News

Labor reforms support growth in France

President Emmanuel Macron’s administration has enacted major supply-side-oriented reforms to stimulate the country’s growth potential, Scope Rating believes issuing a national AA credit rating with a Stable Outlook.

“In 2019, we expect economic growth to moderate toward 1.3%, below previous expectations but above euro area peer levels,” Bernhard Bartels, analyst at Scope, says. “A rebound in domestic consumption supported by positive fiscal measures and a strengthening labour market are the main drivers”.

The fiscal stimulus, together with less buoyant growth, will, however, result in a wider budget deficit, which is set to rise above 3% of GDP in 2019, a deviation from the previous official target of 2.8% and a temporary breach of the Maastricht threshold.

The debt ratio is expected to stabilize at around 2018’s level of 98.4% of GDP before decreasing gradually. Persistent fiscal deficits have limited the reduction in the debt-to-GDP ratio in recent years and, according to Scope’s baseline scenario, public debt is unlikely to fall substantially in the near to medium term.

Tax cuts for employers and employees, reduced ancillary wage costs, and a reform of the tax system aimed at reducing distortive taxes (i.e. the wealth tax) while broadening the tax base by increasing the CSG solidarity tax rate are among Macron’s key reforms. Such measures could add around 0.1-0.2% to France’s growth potential, as reflected in higher-than-expected growth during H2 2018.

The rebound in the French economy has helped lower overall unemployment from 10.4% in 2015 to 9.1% in 2018. Private-sector employment is set to increase further over the forecast horizon, though more moderately than in previous years. Corporate tax cuts could also contribute in the future though increases in private sector employment may be partly offset by a drop in public-sector-subsidised jobs. Job growth could further lower unemployment towards 8% by 2021 if the government completes its reform agenda.

However, persistent entry barriers to the labor market still prevent broader job creation. The high level of youth unemployment can also be traced back to deficiencies in education in France. The latest PISA tests dated 2015 show that 15-year-old French students fare worse in reading, maths and science than students in peer countries.

“This underscores the importance of the government’s initiated educational reforms, particularly for the low-skilled and migrant groups,” Bartels says. Such reforms need time to have a material economic impact, compared with cuts on taxes or social contributions. “We expect only a gradual reduction in structural unemployment from 9.2% in 2018 to 9.0% in 2020,” he notes.

Previous ArticleNext Article