PARIS: Better-than-expected 2015 budgetary outturns and the prospect of smaller cuts in state grants will ease the near-term impact of stagnating revenues and inflexible spending on French local and regional governments (LRGs), Fitch Ratings says.
But these structural challenges remain, meaning that operating performance will continue to weaken. INSEE data last month showed that French LRGs posted an overall budget surplus (before debt repayment) of EUR0.7bn last year, compared with a EUR4.6bn net deficit in 2014. Overall revenues grew by 0.8%, but overall spending fell by 1.3%.
This was mostly due to a reduction in capex. Meanwhile, the French government said it would halve a planned cut in transfers to municipalities in 2017 to EUR1bn. If approved by parliament, this could support municipal budgets (including those of municipal groupings) in that year. This measure will benefit the cities and their groupings, which together account for 56% of the total state grant cuts planned in 2015-2017.
It will not apply to departments and regions. Nevertheless, operating performance is still set to weaken as pressure on budgets grows. Cuts in state grants to LRGs planned for 2015-2017 will still total EUR10bn, or a drop of nearly 20%, with a material impact on budget revenues. Declining margins have already forced a significant reduction in LRGs’ capex, which fell by 8.4% in 2014 and almost 10% in 2015. Further capex reduction may be harder to achieve.
LRGs account for more than 70% of total national public investment in France, keeping capex needs high, especially for regions engaged in transport projects. At the municipal level, where capex cuts have been most pronounced, we think capex will take up most of the extra EUR1bn available in 2017 from the smaller cut in state transfers. Controlling operating expenditure will therefore be important for LRGs to maintain sound operating balances, and this is challenging because of the lower flexibility of opex than capex.
Decentralisation of spending responsibilities has increased staff costs, and high unemployment makes it hard to curtail some benefits spending, putting departments’ budgets under greater pressure. The departments and central government are discussing changes to the system for funding social benefits, including the mix between department and central government spending, to try to ease the departments’ budget pressures. The adoption of the indicative local public spending target in 2014, which sets non-binding maximum expenditure growth targets for LRGs of 1.9% this year and 2.0% in 2017, gives LRGs an incentive to control spending.
Staff spending reviews, the gradual consolidation of some inter-municipal services, and economies of scale following the 2016 regional mergers may also help contain spending in the medium and long term.. Economic growth (Fitch forecasts real GDP to rise 1.4% this year and next) may contribute to revenue growth, although this is uncertain. Economic growth accelerated last year but revenue growth almost halved from 1.5% in 2014, and tax pressure on households and companies may limit the scope for tax rises. We therefore expect French LRGs’ overall operating margin to continue to weaken to below 19% in 2017, from nearly 20% in 2014 and 2015. LRGs’ outstanding debt rose 3.9% in 2015 to EUR184.5bn.
Low interest rates and the ability to part-finance capex from cash reserves should continue to limit the need for additional borrowing. Our stable outlook for French LRGs in 2016 reflects their low debt burden relative to EU peers, and their fiscal flexibility.