Annexes to COM(2019)529 - France Report prepared in accordance with Article 126(3) of the Treaty on the Functioning of the EU

Please note

This page contains a limited version of this dossier in the EU Monitor.

dossier COM(2019)529 - France Report prepared in accordance with Article 126(3) of the Treaty on the Functioning of the EU.
document COM(2019)529 EN
date June  5, 2019
agreement among social partners allowed limiting the debt of the unemployment benefit system to EUR 37.1 billion at the end of 2018. New negotiations between social partners on the unemployment benefits system took place at the beginning of 2019. The aims were i) to reduce the debt of the system and ii) to amend the rules in order to reduce job insecurity and make them more conducive for the unemployed, iii) to find an incentive mechanism to decrease the separation rate of the firms when it is excessively high. Social partners have failed to find an agreement on a new set of rules though. The reform now stands in the hands of the government, which is committed to find an agreement before the end of 2019.

4.4.       Other factors considered relevant by the Commission

Another factor considered relevant by the Commission is the statistical and one-off nature of the deficit and debt increases associated with the transformation of the tax credit for competitiveness and employment (CICE) into a permanent reduction of employer's social contributions.

The CICE is a scheme created in 2013. It aims at reducing social contributions of employers through a payable tax credit on corporate taxes, based on gross wages paid to employees during a given year. In national accounts, that tax credit is treated as a subsidy and it is recorded with a delay from one up to three years compared to the relevant year of the claim.

The specific recording approach and the replacement of the CICE by an equivalent reduction in social contributions produce two effects. On the one hand the reduction of contributions is registered as soon as it is implemented (i.e. 1 January 2019). On the other hand, the claims under the CICE corresponding to employees in staff in 2018 generate a subsidy which is also to be registered in 2019 although the CICE is no longer in place. The combination of these two effects generates a one-off double-cost in the year of the transformation of around 0.9% of GDP. Without that one-off effect the headline deficit in 2019 would be projected at 2.2% of GDP.

Overall, the change from CICE to a reduction in social contributions entails a transitory budgetary effect that does not lead to a sustained change in the budgetary position. As such, it is regarded as a one-off for the purposes of the Stability and Growth Pact and its impact is removed from the calculation of the fiscal effort under the preventive arm of the Pact.

9 See Commission Communication COM (2019) 150 final, 27.02.2019 " 2019 European Semester: Assessment of progress on structural reforms, prevention and correction of macroeconomic imbalances, and results of in-depth reviews under Regulation (EU) No 1176/2011".

The replacement of the CICE by a reduction in social contributions in a budgetary neutral manner responds to the Country Specific Recommendation 2 (sub-part 1) addressed to France in 2017. Specifically, that recommendation read “Consolidate the measures reducing the cost of labour to maximise their efficiency in a budget-neutral manner and in order to scale up their effects on employment and investment”, for which progress has been considered as substantial in 2019.

4.5.       Other factors put forward by the Member State

On 31 May 2019, the French authorities transmitted a letter with relevant factors in accordance with Article 2(3) of Regulation (EC) No 1467/97. The analysis presented in the previous sections already broadly covers the key factors put forward by the authorities.

Specifically, regarding the deficit criterion, the French authorities argue that the planned breach of the 3% of GDP reference value in 2019 is temporary, limited and exceptional in that it stems from the exceptional cost linked to the transformation of the CICE into a permanent outright cut in social contributions, without which the deficit would be at 2.3% of GDP. The headline deficit in 2020 is planned to go down to 2% of GDP.

On the other hand, the authorities argue that public expenditure has been strongly contained, given that it declined in real terms in 2018 (by 0.3%). Moreover, the authorities claim that that such an expenditure retrenchment will continue in the future. Specifically, in 2019, the growth of public expenditure in real terms is planned to be much lower than the average over the last ten years, thanks to the under indexation of social benefits, the upcoming savings on unemployment benefits and the effective implementation of contracts with local governments.

At the same time, according to the French authorities, the public finance trajectory sketched in the Stability Programme 2019 confirms the commitment to reduce taxes further in order to support employment and households’ purchasing power.     In this respect, the measures

adopted in response to the yellow vests crisis aim at ensuring the acceptability of the reforms undertaken and mainly frontload already planned actions.

Consequently, the authorities recall that the trajectory towards the MTO has been adapted to the new conditions, including the possibly of a lower-than-expected GDP growth over the coming years.

Regarding the debt criterion, the French authorities argue that, after taking into account the margin of tolerance allowed by the Treaty, the observed structural adjustment of 0.2% of GDP in 2018 implies compliance with the effort required under the preventive arm of the SGP.

Accordingly, the authorities claim that the foreseen convergence towards the MTO tabled in the Stability Programme 2019 ensures the sustainability of public debt.

5. Conclusions

The general government gross debt stood at 98.4% of GDP at the end of 2018, well above the 60% of GDP Treaty reference value. France did not make sufficient progress towards meeting the debt reduction benchmark in 2018. This suggests that before consideration is

given to all relevant factors, the debt criterion as defined in the Treaty does not appear to have been fulfilled prima facie in 2018.

Moreover, the headline general government deficit in 2019 is planned to increase to 3.1% of GDP, thereby remaining close to but exceeding the 3% of GDP Treaty reference value. The excess is considered to be not exceptional, although temporary for the purposes of the Treaty and the SGP. Hence, the analysis suggestst that, before considering all relevant factors, the deficit criterion for the purpose of the Treaty is not fulfilled.

In line with the Treaty, this report examined the relevant factors to assess compliance with the deficit and debt criteria.

Regarding the debt criterion, based on an overall assessment of compliance with the preventive arm, France broadly complied with the recommended adjustment path towards the MTO in 2018. Moreover, short-term sustainability risks are low.

Regarding the planned breach of the 3% of GDP reference value in the Treaty, the Commission considers that the planned deviation in 2019 is marginal and temporary. Moreover, the deficit increase to 3.1% is solely due to the one-off statistical impact of the transformation of the tax credit for competitiveness and employment (CICE) into a permanent outright reduction of employer's social contributions, which amounts to 0.9% of GDP.

Overall, France has made some progress in implementing the structural reforms announced since 2017 that aim to address the Country Specific Recommendations, notably in the area of competitiveness, employment, education, vocational training and taxation. They are expected to contribute to enhancing the economy's growth potential and reducing the risks of macroeconomic imbalances, thereby having a positive impact on debt sustainability in the medium to long term.

The analysis presented in this report includes the assessment of all the relevant factors and notably: (i) the fact that France is found to be broadly compliant with the recommended adjustment path towards the MTO in 2018; (ii) short-term sustainability risks are low; (iii) the breach of the 3% of GDP reference value in 2019 is marginal, temporary and solely due to a one-off effect, and (iv) the implementation of growth-enhancing structural reforms in recent years in response to the Country Specific Recommendations addressed to France, several of which are considered to help improve debt sustainability. The analysis suggests that the deficit and debt criteria as defined in the Treaty and in Regulation (EC) No 1467/1997 should be considered as currently complied with. At the same time, as France is assessed to be at risk of significant deviation in 2019 and 2020, additional fiscal measures are to be taken as of 2019 to ensure compliance with the adjustment path towards the MTO.