French Public Finances through the Financial Crisis: It's a Long Way to Recovery

Abstract

AbstractFrance was modestly hit by the financial crisis compared with its neighbours but the recovery has been particularly slow. The shock to the public finances was nonetheless significant, and came on top of an already weak pre‐crisis fiscal position. Part of this shock is expected to be permanent and the French government has so far mostly used increases in taxation to bring borrowing under control. However, in 2014, spending cuts took over as the main tool for balancing the public finances. Despite the significant fiscal adjustments that have been required, the crisis has not been used as an opportunity for reforms. Some reforms to labour and service markets have been carried out, but there have been no radical changes. While some tax changes, such as cuts to employer social security contributions and an increase in reduced rates of VAT, have improved the efficiency of the tax system, overall the tax and benefit system continues to be plagued by complexity and a sheer lack of transparency. As the remaining effort for balancing the public finances seems likely to rely on spending cuts, the overall efficiency of the policy response to the crisis will depend in large part on how these are done.