INTERNATIONAL Monetary Fund (IMF) believes that France's fiscal policy objectives of reducing both the taxes and expenditures are “very challenging.”

According to the preliminary findings of IMF staff at the conclusion of Article IV consultation with French authorities, the planned reductions in taxes mean that the cutbacks to spending relative to trend will need to be very large if public finances are to be brought back to balance over the medium term, as they should.

The requisite cuts have been estimated at euro 50 billion over the next three years. If achieved, these expenditure savings would be remarkable by historical standards. Cuts in taxes and social security contributions will enrich the employment content of growth and help enterprises rebuild their competitive capacity, provided they are used to boost investment, says an IMF release.

As put by the release, “Over decades, a permanent structural fiscal deficit - driven by public spending that has outpaced GDP - has boosted public debt. The resulting erosion of fiscal space constrained the government's ability to sustain demand as the economy slowed down in 2012-13. The concomitant rise in taxes has weighed on the capacity of the economy to grow. Recreating room for policy maneuver has become critical to enable the government to respond more flexibly in the face of possible future shocks. And cutting spending has become critical to help put social safety nets on a sound footing for future generations.”

IMF staff believes that achieving the deficit objectives while delivering on the tax cut commitments leaves no room to deviate from the announced expenditure reductions.

The release says that the major risk risks are that the initial plans may be diluted in sequential annual budgets and that cuts in transfers to local governments may be compensated by unsustainable cuts in investment, higher taxes or higher debt. This would undermine the government's fiscal rebalancing strategy. Also, if there is an over reliance on containment rather that structural measures, expenditure growth will bounce back once pressures subside.

As regards monetary policy and banking system, IMF staff believes that France might have to undertake broader reform of tax incentives and regulated savings to enhance the capacity of banks to raise deposits, and ensure the efficiency of financial intermediation and continued financing of enterprises.

IMF staff has concluded that the recovery of economic activity in France is likely to remain subdued. They have projected project real GDP growth of 1 percent this year and 1.5 percent in 2015.