FRANCE 2016 stability programme: Deficit/GDP ratio cut to 3.3% in 2016 and 2.7% in 2017

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1 No.16/ April 2016 FRANCE 2016 stability programme: On 13 April, the French government presented its Stability Programme. The document describes the public finance strategy during this period. It sets out the strategy s main objectives, a macroeconomic scenario, and a multi-year path for the public finances. The public deficit is due to be cut to 3.3% of GDP in 2016 and 2.7% in 2017, compared with 3.5% in The objective of a deficit of less than 3% of GDP should, therefore, be reached in Priority is given to spending cuts as part of a structural effort, with savings of 50 billion euros in Further savings are also planned (3.8 billion euros in 2016 and 5 billion in 2017) to offset the effects of very low inflation. In parallel, mandatory contributions are due to decrease little by little. Public debt, which stood at 95.7% of GDP in 2015, is forecast to continue rising, but only modestly, to 96.5% in 2017, before easing down back from These figures are based on fairly cautious growth assumptions of 1.2% in 2015, and 1.5% in 2016 and France s budget commitments The French public deficit narrowed more rapidly than expected in 2015, falling to 3.5% of GDP as against the previously forecast 3.8%. The targets for 2016 and 2017 are unchanged at 3.3% and 2.7%. The target of a deficit of less than 3% of GDP should, therefore, be achieved in The main objectives of budgetary policy are: Continue to reduce public deficits to satisfy France s commitments to the EU and gradually cut the ratio of public debt to GDP. This ratio was a high 95.7% in 2015, compared with 95.3% in Bring the deficit/gdp ratio down to under 3% in 2017 and get the structural deficit to near-balance in Concentrate the structural effort on public spending, with plans for 50 billion euros in planned savings in Growth in spending by value should be a very modest 1.1% a year in , after 0.9% in 2015, compared with an average 3.2% a year in Over the same period, reduce mandatory contributions, in particular though the ramp-up of the CICE tax credit and the Responsibility and Solidarity Pact in order to restore firms competitiveness and sustain growth and employment. Growth is picking up gradually, which will slightly improve the cyclical balance and make it easier to attain the objectives listed above. It will be necessary, on the other hand, to take account of an inflation rate that is picking more slowly than expected and will continue to hover around zero in 2016, which has an adverse effect on deficits, especially the returns on spending cuts. This explains the plans for a further 3.8 billion additional savings in 2016 and 5 billion euros in Group Economic Research

2 Cautious growth assumptions For , the official macroeconomic framework is posited on measured growth increases of 1.5% in 2016 and 2017, as against 1.2% in Annual inflation, which was zero in 2015, is forecast to reach 0.1% in 2016 and 1% in This gradual recovery will be enabled through a series of factors. The external environment should be relatively favourable, with fairly dynamic growth in the United States and United Kingdom and a gradual recovery in the Eurozone. This, combined with the 2015 depreciation in the euro, should lead to a recovery in exports. Second, household consumption is forecast to grow at around 1.5% a year due to lower oil prices, the gradual recovery in employment, and the support measures in the Solidarity Pact. Last, business investment should pick up once more in conjunction with the support measures implemented (the CICE tax credit, the Responsibility Pact, and the one-off 40% depreciation) plus lower interest rates and falling energy prices. Investment is forecast to rise by 3.2% in 2016 and 3.8% in Our own forecast is similar but slightly more prudent as regards GDP growth. We are forecasting growth of 1.2% in 2016 and 1.4% in French growth is affected by a number of obstacles, especially by a structural deficit in competitiveness, which will only be absorbed progressively, and by the high unemployment rate. Business investment should pick up more slowly despite the positive factors set out above, due to the relative weakness of market openings and the lack of pressure on production capacity. A look back at the 2015 public deficit The 2015 public deficit finally came out at 3.5% of GDP, lower than the 3.8% forecast in the 2016 Finance Act. The 2015 deficit was thus cut by a significant 0.5 of a point of GDP (3.5% compared with 4% in 2014). This was achieved by a large-scale structural effort amounting to 0.7 of a point of GDP. The spending effort was a marked, 0.8 of a point of GDP (see definition in box on page 3). Spending growth by value (excluding tax credits) was limited to 0.9%, a significantly lower level than the 2.2% growth by value of potential GDP. One may note in particular a slight rise in remuneration by value of 1% compared with 2% in 2014; a slowdown in welfare benefits (1.8% vs. 2.2% in 2014); a marked fall in interest charges (down 4.5%); and a marked, 5.1%, drop in investment, especially at local government level, as the municipal electoral cycle ended. Conversely, the measures to reduce taxes and levies, especially in the Responsibility Pact, have shaved 0.1% of GDP off the structural effort. Other factors, especially elasticity effects, are also affecting the structural balance, and these are having a downside effect, with the spontaneous elasticity of receipts to activity of less than 1. Modest growth and, more importantly virtually zero inflation, have lowered the spontaneous growth of taxable bases (wages, consumption, etc.), which is as a result lower than that for GDP. The structural deficit has therefore been cut by 0.5 of a point of GDP, falling from 2.1% of GDP in 2014 to 1.6% in The cyclical deficit remained stable at 1.9% of GDP. This is because GDP growth came out at 1.2% by volume in 2015 a rate close to that of potential growth of 1.1 %. (as % of GDP) Real GDP 1,2 1,5 1,5 1,75 1,9 Real potential GDP 1,1 1,5 1,5 1,4 1,3 Public balance -3,5-3,3-2,7-1,9-1,2 Cyclical balance -1,9-1,8-1,8-1,6-1,3 Structural balance -1,6-1,3-0,8-0,3 0,0 Public debt 95,7 96,2 96,5 95,4 93,3 Source: Ministry of Finance Public balance is not absolutely equal to the sum of the cyclical and the structural balances. Also matter occasional and temporary ( one-off ) measures, whose weight as % of GDP is generally closed to zero. No.16/ April

3 France: Public balance forecasts Public balance Cyclical balance Structural balance Sources: MinFin, CASA. savings of 3.8 billion euros have been announced to offset the effects of low inflation (see box). Conversely, the new measures on mandatory contributions, as the Responsibility and Solidarity Pact gets into its stride, will reduce the structural effort by 0.2 of a percentage point. The elasticity of these mandatory contributions to growth is likely to again be less than 1, coming in at 0.9. The structural deficit would thus be reduced by 0.3 of a point of GDP which, given the 0.1 point of GDP drop in the cyclical deficit and the factoring in of certain one-offs, would lead to a fairly modest reduction in the ratio of deficit to GDP from 3.5% to 3.3%. Components of the 2016 public deficit The 2016 public deficit should amount to 3.3% of GDP, a slight reduction compared with 2015 s 3.5%. Analysis of the deficit components is fairly similar to that given for the 2015 deficit France: Weight of public spending Forecast Public spending/gdp Sources: Minefi, Crédit Agricole S.A The cyclical deficit is forecast to remain virtually unchanged, at 1.8% of GDP, compared with 1.9% in Volume growth is forecast at 1.5% and potential growth at 1.5% also. The structural deficit is forecast to fall from 1.6% to 1.3% of GDP. The fall is relatively small. Yet the structural effort should be more marked, at 0.5% of GDP, and mainly achieved via spending cuts. The effort on spending should amount to 0.7% of GDP. The planned rise in spending by value is set at 1.1%. This is a very modest rate, obtained through spending cuts that have already been agreed of around 21 billion euros. But these measures will not be sufficient, and additional The spending effort The spending effort is one of the two components of the structural effort, with new measures affecting mandatory contributions. It measures the reduction in the structural deficit achieved through spending cuts. It is calculated like this: D GDP pot ( D D GDP pot GDP pot ) where D is public spending and GDPpot potential GDP. The spending effort is achieved when spending is lower than the potential growth figure. These changes are measured by value. Spending targets are generally given by value. Potential GDP growth by value is equal to volume growth plus the change in the GDP deflator. Low inflation eases the spending effort. A great many savings measures are calculated on the basis of spending by value: the value standard for the rise in state and healthcare spending, a freeze on the multiplier point for public sector pay, postponement of pension increases, and the non-indexing of certain welfare benefits etc. If inflation is lower than expected, this has no impact on the spending cuts, but reduces potential growth by value. Hence a lower than expected spending effort. New savings measures are, therefore, necessary if the government is to meet its spending effort, spending cuts and deficit reduction commitments. This is what is going to happen in 2016 and No.16/ April

4 Components of the 2017 public deficit The public deficit is forecast to be cut more sharply in 2017, to 2.7% of GDP. The cyclical deficit is expected to remain stable at 1.8% of GDP, with GDP growth and potential growth trending at the same level. In addition, the elasticity of receipts to growth would revert to its normal level of 1. The reduction in the total deficit would, therefore, be achieved through a fairly marked decrease in the structural balance of 0.5 of a point of GDP. The effort will again be concentrated on spending, up 1.1% by value, resulting in a spending effort of 0.7 of a point of GDP. As in 2016, the spending effort is greater relative to the measures already planned in the programme of spending cuts (with an additional 5 billion euros in savings). Conversely, the new measures planned under the Responsibility and Solidarity Pact should reduce the structural effort by 0.3 of a point of GDP. Beyond this, in , the public balance should continue to fall to 1.9% then 1,2% of GDP, thanks to continued spending cuts and more sustained growth, which will help to improve the cyclical balance. France: Breakdown of public spending by function 46% 12% 6% 4% 9% 23% Procurement Compensation Debt interest Social benefits Other transfers Investment Sources: Insee (2015 data), Crédit Agricole SA 50 billion euros in spending cuts planned in Below, we set out the main measures (it being understood that, to meet the plan s targets, new savings measures will be implemented coming to 3.8 billion euros in 2016 and 5 billion euros in 2017). 19 billion euros in spending cuts by the state and its agencies The public sector wage bill will be curbed; increased pooling of procurement and information systems; controls on operating costs; and a refocusing of intervention spending. The debt interest burden will also be lower (1.9% of GDP) due to the very low level of interest rates. 10 billion euros in savings on healthcare spending Slowdown in the rate of increase of ONDAM, the target for the rate of increase in healthcare spending, set at 2% in 2015 and 1.75% a year in ; these rates are lower than the trend rate of growth in healthcare spending (estimated at around 4% a year by value). The reduction will be achieved by improving the effectiveness of hospital spending, an extension of outpatient surgery procedures, reduced spending on medicines, and a reduction in the number of medical procedures. 10 billion euros in savings on other Social Security spending Savings on the Families component (child benefits to be means tested). Savings on Agirc- Arrco supplementary pension regimes. Rampup of pension reforms decided in 2010 and Reduced management costs of Social Security offices by going paperless and simplifying procedures, etc billion euros in local government savings The overall operating contribution from the state to local government is to be cut by 10.5 billion euros in the period. No.16/ April

5 Components of public debt The public debt ratio, at 95.3% of GDP in 2014, rose slightly in 2015 to 95.7%. It is forecast to see further small increases in 2016, to 96.2%, and in 2017, to 96.5%. These ratios are calculated inclusive of financial support for Eurozone states France: Public debt Sources: Minefi, Crédit Agricole S.A. Forecasts This modest increase in the public debt ratio can be explained by moves to cut deficits and the recovery in nominal GDP growth. The gap is thus narrowing between the effective public deficit and that which would stabilise the debt ratio (-2.3% of GDP in 2016). The ratio of debt to GDP should start falling from To conclude, the planned spending effort is marked. The annual increases amount to around 1% by value in , which represents constant, sustained spending cuts relative to higher trend increases of around 3% a year by value. In addition, the priority given to spending cuts rather than to increased levies is a positive point. Adjustments to spending are generally more lasting and less penalising for growth than efforts to boost tax receipts. The ratio of public spending to GDP is still one of the highest in Europe, however, and is likely to fall only gradually, from 56.1% in 2014 to 55.3% in 2015, 54.6% in 2016 and 54% in The ratio for the Eurozone as a whole stood at 49.1% in 2014 and 48.4% in There will need to be more spending cuts, therefore, and these are already planned for , in order to generate the room for manoeuvre needed to cut mandatory contributions. Elsewhere, the public debt ratio should stabilise and then fall. It remains very high, however, and is far higher than the levels prevailing prior to the crisis of Any nasty surprises as regards growth or inflation would push the ratio up again. Consequently, efforts to cut spending and the public deficit need to be pursued in the years ahead. Crédit Agricole S.A. Group Economic Research 12 place des États-Unis Montrouge Cedex Publication manager: Isabelle Job-Bazille Chief Editor: Armelle Sarda Information centre: Dominique Petit - Statistics: Robin Mourier Sub-editor: Fabienne Pesty Contact: publication.eco@credit-agricole-sa.fr Consult Economic Research website and subscribe to our free online publications: Website: ipad : Etudes ECO application available on App store platform Android : Etudes ECO application available on Google Play platform This publication reflects the opinion of Crédit Agricole S.A. on the date of publication, unless otherwise specified (in the case of outside contributors). Such opinion is subject to change without notice. This publication is provided for informational purposes only. The information and analyses contained herein are not to be construed as an offer to sell or as a solicitation whatsoever. Crédit Agricole S.A. and its affiliates shall not be responsible in any manner for direct, indirect, special or consequential damages, however caused, arising therefrom. Crédit Agricole does not warrant the accuracy or completeness of such opinions, nor of the sources of information upon which they are based, although such sources of information are considered reliable. Crédit Agricole S.A. or its affiliates therefore shall not be responsible in any manner for direct, indirect, special or consequential damages, however caused, arising from the disclosure or use of the information contained in this publication. No.16/ April