France

   

Economic Policies

#19
Key Findings
With many new programs only just beginning to bear financial fruit, France falls into the middle ranks internationally (rank 19) in terms of economic policies. Its score in this area has improved by 0.8 points relative to 2014.

The government has launched a highly ambitious set of economic reforms over the last 18 months, aimed at creating jobs and improving competitiveness while boosting workers incomes. Tax cuts, greater labor-market flexibility and financing aids have improved business investment. Economic growth has been positive but remains somewhat anemic.

Unemployment rates are falling, but remain high. Unskilled jobs are increasingly being filled by migrants. Labor-market measures have focused on improving job qualifications for the long-term unemployed. The government’s response to the “yellow vests” protests resulted in extra social program spending.

Many individual and company taxes have been raised, but the overall tax ratio has remained relatively constant due to social contributions. Efforts to slow public spending growth have been fiercely criticized by opponents. Commitments to reduce the budget deficit to below 3% have proved difficult to meet.

Economy

#19

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
7
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 had 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. Over the past 18 months an impressive set of reforms (probably comparable in magnitude only to the 1958/9 reforms prompted at the beginning of the Fifth Republic) have been adopted or launched.

In parallel, the draft 2019 budget (currently under discussion) proposes additional changes, such as consolidating the lowering of company taxes, abolishing local taxes on housing for 80% of taxpayers with a complete elimination by 2022, 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. The crucial feature is the consistency of the overall package, which favors the creation of jobs and reinforces the competitiveness of companies while slightly increasing workers’ incomes due to the reduction of social levies on employees.

These structural measures need time to take effect. In the short run, the economic situation has improved, even if the scheduled economic growth rates for 2018 and 2019 have been reduced to 1.6%. Business investment has been boosted by Macron’s business tax cuts, supportive financing conditions and greater labor market flexibility. Meanwhile, lower labor taxes and improved job training opportunities have helped job creation, albeit the high unemployment rate is declining very slowly. The public deficit will take time to come down. While the overall budget deficit was planned to be below the 3% ceiling for the first time in several years, it will be higher than expected in 2018 and the public deficit target set for 2019 (2.8% of GNP) may not be met. The financial consequences of Macron’s social measures, announced on 10 December 2018 as an end to the gilets jaunes riots and including an additional expenditure of about €10 billion, are still to be calculated.

Citations:
OECD Economic Surveys, France, September 2017
http://www.oecd.org/economy/surveys/France-2017-OECD-economic-survey-overview.pdf
OECD Economic Outlook, Vol. 2018 Issue 2, France (p.114-116)

Labor Markets

#28

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
7
Between 2012 and 2017, unemployment had increased by 500,000 people. However, slight improvements can be observed since 2016 as the unemployment rate has fallen from 9.9% in the first quarter of 2016 to 9.1% in second quarter of 2018. The employment rate of workers over 55 years of age is one of the lowest in the OECD (52.2% in 2015 compared to an OECD average of 61.3% 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 Macron government has decided to get rid of the cosmetic measures adopted in order to artificially lower unemployment, such as subsidized jobs for young people, and a special focus on training and employability. In 2018, the rate of unemployment continued to decline, although a very low margin in spite of the large number of unfilled job vacancies across various sectors of the economy. More and more unskilled jobs are filled by non-EU migrants or workers from Eastern and Central Europe recruited on temporary contracts in particular in the building and agriculture sectors.

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 trade unions, is already producing positive effects by lowering the number of legal cases related to the firing of employees (the law has fixed standard rates of financial compensation). The government has also launched immediate measures to improve the job qualifications of long-term unemployed and young people who left school without a diploma, a program involving €15 billion over five years. Furthermore, a reform of the job training system was adopted in 2018, which will upgrade apprenticeship schemes which suffer from a poor reputation. This reform has still to be implemented.
During the summer 2018, a new bargaining session opened in order to reform the unemployment insurance scheme, which should be adopted in 2019. The aim is twofold: to reduce the huge deficit that has accumulated and to create more efficient incentives (both positive and negative) to encourage unemployed workers to re-enter 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 (56.5% of GDP in 2017 and 55.9% in 2018, compared to the EU-28 average of 47.1% in 2017).

In spite of the lowering or deletion of many individual and company taxes, the tax ratio has remained at the same high level as in previous years. This is due to the increase in ecological taxes (e.g., on fossil fuel energy), and to the social contributions for the generous pension and health care systems. The effect on economic growth has been felt during the first semester of 2018, with a decline in consumption (a major factor affecting economic growth in France), prompting further financial incentives in the draft 2019 budget (e.g., the planned exemption of social contributions on additional hours worked beyond 35 hours per week) in order to boost consumption and company investment.

The tax policy initiated by Macron has been complemented by various measures that aim to better control the main factors of public spending, such as signing “contracts” with the main local government authorities in order to slow the expansion of local expenses, reduce fiscal niches (whose total cost is estimated by the Ministry of Finance at €100 billion per year), cut social expenses and streamline funding for social housing. This overall policy has attracted fierce criticism from opposition parties and the media, and Macron has been depicted as favoring the wealthy at the expense of the poor. The low flat rate for income on capital and particularly the partial abolition of the wealth tax (ISF) have been perceived as symbolic of Macron being a “president of the rich.” The good news is that for the first time since 2006, the social security budget will be positive in 2019 due to the better management and control of social expenses. For instance, to the dismay of pensioners or beneficiaries of social allocations, state payments will be revalued less than the expected inflation in 2019 (0.3% increase only).

Some of the measures mentioned were altered or abolished (e.g., the rise in the fuel tax) in December 2018 in response to the riots.

Budgets

#38

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 still unsatisfactory with regard to European commitments and long-term sustainability. 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. 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.

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 was not only to return to sound 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 European Union’s policy agenda.

Macron’s commitment is clear, but his hopes that economic growth would support his strategy have been disappointed. The economic growth forecast for 2018 has been lowered from an expected 2% to 1.7%, which is still an optimistic estimate. Consequently, the 2019 budget will be squeezed between past commitments (e.g., the elimination or lowering of individual and company taxes) and the desire to increase salaries (e.g., through changes to taxes and social contributions). Furthermore, the cost of the “urgency measures,” proclaimed on 10 December 2018 in order to meet the social protest of the “yellow vests” movement, is another impediment to a balanced budget. Given that very few sustainable economies have been realized as the administration reform is stagnating, the structural budgetary deficit will barely diminish, and the budget deficit will probably exceed the 3% limit of the European Stability and Growth Pact.

Research, Innovation and Infrastructure

#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 2018, France is ranked 11 out of 28 EU member states 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 2.22% of GDP (2016), 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, and limited broadband penetration, intellectual assets and employment in fast-growing enterprises.

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 United Kingdom, 50 for the Netherlands and 48 for Sweden). The Macron government has adopted further legal and fiscal policy measures that aim to boost the birth and growth of startups.

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 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 also 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. However, the funding of public research in the big research institutions (e.g., CNRS) is still insufficient to compete with the leading countries.

Citations:
European Innovation Scoreboard 2018
(https://ec.europa.eu/growth/industry/innovation/facts-figures/scoreboards_en)

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

#10

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 System
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 to tackle corruption at the international level (“Loi Sapin 2”), and Macron is actively pushing at EU level for a higher and fairer taxation of multinational companies working in the information technology sector (the so-called “GAFA”).
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