KEY ISSUES
Context.
After
several years of near-stagnation, France’s economy is recovering,
supported by
an accommodative external environment, in particular lower
oil prices, a depreciated euro, and low
interest rates. However,
structural rigidities continue to weigh on France’s medium-term growth
potential, estimated to average just 1.2 percent, despite steady labor
force growth.
Policies. The fiscal strategy has rightly shifted to
expenditure-based consolidation, but nominal
spending containment has
not yielded the intended savings in a low growth and inflation
environment. Important progress has recently been made on structural
reforms, notably by reducing
the labor tax wedge and advancing on
supply-side reforms. Further efforts are needed to address
high
unemployment, growth bottlenecks, and record-high public spending.
Spending-based fiscal consolidation. To ensure that medium-term fiscal
objectives are met, general
government primary spending should be kept
flat in real terms, starting in 2016. This would deliver
structural
adjustment of ½ percent of GDP per year, and place public debt on a
downward trajectory
by 2017. Spending containment should shift to
higher quality structural measures based on
broad-based expenditure
reviews at all levels of government—notably staffing reform,
institutional
streamlining and tighter budget constraints for local
governments, better targeting of social
benefits, and a further
increase in the effective retirement age.
Combating unemployment.
Building on recent reforms, broad-based efforts are needed to reduce the
high level of structural unemployment and accelerate job creation.
Flexibility for social partners
to agree at firm level on hours and
wages should be expanded. Annual increases in the minimum wage
should
be limited to inflation as long as unemployment remains high. Job search
incentives should
be strengthened for recipients of unemployment and
welfare benefits. Education and training
resources should be better
targeted to the youth and the unemployed.
Removing growth
bottlenecks. The recent momentum on product market reforms should be
maintained.
Further removing barriers to competition in services would
help provide better incentives for
innovation and productivity
growth. Disincentives for firms to grow beyond certain employee
thresholds should be reduced and the process for cutting red tape be
made more effective. Further
efforts are also needed to alleviate
constraints on the supply of affordable housing.
Financial sector.
The financial sector should continue to adapt to a changing
macroeconomic and
regulatory environment. The guaranteed interest
rates on regulated savings deposits should
be reduced, and tax
incentives for savings and insurance products reviewed.
