Public Sector Assignment 1

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PublicSector Assignment 1





19 January 2016

Module PublicSector Accounting and Finance

ModuleCode: ACFI 3210

Tutorname: FredMear

Backgroundof current fiscal position

TheEuropean Union establishes rules to govern member states on severalissues. One of them is to prevent weak countries from borrowing toomuch to make the central bank inflate the currency. In such a case,inflation is spread across all the member states. Therefore, whenestablishing the Eurozone, some rules and regulations were alsocreated to ensure growth and stability and reduce excessive borrowing[CITATION Fra15 l 1033 ].

Thecountry of consideration in this case is France. Current reportsindicate that France’s discrepancies are continually posing aproblem to the Eurozone. The nation’s deficits are quite largeleading to limited economic growth thereby diminishing the tax base.Even before the 2015 budget was outlaid, France had predicted a 4.4percent deficit. This figure is above the boundary entailed withinthe Maastricht treaty [CITATION Cec14 l 1033 ].

Francehas not recorded a surplus budget since the 1970s. It continuouslydallies in the road to reform hence the estimated deficits of 4.4percent in 2015. However, the country constantly avoids punishmentfrom the EU owing to its strength unlike smaller nations who cannotface up with the commission. When presenting the 2015 budget, theFrench government anticipated the deficit would decline to 2.8percent which was not the case. Additionally, they realised theywould not meet the fiscal rules of the Eurozone i.e. 3 percent untilthe year 2017. The government however reduced its budgetaryallocation by another EUR 3.6 billion to evade clashing with the EU[ CITATION Foc15 l 1033 ].

Thedismal GDP results led to the French government negating the fiscalcommitments for two years in a row since they could not attain theanticipated targets. For instance, the government had expected a GDPgrowth rate of about 1 percent in 2015 more than the 0.4 percent fromthe previous year. They however fell short in both instances. TheFrench economy needs a radical change to counter check the publicaccounts. This will also help decrease the deleterious impacts oninvestments and consumption that the huge taxation levels have onbusinesses as well as households. The economic issues within Francetogether with the edgy relations with other European counterpartsgenerate political constraints and tensions [ CITATION Fra15 l 1033 ].

Relationshipsbetween legislature and the executive getting the budget into law

Thepolitical system in France is considered a semi-presidential system.It consists of the executive, legislative and judicial branches. Thegovernment and president exercise the executive powers whereasparliament exercises legislative powers. When passing the budget intolaw, both the legislature and executive play a role. In other words,for the budget to passed into law, both have to be involved atdifferent capacities.

Thelegislature has incorporated a requirement within the law thatmandates the executive to provide revenue projections beyond thefiscal years. Therefore, before the budget is passed into law,parliament has to internalize the projections and accept them. Beforea budget is passed into law, the government presents a pre-budget forthe legislature to debate. The main reasons for this include

  • For information purposes i.e. the legislature to become aware of the executive’s policy intentions. The executive outlays the updated med-term and annual budget as well as policy priorities. The budget orientation in most cases coincides with budget performance of the previous year for the legislature to debate.

  • For it to provide a deep multiyear fiscal target or rather spending ceilings that the executive needs to adhere to in preparations of the detailed estimates of spending for the coming year.

Itis always imperative for the legislature to review the pre-budget ofthe executive’s key budget proposals for the coming year,especially budget strategies as well as main aggregates.

Thelegislature’s core task is to analyze and debate on the draftbudget i.e. the revenue estimates as well as the spending plans. Itis the responsibility of the legislature to approve and discharge theannual budget and ensure it is well implemented. The legislature canalso incorporate some aspects within the budget. For instance, Frenchmembers of parliament accepted a plan to cut development funds withinthe budget to assist developing countries. Though the plan wasagainst the executive wishes, it had to be implemented owing to thepowers bestowed to the legislature [ CITATION Mic10 l 1033 ].

Thegovernment which is mainly led by the prime minister is generallyanswerable to the legislature hence vital decisions have to beunanimously accepted among them. If a certain feature within thebudget is not popular with the legislature but is adopted by theexecutive, then it cannot proceed. When a budget is not sanctioned bythe legislature in time i.e. before a fresh fiscal year starts, thenthe executives’ projected budget including the policy alterationsis implemented for a limited period [ CITATION Ian10 l 1033 ].

Theexecutive can also rectify or supplement a current budget and tableit for the legislature to debate as the fiscal year is in progress.Rectification or supplements are mainly due to changed circumstancesor new policies. Additional issues may be due to natural calamities,emergencies among others. In general, therefore, the legislature andthe executive have to work in harmony when enacting the budget intolaw.

Argumentsrelating fiscal constraints

Asestablished by the European Commission, three externalities have beenrealised relating to excessive deficits. Firstly, when a nation isdeeply immersed in debts, other countries may be indented to bail itout i.e. there is no credibility to the “no bail out rule”.Secondly, if a country is not bailed out, then a liquidity crisisaffecting all the involved nations may arise. This may force the ECB(European Central Bank) to input some inflationary sum. Finally, evenwithout solvency, fiscal rules can impact on independent fiscalregulatory, particularly due to inter-nation interest ratesspillovers [ CITATION Mar10 l 1033 ].

Thevalidity of the above arguments can be argued against. For instance,a no bail out policy can be deemed credible. This is because acountry in deficit can pay a premium using its own interest rates andattain credit rationing. Additionally, price instability may arisewhen ECB is compelled to monetize a crisis in liquidity affecting aninsolvent country. This may be done by the EMU(Economicand Monetary Union) to prevent a possible spread. In that respecttherefore, ECB may not destabilize the prices so as to deal withliquidity crisis. Another argument suggests that fiscal rules canmake countries pursuing sovereign fiscal regulations to coordinateduring interest rate spillovers (Kilponen et al., 2015).

Followingthe financial crisis across several countries, several arguments havebeen raised to minimize the same. They include

  • Streamlining the general fiscal governance mechanism i.e. joining corrective as well as preventive SGP arms with a two-step process that is based on specific rules common to the member states. According to this argument, legal alterations and treaty changes are mandatory.

  • Introduction of a singular fiscal anchor having one operational rule i.e. having a two-pillar design with a single fiscal anchor and one operational budget having expenditure growth, debt-correction mechanism all interlinked to one anchor. According to this approach, fiscal sustainability will be safeguarded as well as macroeconomic stability. Additionally, public communication and monitoring will be facilitated.

  • Auxiliary bolster enforcement i.e. additional steps to develop and implement the simplified fiscal approach as well as support compliance. The modes may include credible sanctions reflecting the predominant economic circumstances, automaticity and stepped up monitoring and constraints, management of fiscal policies between the commission and state fiscal councils (Andrle et al., 2015).

    • Some arguments on fiscal constraints deem the continuous reforms have brought about positive components that are supportive to the fiscal policy conduct but also raised its intricacy. The current system has got complex constraints that even complicates appropriate public communication as well as monitoring. This develops risks such as overlap among various portions of the system. It also brings about inconsistency. The complex framework results in unintended violations as other states exploit loopholes with feeble enforcement. It is therefore important to adopt a framework that is simplified and administration strengthened (Andrle et al., 2015).

TCSGentails stricter versions of the growth and stability act, whichgoverns intergovernmental treaty. It was signed into action by theEuropean Union members on March 2012 with the exclusion of Croatia,United and Kingdom and Czech Republic. However, by April 2014, theTCSG was ratified by all the member states and began to be enforcedacross them. In accordance to the treaty, member states could befined up to 0.1 percent of the GDP if a self-correcting mechanism isnot rolled out within their country within one year. According to theprovision, countries governed by the treaty ought to devise atechnique that is monitored by a nongovernment institution. Theinstitution would then ensure a given country balances the budgetwith their own capabilities as per the description of the treaty. Inother words, they would ensure the national budget is within thecapabilities of the given country. Countries which fail to establishsuch a mechanism would be liable to fines of 0.1 percent of the GDP.The provision was meant to instill discipline among the states whowere thought to have excessive debts [CITATION Tre l 1033 ].

Inaccordance to the treaty, a balanced budget is one whose deficit doesnot exceed 3 percent of the GDP. Additionally, its structural deficitshould not exceed the respective country’s medium term objectivesthat is mostly set at 0.5 percent of GDP for countries having debt toGDP ratio more than 60 percent. It is 1 percent for countries havingdebt levels that are within 60 percent. In most cases, the MediumTerm Objectives are revised after 3 years by respective countries,hence more stringent levels can be set. The treaty also contains adebt brake, which describes rates at which levels of debt over 60percent should decrease. This provision states the recommended ratesat which excess debts should decrease thus employing affectedcountries to ensure the same.

Sincethe inception of the treaty, France has had to employ stringentmeasures to decrease their debt levels. As earlier portrayed, thecountry budgetary levels are not in line with the provision of thetreaty. This is illustrated by the 4.4 percent deficit levels by theyear 2015. Though the country expected to lower their debt levels,activities within the country have not ensured the same. Generally,there is a huge imbalance when comparing the countries capacities andthe provisions within the budget. As provided within the treaty, ifthe fiscal account of the ratified states does not comply with thedebt or deficit criteria, they ought to rectify the same. Any statebreaching the treaty are supposed to correct the same or faceramifications. However, in case a state suffers a considerable amountof recession, the treaty tends to exempt them and are given a chanceto provide fiscal corrections when the recession ends [ CITATION Tre l 1033 ].

Thoughthe treaty is not within the European Union legal framework, all itsprovisions are extensions to the existing regulations. In thatrespect, similar organizational structures as well as reporting toolsare utilized. The three extensions areas include

  • Discipline on budgetary perspectives governed by the stability and growth act was protracted by Title III

  • Coordination or rather synchronization of economic policies was protracted by the Title IV

  • Governance in EMU was protracted by the Title V

Thetreaty means to integrate the fiscal extensions within the EuropeanUnion’s framework by the year 2018. In that respect,implementations will be swift to ensure all the signatories to thetreaty conform to the same without contradictions.

Fiscalsustainability in France

Fiscalsustainability entails the aptitude or capability of a government tospend within its limits, policies and tax without fear of solvency ordefaults on its promised expenditures. It generally involves asustainable government whose financial activities are well within theset policies and available resources. Measures of fiscalsustainability are vast but most circle around populations ageing andhow the government is able to sustain its citizens. Sustainability ismeasured in terms of medium and long term indicators. Recentsustainability reports incorporate effects of ageing populations onlong term budgetary estimates. This is meant to outline the effectsof funds allocated to old individuals on the country’s budget. Itis quite evident that life expectancy across the EU states iscontinuously increasing hence the need to realize its effect inbudgetary terms. Analysing government debts and the prospected riskson fiscal sustainability is quite important in accordance to the EUstatues. Addressing levels of debt among different member states isalso crucial to ensure solidity in terms of public finances.

Francefiscal activities are quite intricate with subsequent variations overthe years. As a matter of fact, for over 30 years, the country hasbeen encountering huge fiscal imbalances with debt ratios growing atan alarming rate. The financial state of the country was worsened bythe recent worldwide financial crisis. As prospected, the county’sdebt levels are bound to increase in the long term. This is becausefuture costs are expected to rise in terms of social security, ageingpopulations among others. In accordance to the current sustainabilitytests, the French government is not following a viable path i.e. itis unsustainable. As earlier stated, the government had prospected a4.4 percent deficit even before the 2015 budget was relayed. This wasnot their target in the previous estimations. The spending levels arebound to increase on a daily basis owing to different reasons(Maschewsky, 2012).

Accordingto 2012 fiscal reports, France had no short term fiscal issues.However, they faced a long term sustainability risk due to thespending levels. By 2011, the debt levels were roughly 86 percent ofthe GDP and by 2014 it had risen to 93.8 percent. According to thereport, age-related expenditures were expected to rise to a 0.8 pp.of GDP between 2010 and 2060. Age related expenditures elementsinclude +1.2 pp in healthcare, +0.5 pp in pensions. The increasingcosts need to be sustained so as to ensure the government does haveenormous debts. Looking at the long term sustainability study basedon the 2012 report, age related expenditures are projected to rise.In that respect, the sustainability gap in France is at a 1.6 percentof the GDP. This percentage is quite low in relation to the EU’saverage of 2.6 percent. Achieving a precise fiscal sustainability isquite hard due to the dynamics involved in various sectors. Forinstance, the healthcare system is quite dynamic with continuousimproving systems leading to an improved life expectancy level. Otherfactors that force a government to spend outside their expectationsinclude natural calamities, acts of terror among others. France hasexperienced several terror acts that tend to impact negatively on thecountry’s economy. Such like acts are quite detrimental for acountry trying to limit or rather minimize the debts. The country isforced to spend on events that were probably not entailed within thebudget.(Maschewsky, 2012)

Inconclusion therefore, France faces numerous challenges in fiscalsustainability aspects. The country’s debts have been increasingover the years even though measures to limit the same have been putin place. Spending is bound to increase over the years hence a morestable estimation of the budget is vital. It is also important tospend within the capabilities of the country.

Takingall the above into consideration, there are many budgetary issuesthat France is currently facing and which are relevant in the budgetsetting process. The most important of them are the excessivemacroeconomic imbalances experienced. The public debt hassignificantly increased due to the low growth and low inflationaccompanied with poor companies’ profitability, insufficient policyresponse and risks arising from the deterioration in both cost andnon-cost competitiveness (European commission, 2015, online). Thehigh budget gap of the country of more than 3% of GDP which leads tolimited economic growth thereby diminishing tax base, has put thecountry into an EU disciplinary process the excessive deficitprocedure. France is under pressure to meet the budget consolidationtargets established by the EU finance ministers, otherwise they willbe penalised (Strupczewski andGuarascio, 2015).

Thereis no doubt that France is facing economic hardship which has adirect impact on the country’s budget setting process. According toa report of the European Commission, there is no enforced budgetarypolicy and no effective action under the excessive deficit. TheFrench government must use all of the windfall gains against thedeficit as well as make expenditure plans. Every sub-sector shouldseek for savings opportunities, including local governments whereadministrative expenditure should be cut. However, these spendingcuts will not be supported by the local administration reform if thegrants provided by the central government to local level are beingreduced sharply. Therefore, this reform could further constrain thelocal budget by increasing the short-term administrative costs. Inaddition, the financial situation of the complementary pension schemeis not sustainable and thus France must bring the pension system intobalance. Overall, there is no budgetary sustainability within thecountry which can lead to no incentives to work and thus have impacton the budget (European Commission, 2015, online).

Francewas also impacted by the terrorists’ attacks and as a result thecountry needs to spend more in defence and police while cutting fromother departments. The security of the citizens is the country’spriority which can distance the government of meeting the deficitlimit of 3pc of GDP. It is expected by the European commission thatthe French deficit will be 3.4% of GDP in 2016 and 3.3% next year.However, it is believed that the figure will be much higher and lasttill the end of the decade. Therefore, the country’s debt can goeven higher and reach the 100% of GDP (Ambrose, 2015). There is nodoubt that the French government is still remaining remarkablydepressed with many budgetary issues affecting the budget settingprocess.


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