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May 02, 2011

Trying to Find the Right Balance Between Self-constraint and Flexibility: The Proposal for a New Medium-term Budget Framework in France

Posted by Guilhem Blondy

On March 16, 2011, the French government submitted a bill amending the Constitution to the parliament. The bill introduces three changes in fiscal governance regarding respectively: (i) the transmittal of stability programs to the national parliament before their submission to the European Commission, (ii) the monopoly of budget laws in tax matters, iii) the legal force of the medium-term budget frameworks (MTBFs).

The transmittal of the stability programs to the parliament before their submission to the European Commission was for a decade strongly demanded by French lawmakers. However, the impact of the new procedure on the substance of the programs might remain limited, as the legislature will still not be authorized to amend the stability programs.

The monopoly of budget laws in tax matters is part of a series of recent measures taken to control the level of tax expenditure. They comprise a review of tax exemptions conducted in 2010, and the introduction of a rule that requires offsetting measures for any new tax exemption.

The most interesting part of the bill concerns the MTBF.

Unlike in other European countries, medium-term budgets are a recent feature in the French public financial management (PFM) system. A five-year public finance programming act was passed in 1994 to qualify the country for the euro, but this was a one-shot experiment. After 1998, stability programs were prepared for the European Commission, but no detailed medium-term budget was produced at the national level. In 2008, the Constitution was amended to create multiyear public finance programming acts. Two public finance programming acts, providing outright ceilings for two years and estimates for two more years, were adopted respectively for the periods 2009-2012 and 2011-2014.

The constitutional bill renames the French MTBFs and reinforces their legal status. If the revision were adopted, the parliament should not vote on an annual budget anymore, without the prior approval of a “public finance balance framework act” (loi-cadre d’équilibre des finances publiques). Some provisions of these new medium-term budgets should have the same legal effects as constitutional by-laws: they would be legally binding in the preparation of the annual budgets and the constitutional court should enforce them by nullifying noncompliant annual budgets. At this stage, the constitutional bill tabled by the government neither provides details on the features (periodicity, scope, content) of the public finance framework acts nor explains which will be those provisions with a supra-legal authority. Although these clarifications should come later in a constitutional by-law, the introducing statement of the constitutional bill already gives some clues: the medium-term budgets should at least comprise three outright years and could cover five years (the time of a legislature); revenue and expenditure estimates for all levels of the general government, as well as detailed expenditure ceilings for the central government and the social security, would be provided; provisions with a supra-legal authority should include aggregate expenditure ceilings (both for the central government and the social security), and a ceiling on new revenue measures.

The French constitutional bill is timely, as the Council of European Finance Ministers decided on March 15, 2011 to start consultations with the European Parliament on a draft directive setting minimal requirements for the national budget frameworks of the euro zone. According to the press release of the Council, effective MTBFs should be one of these requirements.

However, the bill is mostly inspired by earlier recommendations made by the former IMF Managing Director, Michel Camdessus, in a report submitted to President Sarkozy in June 2010. The working group chaired by Mr. Camdessus was initially tasked to propose a new fiscal rule for France, after the adoption of a new constitutionally enshrined “balanced-budget rule” in Germany (see PFM blog, September 4, 2009, The New Constitutional Deficit Rule for Germany: a New Model Governing Deficit and Debt). As noted in a previous blog (see PFM Blog, June 4, 2010, Michel Camdessus’s Message to the French Government : No Good Fiscal Rule without Strong Budget Institutions), the emphasis of the Camdessus report was finally more on the need for a more binding MTBF than on the design of a fiscal rule itself.

A comparison between the constitutional revision achieved in Germany and the current process in France gives some interesting insights on convergence and differences in the budget institutions of the two countries.

The objectives pursued by the two governments are mostly similar. They aim at reinsuring the financial markets on their own fiscal credibility and influencing the fiscal policy of their partners of the euro zone. They try to keep a balance between the self-constraint needed to convince markets and partners, and the flexibility required in an uncertain macro-economic environment. Both rely on a constitutional reform to achieve these objectives, but the design of these reforms is quite different.

The German constitutional revision focuses on a national long-term fiscal rule, covering the central and local governments, but not the social security system. It introduces numerical targets directly in the Basic Law. Some flexibility to use automatic stabilizers is provided by the reference to the structural deficit (for predictable cyclical variations), and a control account (for unexpected deviations). An escape clause is also defined for natural catastrophes or other emergency situations.

The French constitutional bill assumes that the long-term fiscal anchors are provided by the European Stability and Growth Pact, and defines a national mechanism to implement them over a medium-term cycle. This MTBF covers the general government, but is only binding for the central government and the social security. Flexibility does not come from an economic calculation and an escape clause. It is allowed by the use of a less rigid legal instrument that leaves some discretion to the political authorities in the definition of their medium-term fiscal policy within the European rules.

Interestingly, the features of the reforms do not match with the stereotypes generally associated with each of the two countries. The German Federation was successful in associating local governments to the fiscal consolidation, while the French bill includes the well-developed national social security system in the new medium-term fiscal governance. The powerful German parliament restrained significantly its room for maneuver through a Cartesian fiscal rule, whereas the French technocracy seems to rely this time on political commitment to fiscal discipline.

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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