscalpolicyinFrance,especiallyduringgoodtimes.2Whilespendingrestraintduringthe1994-99fiscaladjustmentepisode3helpedreversethespendingincreaseofprecedingyears,the2011-16adjustmentepisodedidnotseeasimilarspendingreversal,asthepost-GFCconsolidationlargelyreliedonrevenues.Hence,thegapbetweenrealspendingandoutputgrowthhaswidenedsincetheGFC,andmoresothaninpeerswheretheadjustmentwaslargerandcenteredonspending(HallaertandQueyranne,2016).WiththehighestspendingratioinEurope,France’sspendinggapwithpeersreached10percentagepointsofGDPin2019.Whilethishighspendinginpartreflectssocialpreferences,thehightaxationrequiredtofunditweighsoncompetitiveness,motivatingsuccessivetaxcutssince2017.Withrevenuegrowthfallingshortofspendinggrowth,deficitanddebtlevelshavebeentrendingupsincethe1980s.Toreversethis,avoidaddingtoanalreadyelevatedtaxburden,andrebuildfiscalbuffers,structuralspendingreformsareneeded. 2.Toidentifyareasforspendingreforms,thispaperevaluatesthelevelandefficiencyofpublicspendinginFrancerelativetoEuropeanpeers.BuildingonearlierIMFanalyses(IMF, 2019-20;HallaertandQueyranne,2016),itfirstbenchmarksspendinginFranceagainstitspeers4by 1WearegratefultoJeffreyFranksforhisguidanceandcomments,andtotheFrenchTrésorfortheirfeedbackduringaseminarpresentation.WethankLaurentKemoeforsharinghiscodetoestimatespendingefficiency,ChunlingPengforherprogrammingassistance,andPaolaAlejandraCastilloforherexcellentresearchassistance. 2Exceptduringlargeshocks(2009and2020-21),fiscalpolicyhasgenerallynotbeencountercyclicalwitnessingthelackofaresponseto(lagged)changesintheoutputgap(seealsoIMFCountryReportNo.19/246). 3Definedasanuninterruptedspellofpositivechangesinthestructuralprimarybalanceofatleastthreeyears. 4PeercountriesincludeAustria,Belgium,Denmark,Finland,Germany,Greece,Ireland,Italy,Luxembourg,theNetherlands,Norway,Portugal,Spain,Sweden,Switzerland,andUnitedKingdom(“EU13+UK+CHE+NOR”). (continued) 2INTERNATIONALMONETARYFUND jointlydisaggregatingspendingbyeconomicandfunctionalclassificationtoidentifyareaswherescopeforsavingsmayexist.Itshowsthatthespendinggapofover10percentofGDPin2019isprimarilydrivenbysocialbenefits(+6½ppts),followedbythewagebillandsubsidies(about +1¼pptseach),togetheraccountingfor87percentofthegap.Withthis“excess”spendingconcentratedinsocialprotection(+5.5ppts),health(1.4ppts),education(+0.2ppts)andeconomicsupport(+1.6ppts),theanalysisfocusesonthesefourareas.Thepaperthenassessestheefficiencyofspendingintheseareasrelativetopeersbyestimatingefficiencyfrontiersusingstochastic frontieranalysis(SFA,seeAnnex).Thepaperisstructuredaccordingly,withsectionsB,C,andDcoveringsocialprotection,health,andeducationspending,followedbypublicadministrationandtaxexpenditures(thatdrivewagebillandsubsidyspending,respectively)insectionsEandF.SectionGpresentsconclusions. Notwithstandingsignificantdisparitieswithinthisgroup,thesearealladvancedeconomieswithbroadlycomparablefundamentalsintermsoftheirlevelofdevelopment(proxiedforbyGDPperc