As France's public finances suffer from a weak economy, the Organization for Economic Cooperation and Development urged President Francois Hollande's government Tuesday to focus on longer-term spending cuts in areas like healthcare and pensions.
"France faces serious long-term challenges," the OECD said in a study of the country published Tuesday. "The improvement of the economic outlook will depend closely on the reduction in inefficient public spending and the implementation of crucial reforms aimed at reducing structural unemployment and restoring firms' competitiveness."
The OECD expects French gross domestic product ( GDP ) to expand only 0.1% this year before an acceleration to 1.3% growth in 2014. With slow growth, the budget deficit will fall less than Paris initially hoped to 3.5% of GDP in 2013 and 3% in 2014 from 4.5% in 2012.
Francois Hollande has already said he'll fail to meet the 3% target in 2013 - as he pledged to when he took power in May last year - because the government argues the extra austerity that would be needed to get there would plunge the country into deeper economic difficulty.
The OECD cautiously backed Mr. Hollande's approach, saying sticking to targets that ignore the depressed economic situation could exacerbate the downturn. But the Paris-based organization put pressure on Mr. Hollande to step up measures to cut spending in the longer term in areas including pensions and healthcare.
Out of the OECD's 34 members, France has the second-highest public spending ratio and state employees account for 23% of employment. Public debt as a percentage of gross domestic product will rise to 96.1% in 2014 from 94.5% this year and 91.3% in 2012, the OECD forecast.
"There is substantial scope for cutting public spending," the OECD said.
France should rapidly adjust the parameters of its pensions system to limit spending in the short and medium term, the OECD said. It also recommended a potentially controversial move to make pensioners pay higher social security contributions and taxes on capital gains.
Mr. Hollande has pledged to begin negotiating with unions this year to change the pension system as forecasts show it will post a deficit of EUR20 billion in 2020 if nothing is done.
"The projected trajectory of the pension system deficit requires that hard decisions be taken soon to limit spending in the short and medium term," the OECD said.
The OECD identified other savings France could make in healthcare by reimbursing only the price of generic drugs and treating more patients out of hospitals.
France's complex system of local government was also criticized in the report. Some of France's 36,700 municipalities should be merged and larger regional authorities abolished, the OECD said.
Mr. Hollande's government should also more take steps to cut costs and rigidities of labor. His government has already introduced EUR20 billion of tax credits for employers and secured an agreement between unions and employers for greater labor flexibility, but the OECD said these are only "encouraging signals."
Among the OECD's recommendations, France should simplify layoff procedures and make redundancies for economic reasons easier.
"The functioning of the labor market needs to be further improved," the OECD said. It forecasts unemployment to reach 11% in 2011 and 11.2% next year.
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