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At last, the IMF is taking a stance

Finally, he is not better than the other ones...

In l’Opinion, KAK, 22 novembre 2022

Jean-Pierre Dumas

November 27, 2022

Yesterday, it was the UK; today it is France’s turn which is under the IMF’s line of fire, and this is new. Under French Executive Directors, France was protected.

The fiscal policy of rich countries is disastrous, yes, they have an excuse, they were hit by the covid crisis and an energy shock due to the Russian invasion (all countries rich and poor were hit). France, as other developed countries, was swift to respond to these shocks through a generous traditional Keynesian policy. France fiscal deficit increased by 5.8% of GDP from 2019 to 2020 to reach 8.9% of GDP in 2020. But France was not alone, Germany raised its fiscal deficit in 2020 also by 5.9%, the UK by 10.6% and the US by 9%.

Figure 1 All rich countries have made a Keynesian policy during crisis time

Source: IMF/WEO/2022

Table 1…but at a different rhythm

Among the major countries, the US, Japan, the UK and France have all experienced significant deficits over the period, France not being the single one nor the most deficit country, so why to single out France? Is this traditional "French bashing" on the part of the IMF? Certainly not.

France has a fiscal characteristic; its expenditure ratio is high (the highest in the world) and rigid downwards.

The UK, and the US are flexible countries. They can raise or decrease their public expenditure (see Figure 3), France is a rigid country, it only raises public expenditure never decreases them (see Figure 2).

Figure 2 The French government expenditure ratio rises in step

Source: IMF/WEO/2022

The French public expenditure ratio increased to 57% of GDP in 2009, it stayed at that level during the period 2009-2019, the UK public expenditure ratio also increased in 2009 to reach 44% of GDP but decreased in 2019 by six points of GDP in 2019.

In 2021, the French government expenditure ratio is close to 60% of GDP, will it stay at that level? The country cannot afford such a high expenditure ratio in the long term without incurring an unsustainable debt dynamic or an increase of tax, factor of bigger economic decline and popular discontent.

The characteristic of French stimulus (plus six points of GDP in 2020) is that most of the increase in public expenditure is devoted to current expenditures (gas, fuel and electricity subsidies, “bouclier tarifaire’’), cash transfers to households (“chèque énergie”), increase of public servants’ salary and pension and support to enterprises (curiously the Government did not allow any increase in the controlled price of the fees paid to medical doctors which is capped at €25 per consultation, no wonder that there is no more medical doctors in France). According to the IMF, two thirds of these measures reflect price and purchasing measures. President Macron’s official policy consists to “protect the French”. All these measures have nothing to do with investment or transition investment and they are financed through public debt.

Nevertheless, one measure can be considered as a positive investment, the financing of training of unemployed peopleor people looking for a reorientation through apprenticeship within the enterprise or through specialized training units (not through universities which are not in a position to do this job). This reform should be pursued, the Government should generously finance training made within the firm (particularly for small & medium industries). The results so far have been very positive, bringing more young people into the workforce (it is preferable for the Government to finance job creation, rather than unemployment, or assistance to young people who refuse to work).

Figure 3 The UK and US expenditure ratios are lower and seem able to decrease

Source: IMF/WEO/2022

“Risks to the outlook are high and titled to the downside”

IMF, as usual, does not limit itself to the past but to the future, and prospects for French fiscal and debt dynamics are not good, especially since France has no more fiscal space (Germany has fiscal space, not France).

In France increased spending was effective to cushion the crisis but have beefed up an already high expenditure ratio (see Figure 2) and the debt ratio (in other European countries, the level of debt before the crisis was lower). Other European countries have put in place policies to reduce their fiscal deficits. For J. Franks, Head of the IMF mission to France, the fiscal deficit will remain at 4.5% of GDP in the medium term.

If the average fiscal deficit remains at 4.7% of GDP over the period 2022-2027; the average growth rate (in real terms) (g), 0.7%; the GDP deflator (4%); the average real interest rate (r) -1% (because of inflation), the average primary deficit at 1.3%, we project no decline in the French public-debt ratio (which stays at about 113% of GDP). The IMF projection is more pessimistic, the debt ratio will be 119% in 2027.

Table 2 France debt ratio will stay at the same level (thanks to inflation) or will increase (IMF projection)

Source: WEO:2022 for IMF projection

The IMF considers rightly that the French Government “should begin a multiyear process of expenditure-based fiscal consolidation to put the public debt ratio on a firmly declining path.” Yet the Government has shown no willingness to seriously reduce the deficit in 2023, deferring the decision to future years...

The Fund proposes a fiscal adjustment path averaging an annual 0.7% of GDP (or five percentage points of GDP over seven years). This is quite ambitious for a country who thinks only in terms of deficit.

The Fund proposes welcome structural expenditure reforms (never done).

- Reduce current spending, the quasi totality of expenditure surge is composed of recurrent expenditures which become encrusted in the long run (there is a ratchet effect).

-Reduce the number of civil servants (not done under Macron).

-Canceling overlaps between expenditure (between the different layers of the administrative “mille feuilles”).

-Canceling useless expenditures, the number of people managing hospitals (ARS), teachers. All these useless expenditures explain that France has the highest “social expenditure ratio” in the world whereas its social performance is rather low (OECD).

-A comprehensive pension reform which increases labor working time. This is a measure in the agenda of the President, the details are important (see Gérard Neel, “Des compromis nécessaires”, 2022, Librinova). The Government is quite hesitant in front of the street opposition to any reform.

-Reform of the unemployment benefits (ongoing).

-Rationalizing tax expenditure. The Ministry of Finance believes that piecemeal tax exemption can fine-tune the economy. This is, of course, completely wrong; it would be better to go to a lower tax rate across the board without exemptions.

-A fiscal law curtailing expenditure growth.

We add :

-Reforming the complex and outdated French (and francophone) fiscal framework which prevents any budget by programs and encourage expenditure increase every year (past expenses are never questioned).

The probability of implementation of these reforms is quite low. The President Macron is not much interested in economic reforms, his main interest lies in foreign policy. He has forgotten one of the lessons of the Général de Gaulle: « pas de grandeur nationale dans un pays sans finances stables » (no national greatness in a country without stable finances). French people are not keen on structural reforms which put into question acquired advantages ("les avantages acquis").

This IMF statement is welcome and useful. IMF is too often considered as the bad boy, it imposes conditionalities only on poor countries, whereas “rich” countries never go cap in hands toward the IMF. The last experience with the UK reminds us our fragility. In the UK case, the bond vigilantes did the IMF job, they obliged the authority to adjust, so far France has been shielded from the vagaries of the market thanks to the generous QE operated by the ECB, but this policy is translating into inflation and even the ECB will be obliged to enter QT. France, Italy and Spain are risky countries for the EZ.

It is good that the IMF reminds publicly to rich countries that debt sustainability and fiscal adjustment cannot be limited to poor countries.

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