Business | Opinion
France pursues a new approach: Spend in a smart way
France already raises and spends about 1 trillion euros ($1.5 trillion) a year out of a gross domestic product of 1.8 trillion euros.
- Financial Times
- Published: 00:30 March 17, 2008
This year Jacques Attali took to the stage of a Paris theatre to present 316 recommendations to "liberate" French economic growth. At the request of President Nicolas Sarkozy, the Socialist intellectual and his high-profile 43-member commission ransacked many of the best ideas from home and abroad to reform the sluggish economy.
But perhaps most telling is the recommendation the commission did not make: that policymakers reach for the traditional French remedy of throwing more public money at a problem. As the commission noted, the state already raises and spends about 1,000 billion euro ($1.5 trillion, £760 billion) a year out of a gross domestic product of 1,800 billion euro. Indeed, Attali argued it was essential to cut public spending as a proportion of GDP. What was needed was to streamline government, liberalise labour and product markets, overhaul the tax system and increase the efficiency of spending.
To that end, Francois Fillon, the prime minister, has already announced a spending freeze for the next five years. His government is now scrutinising every line item in the budget to identify savings. It is promising an economic modernisation law shortly that will adopt many of the recommendations of the Attali report. Britain's better regulation initiative is cited as a model.
Andre Sapir, a director of the Bruegel public policy think-tank, says it is too simplistic to look at Europe and say its problem is that it has levels of government spending and taxation that are too high. Economically liberal Anglo-Saxon economies may benefit from comparatively small government and low taxes but several Nordic countries remain just as competitive with far bigger public sectors. "What we have at the two extremes are two systems that function. It is a choice of a society. But in both models there is much concern about efficiency," Sapir says.
"The problem comes in those European countries where you have a high level of government spending but low efficiency. France will this year have higher public spending than in all other EU countries - including the Nordic countries - but one can dispute if that amount of public spending is achieving the same kind of results.
"The more desirable discussion - given the societal preference for a strong public sector - is that the public sector operates in a more efficient and market-oriented way. You need to put in place mechanisms to do that, but this is not a trivial thing to do."
Benchmarking between countries - and even within countries - can be a useful tool, given that performance widely varies. Although much of French public spending may appear wasteful, the public health system, for example, delivers an excellent service at relatively modest cost. The trick is to standardise best practices across the public sector.
John Dowdy, a director of McKinsey who heads the management consultancy's public sector division, agrees that there is an urgent "productivity imperative" in Europe given the region's large public sectors, its heavily indebted governments and its ageing populations. Demanding voters will insist their governments improve public services in future - but there will be fewer resources to pay for them. Increasing public sector productivity is the only way to square the circle.
Dowdy says it is far harder to measure productivity in the public than the private sector. Productivity improvements usually stem from competitive intensity. Still, there are ways to mimic the competitive pressures of the private sector: set bold targets; deploy state-of-the-art technology; attract higher quality managers; and measure and manage financial performance.
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