IMF warns France must ditch high taxes,35-hour week

16th July 2004, Comments 0 comments

WASHINGTON, July 16 (AFP) - France's economy is crawling forward at a modest pace, but faces "serious challenges" in the long term due to high taxes and generous social programmes including its 35-hour work week, the IMF said Friday.

WASHINGTON, July 16 (AFP) - France's economy is crawling forward at a modest pace, but faces "serious challenges" in the long term due to high taxes and generous social programmes including its 35-hour work week, the IMF said Friday.  

The International Monetary Fund staff said in its annual report on the French economy that gross domestic product is likely to expand at a pace of about 2.5 percent over 2004 and 2005, up from an earlier forecast of 1.8 percent this year and 2.4 percent in 2005.  

But the IMF, in an unusually harsh assessment, said France faces looming economic and budget problems as tries to maintain its social welfare policies with an aging population and rigid labour market rules.  

"Serious challenges persist to maintain France's attractiveness for investment and secure long-term fiscal viability," said IMF report presented to its executive board.  

"Indeed, a high tax burden and low employment rates, together with a large deficit, and an impending demographic shock cast a shadow over long-term growth prospects."  

The IMF was especially critical of the French law mandating a 35-hour work week. The program was enacted in 1998 in an effort to boost job creation by reducing the number of hours for each employee, but has failed to curb the high jobless rate and is now under scrutiny by the government.  

"The issue that has now clearly come to a head is the pernicious nexus between labour market policies and the budget. This nexus needs to be untangled," the IMF report said.  

Also hurting French competitiveness was the minimum wage, known as the SMIC, recently raised to 7.61 euros (9.40 dollars) per hour and due to increase again in 2005.  

"The ensuing increase in labour costs is likely to price more young and unskilled workers out of market jobs and reduce the tax base or, alternatively, require further cuts in social security contributions that will burden the budget," the IMF said.  

"Only changes in labour market institutions can reverse this spiral ... It is necessary to avoid further real increases in the SMIC."  

France, with a jobless rate of 9.8 percent, can ill-afford to keep generous unemployment benefits, the IMF added, suggesting "work-fare" taking the place of welfare payments in some cases.  

"Returning people to activity will be helped by shifting from income support to work-fare arrangements."  

Nonetheless, the French economic landscape "presents several positive features that provide encouragement for an unwavering pursuit of the government's reformist strategy and for strengthened fiscal adjustment," the IMF said.  

"The economic recovery is now reasonably self-sustained and not in need of policy stimulus."  

Positive factors included some cuts in social security contributions and a health care reform.  

However, to make further progress, the IMF said "the solution lies in an improvement of labour market institutions to raise labour utilization, a steadfast reduction in public spending to eliminate budget deficits and make room for growth-enhancing tax cuts, and an acceleration of product market reforms to increase competition."

 

 

© AFP

 

Subject: French news

 

 

 

 

 

 

 

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