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June 04, 2010

Michel Camdessus's Message to the French Government: No Good Fiscal Rule Without Strong Budget Institutions

Posted by Guilhem Blondy 

As public debt reached 78 percent of GDP at the end of 2009, the French government set a working group chaired by former IMF Managing Director Michel Camdessus to propose a new fiscal rule. This group, whose final conclusions will be known at the end of June, published a preliminary report on May 20.

The main interest of the report is the strong link established between the implementation of a new macro-fiscal rule and the need to strengthen public financial management procedures, and especially the medium-term budgetary framework.

The group recommends basing the national fiscal rule on a structurally-balanced general government fiscal target. Nominal and primary balance targets would not take the effect of economic cycles on the budget enough into account. The “golden rule” (authorizing the government to borrow only to finance investments) would not be consistent with the fungibility of current and capital appropriations within programs, a strong feature of the new central government expenditure management system introduced in France in 2006. The structural balance is also the indicator used to define the public finances medium-term objective in the  Stability and Growth Pact (SGP) signed by the European countries members of the euro zone. The report supports the creation of a single European method to calculate the structural balance and of a European public accounts authority to harmonize national budgets presentation and accounting standards.

The path towards structural balance should be determined by a medium-term budget framework inserted in a constitutional by-law (loi organique). France introduced in 2008 in its Constitution a new category of laws, called public finances programming acts. The first programming act for 2009-2011 was voted and a second programming act for 2011-2013 should be adopted this year to implement the commitment taken by the French authorities to come back to a (nominal) general government deficit of 3 percent of GDP in 2013. However, though the 2009 and 2010 budgets were consistent with the first programming act, public finances programming acts are not legally binding in the preparation of the annual budgets, and they cover only the central government and the social security system, whereas the stability programs required by the European Commission include also the local governments. The working group proposes to extend the coverage of the programming acts to all subsectors of general government, to align their duration with the time of a legislature (five years) and to give them the status of a constitutional by-law that would be legally binding for other laws and especially annual budgets. This change would require a revision of the Constitution.

Beyond these two central ideas, the report discusses other significant measures to improve the fiscal governance:
- merging the State budget and the social security budget, which are currently separately adopted by the parliament,
- forbidding ordinary laws to introduce new tax expenditures,
- requiring a supplementary budget if revenue collected during the year are less than foreseen in the initial budget (this requirement currently exists only if expenditures exceed appropriations).

The recommendation to forbid autonomous agencies of the central government to borrow is also a step in the right direction. However, it could be extended to social security institutions, whose borrowing limits were raised several times in the last years.

The proposal to create a consultative fiscal council is less convincing. Rationalizing the functions of the numerous pre-existing independent consultative bodies active in the field of public finances (court of audit, national economic committee, public finances national conference, public finances orientation committee, tax and social security contributions council, local finances committee, healthcare alert committee) might be a pre-condition, before creating a new one.

Nicolas Sarkozy already endorsed some of the reforms proposed by the preliminary report. He announced a constitutional revision to introduce three changes:
- the requirement for every government to commit to public finance objectives for five years at the beginning of each legislature,
- an annual vote of the parliament on the stability programs at the start of the annual budget preparation process,
- the monopole of budget acts in tax matters.

Some other suggestions like merging the State budget and the social security budget or creating a European public accounts authority might take more time to materialize, but should attract as much attention as the constitutional revision announced by President Sarkozy, as they could also be important pieces of a global reform of French budget institutions.

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