A PFM View of the New French “Loi Organique”

Posted by Benoit Chevauchez[1]

France is now equipped with a fiscal rule. The organic budget law adopted last December[2] was the French government’s response to the obligations set out in the European Treaty on Stability, Coordination and Governance (TSCG) signed in March 2012. The Treaty resulted from a process initiated in December 2011 by the European Council, in the wake of the euro crisis. The basic idea of the Treaty is that “Euro zone countries” should adopt national fiscal rules in order to integrate in their own legislation the Maastricht principles of fiscal discipline that are set out in the European treaties.

Before the new treaty was ratified, the French national budget law did not address issues of fiscal sustainability. The French Constitution of 1958 was silent in this regard, even if an amendment adopted in 2008 had introduced the concept of “budget balance over the medium term”, but only as a theoretical principle without any operational impact. Similarly, the 2001 LOLF (loi organique relative aux lois de finances), and its predecessor the 1959 Organic Ordinance, wholly ignored sustainability issues.

In practice, France has had a rather modest record in terms of fiscal sustainability: its EU stability programs have seldom been respected, its macroeconomic assumptions have been frequently optimistic, and its debt level has steadily increased up to 90 percent of GDP. Thus, for France, the adoption of the new organic law (OL) is an important initiative, that might also mark a turning point in its fiscal tradition.

The new fiscal rule was not enacted as a constitutional amendment. While the idea of the 2012 Treaty drafters was to establish such rules at the constitutional level, as in Germany, France did not adopt this approach. Instead, the government preferred to use the option, formally allowed by the Treaty, to set this rule in a law, albeit an organic law that has a stronger authority than an ordinary law. Incidentally, one might ask why the government decided not to integrate the new rules within the LOLF. Some PFM experts suggest that a unique and comprehensive legal PFM framework can be a good solution in term of visibility, authority and consistency, but for different reasons, rather than amending the LOLF, a new OL has been passed.

The OL defines a procedural rule rather than a numerical one. The new law stipulates that a multiyear budgeting approach be adopted with which annual budgets must comply. Thus, no numerical fiscal targets or ceilings are directly set in the OL though many references to the Maastricht objectives are made.

Technically speaking, the OL establishes a medium-term fiscal framework (MTFF) which takes the form of a law, named the Public Finance Planning Act (PFPA). With a five-year time horizon, this framework covers the general government, broken down into three components: the central budget, the social security budget and local budgets. The PFPA is binding for both the central government and the social security budget: the annual budget laws need to be brought in line with the “sustainability path” set out in the PFPA. In relation to local budgets, the figures in the PFPA are only indicative, in order to comply with the principle of local autonomy recently introduced in the French Constitution. The first PFPA was adopted last year, covering the 2012/2017 period. The PFPA coexists with the “triennial budget” laws, created in 2008[3], which have a narrower time horizon (3 years), and mainly focus on the central government budget, but have a more detailed breakdown of expenditures.

To sum up this quite complex set of multiyear budgeting tools in today’s France, one can refer to the PFM jargon and say that the PFPA created by the 2012 OL is a fiscal framework (MTFF), while the triennial budget laws of 2008 are budget or expenditure frameworks (MTEFs). The government may want to consider streamlining the multiyear budgeting framework in the coming years.

In addition, the OL created a fiscal council, the Public Finances High Council[4], which was in fact the major novelty of the new legislation. Composed of 10 economists and fiscal experts appointed by the Government, the Parliament and France’s external audit authority (Cour des Comptes), this new body is attached to the Cour des Comptes and chaired by its president.

The High Council is responsible for providing an independent opinion on the macroeconomic forecasts prepared by the government that are included in the EU “Stability Program”[5], the MTFF and the annual budget. It is also responsible for assessing the coherence and consistency of these three financial documents. It is worth mentioning that the main focus of the Council’s mandate is macroeconomic issues: purely fiscal aspects, such as the reliability of revenue and expenditure estimates, are not expected to be central to its work.

The new institution appears to be making good progress. Since it was established in February 2013, the High Council has issued reports on the European Stability Program, on the 2012 budget and, more recently, on the draft 2014 budget. These reports provide convincing evidence of the professional competence of the Council, and it has demonstrated an independence of purpose that has not been challenged by politicians or the media: a good omen indeed. Nevertheless, it is only over the longer term that its independence and effectiveness will be truly tested.

The Council will have to face several challenges in the coming years. One challenge is technical and relates to the subtle notion of a “structural balance”. Considered now as the beacon of the EU’s approach to fiscal discipline, the “structural balance” is a complex, disputed and evolving concept. The High Council will have the difficult task of interpreting and clarifying this concept in the French context, to avoid any discrepancy with the assessment of EU Commission experts and, ultimately, to establish the structural balance as a commonly-accepted term in the French fiscal debate.

Another challenge is more fundamental: to what extent will the High Council’s reports and statements actually impact on France’s fiscal policies? The Treaty stipulates that any major deviation[6] from the “sustainability path” should be automatically corrected. But, since the role of the Council is purely advisory, the automaticity of the corrections will depend entirely on the good will and compliance of the government. Legally, the language of the OL is prudent: in case of a major deviation from the rule, the government is required to present a report proposing corrective measures that will return to the sustainability path set in the Public Finance Planning Act, within two years. The law at present does not require any stricter sanctions to be imposed on the government. Thus the High Council’s role is similar to that of any watch dog, essentially “to name, shame and blame” undisciplined governments.

A stronger role may be played by the Constitutional Court which almost every year has to assess the constitutionality of the government’s budget, and frequently cancels some of its provisions (on one occasion it declared the whole budget unconstitutional). Up to now, the Court has been shy of venturing into the area of fiscal sustainability, mainly because the rules were not clear, but also because its capacity to address such technical matters is limited.

In that regard, the new OL, with its formal fiscal rules monitored by a strong body of experts, may change the situation. An alliance between the Constitutional Court, which has the authority but not the competence, and the High Council, which has the competence but not the authority, would give some teeth to the new fiscal governance arrangements that are progressively emerging in France.

[1] Benoit Chevauchez is Technical Assistance Advisor in the PFM I Division of the IMF Fiscal Affairs Department. He previously worked in the French Ministry of Finance, in the budget area and in the capacity building domain.

[2] Loi organique n° 2012-1403 of December 17, 2012.

[3] See Richard Hughes' post France Announces Details of its First Multi-Year Budget.

[4] Haut Conseil des Finances Publiques.

[5] Prepared by each Eurozone country, EU Stability Programs are submitted each year to Brussels for scrutiny and approval.

[6] More than 0.5% of gross domestic product in a given year, or 0.25% of gross domestic product averaged over two consecutive years.

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