By the Rule

• Author: Michel Camdessus and Renaud Guidée
• Position: a former IMF Managing Director, chaired the fcal consolidation commission and served as its Secretary-General.

FRANCE, facing the same unsettling long-term fiscal prospects as most advanced economies, set up a high-level working group in early 2010 to design a rule-based framework for fiscal consolidation to achieve the public budget balance that was enshrined in the French Constitution in 2008.

The working group, chaired by former IMF Managing Director Michel Camdessus, had 15 members: four from Parliament, seven top-ranking civil servants (including Banque de France Governor Christian Noyer), and four academics.

There is more to achieving debt sustainability—that is, bringing down deficits and debt ratios to prudent levels—than merely winding down the stimulus that France undertook during the recent economic crisis. Like other advanced economies, France will have to cope in future budgets with the rising pension and health costs of an aging population (see “The Long Run Is Near” in this issue of F&D). While part of the policy response will come from the major overhaul that the French pension system is undergoing, the rule-based framework proposed by the working group should be a critical complement.

Rules play a role in instilling fiscal discipline in France. They include the Stability and Growth Pact—the European Union–wide agreement that caps deficit and debt levels—and a set of expenditure rules at the national level that prohibit general government current spending from rising in volume year over year.

However effective, though, expenditure rules “are not linked directly to the debt sustainability objective since they do not constrain the revenue side,” according to a recent paper (IMF, 2009) the working group took into consideration. The working group aimed to join the missing links in the existing rules framework, by designing a comprehensive rule that would bind policymakers to medium-term objectives and provide operational tools to undertake the required fiscal adjustment.

The key provision is designed to ensure that the budget acts passed year after year are consistent with reaching the ultimate target of a balanced budget. To achieve that objective, the working group suggested that lawmakers commit to a mandatory multiyear framework for budget programming, which would bind future yearly budget acts by setting milestones those budgets would have to meet to reach eventual fiscal adjustment.

The fiscal rule, though, must be flexible enough to respond to shocks and allow the government to avoid policies that push in the same direction as the...