Category: CTF

Paris, France – May 22, 2025

An International Monetary Fund (IMF) mission, led by Manuela Goretti and comprising Florian Misch, Rasmane Ouedraogo, Maryam Vaziri, and Torsten Wezel, conducted discussions during May 12-22 for the 2025 Article IV Consultation with France. At the end of the visit, the mission issued the following statement:

The French economy has demonstrated resilience despite high uncertainty, with disinflation progressing well and the labor market remaining robust. However, high and rising public debt, combined with significant domestic and external headwinds to the recovery, highlights the need to strengthen public finances and pursuing structural reforms to foster sustainable growth. The French authorities’ commitment to bring the deficit below 3 percent of GDP by 2029 is welcome and should be supported by a credible and well-designed package of measures. Advancing France’s structural reform agenda will be crucial to boost productivity and facilitate fiscal consolidation. While the financial sector remains resilient, strong supervisory practices need to continue adapting to an increasingly complex financial landscape. France’s sustained efforts to deepen the European single market remain critical to support the economy and strengthen its ability to withstand shocks.

Economic Outlook

High domestic and external uncertainty is expected to continue weighing on the short-term economic outlook. Real GDP growth is projected to slow to 0.6 percent in 2025 and reach 1 percent in 2026. These projections reflect a delayed recovery in private consumption and investment due to weak confidence and fiscal tightening this year, despite some uplift from monetary policy easing. Weaker external demand, amid trade tensions, market volatility, and geo-economic uncertainty, is expected to further dampen exports and investment prospects. These projections are based on the April World Economic Outlook global assumptions and do not reflect the latest trade policy announcements. Over the medium term, growth is projected to converge to around 1.2 percent, before decelerating towards its long-term potential of 1 percent reflecting both demographic trends and need for further structural reforms. The disinflationary process is progressing well, with average headline inflation projected at 1.2 percent in 2025, due to base effects and lower energy prices, and core inflation at 1.9 percent.

The outlook remains subject to significant downside risks, notwithstanding potential upsides. Deepening geoeconomic fragmentation and rising trade tensions could disrupt trade and financial flows and dampen economic activity. In such an environment, uncertainty would increase, and financial conditions could tighten further, reducing domestic demand and worsening debt dynamics. Political fragmentation and social tensions could delay fiscal consolidation and reform efforts, further weighing on confidence and the outlook, raising fiscal risks. On the upside, easing trade tensions and renewed structural reform momentum could improve growth prospects over the medium term. Domestic reforms could be strengthened through deeper coordination and integration at the EU level. Consumption could be stronger if household saving rates eased more rapidly on the back of dissipating uncertainty. Business investment and export performance could also surprise on the upside, driven by higher demand—in France and in the rest of Europe—including for defense as well as digital and green technologies.

Fiscal Policy: Reducing Debt while Refocusing Spending Priorities

Building on the 2025 budget, the authorities are committed to implementing their Medium-term Fiscal Structural Plan (MTFSP) to bring the deficit below 3 percent of GDP by 2029. While the envisaged adjustment is appropriate to improve debt dynamics and strengthen France’s resilience to shocks, it needs to be supported by a credible and well-designed package of measures and remains subject to implementation risks, as evidenced by recent setbacks. Under staff’s current policy baseline scenario, which incorporates only legislated and clearly specified measures, the deficit is projected to decline to 5.4 percent of GDP in 2025, in line with the budget target. However pending approval of significant additional measures, it would remain around 6 percent of GDP in the medium-term, keeping debt on an upward trend until 2030. While short-term risks remain manageable, debt dynamics have weakened significantly, following consecutive fiscal slippages in 2023 and 2024, and remain highly sensitive to the real interest rate and growth path. In this context, France’s commitment to undertake further fiscal consolidation, as per EU rules, represents an important mitigating factor.

Significant additional fiscal efforts will be crucial to preserve fiscal space and create room to absorb rising spending demands, while placing debt on a downward path. Staff recommends a frontloaded structural fiscal effort of 1.1 percent of GDP in 2026, followed by an average of about 0.9 percent of GDP per year over the medium term, broadly in line with the authorities’ plans. The recommended adjustment would allow the country to exit the excessive deficit procedure by end-2029, as targeted. Staff’s debt sustainability analysis indicates that the recommended fiscal path would markedly reduce medium-term debt sustainability risks, with the debt-stabilizing primary balance being reached in 2027.

Achieving this substantial fiscal consolidation will require decisive actions and difficult decisions to ensure equity and fairness amid challenging trade-offs:

• Given France’s already high tax-to-GDP ratio, any new tax measures should be focused on reducing inefficient tax expenditures and tackling tax avoidance while improving equity. While exceptional temporary revenue measures can help kickstart much needed fiscal adjustment, France’s level of taxation—among the highest in the EU—indicates that sustained tax-based fiscal consolidation, of the magnitude necessary to advance France’s medium-term plans, would hamper business confidence, household consumption, and growth potential. Building on recent experiences, the authorities should continue to monitor and evaluate tax expenditure programs to address inefficiencies vis-à-vis intended objectives and generate savings. This approach would also simplify the tax system and facilitate revenue forecasting.

• The authorities should focus on rationalizing spending and strengthening its efficiency, with concerted action across all government levels: central government, social security, and local governments. France has the highest spending-to-GDP ratio among EU countries. There are several avenues to rationalize spending and improve its quality, while preserving growth-enhancing investment in key priority areas and mitigating distributional impacts on the most vulnerable. The planned expansion of spending reviews and efforts to minimize overlaps across government entities, including local governments, can streamline spending by addressing inefficiencies and reducing red tape. There is also scope to further improve the targeting of social benefits, including by reviewing eligibility and duration of unemployment benefits, to better target active labor market initiatives, as well as to further simplify and harmonize pension schemes, while ensuring a balanced system, building on the 2023 pension reform. These efforts would foster less fragmented and longer careers while enhancing the sustainability and intergenerational equity of the social security system. Enhanced monitoring and financial coordination can also generate savings at the local and national levels.

The authorities’ initiatives to reinforce public finances forecasting and budget controls, in response to recent fiscal slippages, are welcome. The March 2025 Action plan by the authorities aims at enhancing monitoring of tax revenue, fostering greater transparency, and reinforcing the role of the High Council for Public Finances. Sustained efforts in these areas are essential to identify and proactively address fiscal risks, strengthen public finance management, and enhance fiscal policy credibility. Contingency plans will be also needed to ensure that pressing priority spending needs, including in defense, are met without compromising public finances.

Macrostructural Policies to Support Jobs and Productivity Growth

Raising weak productivity growth is critical for sustaining France’s economic prospects, in the face of substantial fiscal consolidation needs. The per capita income gap between France and the US has increased since the early 2000s and now exceeds 20 percent, primarily due to lower productivity and employment in France. Macro-structural reforms can play a critical role in lifting potential output, while facilitating fiscal consolidation efforts. For example, an increase in potential GDP growth of 0.3 percentage points could help reduce public debt by nearly 10 percent of GDP over the long term.

France is well-positioned to capitalize on the green and digital transitions through greater efforts to support innovation and access to capital. France’s comparative advantage in low-carbon technologies and its potential to become a European hub for Artificial Intelligence can foster the development of new technologies and support growth. Ongoing efforts by the authorities to review and rationalize state aid and R&D tax expenditures by focusing on the most impactful schemes and better targeting eligibility criteria can boost innovation and help close gaps with peers. Enhancing access to finance and reducing financing costs for productive but credit-constrained firms is crucial and should be supported by advancing the EU Savings and Investment Union which can increase the availability of capital and its efficient allocation.

To support entrepreneurship, policies should focus on easing entry barriers and reducing the regulatory burden. France performs relatively well in terms of product market regulation, but reducing administrative market entry barriers for firms, especially in some services sectors, is crucial for boosting business dynamism and productivity growth. The Simplification Bill, currently under discussion, would be an important step towards further reducing the regulatory burden and streamlining requirements, particularly for small and medium size firms. At the European level, deepening the single market through the removal of remaining intra-EU trade barriers and greater harmonization of regulations can help firms achieve economies of scale and incentivize innovation by expanding market size.

Sustained efforts to promote employment and job quality remain critical to facilitate green and digital transitions, amid an aging workforce, and boost productivity growth. While employment rates have increased, they remain low in segments of the population compared to other countries. Possible areas for policy intervention include further social benefit reforms to enhance work incentives and reduce career fragmentation, particularly among younger and older individuals. These measures can be complemented by efforts to further raise labor force participation of women, including through recent initiatives to support STEM careers, and better integrate migrants into the labor market. Promoting workforce skills and healthy aging would also contribute to job quality.

Adapting to a Complex Financial Landscape