On 2 November 2020 the IMF published a report following a virtual visit to France as part of the 2020 Article IV consultations.
France has introduced flexible emergency support packages to provide additional stimulus from 2021 onward. An economic recovery began from the third quarter of 2020; but the economy has been weakened by the second wave of coronavirus with growing downside risks. There may therefore be a need for additional stimulus.
The IMF report recommends that a credible medium-term fiscal consolidation plan is necessary and should be implemented when the economic recovery is firmer. This should continue the reform agenda and promote a greener, more inclusive and productive economy. The support package currently focuses on support for households and businesses
The IMF estimates that output is to decline by around 10% in 2020 with a partial recovery of 5% to 6% in 2021 depending on the development of the pandemic. The government’s Plan de Relance aims to facilitate a transition to greener industry and a digital transformation that can increase future productive capacity and provide employment support.
In addition to the pandemic there are broader risks including a more severe fall-out from Brexit; tighter financial conditions; increased social tensions, and other developments relating to de-globalisation.
When the economic recovery gains momentum the government should shift from broad-based emergency support to targeted support for the more dynamic economic sectors while continuing to support those most affected by the transition. As fiscal space is restricted the additional expansionary measures must be well-targeted and temporary. There is no room for permanent tax cuts or expenditure hikes and any such measures should be accompanied by specific compensatory measures.
The IMF considers that when the recovery gains momentum a process of expenditure-based consolidation is necessary to reduce public debt. The consolidation should begin when output has broadly recovered to its pre-crisis level and downside risks to growth have decreased. Structural fiscal reforms should aim to increase the efficiency of current expenditure.
As the recovery strengthens, France should implement further green policies, including measures in relation to carbon pricing. Mitigating measures should be taken for low-income households but there should be enough fiscal space to reduce distortionary taxes in a revenue-neutral way.
The proposals to boost the digital transformation will help to boost productivity. Further simplification and modernization of the tax system can improve efficiency and should include streamlining of distortionary taxes. Policies to boost employment should be continued especially in view of the proportionally stronger effect of the crisis on lower skilled workers and those not on permanent contracts. Retraining and integration of vulnerable groups into the labour market are important. Structural unemployment and more labour force participation are also important in the medium-term.
