International Monetary Fund (IMF) has advised France to consider reducing further labour tax wedge (LTW) and restructure tax incentives on financial products as a part of ongoing fiscal consolidation and initiatives to revive economic growth. According to IMF Country report on France released on 5 th August, a significant competitiveness boost has been provided by the reduction of the LTW which is expected to cut labour costs by about 3 percent by 2015.
The related increase in profit margins should enable enterprises to improve competitiveness through lower prices or through investment. The budgetary cost of the measure (about 1 percent of GDP) will be split evenly between lower expenditure and higher other taxes (VAT and yet-to-be-identified environmental taxes), it says.
Analysts consider LTW as a measure of the difference between labour costs to the employer and the corresponding net take-home pay of the employee. LTW indicates the extent to which the tax system discourages employment.
The report notes that the minimum wage remains an obstacle to employment at the lower-skill end of the labour force and for youth, despite substantial reductions in the tax wedge and employment subsidies targeted to these groups.
It says: “Even after such targeted reductions, the cost of unskilled labor compares unfavorably to that of other European countries. Budget constraints limit the potential for reducing the tax wedge any further. The authorities expected substantial job creation from the expansion of subsidy schemes. The (IMF) mission suggested that a temporary freeze of the minimum wage indexation could help bridge the productivity-labor cost wedge. The next index jump will take place in January 2014.”
As regards IMF's advice to consider reducing the LTW, French authorities have elaborated that “EUR 20 billion (1 percent of GDP) allocated to reduce the labor tax wedge through a corporate tax credit linked to the payroll (excluding wages above 2.5 times the minimum wage). The tax credit is phased in over three years. The rebate amounts to a 3 percent cut in labor costs. The tax credit will be financed in equal measure by revenue measures (VAT and a new green tax) and expenditure measures.”
The report suggests that financial sector policies should aim at consolidating the significant progress achieved in strengthening financial stability and preserving the capacity of banks to provide credit as they adapt to new prudential requirements, notably by better aligning tax incentives on financial products to regulatory objectives.
The report says: “It would be important, in this regard, to ensure that tax incentives on financial products are better aligned with bank regulatory objectives, for instance by limiting the capture of saving by government financial institutions, phasing out regulated interest rates, and taking maturity-based rather than a product-based approach to tax incentives.”
The French authorities' stance on this issue is that “the current reform proposal rebalances tax incentives provided to life insurance savings toward equity investments over fixed income investments. A broader reform of financial income is not on the table.”
In response to the Fund's suggestion for simplifying the regulatory and tax environment for enterprises, French authorities say that the Government's “key initiatives include ‘ Dites-le nous une seule fois '(Tell us only once); the requirement that new rules replace (rather than add to) older regulations; no earmarked taxes will be created without parallel removal of other(s) of at least an equivalent size; and the reform of commercial courts to improve the efficiency of the business justice.”
The IMF Country report on France is accompanied by another report captioned ‘France-Selected Issues paper' which was prepared by IMF staff as backgrounder for periodic consultation with France.
The Selected Issues paper says: “In order to achieve its medium-term objective of a balanced structural budget, France plans to implement a fiscal consolidation split broadly evenly between tax measures and expenditure saving. So far, the government has mostly relied on new taxes and tax increases. Going forward an expenditure saving in the amount of about 3 percent of GDP is required.”
Discussing economic outlook, risks and spillovers, the IMF Country report observes: “A growth failure in France would have significant outward spillovers to its neighbors, particularly small open economies in the euro area, and smaller but still measurable impacts on Italy and Spain." The report states that tax measures have raised the tax burden to 46 percent of GDP, one of the highest levels in Europe. "The perceived risk that taxation will rise further appears to be one of the factors holding back spending by households and enterprises.”
The French authorities confirmed to IMF that the adjustment effort would be rebalanced toward expenditure containment starting in 2014, but that revenue measures may still be necessary.
They noted that reducing tax expenditures could be an efficient adjustment instrument, even though it would raise the tax-to-GDP ratio, as in the case of the recently announced reduction in the family tax allowance. Furthermore, reducing tax expenditures was, in many cases, akin to reducing transfers in terms of its economic impact. At the same time, the authorities have stated that they would stabilize tax incentives pertaining to enterprises in order to reduce tax uncertainty.
The French authorities have also assured IMF that existing tax incentives for small and medium enterprises (SMEs), including rebates for research SME investments, will be kept over the next 5 years.
As put by IMF release incorporated in the report, “in a context of weakening economic conditions in Europe, sizeable fiscal consolidation and domestic policy uncertainty, the French economy flat lined in 2012, but recent improvements in economic indicators support the expectation of a gradual recovery in the second half of 2013. Credit conditions remain supportive, and private demand is unencumbered by balance sheet repair issues and thus more apt to respond favorably to an improvement in confidence. In all, the economy is projected to contract by 0.2 percent in 2013 and to grow by 0.8 percent in 2014.” |
