IMF warns France on ‘record’ spending high

20 May 15

France must reduce its record levels of public spending and public debt and tackle stubbornly high unemployment, the International MFrance must reduce its record levels of public spending and public debt and tackle stubbornly high unemployment, the International Monetary Fund warned after an economic review.

France must reduce its record levels of public spending and public debt and tackle stubbornly high unemployment, the International Monetary Fund warned after an economic review.

The fund said in its review of the embattled French economy that although France was seeing ‘solid short-term recovery, structural rigidities continue to weigh on medium-term prospects’.

Growth still appears to be much weaker than before the 2008 global recession, the IMF said. It is predicted to be 1.2% this year, thanks to lower oil prices, a depreciated euro, and interest rates at historic low, the fund said.

However, unemployment remains stubbornly high, and public debt continues to rise, it warned.

The fund said high and rising government spending had been ‘at the heart’ of France’s fiscal problems for decades driven by local governments, social security, and the wage bill.

‘Continued efforts are needed to tackle France’s fundamental economic problems: high structural unemployment, low potential growth, and record-high public spending,’ the IMF recommended.

Last year, France’s general government expenditure reached a record high of 57.5% of gross domestic product, 11% higher than the eurozone average.

Local government spending has continued to grow and social spending is the highest in the OECD area, warned the IMF.

It said: ‘The persistent spending pressures have pushed up not only public debt but also the tax burden on the private sector to very high levels. After years of significant fiscal adjustment through higher revenues, the switch to spending-based consolidation is the right strategy, and should be maintained for the coming years.’

Also, high unemployment and stagnant job creation remain ‘the defining challenge for France’s policymakers’, the IMF said.

It recommended that Europe’s second largest economy should only raise its minimum wage in line with inflation and unemployment benefits should be tightened.

‘To ensure that medium-term fiscal objectives are met, we recommend that spending growth be anchored to the rate of inflation, starting in 2016. While we project that the fiscal deficit will be brought narrowly to below 3% of GDP in 2017, we see a risk that this target will be missed in the event of adverse shocks,’ the IMF said.

‘Moreover, the planned pace of adjustment provides little margin in the event that growth and inflation disappoint or new spending needs arise. Keeping spending flat in real terms would deliver structural fiscal adjustment of about 0.5% per year, and build larger buffers to achieve the medium-term deficit objectives, including structural balance by 2020. Crucially, it would help ensure that public debt is on a firm downward trajectory by 2017.’

  • Judith Ugwumadu
    Judith Ugwumadu

    Judith writes about public finance, public services and economics across Public Finance International and Public Finance. She previously undertook reporting stints at Financial Adviser, Global Security Finance and The Sunday Express.

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