Boosting growth in France and making reforms beneficial to all

by Antoine Goujard and Pierre Guérin, France Desk, OECD Economics Department

The French economy is slowing, but less
than its neighbours. The French authorities have engaged a significant reform
agenda that should be complemented with particular care for inequality issues. Income
per capita growth has lagged the euro area average (Figure 1). The 2019 OECD
Economic Survey,
launched on 9 April 2019 by the OECD Secretary General and the
Minister of Finance, points that there is a need to boost growth and ensure
that the gains of reforms reach low-income households.

Reforms need to be beneficial to all and improve the prospects of low-income populations.
The recent “yellow vest” demonstrations have shown that gains of reforms
seem elusive for part of the population. Income per capita when corrected by
household composition has been flat for the past ten years (Figure 2). Employment
rates, notably for the youth, low skilled and older workers are low, and
economy-wide productivity has declined as in many other OECD countries.
Moreover, weak social mobility tends to perpetuates economic and social
situations from one generation to the next, despite the relatively low poverty
rate after taxes and transfers (Boone and Goujard, 2019).

What will it take to reach more
sustainable growth and make sure that it benefits all?

The
government’s reform agenda is significant. The “PACTE” law would strengthen
business dynamism and firm growth. Comprehensive labour reforms, lower business
and labour taxes and a welcome productivity-enhancing public investment plan would
help raise medium-term growth and boost employment. Spending reviews and a
planned pension reform are set to increase the effectiveness of public
expenditures and make room for tax cuts, while preserving public investment.
OECD estimates, covering a broad part of ongoing reforms and based on the
experience of other OECD countries (Akgun et al., 2017; Causa et al. 2016),
show that, if fully implemented, these measures could boost GDP per capita by
3.2% at a ten-year horizon and would mostly benefit middle- and lower-middle
income households in the medium term (Figure 3).

Looking
forward, France should capitalise on this reform agenda and take further
measures to increase high-quality jobs, improve social mobility and raise
public spending efficiency. Additional measures could do much to boost employment and
productivity, and to ensure higher equality of opportunity, while lifting the
average annual growth rate and helping to reduce firmly the public debt-to-GDP
ratio. Such measures could push GDP per capita gains to 5% at a ten-year
horizon. This is among the key policy insights of the OECD’s 2019
Economic Survey of France:

  • Raising
    well-being will depend on strengthening skills and greater inclusion of
    low-skilled workers in the labour force    . This requires increasing
    the quality of education from an early age and reforms to ensure high-quality lifelong
    training programmes benefit everyone. Regularly evaluating vocational training
    and subsidised job programmes, will improve their quality. Increasing
    the relative cost of short-term hiring and reforming the unemployment insurance
    system would reduce incentives for recurrent short-term employment periods and
    unemployment spells that weigh on the career prospects of low-skilled and
    younger workers.
  • Continuing
    to reduce administrative barriers to entry and unduly restrictive regulations
    will raise competitive pressures and ensure favourable conditions for young and
    dynamic firms.     Continuing to reduce the administrative burden could
    ease firm entry and growth. Moreover, entry and conduct regulations remain
    stringent in several professional services – such as accountants, notaries and
    pharmacists – weighing on productivity and employment. To ensure such
    regulations are in the public interest, reviewing existing regulations from a
    competition perspective would be helpful.
  • Reducing
    the public spending-to-GDP ratio is needed to improve the fiscal position, and
    lower tax rates in the long run, particularly on labour    .
    Government spending policies should focus on ensuring investment and social
    spending are better targeted to increase efficiency. Streamlining the tax system would also
    support economic activity. Reviewing some narrow-based low-revenue taxes
    that affect businesses would simplify the tax system. VAT exemptions and
    reduced rates are also sizeable and some of them benefit too little low-income
    households.

References

OECD (2019), OECD Economic
Surveys: France 2019, OECD Publishing, Paris. http://www.oecd.org/eco/surveys/france-economic-snapshot/

Boone, L. and A. Goujard
(2019), France, inequality and the social
elevator. https://oecdecoscope.blog/2019/02/25/la-france-les-inegalites-et-lascenseur-social/.

Akgun, O., B. Cournède
and J. Fournier (2017), “The effects of the tax mix on inequality and growth”, OECD Economics Department Working Papers,
No. 1447, OECD Publishing, Paris, https://dx.doi.org/10.1787/c57eaa14-en.

Causa, O., M. Hermansen
and N. Ruiz (2016), “The Distributional Impact of Structural Reforms”, OECD Economics Department Working Papers,
No. 1342, OECD Publishing, Paris, https://dx.doi.org/10.1787/5jln041nkpwc-en.