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Unlike federal States such as Germany, for example, the Constitution does not specify revenue and expenditure competencies of local governments. The Constitution nonetheless contains a number of general provisions that point to specific areas to be governed by separate laws. In particular, Article 72- 2 of the Constitution provides that:

●Local governments may use revenues within conditions laid down by law. Revenues may come from any tax, whose base and rate are established by law.

●Local governments’ self-raised revenues are to provide the major portion of their resources. An organic law is to govern this rule.23

●Transfers of expenditure competencies from the State to local governments

must be accompanied by a corresponding increase in resources, to be determined by law.24

●Equalisation mechanisms that promote regional equality across local governments are to be determined by law.

The Local Government Code (Code général des collectivités territoriales), which regroups, under specific themes, the various laws and decrees relating to local governments, is divided into four main parts. The first part (general dispositions) includes the establishment of a high-level committee on local government finances. This committee is composed of representatives from: both houses of Parliament, the central government, regions, departments, municipalities, inter-municipal public entities25 and mayors. The committee prepares an annual report on local government finances and studies of medium-term developments of local government spending. Parts II to IV of the Code contain provisions relating to municipalities, departments, and regions respectively. For each of these three levels of local government, the Code specifies revenue and expenditure assignments, budgeting and accounting arrangements (see Box 3), and special arrangements for large cities or specific local governments.

4. Legal provisions for each stage of the budget cycle

4.1. Budget preparation and presentation by the executive

4.1.1. Institutional coverage of the budget

The LOLF relates only to annual budget laws covering “the State”. It does not define the institutional units covered by the budget. In practice, the State budget covers only a portion of central government institutional units, namely central administrative directorates, administrations under national competence, and local services of central government (services déconcentrés) (OECD, 2003, Table 15). Public establishments and local authorities are excluded from the State budget, although transfers to them are included.

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Box 3. France: Key features of the Local Government Code

●Establishes co-ordination arrangements – a local government finance committee.

●Details revenue assignments and shared revenues.

●Specifies in detail the compulsory expenditure assignments for each level of government (L2321, L3321, and L4321).

●Allows an unallocated reserve of up to 7.5% of total budgeted expenditure that permits local governments to meet unforeseen expenditures.

●Requires regional and departmental budgets to be voted by councils.

●Requires municipal budgets to be voted by 31 March by municipal councils.

●Specifies that separate budgets be prepared for current and capital expenditures. Budget nomenclature is to be established by the Ministers of Local Government and of Finance.

●Establishes a “golden rule”: current spending must be fully covered by revenue.

●Specifies that borrowing for investment is not restricted by central government.

●Allows public services at local level to be contracted out.

●Applies for all local governments the principle of the separation of ordonnateurs (mayors and presidents of regional councils) and comptables.

●Designates that all accountants of local governments are central government employees appointed by the MINEFI. They collect local taxes and make payments.

●Specifies that regional Chambers of Accounts perform external audit functions.

4.1.2. Extrabudgetary funds and earmarking of revenues

The 2001 LOLF retained a number of the articles of the 1959 Ordonnance devoted to the earmarking of revenues, budget annexes and special accounts. However, compared with the 1959 law, expenditures from the cost-sharing contributions (fonds de concours) are to be appropriated by Parliament and included in total expenditure aggregates (Art. 17) rather than escaping parliamentary control. Moreover, missions and programmes have to be developed (a framework was established for them in 2004) for the budget annexes and the special accounts. The LOLF allows the executive to spend excess revenues in earmarked accounts (comptes d’affectation spéciale) – those higher than foreseen in budgetary projections – subject to informing Parliament (Art. 21).

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The health and social security funds are not governed by the LOLF and are not part of the State budget. The Organic Law No. 96-646 of July 1996 relating to the Financing of Social Security (LOLFSS) provides a framework for parliamentary approval of the expected revenues (mostly payroll taxes26), the objectives for spending, and the financing of the social security funds. Discussion in Parliament of the annual law for financing social security must take place in conjunction with the discussion of the annual budget law (loi de finances) of the State. The LOLFSS does, however, define the compulsory schemes and associated organisations. Binding expenditure limits are not established for each sector and Parliament votes on only seven categories of social security revenues. This inhibits, for example, establishing health spending priorities. In 2001, to address some of the shortcomings of the 1996 LOLFSS, the Senate presented a revised organic law (www.senat.fr/leg/pp100-268.html). However, it was not adopted.

4.1.3. Definition of budget aggregates

The 2001 LOLF and the 1996 LOLFSS do not begin with a comprehensive list of definitions, although some terms are defined in individual articles of the text. For example, the LOLF specifies that total inflows (ressources) include budget revenues and financing inflows, and total outflows (charges) include budget expenditures and financing outflows (Art. 2-6). The LOLF also defines the financial inflows and outflows (Art. 25) and requires the financing of the budget balance to be shown in a table of the annual budget (Art. 34.I.8).

The Constitution requires the financial balances of the social security funds to be shown in the annual law for financing social security. The concept of financial balance is not clearly defined in the LOLFSS. More importantly, the overall balance of general government is not defined by law, even though fiscal policies and the budgetary strategy are formulated on the basis of this balance.

4.1.4. Fiscal rules

Under a constitutional amendment (Art. 88-2), France consents to transfer competencies necessary for the establishment of the European Economic and Monetary Union. However, domestic laws were not changed to include quantitative fiscal rules proposed by the European Union. Nonetheless, the LOLF (Art. 50) requires that budgetary projections are to be drawn up “taking into consideration its European obligations” – an indirect reference to EU directives such as the Maastricht criteria on deficits and debt and the Stability and Growth Pact’s obligation for “at least a balanced budget over the cycle”. A “golden rule” is not established for the State budget. However, the Local Government Code imposes such a rule on local governments’ budgets.27

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4.1.5. The timetable for budget preparation and presentation to Parliament

The LOLF establishes the first Tuesday of October as the latest day that the draft annual State budget is to be submitted to Parliament (Art. 39). The fiscal year begins on 1st January (LOLF, Art. 1). To meet the October deadline, the budget preparation process begins in the previous December, with an update of the multi-year medium-term budget framework. There are internal non-legally-binding deadlines for the key steps in budget preparation (OECD, 2003, Table 16).

4.1.6. Approval process within the executive

The Constitution states that the Prime Minister is responsible before Parliament for the government’s programme (Art. 39). The LOLF (Art. 38) specifies that the Minister of Finance prepares the draft budget law, under the authority of the Prime Minister. The timing and most procedures for preparing and approving the draft budget law within the executive are determined internally. The President of the Republic can also play a role in shaping the draft annual budget law. In particular, the LOLF states that the draft budget law is discussed in the Council of Ministers, which is headed by the President (Constitution, Art. 9). In practice, the roles of the President, the Prime Minister and the Minister of Finance are dependent on the political situation. In normal times, the President of the Republic makes final decisions when budget clashes occur in the Council of Ministers (which happens rarely). In contrast, in times of cohabitation – when the President of the Republic and the Prime Minister are from different political groupings – final budget decisions are taken by the Prime Minister in meetings with Council ministers not attended by the President of the Republic.

4.1.7. Documents to accompany the budget law

Medium-term macroeconomic framework and fiscal strategy. In submitting the draft annual budget law to the two houses of Parliament, the LOLF (Art. 48 and 50) requires the government to present a report on the national economic situation, including:

●Macroeconomic projections, based on national accounts. These are to include the hypotheses on which they are based and projection methods.

●Medium-term developments, covering at least four years following the year in which the draft budget is submitted – of consolidated revenues, expenditures and balance for general government, with disaggregation by subsectors. Medium-term projections of revenues (ressources) and expenditures (charges) of the State budget, with the latter disaggregated by main functions,

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are required by the LOLF. The LOLFSS also requires medium-term projections of revenues and expenditures.

●The main orientations of economic and budgetary policies, considering France’s European commitments.

New measures versus existing expenditure policies. The 1959 Ordonnance on annual budget laws distinguished expenditures based on existing policies and those based on new policies. The budget was adopted on this basis – with a single vote on existing expenditures. This distinction was abolished by the 2001 LOLF: new measures are henceforth to be introduced in the context of specific programmes, which will be re-examined each year in the context of justifying every euro. For enhancements in general measures regarding civil servants, a provision is foreseen; only the global amount is proposed in the budget. Once Parliament adopts the budget, the executive allocates the salary increases by programme.

Performance-related information. The fiscal strategy report annexed to the draft budget must contain a list of missions and programmes, as well as programme performance indicators relating to the next year’s budget (Art. 48). Draft performance plans for each programme are to be annexed to the budget, including objectives, costs, and past and expected results as measured by performance indicators (Art. 51).

Tax expenditures, contingent liabilities and fiscal risks. An explanatory annex on projected tax expenditures is required to be presented with the budget (Art. 51). The LOLF requires parliamentary approval of new debt guarantees as well as the take-over by the State of debts issued by public or private bodies (Art. 34). All existing government guarantees are required to be established by law by end-2004; the budget execution report for 2004 is to contain an annex with all guarantees granted by the government but unknown by Parliament (Art. 61). The LOLF does not require that any other explicit, and any implicit, contingent liabilities be annexed to the draft annual budget. Nor is there a legal obligation to provide a statement of fiscal risks.

Other information required by law. The LOLF (Art. 51) details other information to be annexed to the draft annual budget. This includes the earmarking of taxes benefiting public entities outside “the State”, an analysis of the impact of changes in budget presentation, and the schedule of expected annual payments associated with multi-year authorisations for expenditure commitments. Details of projected State employment, by category or by type of contract, inclusive of justifications for variations, must also be annexed.