Opinion on the budget settlement bill for 2016

The High Council of public finance delivers on 12 June 2017 an opinion on the compliance with multi-year targets concerning the structural balance in the budget settlement bill for 2016 (PLR).

Opinion's summary

The nominal public deficit was 3.4 % of GDP in 2016, compared to 3.6 % in the public finance programming law of December 2014, which, under the 2012 organic law, has to be the reference of the High Council for the identification of possible deviations to the trajectory within the framework of the correction mechanism.

The High Council notes that the estimated structural deficit for 2016, which is 1.7 % of GDP with the assumptions of the programming law, is in line with the forecast adopted in this law (1.8 %).

It considers, however, that the 2014 programming law no longer provides a relevant framework for a proper assessment of the public finance trajectory.

The potential GDP and thus output gap  assumptions of this programming law, which were originally based on those of the European Commission but have not been adjusted subsequently, are now unlikely. They are increasingly distant from the estimates of international organizations which have been revised downwards several times in the meanwhile.

Moreover, as the High Council had pointed out from the outset, this programming law was setting structural adjustments objectives below the minimum laid down in the rules resulting from the Fiscal Compact.

The overestimation of the output gap in stability programs and financial frameworks of budget laws since 2015 artificially increases the cyclical component of the deficit, which mechanically reduces the structural deficit estimate. Therefore, the structural deficit, and consequently the effort to be made to restore the equilibrium of the public finances in the medium term, are underestimated. By way of comparison, the structural deficit estimated by the European Commission for the year 2016 is 2.5 % of GDP, which is 0.8 point higher than the estimate presented by the Government.

Even if they are smaller than previously, the revisions of the economic data of the past years (in this case, 2014 and 2015) in the national accounts published by INSEE in May modify the estimates of the output gap and hence those of the structural budget balance. As the High Council has already pointed out, this instability over time in estimating the structural balance calls for the assessment of public finances to take account of other indicators that are more representative of the fiscal policy stance.

In this respect, the High Council notes that structural adjustment (the structural budget balance change) and structural effort (the part directly linked to an expenditure effort or to new measures of compulsory levies) are low in 2016 according to the current estimates. The first is estimated at 0.3 % of GDP and the second at only 0.1 %, after 0.7 % in 2015, 0.6 % in 2014 and about 1 % per year on average over the period 2011 - 2013. The year 2016 thus marked a slowdown in the efforts for the consolidation of public finances, which, as in the previous year, was exclusively on the expenditure side.

The High Council considers that, in the current situation of France's public finances, greater attention should be given to the assessment of structural effort and, more specifically, to expenditure effort.

The High Council stresses the need for the next programming law to set annual structural adjustments in line with the rules to which France has subscribed under the European Fiscal Compact.

This law must also be based on realistic output gap and potential growth assumptions, taking into account estimates made by external institutions and organizations. These assumptions of the output gap and potential growth should also be updated if necessary during the period covered by the programming law.