World Economy

France Warned Over Record-High Spending

France Warned Over Record-High SpendingFrance Warned Over Record-High Spending

The International Monetary Fund (IMF) has warned France that it must reduce government spending and debt levels, as well as tackling its sticky unemployment rate.

The IMF said in its latest economic outlook on France, published on Tuesday, that although it sees a “solid short-term recovery (in France), structural rigidities continue to weigh on medium-term prospects,” CNBC reported.

“Continued efforts are needed to tackle France’s fundamental economic problems: high structural unemployment, low potential growth, and record-high public spending,” the group added.

Indeed, the IMF noted that high and rising government spending has been “at the heart” of France’s fiscal problems for decades.

The warning comes at a turbulent time for the eurozone, with growing concerns about Greece and the possibility of a sovereign default, which would affect the region more broadly.

Like Greece, France’s economy was hit hard by the financial crisis in the region, and it has since struggled to convince investors that an economic recovery is entrenched.

And despite posting surprisingly strong growth data for the first quarter of 2015 – when the economy expanded by 0.6 percent – unemployment in the country remains of serious concern.

French President, Francois Hollande, has consistently promised to lower the unemployment rate, which was at 10.6 percent in March, according to Eurostat. Indeed, it is such a hot issue that Hollande has said he will not run for re-election in 2017 if he fails to create more jobs.

But the IMF said that without further structural reforms, the unemployment rate in France was “likely to decline only very slowly.”

It added that the country’s growth potential “still appears much weaker than before the crisis,” and said that the current expansion was being supported by the accommodative external environment – such as lower oil prices, a weaker euro and low interest rates – rather than the domestic one.

“Investment has not yet responded, unemployment remains stubbornly high, and public debt continues to rise,” the IMF said. “Moreover, the positive external impulses may dissipate soon while structural rigidities continue to weigh on France’s growth potential.”

 Important Progress

The IMF said that some important progress had been made to address “structural rigidities” in the economy -- notably changes to labor taxes and supply-side reforms -- but stressed that more work needed to be done, specifically on reducing government spending.

“While the growth of central government and health care spending has been contained in recent years, local government spending has continued to expand,” the report noted.

The IMF recommended that France’s spending growth be anchored to the rate of inflation starting in 2016, and that keeping spending flat in real terms would “ensure that public debt is on a firm downward trajectory by 2017.”