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June 21, 2016

Central Government Expenditure Rule Under Scrutiny in France

Cour Des Comptes

By Guilhem Blondy and Vianney Bourquard[1]

A central government expenditure rule that has been in place in France for twenty years has been assessed by the Court of Audit in a report that was recently submitted to the Parliament. According to the Court, the rule has reduced the growth of central government expenditure, while loopholes in its coverage and poor in-year reporting have weakened the rule’s influence on budgetary policy. The full report (in French) is available at : Le budget de l’État en 2015 (résultats et gestion) / Publications / Publications / Accueil / Cour des Comptes - Cour des comptes.

The report notes that 17 EU member countries have implemented budget rules covering all or part of their public expenditure, using budgetary accounting, financial accounting, or government financial statistics as a measuring tool. France chose two such rules - a central government expenditure rule (“norme de dépenses de l’État”) created in 1996 and a healthcare expenditure rule (“objectif national des dépenses d’assurance-maladie”) established in 1997[2]. The report mentions that France was at that that time engaged in a difficult fiscal consolidation exercise to qualify for membership of the Economic and Monetary Union. These rules were supplemented in 2014 by a local government expenditure target (“objectif d’évolution de la dépense publique locale”), but this rule is less binding than the others. Both the central government and healthcare expenditure rules use accounting data rather than statistical data to improve the timeliness of reporting expenditure outcomes.

The scope of the central government expenditure rule has changed several times since it was established. Between 1996 and 2007, the rule covered general budget expenditure, including debt service costs and civil servants’ pensions, but excluded expenditure under special accounts or subsidiary budgets. In 2008, the central government rule was extended to central government receipts earmarked to local governments and the European Union. In 2011, the expenditure rule was divided into two parts: the existing rule and a second rule which excludes interest costs and government pensions. The objective of this change was to reduce the volatility of expenditure under the rule. In 2012, the rule was further extended to include taxes and levies earmarked for spending by autonomous extra-budgetary central government agencies. These extensions were aimed at making it more difficult to circumvent the rule.

The purpose of the rule has also changed over time. While the rule has always been announced in the Budget Speech, it was initially seen mainly as an internal management tool for the Executive Branch. In recent years, however, the rule has increasingly become a means of expressing the government’s budgetary strategy. Since 2009 it has been approved by Parliament as part of the multiannual Public Finance Planning Programme Act. The scope of the rule and its methodology are described in an appendix to these Acts, known as the Budgeting Charter (“charte de budgétisation”).

Growth in central government expenditure (according to the statistical definition and excluding tax credits) has slowed since the expenditure rule was introduced, from an annual average of around 1.3% in 1986-95 to 0.9% in 1996-2007 and 0.4% since 2008 (see Chart below). More specifically, the inclusion of taxes earmarked for spending by autonomous central government bodies has reduced the growth of their expenditures to a more sustainable path.

Trends in French Central Government Expenditure (1986-2016)

Average change in spending in each of the 3 periods

1986-1995: no expenditure rule

1996-2007: central government general budget expenditure rules

2008-2014: other central government bodies spending indirectly taken into account by the rule (through taxes earmarked to them)

By budgetary central government

1,50%

0,80%

0,70%

By other central government bodies

1,30%

0,90%

0,40%

Budget Bill expenditure rule (excluding pensions and debt service)

not applicable

-0,2 %

-0,5 %

Central government expenditure as shown in the national accounts has risen faster than implied by the expenditure rule, however. The report by the Court attributes this trend to differences in the scope and recording basis of the central government’s financial statistics, but also to circumvention of the Budgeting Charter. While the rule is supposed to reflect the growth of expenditure from one year to the other on unchanged assumptions, in practice changes in the scope and definition of the budget have not always been reported correctly by the Ministry of Finance.

In order to clarify and stabilize the scope of the central government rules, the Court of Audit has proposed a further subdivision of the rules into a so-called “management rule” for spending that can be controlled by the administration within each fiscal year, and a broader “overall rule” that is directly aligned with the government’s fiscal objectives.

According to the Court, the “management rule” should include subsidiary budgets and special accounts. On the other hand, receipts earmarked to the European Union which are not decided at the national level and difficult to predict should be excluded from this rule. On the other hand, the “overall rule” would cover the resources transferred to the European Union as well as tax credits.

Finally, the report proposes that the government should publish reports on the performance of the expenditure rules three times a year, in April, July and October.

[1] Guilhem Blondy and Vianney Bourquard are Senor Auditors at the French Court of Audit. Guilhem was a staff member of the International Monetary Fund from 2009 to 2012 and has worked for the Ministry of Finance and several government agencies in France. Before joining the Court in 2013, Vianney worked for the French Ministry of Finance and the Prudential Supervisory Authority.

[2] As in most continental European countries, social security funds (excluding civil service pensions and unemployment benefits) are not part of the budgets of central or local governments in France, but are considered as a specific institutional sub-sector managed autonomously by employers and workers’ unions.

Photo: La Cour des comptes doute de la "sincerite" du budget du gouvernement (illustration). Credit: AFP Photo/Thomas Samson

Note: The posts on the IMF PFM Blog should not be reported as representing the views of the IMF. The views expressed are those of the authors and do not necessarily represent those of the IMF or IMF policy.

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