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January 09, 2008

France improving its medium-term budget framework

Posted by Ian Lienert

FranceMany developed and developing countries are struggling to implement or improve their medium term expenditure frameworks (MTEFs) to elaborate on a government’s sectoral spending objectives. In April 2007, l’Inspection Générale des Finances (IGF), a high-level government body under the Ministers of Economy/Finance and of Budget/Accounts, published a report (in French) analyzing France’s a medium-term budget framework (MTBF), making recommendations for strengthening the framework.

Since 1998 France has published a MTBF, covering four future years. The IGF notes that the multiyear programming has not been respected, mainly because of slippages on the spending side. The MTBF suffers from three important weaknesses:

  • The MTBF is prepared solely to satisfy the requirements of the European Stability and Growth Pact.
  • The MTBF is not supported by operational targets that allow the achievement of public finance objectives.
  • There is no direct link with the annual budget preparation procedures.

Although the government has established spending norms, according to IGF these are too general and only apply to part of the State budget. In turn, the “State”, or central government of France, covers less than 40% of total general government spending. Much general government spending (around 45%) takes place through the extrabudgetary social security funds, which provide the financing of France’s extensive social protection networks—for health, pensions, unemployment and other social spending. A smaller amount (around 15%) is spent by France’s subnational governments: regions and lower-level local authorities. Although there are sectoral multi-annual spending norms, the rate of increase for these, along with the transfers to local authorities, surpasses the general spending norms. Moreover there is a lot of rigidity in central government spending, despite the adoption of a program-based budget, implemented first in 2006, which requires justification of spending to “the last euro”. The IGF points out that baseline MTEFs are not agreed between the central ministry responsable for the budget and spending ministries/agencies.

After examining the experience of the three EU countries that have operational MTEFs in place, the IGF recognizes the need for France to define a multi-year MTBF for the duration of the legislature and to project budgeted program spending on the basis of rolling three-year MTEFs. To succeed, adequate political support would be required and clear prioritization established for the objectives of the MTEFs. In other countries these are: the need to control budget deficits by strictly respecting spending ceilings (the case in the Netherlands and Sweden) and strong emphasis on the accountability of budget managers (especially the case in the United Kingdom).

The IGF’s key recommendations are:

For general government:

  • Fixing strict medium targets for debt and the structural budget balance, to be attained by 2012.
  • Identifying clearly the efforts needed by each major actor each year to attain the targets.
  • Making prudent hypotheses for the underlying variables that drive the budget projections, such as economic growth and tax elasticities. 

For the State:

  • Formulating revenue and multi-annual spending targets.
  • Defining (ex ante) any tax measures, including changes in France’s large tax expenditures.
  • Extending spending norms so that the ceilings are larger in scope than as present. They could, for example, include all earmarked spending as well as amounts needed to cover the deficits of the social security funds (which are funded by taxpayers but not on the basis of firm medium-term targets).
  • Making medium-term expenditure projections for each of the 34 “missions” of France’s new program-based budget system. This would strengthen the link between the annual budget appropriations and the MTEFs.

The IGF also advocates that:

  • The detailed projections should be prepared after conducting an in-depth spending reviews;
  • After establishing the baseline for salary determinants, the medium-term spending ceilings should provide a more-binding framework for salary negotiations; and,
  • Studies of the baseline three-year detailed spending projections should be conducted, to identify in advance possible causes of spending slippages.

Since the formation of a new government in France following the election of Mr. Sarkozy, the Ministry of Budget, Accounts and Civil Service has begun formulating plans to address the concerns raised by the IGF (see December 21, 2007, blog post and presentation).

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