IMF Says France Must Continue to Free Labor Market; Cuts Outlook

The International Monetary Fund cut its growth forecasts for France and said the country had to build on efforts to free up its labor market.

In its latest Article IV consultations, the Washington-based IMF said the French economy will contract 0.2 percent this year and rebound 0.8 percent next year. In its mid-April world outlook, the IMF had forecast a decline of 0.1 percent this year for France and growth of 0.9 percent next year.

“The main downward risk to French growth is household confidence, which has been hurt by uncertainty over taxes,” Edward Gardner, the IMF’s mission chief in France, said today in a Paris press conference. “It will be difficult to reverse growing unemployment by the end of the year.”

A day after the government of President Francois Hollande announced yet another income tax increase, the IMF’s Gardner said France had “no more scope to raise taxes” and that its high tax rates were “distorting incentives and undermining growth.”

While the IMF said recent tax increases had put the French government on track to hit its target of a budget deficit under 3 percent in 2015, further efforts had to come from lower spending.

French Prime Minister Jean-Marc Ayrault yesterday announced a reduction in income tax child credits for wealthy families, which will raise an extra 1 billion euros ($1.3 billion) in revenue next year, while rejecting calls to cut direct child support payments to wealthy families.

Labor Market

“France spends more on welfare than other countries while not having results that are better than most other countries,” Gardner said.

The French government has “made meaningful progress” on liberalizing its labor markets, since the last Article IV consultations in October 2012, today’s report said.

After his election a year ago, Hollande pushed through measures making it easier for companies to sign labor contracts outside the framework of national union accords. More has to be done to create flexible contracts for low wage earners and to reduce legal uncertainty for companies in firing procedures, Gardner said.

“France has more than just cyclical problems, it has structural problems,” Gardner said. “But the number of reforms that have been passed in the past six months shows that the government appreciates it has problems. But we see it as a first step in a long process.”

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