IMF urges France to tighten fiscal policy from next year

The monetary institute believes that it is “time” to end “at all costs” to replace it with more targeted support measures without “degrading public finances”.

France must start cleaning up its finances next year after spending billions to bail businesses and households out of an energy crisis, the International Monetary Fund (IMF) advised on Monday.

“We supported it at all costs, but it’s time to stop,” Jeffrey Franks, the IMF’s head of mission for France, told a news conference. “It is not a question of ending all support to the economy, (but) more targeted” support to households and businesses “without undermining public finances,” the IMF said in a report released Monday morning.

“Start fiscal consolidation in 2023”

Freezing electricity and gas prices, energy vouchers, discounts on fuel prices, support for business… France increased its spending in a year estimated by the IMF at more than 2% of GDP. The government’s initiatives have kept inflation “two to three points” below what it would have been without the bailouts, Jeffrey Franks hailed. “Thanks to the tariff shield, France has the lowest inflation rate in Europe,” Economy Minister Bruno Le Maire said in an email to AFP.

But this exceptional spending also affected public finances, already badly damaged by the Covid-19 pandemic, in which the government particularly funded partial unemployment and business closures at all costs. After these two crises, and with aid reduced due to the pandemic, “it is justified to start fiscal consolidation in 2023,” the IMF writes in the results of France’s economic assessment mission, known as “Article IV”.

However, this is not the path taken by Paris, the Washington Institute notes that “the 2023 fiscal law does not aim to reduce the deficit by delaying the budget adjustment until 2024”. The government hopes for a public deficit of 5% next year, down from 4.9% this year, and plans to return below 3% in 2027, where its larger neighbors are betting on a faster return to that level. In a document published on Monday, the IMF still expects France to grow by 0.7% next year. An estimate that “confirms” the “resistance of the French economy” for Bruno Le Maire.

Aid targeting

Still, the IMF fears a “slight widening of the deficit” in 2023, citing the extension of energy measures and the continued elimination of production taxes for companies. However, targeting energy aid could “substantially” allow the budget to be tightened by a quarter of GDP, the IMF estimates, as well as a possible postponement of production tax cuts. According to Jeffrey Franks, other ways to reduce government spending and ultimately the deficit: pension and unemployment insurance reforms, as well as reducing tax loopholes.

On Monday, we will “implement” the first two reforms drafted by Bruno Le Maire, while Labor Minister Olivier Dussopt presented new rules for calculating unemployment benefits to the social partners. To reduce public spending, Jeffrey Franks also insists on “clarifying who does what” between the government and local authorities. “We see a lot of duplication of costs between central government and local governments,” he said, calling for “rationalisation”.

In the long term, France’s deficit should remain above the level at which it stabilizes debt, worries the IMF. The Washington institute is therefore calling for a “sustainable adjustment” to reduce the deficit to 0.4% of GDP by 2030, based on a reduction in the growth of current spending, especially related to the pandemic and the energy crisis.

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