PUBLIC FINANCES AND ACCOUNTS
THE SITUATION
AND OUTLOOK
OF PUBLIC FINANCES
Summary
June 2016
AVERTISSEMENT
This summary is intended to aid in understanding and using the
report prepared by the Cour des comptes.
Only the report is legally binding on the Cour des comptes.
The response of the Ministry of Finance and Public Accounts and
the Minister of State for the Budget appear after the report.
Summary
Summary of the report on the financial situation and prospects
Introduction
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1
The situation in 2015
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7
2
The situation in 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
3
Outlook for 2017 to 2019
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15
4
Measurement of expenditure savings between 2015 and 2017 . .17
5
New European rules on the governance of public finances:
an initial assessment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2 1
Conclusion
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25
3
This report on the situation and outlook of public finances is prepared, as in
every year, pursuant to Article 58-3° of the by-law relating to finance acts
(LOLF).
Filed jointly with the Government’s report on the development of the national
economy and the guidelines for public finances, it is intended to contribute to the
Parliament’s annual debate on the guidelines for public finances (article 48 of the
LOLF).
This first chapter is devoted to the situation of public finances in 2015 and its
development compared with previous years. The Court examines the development
of the expenditures, revenues, deficit, and debt of all public administrations. It then
more specifically analyses the accounts of each of the major categories of public
administrations: central government, social security administrations, and local
public administrations. This chapter also compares France’s situation with that of
other countries of the European Union.
The second chapter covers fiscal year 2016. The Court, on the basis of the information
available in mid-June 2016, assesses the risks to achieving the projected revenues,
expenditures, and balances of the Stability Programme for all public administrations.
The third chapter assesses the risks weighing on the public finance trajectory
incorporated into the Stability Programme for 2017 to 2019. It also examines
the measures to reduce the structural deficit at this horizon.
In the fourth chapter, the Court provides a critical analysis of the methods of
assessing the Government’s savings plan over the 2015-2017 period. For 2015,
it compares the savings achieved with those published and measures the effort
made.
Lastly, the final chapter is devoted to the lessons that may be learned from
implementing the fiscal governance rules introduced following the 2008-2009
financial crisis in the Member States of the European Union (rules of structural
balance of public finances, mechanism for automatic correction of the public
finance trajectory, independent fiscal institutions, etc.).
Introduction
Summary of the report on the financial situation and prospects
5
1
The situation in 2015
Summary of the report on the financial situation and prospects
7
A scaled-down deficit
The deficit of public administrations
in 2015 was 0.5 points lower than
projected in the public finance
programming
bill
(LPFP)
and
0.4 points lower than the 2014
results1. Although this was an
improvement, it remained high at
3.6% of GDP.
The central government’s deficit, which
accounts for most of the deficits of the
public administrations (3.3% of GDP
out of a total of 3.6%) decreased only
slightly. The spontaneous growth in
revenues was close to GDP growth for
the first time since 2011, and interest
expenditure once again decreased. The
measures to reduce mandatory levies cut
revenues slightly, whereas expenditures
within the “value rule” (excluding debt
and pensions) increased (by €2.1bn)
compared with the target passed in the
initial finance act (LFI) for 2015.
For the first time since 2003, local
communities generated in 2015 a
financing capacity in the national
accounts sense. This positive balance
resulted from the slowdown in operating
expenditure (+1.0% in 2015 after
+2.7% in 2014), but especially from the
pronounced decline in investment
Source: Cour des comptes on the basis of
INSEE data and the LPFP
LPFP forecast of public deficit
and reported deficit
A reduction of the deficit due
to local authorities for nearly
two-thirds
The reduction of the public deficit
compared with 2014 stemmed from local
public administrations for two-thirds
and from social security administrations
for a smaller proportion.
______________________
1
The public deficit was also 0.2% of GDP lower than the forecast associated with the 2016
finance act (-3.8% of GDP).
Source: Insee
Financing capacity (+) or need (-)
of public administrations
by sub-sector (in €bn and % of GDP)
The situation in 2015
Summary of the report on the financial situation and prospects
8
expenditures for the second consecu-
tive year. Although the decrease in
allowances exerted real pressure, for
the second year, on local finances, its
impact was in part lessened by the
dynamism of their fiscal resources.
The balance of social security
administrations also contracted in
2015 to -0.3% of GDP. This improvement
is attributable in particular to the
general scheme, the CADES (social
debt redemption fund), and hospitals.
An improving structural
balance
The reduction of actual (3.6% of GDP)
and structural (1.9% of GDP) deficits
of around 0.4% of GDP between 2014
and 2015 primarily resulted from a
“structural effort2” on expenditures:
their growth in volume remained
close to 1% in 2015, whereas they
grew by more than 2% in the 2000s.
However, all the factors contributing
to the moderation of expenditures
will not be renewable, such as the
decrease in local investment and the
further decline in interest expenditure.
Since 2012, nearly half of the reduction
of the public deficit has resulted from
the decrease in interest expenditure:
the reduction of the primary balance,
i.e., excluding interest expenditure, was
nearly half of the reduction of the
actual balance (0.7 points versus
1.3 points).
France’s persistent lag behind
its European neighbours
Compared with other countries, France
presents a more degraded public
finance situation: only four EU countries
maintain a more degraded actual deficit
than France (Greece, Spain, Portugal,
and the United Kingdom), and four have
a higher structural deficit (United
Kingdom, Spain, Slovenia, and Belgium).
Between 2010 and 2015, public
expenditures in volume continued to
increase more in France than in most
other
EU
countries
(except
for
Germany).
Growth of public expenditures between
2000 and 2015 (in %, in volume)
Source: Cour des comptes on the basis of
INSEE data
______________________
2
The structural effort measures the discretionary portion (new revenue measures and
expenditure efforts) of the change in the structural balance.
The situation in 2015
Source: Cour des comptes on the basis of
Eurostat data
Summary of the report on the financial situation and prospects
9
France’s
debt
trajectory
now
diverges not only from that of
Germany, but also from that of the
average of eurozone countries: as a
proportion of GDP, public debt
continued to rise in France in 2015
(+0.4% of GDP), while it declined in
Germany (-3.5% of GDP) like on
average in the eurozone (-1.3% of
GDP). At 96% of GDP, it exceeds
that of Germany by nearly 20 points
and that of the eurozone’s average
by 5 points.
Change in public expenditures
in volume (base 100 in 2010)
2
The situation in 2016
Source: Cour des comptes, on the basis of INSEE and the economic, social, and financial report
of 2003 to 2016
Growth of mandatory levies and GDP in value
Summary of the report on the financial situation and prospects
11
The April 2016 Stability Programme
projects a deficit of 3.3% of GDP for
2016, a decline of only 0.3 points
compared with the 2015 result,
although a further improvement in
growth is anticipated.
Despite increased risks compared
with 2015 of exceeding the central
government’s expenditure objectives,
the deficit forecast of 3.3% of GDP in
2016 can be achieved. However, this
deficit reduction, both actual and
structural, would be limited and still
would not bring down the weight of
public debt in GDP, which would
therefore remain above 95% of GDP
in 2016.
A plausible public
revenue forecast
The revenue forecast is based on a
scenario of GDP growth and inflation
considered realistic by the High
Council of Public Finances and
does not include significant risk of
over-valuation.
______________________
3
This table shows overspending compared with the 2016 initial finance act, after unfreezing of
the precautionary reserve.
The situation in 2016
Significant risks concentrated
on expenditures of the central
government and Unédic
On the other hand, the central
government’s ability to meet the
expenditures
value
rule
already
appears to be compromised. Pressures
on appropriations are greater than
they were in 2015 at the same time:
compared with the credits of the 2016
initial finance act, the risk of overrun is
thus estimated at between €3.2bn and
€6.4bn, i.e., amounts significantly
higher than those estimated by the
Court last year at the same time
(between €1.8bn and €4.3bn). Although
the precautionary reserve is high
(particularly with the freezing of
carryovers of appropriations), only
some of the appropriations thus placed
on reserve will ultimately be able to be
cancelled: in 2015, only €4bn of the
€11bn in appropriations placed on
reserve at the beginning of or during
the year had been cancelled, and the
finalisation in June 2016 of the first of
the three supplemental appropriation
decrees expected during the year has
already led to difficult choices, the
Government having renounced some
initially planned cancellations.
Summary of the report on the financial situation and prospects
12
Risks in expenditures on the scope of the value rule, deviation
from the 2016 initial finance act (in €bn)
3
* An assumption is made, as in previous years, of a statistical margin of under-consumption of
credits, estimated at €0.8bn in 2016, which allows some of the observed overshoots in the
management process to be secured.
Source: Cour des comptes
The situation in 2016
Summary of the report on the financial situation and prospects
13
The new expenditures decided and
announced since the beginning of
2016 represent the biggest source
of deviation from the 2016 initial
finance act, amounting to nearly
€2.5bn in risks for central government
expenditures for fiscal year 2016
alone. They correspond mainly to the
emergency employment plan and
measures intended for ranchers and
farmers. The increases in the workforce,
the index point, and the categorical
measures for officers of the Security
and Schooling missions will also drive
up the wage bill, whose total growth is
expected to exceed 1.0% at constant
scope (after +0.5% in 2015), for the first
time since 2009.
Under-budgeting represents approxi-
mately €2.0bn, near the 2015 level, and
expenditures carryovers from 2015 to
2016 represent around €0.6bn. The
management contingencies and bad
surprises seen since the beginning of
the year represent only a marginal
share of the identified risks (around
€0.6bn)
4
.
Risks of lesser magnitude also
influence the expenditures of social
security administrations. The €800m
in savings expected in 2016 from
the renegotiation of the Unédic
agreement will not be achieved
because this negotiation failed.
All in all, meeting the deficit objective
will require very strict management of
expenditures and leaves no room for
new decisions leading to expenditure
increases. Although public revenues
appear properly calibrated and are
expected to grow in 2016 at the pace
of
improving
economic
growth
compared with 2015, the successive
announcements
of
new
public
expenditures, which are neither funded
nor secured by sustainable savings,
pose a risk on public finances in 2016
but even more in subsequent years.
Among the additional expenditures
announced during 2016, those pertaining
to the wage bill will weigh essentially on
2017 and will continue to increase in
subsequent years.
______________________
4
In practice, this mainly involves Agriculture, food, forestry, and rural affairs and Ecology and
sustainable development and mobility missions.
Source: Cour des comptes. This graph, produced
on the basis of the average of the two low and
high assumptions of over-expenditures, does
not take into account the margin related to
the under-consumption of appropriations or
statistical allowance (€0.8bn). These are
therefore gross overruns.
Distribution of government expenditure
overrun risks in 2016 by category,
deviation from the 2016
initial finance act
3
Outlook
for 2017 to 2019
Source: Public finance programming bill of December 2014, Stability programmes of April
2015 and April 2016
Successive forecasts of actual public balance for 2015 to 2019
(as % of GDP)
Summary of the report on the financial situation and prospects
15
In the public finance programming bill
of December 2014, the Government
made a commitment to return to
structural balance and a public deficit
below 1% of GDP in 2019. The public
balance trajectory applied for 2017 to
2019 in the April 2016 Stability
Programme is less ambitious, even
though the 2015 deficit was half a
point below the LPFP forecast: the
better-than-expected result was not
utilised to cut the public deficit more
quickly and significantly change the
course of the debt trajectory.
A public finance trajectory
not ensuring a return
to structural balance
Starting from the April 2015 Stability
Programme, the Government has revi-
sed potential growth upwards. It is
now at a substantially higher level
than the level accepted by internatio-
nal organisations. It thus allows the
Government to post a structural
balance in equilibrium in 2019 despite
an actual deficit still amounting to
1.2% of GDP. However, with the poten-
tial GDP estimates of international
organisations, such a deficit would
still leave a structural deficit above
1% of GDP. A more ambitious public
finance trajectory would be required
to meet, in 2019, the medium-term
objective of structural balance of
0.4% of GDP by the programming bill
and 0 in the April 2016 Stability
Programme.
Outlook for 2017 to 2019
Source: Cour des comptes on the basis of the
national accounts of the INSEE and the April
2016 Stability Programme
Growth of public expenditures (as %)
A trajectory that also assumes
an unprecedented decline
in public expenditures
The
analysis
of
the
Stability
Programme also shows that achieving
a deficit target of 1.2% of GDP in
2019 assumes unprecedented control
of public expenditures: with the
macroeconomic
scenario
of
the
Stability Programme and the continued
decline in the mandatory levies ratio to
GDP of 0.2 points per year, a reduction
of public expenditures in volume,
excluding interest expenditure, between
2016 and 2019 would be required,
whereas it increased by 1.1% on average
between 2010 and 2015 and 2.6%
between 2000 and 2009.
control objective for 2017, and the
policies
implemented
in
recent
years hardly carry the promise of
medium-term
savings.
On
the
contrary, the planned increase in
military expenditures, the measures
announced at the beginning of the
year concerning employment, the
measures young people, the mitigation
of the effort requested from cities and
inter-city bodies, and especially the
growth of civil service wage bill will
push expenditures up, by around 0.3%
of GDP in 2017.
The wage bill of administrations,
representing almost a quarter of
government
expenditures,
will
increase starting in 2017 at a pace
marking a divergence from the trends
observed for 10 years: none of the
three levers – workforce stability,
freezing of the index point, and
limitation of categorical measures –
that had allowed the growth of the
public wage bill to be controlled
over the last decade will be at work
any longer. Over 2017 alone, the
wage bill could grow more quickly
than over the entire period of 2009
to 2015. The protocol on professional
development, careers, and wages,
which will begin to take effect in
2017, is also expected to ramp up in
the coming years.
The risks weighing on achieving the
expenditures and balance trajectory of
the Stability Programme are therefore
very significant, even though this
trajectory would not be enough to
restore
the
situation
of
public
finances
beyond
the
Stability
Programme horizon.
Summary of the report on the financial situation and prospects
16
A significant risk
of not meeting the deficit
objectives starting in 2017
The Stability Programme does not
present the necessary reforms to achieve
the public deficit and expenditure
4
Measurement of expenditure
savings between 2015 and 2017
Source: Cour des comptes on the basis of the information report of the Finance Committee
of the National Assembly on the Stability Programme for 2016 to 2019 and the national
reform programme
Timing of the €50bn savings plan
(in €bn)
Summary of the report on the financial situation and prospects
17
The Government announced a €50bn
savings programme over 2015 to 2017,
including €21bn in savings in 2015,
then €14.5bn in savings in 2016 and
2017. This distribution was modified
during
the
April
2016
Stability
Programme (see graph below): the
amount of savings was revised down to
€18.1bn for 2015 and €13.2bn for
2016, with the greatest effort being
postponed to 2017 (€18.7bn).
Measurement of expenditure savings
between 2015 and 2017
A significantly lower
amount of savings in 2015
than the amount reported
by the Government
The calculation of these savings is
based on the assessment of trend
growth in expenditures, i.e., “no
policy change”.
The assessment of trend growth of
public
expenditures
is
based
on
various and sometimes questionable
methods. Although “no policy change”
growth can be defined rather naturally
for expenditures like welfare benefits,
which are very largely determined by
the legislation, this definition cannot
be applied to other expenditure items
more directly controlled by the public
authorities, like investments or operating
expenditure.
The review of the assumptions used by
the Government reveals that they result
in a rather high evaluation of trend
growth and therefore an overestimation
of the reported savings, which are
calculated on the basis of this trend.
Even with the assumptions made by
the Government, the Court considers
that the savings effort made in 2015
(€12bn) is real, but significantly lower
than that reported in the Stability
Programme
(€18.1bn),
essentially
because of the central government.
Summary of the report on the financial situation and prospects
18
Review by the Court of the savings measures for 2015 of the €50bn plan
presented by the Government (in €bn)
Source: Cour des comptes on the basis of the tables and data presented previously and the
Stability Programme (Stab. P.) of April 2016
Measurement of expenditure savings
between 2015 and 2017
Summary of the report on the financial situation and prospects
19
A structural effort
in expenditures
less than 0.5% of GDP
Although the construction of a
trend on expenditures is helpful for
decision-making and the formalisation
of a fiscal consolidation strategy in the
form of a savings plan, its realisation
does not allow the sustainability of the
policy for public finances to be judged. It
is the structural effort in expenditures,
built on the difference between the
growth of public expenditures and the
potential growth of the economy, that
permits it.
In 2015, the structural effort in
expenditures was around €6bn less
than the minimum adjustment effort
of 0.5% of GDP required by European
rules from a country that, like France,
has not achieved its medium-term
objective of structural balance.
This difference is equivalent to the
difference between the amount of
savings actually achieved in 2015 and
the Government’s objective in its
savings plan.
The savings effort made in 2015 is
therefore less than the Government’s
ambition and less than what would
have been necessary to ensure the
sustainability of the fiscal policy over
the medium term.
5
New European rules
on the governance
of public finances:
an initial assessment
Summary of the report on the financial situation and prospects
21
The 2008 financial crisis, then the
sovereign debt crisis, forced the
Member States of the European
Union, and particularly those of the
eurozone, to strengthen their fiscal
governance.
Several
texts
were
adopted in this sense between 2012
and 2013: the Treaty on Stability,
Coordination, and Governance (TSCG),
the “six-pack”, and the “two-pack”,
which refer to a set of directives and
regulations to strengthen the rules of
the Stability and Growth Pact (SGP).
These texts provide for three main
innovations: a structural balance rule,
the establishment of an automatic
correction mechanism, and the creation
of independent fiscal institutions.
The structural balance rule:
a procedural constraint more
than a legal constraint
European texts now require setting
a medium-term objective (MTO),
defined in structural terms. Under the
TSCG, the corresponding structural
deficit cannot exceed 0.5% of GDP.
The steering of fiscal policy on the
basis of a structural balance objective,
rather than nominal, is economically
desirable: it limits the risk of an overly
relaxed fiscal policy in a period of
strong growth or overly rigorous
growth in a recession period.
The TSCG requires that the MTO be
transcribed through “permanent and
binding” provisions. Only a few States,
including Germany, Italy, and Spain,
have chosen to adopt constitutional
“golden rules”, often even before the
signing of the TSCG. Most other
countries have transposed this rule in
ordinary laws.
France transposed this requirement in
the organic law of 17 December 2012
on programming and governance of
public finances. The organic provisions
leave it to the multi-year public finance
programming bills (LPFP) to the OMT
and define the fiscal trajectory. The
structural balance objective must be
included in the introductory article of
the finance acts. The achievement of
this objective is evaluated in the
finance review act. The LPFP currently
in force was adopted in December
2014 and sets the OMT to -0.4% of GDP.
New European rules on the governance
of public finances: an initial assessment
Source: Cour des comptes
Compliance with the provisions
of the TSCG
However, the organic law imposes
only a procedural constraint and
not a legal constraint, to the extent
that the LPFPs can be revised at any
time and do not bind the financial
legislator.
Summary of the report on the financial situation and prospects
22
The “correction mechanism”:
an alert function more
than an automatic mechanism
The automatic correction mechanism
supports the structural balance
rule by imposing a correction in
case of a significant deviation from
the trajectory (i.e., a difference between
actual and forecast deficits of 0.25%
of GDP two years in a row or 0.5% in
one year).
Most countries have translated
this rule by providing for a simple
obligation to explain deviations
from the trajectory under the
“comply or explain” principle.
In France, the organic law provides that,
where the High Council of Public
Finances (HCFP) triggers the correction
mechanism, the Government is obliged
to explain the reasons for the deviation
in a report to Parliament setting out,
where appropriate, the corrective
measures envisaged. This mechanism
was triggered in spring 2014, during
the HCFP’s examination of the
2013 finance review act, following a
deterioration of more than 1.5% of
GDP of the deficit5. The Government,
rather than go back to the LPFP in
force, chose to change the public
finance trajectory by introducing a
new multi-year programming
6
.
The establishment
of independent fiscal agencies:
real progress
The new governance rules required
the creation of independent fiscal
agencies with a dual mission: ensure
the unbiased and realistic nature of
macroeconomic and public finance
forecasts and perform an ex-post
assessment of compliance with the
financial
trajectory.
Governments
must comply with their opinions or
publicly explain themselves if they
decide to depart from them.
______________________
5
This deviation is noted in relation to the trajectory provided for in the multi-year public
finance programming bill for 2012-2017 of 31 December 2012.
6
See multi-year public finance programming bill for 2014-2019 of 29 December 2014.
New European rules on the governance
of public finances: an initial assessment
Summary of the report on the financial situation and prospects
23
All Member States have established such
agencies, usually by creating
ad hoc
structures. Their mandates are quite
variable: some
build the macroeconomic
projections themselves (Austria, Belgium,
Netherlands, United Kingdom) or public
finance
forecasts
(Austria,
United
Kingdom) themselves, while others
make fiscal policy recommendations
(Portugal) or advise on structural
reforms (Italy).
In France, the High Council of Public
Finances, backed by the Cour des
comptes, is responsible for giving a
public opinion when the finance acts
are filed.
Possible developments
Without revisiting the choice made
in
2012
not
to
amend
the
Constitution, it appears possible to
strengthen the governance of public
finances within the current institutional
framework.
First of all, the objectivation of the
potential
growth
assumption
appears necessary to avoid biasing
the structural balance targets. Like for
the macroeconomic forecasts, it seems
desirable to plan for an independent,
transparent body to rule on the potential
growth assumptions, particularly in
connection with the presentation of
the Stability Programme, which is the
first public reference of the process of
developing the finance acts for the
year. Parliament’s control should also
be strengthened, prior to forwarding
the
Stability
Programme to the
European Commission.
Then, the debate in favour of simplified
fiscal governance is currently emerging
in the European bodies. Although the
reference to structural balance, which
ensures the long-term sustainability
of fiscal policy, must be retained in
principle, it deserves to be supplemented
by an expenditure rule, easier to explain
ex ante and verify
ex post
.
It could take the form of an expenditure
objective adapted annually for all
general public administrations, fixed
in current euros, on the basis of a
structural balance target compatible
with
meeting
the
medium-term
structural objective. Such a scheme
requires considering a mode of
governance that involves the central
government, social security adminis-
trations, and local governments in
its definition and monitoring.
Conclusion
Although improved over 2014, the public deficit remained high in 2015 at 3.6% of
GDP, and France’s public finance situation is not as good as its European partners.
The public balance trajectory applied for 2016 to 2019 in the April 2016
Stability Programme, less ambitious than the one indicated in the December
2014 programming bill, projects a return to structural balance of public finances
in 2019. This outlook is very uncertain because it is based on inflated assumptions
of growth potential and very ambitious assumptions of public expenditure
control. However, even though the announced ambition of expenditure control
has never been stronger, decisions taken since the beginning of the year have
instead led to an increase in expenditures, which began in 2016 but is expected
to grow significantly in 2017 and beyond.
The expenditure control policy pursued so far has aimed more at containing it than
improving its effectiveness. The action to be taken must now be based on explicit
choices, address key sources of inefficiency in expenditures, review the missions of
public administrations overall, and better target intervention expenditures.
25
Summary of the report on the financial situation and prospects