OECD EU Fiscal Surveillance France

© OECD
AjointinitiativeoftheOECDandtheEuropeanUnion,
principallyfinancedbytheEU
Roundtable Meeting
Fiscal surveillance in France
Christian CHARPY, Cour des comptes, France
Podgorica, 28 May 2015

Fiscal surveillance
• Fiscal surveillance has been reinforced due to
high levels of public deficit (either effective or
structural) and of public debt
• European Union has played a key role in this
process
• Maastricht Treaty (1992):
 creation of Euro
 common discipline :
• Budget deficit : no more than 3% of GDP
• Public debt : no more than 60% of GDP
1

Government deficit/surplus
(% of GDP)
2
-4.0
0.7
-3.0
-5.7 -5.8
-2.3 -2.4
-12.0
-10.0
-8.0
-6.0
-4.0
-2.0
0.0
2.0
2008 2010 2013 2014
Maastricht Treaty limit

Public Debt in 2014 (% of GDP)
3
74.7
97.7 95
132.1
68.8
89.4 92
0
20
40
60
80
100
120
140
Maastricht Treaty

Fiscal surveillance
• Brussels Treaty (2012) reinforced fiscal
discipline :
 Structural deficit under 0,5 % of GDP, excepted in
case of special circumstances for countries with
public debt superior to 60 % of GDP
 Public debt have to be reduced by 1/20 each year.
Countries under excess deficit procedure have to
make “sufficient efforts”
4

Fiscal surveillance
• Transposition of the new European rules on
fiscal governance:
 Implementation of the Fiscal compact:
independent fiscal institutions must be in charge in
charge of checking compliance with fiscal rules at
national level
 Anticipation of the “Two Pack” ’s provision:
independent macroeconomic forecasts” means
macroeconomic forecasts produced or endorsed by
independent bodies
5

Organisational Framework (1)
• In France, several options were originally
considered:
 Creating an ad hoc authority, but possibly costly for
public finances and credibility has to be built ab
initio
 Broadening the missions of the Court of Auditors
(Cour des comptes): it is endowed with a strong
reputational capital, but confusion may appear as
regard its ex ante and ex post roles. As well, its
legitimacy as a forecasting institution might have
have been weak
6

• An intermediate solution: creating an
“independent body attached to the Court of
Auditors”
 A new body associated with the Court of Auditors
and chaired by the Head of the Court (Didier
Migaud, former head of the Budget Committee in
Parliament)
 However independent from the Court : its
members come from diverse origins, it benefits
from its own financial resources, as well as its own
staff
7

• Court of Auditors and HCPF have different but
complementary roles :
 Court of Auditors : an ex post surveillance role. For instance:
• Monitoring the implementation of Budget Laws and Social Security
Budget Laws
• Signing off the the State accounts and the Social Security accounts
• Issuing reports on the situation and outlook of public finances (in
February and in June)
 HCPF : an ex ante surveillance role, in delivering an opinion
on a set of public finance texts.
• Attaching the High Council to the Court means:
 Preserving an institutional coherence between both IFIs
 Creating financial and human synergies between the institutions
 Ensuring the independence of the new body
8

The Court of Auditors
And
Fiscal Surveillance
9

History of the Court of Auditors
• One of the oldest public institution of the State,
an emanation of the « curia regis » (the king’s
court, in the Middle Ages).
• Article 15 of the French Declaration of Human
Rights sets out that: « Society has the right to ask
any public official to account for its
administration »
• The law of 16 September 1807 established the
present-day Court of Auditors.
10

The « Westminster model »:
The SAI is connected to Parliament.
The « executive model » :
The SAI is connected to the
Executive.
The « equidistant » model:
The SAI is equidistant from
Parliament and from the
Government
SAI
Government
Parliament
SAI
Government Parliament
SAI
Government
Parliament
The Supreme Audit Institutions’ models:
3 patterns with a lot of possible variants
11

The Court’s equidistance
 The Court assists Parliament and the Government : it is
not at the disposal of Parliament more than it is at the
disposal of Government.
 The Court’s equidistance has been confirmed by a decision
of the Constitutional Council in 2001 : « the Court of
accounts is an administrative jurisdiction ; […] the
Constitution ensures its independence from the legislative
and from the executive. »
 The Court of Auditors carries out some works at the
request of Parliament but it remains free to decide on its
program : in 2001, the Constitutional Council censored a
sentence mentioning that the Court should communicate
its draft program to the Parliament’s finance committees
for advice. 12

A strengthened constitutional mission
of assistance to the Government and to
Parliament
• Art. 47-2 of the Constitution :
« The Court of Auditors assists the Parliament in controlling
Government’s action. It assists the Parliament and the Government in
controlling the enforcement of finance laws and the implementation
of laws on the financing of Social Security as well as for the
assessment of public policies. It contributes to inform the citizens
through its public reports.»
13

The Court of Auditors in fiscal
surveillance
• The Court judges the public accountants’
accounts. It verifies regularity of revenues and
expenditures.
• It controls the use of public resources : regularity,
efficiency and efficacy of their management.
• It evaluates public policies
• It certifies State’s and Social Security’s accounts to
guarantee that public administration’s accounts
reflect a fair view of their financial situation.
14

Reports in accordance with the 2001
Constitutional bylaw on budget (« LOLF »)
• Report on the fiscal balance and enforcement of budget
act
• Report on the situation and outlook of public finance
• Annual audit opinions on the State’s account and social
security account (« certification »)
• Reports on Social Security
• Other assistance missions :
 Assistance for evaluation and audit missions for finance
committees (Art. 58-1 of the LOLF)
 Enquiries requested by the finance and social affairs committees
of both Parliamentary assemblies (Art. 58-2 of the LOLF)
15

Report on the fiscal balance and
enforcement of budget act
• each chamber controls the expenditures of the ministries
under its competencies and these reports are on-line
• The report is a synthesis of these controls
• Part 1: government deficit/surplus, compared with last
year’s, with initial budget act, with public finance
programing bill.
• Part 2: fiscal and non fiscal receipts and tax expenditures :
comparison with last year’s, with the initial budget act.
Analyse of the causes of differences:
 Intrinsic evolution
 Elasticity of fiscal receipts to GDP growth
 New fiscal measures
16

Report on the fiscal balance and
enforcement of finance laws
• Part 3: Government expenditures :
 Wage bill and pension scheme
 Debt interest expenditures
 Operating expenditures
 Capital expenditures
In this part, we analyse the respect of government expenditures
norms :
- “0 in real terms” : all government expenditures
- “0 in nominal terms”: all government expenditures except
interest and pension expenditures
• Part 4: overall assessment :
 Regularity : conformity to Constitutional bylaw on budget act :
unity, universality and annularity
 Performance review
 Sustainability
17

Global assessment of fiscal surveillance
by the Court of Auditors
• An in-depth analysis with a high reputational capital
• Which prevents government to bypassing to the
constitutional bylaw on budget
• But :
 each year, recurrent critics, for instance :
• respects of norms
• sincerity of the receipts forecasts
• Quality of expenditures programming.
 An ex-post analysis
• Only a few weeks between the closing of State’s accounts and
the publishing of the report
• Parliament don’t pay enough attention to the execution of the
budget 18

The High Council of
Public Finances
And
Fiscal Surveillance
19

Over-optimistic forecast as a rationale
for setting up an IFI in France
20

Legal framework of public finances
programming and monitoring
• French constitution, article 34 : « the multiannual guidelines for
public finances shall be established by Planning Laws. They shall
contribute to achieving the objective of balanced accounts for
public administrations.”
• Constitution bylaw of December, 17th 2012 on planning and
governance of public finances :
 Defines the content of multiannual planning budget laws
 Adds an introductory article on general government balance in all
budget laws
 Creates an independent fiscal council
 implements the automatic correction mechanism
• Multiannual planning budget laws defines :
 Medium term growth assumptions
 Public finances trajectory
 Fiscal rules : spending limits or objectives and rules for revenues
and tax expenditures
21

Composition of the high council of
public finances
• 10 members drawn of various backgrounds :
 4 members of the Court of Auditors
 4 experts appointed by the heads of finance
committee of the two chambers of parliament
 1 expert appointed by the head of the Economic,
Social and Environmental Board
 The Director general of the National Institute of
Statistic and Economics Studies
22

The HCPF – an independent body
• HCPF is chaired by the head of the Court of Auditors
• Mandates cannot be renewed (5 years) nor revoked
• Members cannot hold elected office
• Members have to submit a declaration of interests
• The HCFP cannot receive or solicit any instruction from the
Government or any other organisations
• Permanent Secretariat but part-time staffers
 Secretary General
 2 Deputies (from the Court of Auditors) : 1 economist, 1 public
finance expert
 2 Senior Economists (originally from OECD and French Treasury)
 1 Assistant
• Budget : 800.000 € and back office provided by the Court of
Auditors
23

Mandate of the HCPF (1)
• HCPF is required to deliver an opinion on a set of public
finance texts :
 Public Finance Programming Bills
 Initial and amending Budget Laws and Social Security Budget Bills
 Stability programs provided to EU Commission and Council
• The missions of the HCPF revolve around 3 axes:
 Examining the soundness of macroeconomic forecasts and
potential growth estimates on which drat finance texts are based
 Analysing ex ante the consistency of annual fiscal forecast set by
Budget Bills with the multiannual structural balance targets
 Identifying ex post “significant observed deviation” arising from
comparisons between past year budget implementation and the
multiannual guidelines on structural balance set in the
Programming Laws
24

• The issues on which the HCPF has to deliver an opinion are
precisely defined:
 Macroeconomic forecasts or assumptions (draft budget, stability
and growth program, multiannual planning law)
 Potential growth (multiannual planning law)
 Consistency of draft budget and annual fiscal targets with the
multi-year structural balance path
 Identifying ex post “significant observed deviations” from the
adjustment path
• the law is silent on the form and content of the opinion:
 It says only “the High Council delivers an opinion on
“macroeconomic forecasts, consistency of draft budget, potential
growth…”
 It is up to the council to decide form and content
25

Mandate of HCPF (3)
• The HCPF provides an opinion on the macro economic
forecasts made by the Government:
 Advisory role: no validation nor coproduction of forecasts. The
making of macroeconomic forecasts lies entirely with the
Government
 Importance of the critical risk assessment undertaken by the High
Council
 Benchmarking with forecasts made by other bodies (institute for
economic research, international organisations…)
• The HCPF provides an assessment on the potential growth
hypothesis from the Government
 Establishing its own analysis is necessary for estimating the output
gap and recovery scenarios which are subject to considerable
uncertainty
26

• The HCPF considers the consistency of annual objectives
set by finance bills in comparison to multi-year structural
balance trajectory:
 Multiannual guidelines on structural balance
 Soundness of receipts and expenditures projections
• The HCPF plays a major role in triggering the correction
mechanism in:
 Delivering an opinion about possible “significant observed
deviation” between the budget turnout and the multiannual
guidelines on structural balance
 Delivering an opinion on the corrective actions taken by the
Government in its next opinion on initial budget bill
 providing a public assessment on the occurrence of “exceptional
circumstances” as agreed in the SGPFP 27

Relationship with Parliament and
Government
• Parliament is closely involved in the process:
 The Chairman of the High Council can be heard at any time at the
request of the Finance Committee of both Chambers
 Opinions are systematically handed over to Parliament
• Opinion from the High Council are not binding for the
Government:
 The High Council is an advisory body
 Nevertheless, given the publicity and media attention attached to
HCFP’s opinions, the Government runs a reputational risk if it
chooses to disregard them
 The Constitutional Council takes into account HCFP’s opinions in
its constitutional check of budget bills (“sincerity”)
28

First reactions
• The High council is now an important institutional actor of
public finances
• Good press coverage in France : the High Council is well
identified in the institutional framework
• Building European and international credibility:
 European Commission (working document DBP review, 11/2013):
“The HCFP is an independent authority by law”
 IMF (article IV consultation 2013): “the first two opinions issued
by the newly created council attest to its independence and
professionalism”
 OECD (Economic Survey 2013): “Members of the Cour des
comptes will play a leading role in (the) council, ensuring its
independence. (…) The success of the new institutional framework
will depend on how much weight will be given to the council’s
evaluations” 29

First working year (2013)
• The High council was set up in mid-March
2013 after all members were appointed
• It delivered its first opinion on 15 April 2013 on
the economic forecasts of 2013-2017 Stability
Program
• 3 other opinions in 2013:
 On the automatic correction mechanism (May, 29th)
 On initial budget bill (September 25th)
 On amending budget bill (November)
30

Second working year (2014)
• 6 opinions :
 Assessing macroeconomic forecasts of 2014-2019
Stability Program
 Analysing ex ante the consistency with structural
balance trajectory (draft budget, amending budget)
 Identifying ex post “significant deviations
 Assessing potential GDP estimates (Programing public
finance bill)
 Output gap and potential growth
31

Opinion on the programming budget bill for
2014-2019 - September 2014 (1)
• Potential output scenario:
 HCPF notes that the Government has chosen to use the European
Commission’s estimates of potential output
 It underscores the inherent weakness of output gap estimates, especially
given the uncertainty surrounding the magnitude of output losses
stemming from the economic crisis
 It explains that overstated output gap would lead to a deeper structural
deficit all along the programming period
 HCPF considers that estimate potential growth presented by the
Government (1% for 2014-2015, about 1.2% on average for 2016-2019) is
an acceptable hypothesis
• Macroeconomic scenario
 HCFP considers that the Government macroeconomic scenario is more
realistic than macroeconomic scenario presented in the latest Stability
programme (April 2014)
 But it relies on too favourable assumptions, especially with respect to
international environment and investment 32

Opinion on the programming budget bill for
2014-2019 - September 2014 (2)
• Public finance scenario:
 HCPF notes that the public finance trajectory in the programming budget
bill is not consistent with the commitments undertaken by France, which
is currently under an excessive deficit procedure, in the Stability
programme of April 2014
 The structural adjustment for years 2014, 2015 and 2016 is clearly less
than that provided by said commitments
 Consequently, and given the worsened economic situation, the nominal
deficit remains above 4% of GDP and the deficit target under 3% is
postponed to 2017
 The medium term objective (MTO), revised downwards to -0.4% of GDP,
has been postponed again to the end of programming period (2019)
 Even if this new trajectory is less ambitious than the previous one,
complying with it would require a strong slowdown of public expenditure.
In view of the announced measures to date, the HCPF highlights a risk of
deviation with respect to the trajectory towards the MTO
33

Opinion on budget bill for 2015
September 2014 (1)
• The HCPF considers that the Government’s growth
forecast of 0.4% for 2014 is realistic
• It considers that the Government’s forecast of 1% for 2015
is optimistic
 It requires a quick and lasting recovery, which is not supported by latest
short-term indicators
 Macroeconomic forecasts suffer from some weakness regarding the
dynamism of the international environment and domestic demand
• The HCPF underscores that the government has not attempted
to correct the “significant deviation” (1.5 point of GDP) between
the structural deficit in 2013 and the programming budget law
for 2012-2017, still a valid reference
• Given the context of weak growth and low inflation, the HCPF
underscores that postponing the structural adjustment again
could put the public debt trajectory at risk 34

Opinion on budget bill for 2015
September 2014 (2)
• The HCPF welcomes the efforts for reducing public
expenditures since 2011
• Nevertheless, given the measures presented by the
Government to date, the HCPF reckons that the expected
public expenditures growth for 2015 (1.1% in nominal
terms), and therefore the structural adjustment target
(0.2%) for 2015, may not be achieved.
35

Opinion on the stability programme 2015-
2018 - April 2015
• The HCPF considers that the Government growth forecast of 1% in
2015, unchanged since the budget bill for 2015, is now prudent,
thanks to a more favourable environment resulting from strong falls in
both the oil price and the euro. Inflation and wage forecasts have
been judiciously revised downwards
• The HCPF considers that the growth forecasts for the years 2016 to
2018 are prudent, despite the financial risks. They are meant to
ensure the credibility of the nominal trajectory of public balances.
• Nevertheless, the HCPF regrets that the potential growth forecast,
whose estimation is highly uncertain, has already been increased, only
a few months after the adoption of the programming budget law. This
review automatically increase the level of structural adjustment
notified to the EU commission, without any change in fiscal ou
revenues measures. It makes the split between the cyclical and the
structural components of public balance difficult to estimate and
makes it harder to analyse fiscal policy
36

Global assessment of fiscal surveillance
by the HCPF
• A particularly difficult job :
 Very short delays to give an opinion
 Highly risky : economic forecasting is as difficult as astrology
• Government forecasts are now more realistic, even
especially cautious
• But :
 Some tricky measures (for instance the review of potential
growth in stability programme)
 The correction mechanism is partly inefficient, because
budget laws are annual and have the same juridical status
than multiannual programming laws
37

THANK YOU FOR YOUR ATTENTION
38

OECD EU Fiscal Surveillance France

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