France

   

Economic Policies

#23
Key Findings
With significant progress evident, France falls into the lower-middle ranks internationally (rank 23) in terms of economic policies. Its score in this area has improved by 0.6 points relative to 2014.

A more forgiving international environment, the delayed effects of past policies, and the significant policy changes being implemented by the Macron government have brightened France’s economic prospects. Growth has picked up, though the absolute level remains low. The still-high unemployment rate is dropping, though slowly.

The previous administration’s halfhearted labor and tax reforms are having some beneficial effects. Macron’s government has introduced significantly more flexibility into the labor market, continued the previous corporate tax cuts, and proposed a considerably simplified system of reduced taxes and social contributions. These measures have drawn strong protests from unions.

The new administration has also vowed to abide by the EU’s 3% budget-deficit ceiling. The country’s current expenditure and debt levels remain high, with structural changes necessary to shift direction. Innovation policy has been a bright spot in recent years, with an additional €50 billion being earmarked for this area over the next five years.

Economy

#26

How successful has economic policy been in providing a reliable economic framework and in fostering international competitiveness?

10
 9

Economic policy fully succeeds in providing a coherent set-up of different institutional spheres and regimes, thus stabilizing the economic environment. It largely contributes to the objectives of fostering a country’s competitive capabilities and attractiveness as an economic location.
 8
 7
 6


Economic policy largely provides a reliable economic environment and supports the objectives of fostering a country’s competitive capabilities and attractiveness as an economic location.
 5
 4
 3


Economic policy somewhat contributes to providing a reliable economic environment and helps to a certain degree in fostering a country’s competitive capabilities and attractiveness as an economic location.
 2
 1

Economic policy mainly acts in discretionary ways essentially destabilizing the economic environment. There is little coordination in the set-up of economic policy institutions. Economic policy generally fails in fostering a country’s competitive capabilities and attractiveness as an economic location.
Economic Policy
6
France’s economic outlook is improving. Structural problems, such as a rigid labor market, high unemployment, growing public debt, insufficient funding of social security systems, an unfriendly entrepreneurial environment and a lack of competitiveness have characterized President Hollande’s term (2012 – 2017). Three major changes explain the recent improvements. First, the international environment has improved in recent years. Second, some of Hollande’s policies, such as the attempt to improve companies’ competitiveness by reducing their tax burden, have begun to take effect. Third, the election of Emmanuel Macron in May 2017 on a liberal and pro-EU platform has radically changed both expectations and the policy agenda.

The new president and his administration have launched an ambitious reform agenda. The first step was completed by the end of September 2017 with the publication of ordinances (executive orders) reforming substantial parts of the labor law code.

In parallel, the draft 2018 budget (currently under discussion) proposes major changes, such as lowering company tax rates, abolishing local taxes on housing for 80% of taxpayers, substantially cutting social taxes paid by employees, and transforming the wealth tax into a much more modest tax on real estate assets for more wealthy owners and a flat-rate tax (30%) on capital gains. The overall philosophy is to increase the net income of low-income employees and workers, avoid capital flight and increase incentives for investors.

These structural measures need time to take effect. In the short run, the economic situation will remain rather poor, in spite of higher economic growth (1.8% forecast in 2017), with a high unemployment rate and rising public debt. However, a major effort has been made to respect EU obligations (e.g., the Stability and Growth Pact). The overall budget deficit should be below the 3% ceiling for the first time in many years.

Citations:
OCDE Economic Surveys, France, September 2017
http://www.oecd.org/economy/surveys/France-2017-OECD-economic-survey-overview.pdf

Labor Markets

#31

How effectively does labor market policy address unemployment?

10
 9

Successful strategies ensure unemployment is not a serious threat.
 8
 7
 6


Labor market policies have been more or less successful.
 5
 4
 3


Strategies against unemployment have shown little or no significant success.
 2
 1

Labor market policies have been unsuccessful and rather effected a rise in unemployment.
Labor Market Policy
6
Despite high overall spending and a large number of cosmetic reforms, the labor market policy of the Hollande administration has shown poor results. Since 2012, unemployment increased by 500,000 people. However, slight improvements could be observed in 2016 as the unemployment rate has fallen from 9.9% in the first quarter of 2016 to 9.3% in 2017. The employment rate of workers over 55 years of age is one of the lowest in the OECD (48.6% in 2015 compared to an OECD average of 58.2% and an EU target of 50%). France has a notoriously high youth unemployment rate. Similarly, French citizens with immigrant backgrounds, particularly young people, face great difficulties integrating into the labor market. According to a report released in 2017 by the National Accounting Office, the labor market policy measures currently in place to support young people are costly (€10.5 billion annually), inefficient (most young people do not find a job at the end of their publicly funded training program) and messy (there are too many unattractive and poorly managed programs). Most young people are hired on short-time contracts (two-thirds of the contracts have a duration of less than one month).

The Hollande administration did adopt some limited yet controversial labor market reforms in January 2013 and in July 2016. However, while admitting that the labor code was too complex and needed more flexibility, Hollande’s government failed to address the 35-hour workweek or the bargaining monopoly of trade unions (only 7% of the workforce are union members, while most union members work in the public sector). The main innovation of the 2016 Labor Law stipulates that in case of extraordinary circumstances (e.g., a steep increase or decline in orders), company agreements may overrule sectoral or national agreements, reversing the usual hierarchy. But, on the whole, the measures were half-hearted, and the government went back on its initial ambitions under the pressure of social mobilization and political opposition.

One year later, the landscape has radically changed. Macron announced during his presidential campaign his intention to substantially reform the labor law code by using ordinances (drafted and adopted by the executive alone). After two months of intense consultations with the unions (but without negotiation), the ordinances were adopted and signed on 22 September 2017. The ordinances are characterized by multiple adjustments rather than the adoption of a brand new grand design. They introduce more flexibility, simplify rules, merge diverse internal bodies involving social partners at the company level, and give greater space to regulations at the company level compared to the sectoral level in order to allow more flexibility especially for small- and medium-sized companies. This highly controversial measure, fiercely opposed by some unions, has been seen as a test of Macron’s ability to implement his huge reform agenda in spite of significant social obstacles. Another contested measure is the gradual reduction of state-financed jobs. The government argues that these jobs are costly and artificial, and fail to enable full integration into the labor market.

Taxes

#17

To what extent does taxation policy realize goals of equity, competitiveness and the generation of sufficient public revenues?

10
 9

Taxation policy fully achieves the objectives.
 8
 7
 6


Taxation policy largely achieves the objectives.
 5
 4
 3


Taxation policy partially achieves the objectives.
 2
 1

Taxation policy does not achieve the objectives at all.
Tax Policy
7
Taxes and social contributions amount to 48% of GDP, one of the highest levels in the OECD. This is the consequence of extraordinarily generous political and budgetary commitments, which have led to continuously rising taxes. Nonetheless, tax revenues do not cover expenses, as public spending is exceptionally high by western standards (56.8% of GDP in 2015, compared to the EU-28 average of 47.4%).

The previous government’s preference for tax increases rather than budgetary savings has had lasting economic effects, for example, on investment and consumption, as well as political effects. The tax policy of the Hollande administration was inconsistent; raising taxes both for individuals and for companies in the beginning before starting to alleviate the tax burden in 2015 and 2016. On the whole, the Hollande era has been perceived as a period of over-taxation and of mediocre results by a large majority of the public. However, driven by the rather dramatic situation faced by French companies, the Hollande government made an important step to lower their tax burden. A rather cumbersome and complex system, simplified in 2014, granted substantial tax reliefs of about €30 billion for companies.

Once elected Macron had to review the overall budget and to make severe cuts in order to present a budget with a deficit lower than 3% of GDP. The 2018 draft budget includes measures in line with Macron’s commitments and proposes both tax cuts and a major restructuring of the tax system. Three measures to be adopted are particularly relevant: the abolition of the taxe d’habitation (a local tax paid by all inhabitants, owners or tenants) over a period of three years for 80% of the taxpayers, the abolition of the wealth tax and its transformation to a less economically damaging tax on real estate properties, and the substitution of the progressive but discouraging tax on dividends for a flat-rate tax. The tax relief for companies set up by the Hollande administration will be continued, and transformed into a permanent, simpler system of reduced taxes and social contributions. The overall objective is to put in place incentives rather than obstacles to investment and wealth creation, and improve lower-income salaries by eliminating the social taxes paid by some employees.

Budgets

#37

To what extent does budgetary policy realize the goal of fiscal sustainability?

10
 9

Budgetary policy is fiscally sustainable.
 8
 7
 6


Budgetary policy achieves most standards of fiscal sustainability.
 5
 4
 3


Budgetary policy achieves some standards of fiscal sustainability.
 2
 1

Budgetary policy is fiscally unsustainable.
Budgetary Policy
6
France’s budgetary situation is unsustainable in the long term. Over recent years, many new commitments (public servants’ salary increase, security or military expenses, disputable rescue operations) further increased public spending in spite of public declarations and commitments to the contrary. The number of civil servants, which had slightly decreased in the Sarkozy era (2007 – 2012), has grown again. The Hollande administration made some efforts to reduce the structural deficit (2012 – 2014) but then abandoned the objective to balance the structural budget.
The Court of Accounts as well as the High Committee on Public Finance had expressed serious doubts about the Hollande government’s economic forecast and estimated 2.7% budget deficit for 2017.

After the presidential and parliamentary elections of May and June 2017, the new administration requested an audit from the Court of Accounts, which confirmed its previous evaluation and furthermore underlined that there were “elements of insincerity.” Later on, the constitutional council canceled an additional tax on dividends adopted by Hollande in 2012, adding an unexpected €9 billion liability. Faced with this dubious situation, Macron and his government have decided to stick to the EU obligations on budgetary consolidation, and make sure that France respects its commitments in 2017 and following years. The president’s aim is not only to return to sane public finances and regain financial room for maneuver, but also to recover lost credibility in Europe, a pre-condition for any ambitious proposal to reform the European Union or to influence the EU’s policy agenda.
Macron’s commitment is clear and is expressed in the draft 2018 budget, but it has to be seen in 2018 to what extent structural reforms will be adopted, the retargeting of public policies and expenditure will succeed, and how the budgetary situation will change.

Research and Innovation

#10

To what extent does research and innovation policy support technological innovations that foster the creation and introduction of new products?

10
 9

Research and innovation policy effectively supports innovations that foster the creation of new products and enhance productivity.
 8
 7
 6


Research and innovation policy largely supports innovations that foster the creation of new products and enhance productivity.
 5
 4
 3


Research and innovation policy partly supports innovations that foster the creation of new products and enhance productivity.
 2
 1

Research and innovation policy has largely failed to support innovations that foster the creation of new products and enhance productivity.
R&I Policy
8
Having improved since 2007, France performs well in research and development policy. According to the EU Innovation Scoreboard 2017, France is ranked 11 out of 28 EU countries with respect to innovation capacity. In the report’s global innovation index, France performs slightly above the EU average and is ranked in the group of “strong innovators,” behind the group of “innovation leaders.” Overall spending on research and development represents 2.23% of GDP (last findings for 2015), below the OECD average and far from the EU target of 3%. Whereas public spending is comparable to the best-performing countries, private spending remains less strong. France’s main relative weaknesses are its low private investment, a less than innovative corporate environment, especially with small- and medium-sized businesses, and weak cooperation between the private and public sectors.

On the positive side, the measures taken by the Hollande administration have fostered the dynamics of new technology-based firms (startups). According to the Deloitte Technology Fast 500 Index, in the past four years, France has featured the highest number of fast-growing startups in the last years (97 in 2017, compared to 92 for the UK, 50 for the Netherlands and 48 for Sweden).

However, barriers to innovation still exist. Cooperation between academic institutions and businesses is still restricted by cultural traditions, such as a lack of investment by small-and medium-sized companies and the reluctance of researchers to invest in policy-relevant or applied research. Productivity levels and public research could also be improved. However, the development of joint public-private initiatives as well as the launching of incubators by private investors are improving the quantity and quality of initiatives and investments, in particular in new technologies.

The Macron government has decided to give a major boost to research and innovation not only by supporting the development and growth of startups but by dedicating €50 billion to this objective over the next five years. The money should not come from new taxes but, for a large part, from the selling of non-strategic assets owned by the state.

Citations:
European Innovation Scoreboard 2017
(http://ec.europa.eu/growth/industry/innovation/facts-figures/scoreboards_de)
Deloitte: 2017 Technology Fast 500 Europe, Middle East, Africa
(https://www2.deloitte.com/global/en/pages/technology-media-and-telecommunications/articles/technology-fast-500-emea.html)

Global Financial System

#12

To what extent does the government actively contribute to the effective regulation and supervision of the international financial architecture?

10
 9

The government (pro-)actively promotes the regulation and supervision of financial markets. It demonstrates initiative and responsibility in such endeavors and often acts as an international agenda-setter.
 8
 7
 6


The government contributes to improving the regulation and supervision of financial markets. In some cases, it demonstrates initiative and responsibility in such endeavors.
 5
 4
 3


The government rarely contributes to improving the regulation and supervision of financial markets. It seldom demonstrates initiative or responsibility in such endeavors.
 2
 1

The government does not contribute to improving the regulation and supervision of financial markets.
Stabilizing Global Financial Markets
8
French governments of either political complexion are generally in favor of regulation and control of the global financial system. The Hollande government, like its predecessor, has been active internationally and at the EU level in supporting better international banking regulations. Both administrations have been strongly supportive of all initiatives contributing to the re-capitalization of banks, to the better control of speculative funds and to the fight against fiscal evasion and tax havens. They also have been active, together with 10 other EU member governments, in proposing to impose a levy on financial transactions (the so-called Tobin tax). In spite of the standstill situation over introducing this tax, the new government has declared its support for this initiative. Recent French governments have also pushed for the creation of a banking supervision mechanism at the EU level. The Hollande and Macron governments have been or are committed to improving fiscal cooperation on information exchange, the fight against tax havens and tax evasion. In 2016, the French parliament adopted a better system of controls and sanctions against corruption at the international level (“Loi Sapin 2”).
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