France: Policies On the Right Track

Gradual recovery of economy underway

Keep moderate pace of deficit reduction to restore sound public finances

Tax cuts should be boosted by better functioning labor and product markets

Compared to peers, the French economy has shown considerable resilience through the crisis, supported by steady private consumption, but the recovery faces a difficult take off, says the IMF in its latest annual assessment of the French economy.

Sizeable efforts to reduce the government deficit over the past three years and structural impediments, including a loss of external competitiveness, have created a drag on growth. But there are signs that a gradual recovery is taking hold. The IMF predicts that France will grow by 0.7 percent in 2014 and 1.4 percent in 2015. Still, the unemployment rate should begin to show an appreciable decline only in 2016, while inflation is expected to remain at around 1 percent.

The challenge for policies in the near term is to complete the ongoing repair of public finances while boosting the economy’s growth potential. Against this backdrop, the Government’s Stability Program and the National Reform Program lay out an ambitious agenda including public spending cuts of 50 billion Euros over 2015-2017—key to reducing the deficit and creating room for growth enhancing tax cuts. The IMF urged full implementation of these plans and recommended expanding competition in services and making the labor market more adaptable to increase productivity and job creation.

Spending outpacing GDP

Despite substantial adjustment, mostly on the tax side, the government deficit still stood at 4.2 percent of GDP in 2013. Efforts to reduce the deficit need to continue, albeit at a more moderate pace, so as to balance the need to restore fiscal space against the risk of undermining the recovery, according to the IMF.

“The long-standing tendency for public spending to outrun GDP has resulted in persistent fiscal deficits, even in good times, which have eroded the ability of the government to counter effectively possible future shocks,” said Edward Gardner, an assistant director in the IMF’s European Department and head of the mission that conducted the assessment. “The authorities’ plan to close the deficit by reducing expenditure is therefore not only appropriate but fundamental to restore sound public finances,” he said.

Tax cuts and structural reforms

In addition to restoring the health of public finances, the government faces the related...