OVERVIEW OF FISCAL DECENTRALISATION 

France is a relatively centralised state which nevertheless offers some discretion to its sub-national governmental entities in the areas of taxation and expenditure.  The Constitution adopted on 4 October 1958 recognises the principle of local government autonomy and the country is broken down into three tiers of sub-national government (collectivités territoriales): regions, departments and municipalities. In addition, with stronger autonomous powers, there are also the ultra-peripheral regions (Guadeloupe, Guyane, La Réunion, Martinique and Mayotte). There are 22 regions and 96 departments in mainland France and five regions and six departments overseas, and nearly 37,000 municipalities. 

Legal acts governing fiscal decentralisation

The division of fiscal responsibilities between local and central governments is regulated by the Constitution, as established in the constitutional revision of 2003 which increased the power of sub-national authorities and recognised the financial autonomy of sub-national governments. The Decentralisation Act of 2004 also devolved further rights to the regions.  

Qualifying fiscal decentralisation

As noted, France is a  centralised state with 20% of total public expenditures accounted for by sub-national governments in 2018. In 2016, public expenditures by sub-national governments was 11.1% of GDP (see the pie chart below). According to the OECD, in 2016, 51.7% of local resources are raised by taxes set and raised locally or by shared taxes, 31.1% from state grants and the remainder from other revenues from the sale of good and services and asset management.

There are four main local taxes: the CET (contribution économique territoriale) from businesses,  the rates of which are set by the local government; a property tax on buildings with the rate set by departments and municipalities; a residents tax and a property tax on non-built land the rates of both of which are set by the municipalities. 

Source: authors’ elaboration on EUROSTAT data. For further details, see methodology.  

Fiscal equalisation mechanisms

France operates a vertical equalisation mechanism governed by the Finance Law. It is applicable to all subnational entities and set yearly. It is calculated by a formula based on the potential income from the four main local taxes above and the remaining tax revenues. It calculates what the resources would be of the regions based on the average tax rate. Regions where the revenues fall short of the national average are eligible for support from the equalization fund.

From 2012 a new fund for horizontal equalisation at the municipal level (fonds de péréquation national des recettes intercommunales et communales (FPIC)) was introduced to upset the loss from the abolition of a “professional tax" in 2011 that was part of the municipal revenues.

LEVEL OF FISCAL DECENTRALISATION  

Revenue autonomy (own revenues relative to total resources available) at local level (regions and municipalities) is consistently higher than the EU average (72% compared to 53% in 2018), this entails a lower dependency on central government transfers. Local own revenues represented 14% of total government revenues in 2018, a value that is slightly higher than the EU average (13%). The lower dependency ratio but marginally higher share of own revenue decentralisation indicate a lower level of competences at the local level. The crisis has affected the ratios to some extent and revenue autonomy increased from 63% in 2008 to 72% in 2018 , most likely due to lower state transfers.

Source: authors’ elaboration on EUROSTAT data. For further details, see methodology.  

The composite ratio, which captures aspects of fiscal decentralisation of both revenue and expenditure, suggests that the sub-national governments in France have a degree of expenditure decentralisation (18% in 2018) that is similar to the EU average (16% in 2018).

As for local tax autonomy, there seems to be a fairly high level of tax discretion over rates and reliefs  at 45.6%.

Source: authors’ elaboration on EUROSTAT data. For further details, see methodology.  

Fiscal rules and borrowing capacity

The 'golden rule' prohibits local government to finance current expenditure through debt – borrowing can only be used to finance capital expenditure. The local budget can only be unbalanced by up to 5% of the year's current revenue (10% for small municipalities). While local governments can, within the maximum level imposed, borrow freely, any decision is subject to ex-post legal control and budgetary control by the office of the central government representative (the prefect) and the chamber of auditors. To ensure this, debt annuity has been included in the budget as a compulsory expenditure. In case of deficit in local budgets, the regional chamber of auditors will propose corrective action.

This means very strong control by central government and low autonomous decision-making power at the regional and local levels. Presently, debts are used to cover about one third of investment spending. It also means that debt annuities have to be financed by own resources.

The rules on asset deposits and defaults are very restrictive. Liquid assets have to be deposited in non-interest-bearing accounts with the French treasury, which does not allow the local authorities to undertake financial investments. Liquidity shortfalls can be handled in the banking sector for day-to-day operations.

Bankruptcy is not permitted and thus defaults by local authorities are not covered by central government guarantees, forcing the local authorities to reschedule debt if the risk of such a situation occurs. In extreme cases, the central government may offer cash advances on future tax payments to cover mandatory operations. The prefect may put the local authority under its supervision in such instances (tutelle de l'État). 

Deficit and debt at sub-national levels

In 2013, the consolidated gross debt of the French local government sector amounted to 8.7% of GDP. It rose to 9% in 2015 but has since fallen again to 8.7% in 2018. Net lending/borrowing has been limited and fluctuating.

EXPENDITURE BY GOVERNMENT LEVEL AND BY POLICY AREA 

In line with the European averages, sub-national government expenditures in France represent a significant part of total general government expenditures in the fields of environmental protection (88% in 2017) housing and community amenities (81% in 2017), and recreation culture and religion (75% in 2017). Sub-national government has much lower competences in the areas of education, health, public order and social protection, where the competences are mostly at the central level.

Source: authors’ elaboration on EUROSTAT data. For further details, see methodology. 

Looking at the distribution of the sub-national budget, the highest expenditure goes on general public services (19% in 2017), social protection (19% in 2017), economic affairs (19%), and education (15%). The share of expenditure on health is very low as there are very few competences in this area. 

Source: authors’ elaboration on EUROSTAT data. For further details, see methodology.