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Text File | 1994-05-02 | 14KB | 291 lines

<text> <title> France: Economic Policy </title> <article> <hdr> Economic Policy and Trade Practices: France </hdr> <body> 1. General Policy Framework France has the fourth largest industrial economy in the world, with a GDP of around $1,119 billion in 1990, about one fifth the size of the U.S. economy. Because France is a member of the European Community (EC), it is subject to the EC's common external tariff and its Common Agricultural Policy. In addition, as the EC puts in place its ambitious program to remove all barriers to the free internal circulation of goods, services and capital by the end of 1992, competence in a growing number of economic policy areas, including certain aspects of fiscal policy and investment policy, will necessarily transfer to the EC. France has a centuries old tradition of highly centralized administration and governmental control of its essentially market economy, including five year plans, nationalized companies in major industrial sectors, and reliance on industrial subsidies and credit control. Government influence over the economy was further extended by the Socialist government in 1981-1982 with additional nationalizations, particularly in the banking sector. Since then, however, both Socialist and Center-Right governments have accepted a reduced involvement in the economy in favor of market forces to cure the sluggish French economy and its high unemployment rate. To this end, they implemented a comprehensive program of market-oriented reform and deregulation: eliminating exchange controls and the majority of price controls, reducing subsidies, modernizing the French financial markets, particularly the stock exchange; reducing taxes, and cutting the budget deficit. Under the Center-Right government (1986-1988) this trend accelerated, and was accompanied by the privatization of 31 industrial and financial companies. The Socialist government, which returned to power in May/June of 1988, formally ended the privatization program although they have recently indicated they would sell minority shares while maintaining control of government-owned firms. Several of the largest French banks, most of the major insurance companies, the utilities, and many of the largest industrial concerns remain state-owned. Cutting the budget deficit and restraining overall expenditure growth while lowering tax rates and increasing funding for Socialist priorities (e.g. education, justice, public housing, guaranteed minimum income, foreign aid) have been the government's principal budgetary goals since 1988. The government of France reduced the central government budget deficit as a percent of GDP from 3.2 percent (FF 151 billion) in 1985 to an expected 1.2 percent (FF 90 billion) in 1991. At the same time, the top personal income tax bracket of 65 percent was lowered to 56.8 percent in 1987. The corporate rate on distributed profits dropped to 42 percent in 1988 from 45 percent. The rate on reinvested corporate profits was further reduced to 34 percent and a single rate of 33 percent is slated for 1993. In preparation for the single European market of 1993, the government has begun to bring its high value added tax (VAT) rates more in line with European norms and has made other tax changes to limit the degree to which French firms are fiscally disadvantaged. In addition, to avoid capital outflows following the elimination of all capital controls on January 1, 1990, the government of France made significant cuts in the tax rate on interest from bonds and other financial placements. On the other hand, the Socialist government reintroduced a wealth tax in 1989 and has steadily raised the corporate capital gains tax from 16 percent in 1989 to 34 percent, effective July 1991. Despite the significant cuts in tax rates, tax revenues have continued to expand. In addition, growth of Social Security collections has outpaced the growth of nominal GDP. As a result, the overall French tax burden, at almost 45 percent of GDP, has not budged in the last few years and remains one of the highest among the member countries of the Organization of Economic Cooperation and Development (OECD). The government's modest budget deficit is principally financed by issuing government bonds at a weekly auction. Until 1985, the government relied almost solely on quantitative credit controls to manage money supply. Since then, it has adopted a more flexible policy relying on open market operations and reserve requirements. The government engages in weekly repurchase operations at a fixed rate to regulate the supply of liquidity available to the banking sector. The official government intervention rates serve as benchmarks for other money market rates. Over the last few years, France has pursued a neutral to slightly restrictive monetary policy, as an integral part of its successful efforts to keep inflation under control. Real interest rates in France are high compared to some of its principal trading partners, as the substantial decline in inflation has not been matched by declines in nominal rates. Nominal rates have failed to decline substantially due, in part, to the wariness of financial markets stemming from France's economic policies in the early 1980's which involved large fiscal deficits and several depreciations of the franc. When market conditions have been favorable, the government has given priority to reducing official interest rates in order to boost economic activity and promote employment. However, consistent with its anti-inflationary policy, the government continues to give priority to maintaining a strong franc. The government has not hesitated to raise interest rates to defend the franc within the European Monetary System (EMS), of which France is a member. (France, along with most members of the EMS, is committed to limit fluctuations of the value of its currency to within plus or minus 2.5 percent of agreed parities with the other participating currencies.) 2. Exchange Rate Policies The actual foreign currency value of the French franc, while influenced by French monetary policy and many other factors, is set by international market forces. In an effort to influence the value of the franc, the French government often coordinates its actions with those of other governments, both within the EMS and as part of broader international economic policy coordination efforts among industrialized countries, including the United States. On January 1, 1990, France abolished its last remaining foreign exchange control, although reporting requirements remain. 3. Structural Policies While putting off comprehensive tax reform, the government has begun fine tuning its tax code to achieve its priorities: increasing investment, creating jobs, and improving the competitiveness of French companies in preparation for the European single market. Recent budgets have incorporated a number of tax incentives to help achieve these objectives, including lower tax rates on reinvested profits, tax exemptions for establishment of new companies, tax credits for hiring and training new workers, tax credits for research, and reductions in the professional tax rate and in taxes on transfers of corporate assets. As a step towards achieving a single market, EC member states are negotiating the harmonization of VAT rates. With some of the highest VAT rates in the EC, the French government has begun to reduce and consolidate its VAT rates. French VAT rates range from 5.5 percent to 22 percent for luxury goods (reduced from 25 percent in September 1990). The VAT rate on cars will be cut to 18.6 percent in 1992. 4. Debt Management France's public debt management policy is market based and highly sophisticated. Servicing the overall national debt does not limit the national capacity to import. 5. Significant Barriers to U.S. Exports U.S. companies sometimes complain of