Posted by Maximilien Queyranne and Jean-Jacques Hallaert1
Jean-Jacques Hallaert and Maximilien Queyranne recently published an IMF Working Paper on France’s spending policy and reforms. They identify areas where there is scope for increasing expenditure efficiency, while maintaining or even improving social and economic outcomes.
At 57½ percent of GDP, public expenditure in France is among the highest in the world. Spending has outpaced GDP growth for over three decades. Notwithstanding successive tax increases, France has experienced chronically large fiscal deficits and a growing public debt burden, approaching 100 percent of GDP.
The fiscal consolidation that started in 2011 was initially supported by revenue-raising measures but is now intended to be fully expenditure-based. It aims to bring the overall deficit below 3 percent of GDP by 2017, turn around the growth in public debt, and achieve a structural fiscal balance over the medium term.
Identifying areas for savings has proved difficult, and there is no clearly articulated consensus on the areas where spending is too high or inefficient. This is in part because of concerns about the social and economic impact of specific spending cuts, in particular the impact on inequality.
Spending measures have thus mainly relied on across-the-board savings to limit nominal spending growth. These cuts have focused on central government spending and the health sector, while local governments and social security funds spending have continued to grow faster than GDP.
A shift from a policy of containment to broader and deeper efficiency-oriented reforms would increase the chance of success and the sustainability of the ongoing fiscal consolidation, while protecting the French “social model”. The government has recently initiated some steps for structural savings e.g., family allowances, health, and pensions.
The working paper identifies areas where there is scope for greater expenditure efficiency in France. This requires an assessment not only of fiscal costs but also the intended results, such as the achievement of social objectives, and the provision of high quality public goods and services.
Based on these results, the paper provides policy options for expenditure reform in each of the following areas, drawing on successful reform episodes in other countries:
- Moving to efficiency-oriented reforms could yield significant fiscal savings. Most could be achieved by rationalizing social benefits and the wage bill, which explain about 90 percent of the difference in the expenditure ratio between France and the EU average.
- The wage bill accounts for 13 percent of GDP and almost one quarter of public spending. Recent efforts have focused on a wage-scale freeze, but low inflation has limited the effectiveness of this approach. A reduction in employment (notably at local government level) and measures to limit wage drift would promise greater scope for efficiency gains.
- There is significant scope to improve the impact of fiscal redistribution on inequalities and poverty through reforms of the welfare and pension systems. France has the largest social spending in Europe, but the reduction in inequality due to transfers is only slightly above the EU average. If the redistributive power of social benefits was at the EU level, France could achieve the same reduction in income inequality while reducing the fiscal cost by 3.5 percentage points of GDP. Moreover, social outcomes and poverty impact are uneven. Social protection benefits mostly the elderly due to a generous pension regime. While long-term demographic trends are more favorable than in many European countries, additional pension reforms would support consolidation and, together with a further increase in the means-testing of family-related spending, make room for more resources to address child and youth poverty.
- At over 8 percent of GDP, health spending is high by EU standards. While health outcomes are good, they are similar to comparator countries whose health spending is lower. Building on the National Health Strategy of 2014, France could consider reforms implemented in other countries such as further improving the market penetration of generic drugs, rationalizing hospital services and streamlining costs, and evaluating the cost-effectiveness of spending programs to decide which services should be covered by public insurance.
- The allocation of resources in education is less efficient than in many European countries, particularly at the secondary level, and has failed to address deteriorating test scores and rising educational inequalities. Organizational reforms could help improve both education quality and social outcomes, for instance by better allocating teaching resources to the neediest, rationalizing inefficient spending, and improving the targeting of vocational education and training for those who have difficulties getting a job.
- Public investment spending, which is broadly at the European average, should focus more on maintenance rather than new investment, given that France is already well endowed with high quality public infrastructure. Rationalizing investment across local governments and state-owned enterprises would avoid duplication.
- Finally, spending on public housing is higher in France than in other European countries but outcomes do not appear much better than in other EU countries. This suggests potential for increasing the use of means-testing and reducing institutional fragmentation.
[1] Maximilien Queyranne is an Economist in the Expenditure Policy Division of the IMF’s Fiscal Affairs Department; Jean-Jacques Hallaert is a Senior Economist in the IMF’s European Department.
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