FRANCE

France is a unitary republic with a semi-presidential regime determined by the Constitution of the 5th Republic adopted in 1958. The executive power is exercised by the president, who is elected by direct universal suffrage for a five-year term, and by the government which is headed by the prime minister, who is appointed by the president and responsible to the parliament. The parliament is bi-cameral. The lower house, the National Assembly (Assemblée nationale), is composed of 577 members elected by direct universal suffrage for a five-year term while the upper house is the Senate (Sénat). Senators are elected for a six-year term by indirect suffrage by “grands électeurs”, an electoral college of about 145 000 local elected officials who represent territorial units and citizens living abroad. Half of the Senate is renewed every three years.

Decentralisation is enshrined in the first article of the Constitution, which states that “France shall be organised on a decentralised basis”, as well as in article 72, which recognises the principles of subsidiarity, autonomy and the right of experimentation as set by the law. The Constitution establishes three levels of subnational governments (communes, departments and regions), in addition to special-status communities and overseas territorial communities. The main legal sources governing subnational governments are found in the General Code of Subnational Governments (Code général des collectivités territoriales) promulgated in 1996 and regularly amended. All levels and types of subnational governments have their own deliberative assemblies (municipal, departmental and regional councils), elected independently by the population by direct universal suffrage for a six-year term. The president of the regional council and the president of the departmental council are elected by the members of their respective councils to exercise the executive power. In municipalities, the mayor (maire) heads the executive body and is elected by the members of the municipal council.

The decentralisation process started in 1982 with the adoption of decentralisation laws establishing the principle of “free administration” and organising the transfer of responsibilities and resources, in particular to the departments and the regions, with a status of self-governing bodies since 1986. After the “first Act” of decentralisation, a “second Act” was launched in 2003 to transfer additional responsibilities and financial autonomy to departments and regions. The “third Act” of decentralisation took place between 2013 and 2015, which included the law on metropolises (2014), regional mergers (2014) and the law NOTRe (2015) on the New Territorial Organization of the Republic. It also modified the allocation of responsibilities across levels of subnational governments and reinforced the competences of regions.

Decentralisation process has been recently fostered with the reform 3DS “Differentiation, Decentralisation, Deconcentration and Simplification”, adopted in February 2022. The reform aims to reinforce decentralisation, with more powers granted to both subnational governments and deconcentrated state administration (préfets), and to simplify public actions between the levels of governance. The law is structured around four axes: (i) Differentiation: subnational governments are able to modify legislations in their domain of competences to adapt them to the local context. Municipalities can also transfer competences to their inter-municipal groupings; (ii) Decentralisation: subnational governments’ responsibilities on transport, housing, welfare and environmental transition are reinforced (see below); (iii) Deconcentration: the role of prefects is increased (see below) and the link between the central government and subnational governments is strengthened through contractualisation; and (iv) Simplification: the sharing of data is promoted between the different levels of government.

TERRITORIAL ORGANISATION
MUNICIPAL LEVEL	INTERMEDIATE LEVEL	REGIONAL LEVEL	TOTAL NUMBER OF SNGs (2021)
34 955 municipalities (communes)	101 departments (départements)	18 regions (régions)
Average municipal size: 1 928 inhabitants
34 955	101	18	35 074

OVERALL DESCRIPTION: The three-tiered subnational system of France (including Corsica and outermost regions) comprises 18 regions at the upper level, 101 departments at the intermediate level and 34 955 municipalities at the lower level on 1 January 2022 (of which 34 836 municipalities in metropolitan France).

REGIONAL LEVEL: Regions were established in France in 1972 as “public establishments”, transformed into self-governing entities in 1982 with the first direct elections held in 1986, and again mentioned in the Constitution in 2003. In 2015, the regional boundaries were substantially modified by the Law 2015-29 on the Delimitation of Regions and Regional and Departmental Elections. It introduced forced amalgamations for regions in mainland France, whose number was reduced from 22 to 13. Despite the reform (the average regional size increased from 2.9 million inhabitants in 2015 to 5.2 million estimated in 2021 in metropolitan France), French regions are still quite heterogeneous in terms of area, demography and socioeconomic development: 30% of the French population lives in one of the two most populated regions (Ile-de-France and Auvergne-Rhône-Alpes) which represent only 13% of the territory. In 2018, France had the tenth highest regional disparities in GDP per capita among 30 OECD countries with comparable data.

France also has five outermost regions and departments (Départements ou Régions français d’Outre-Mer, DROM) located in Latin America (Guyane), Lesser Antilles (Martinique, Guadeloupe) and Indian Ocean (La Réunion and Mayotte). These territories are an integral part of the European Union, but they have a special status according to Article 349 of the Treaty on the Functioning of the European Union (TFEU) and Article 73 of the French Constitution, due to their characteristics (remoteness, islands, small size, etc.). As a result, they have specific measures that apply to them, which provide them more autonomy. Corsica also has special status including greater autonomy, especially in areas related to protection of cultural goods.

Finally, there are also five overseas territories (Collectivités d’Outre-Mer, COM), whose status was revised in the Constitutional revision of 2003. COM are located in the Pacific (French Polynesia, Saint-Pierre-et-Miquelon, Saint-Martin and Saint-Barthélémy) and the Indian Ocean (Wallis-et-Futuna), and have a special status given their spatial specificities (Article 74 of the Constitution). COM are not part of the European Union, except Saint-Martin. However, they benefit from a “regime of association”, meaning that they are eligible for the European development funds while not being subject to EU law. COM have more autonomy than DROM and are less connected with metropolitan France. Nouvelle-Calédonie has a special status.

INTERMEDIATE LEVEL: Created by the French revolution in 1791, the departments have remained unchanged since then (except those added to the initial list of 83 departments to reach 101 today). While their geographical size is homogeneous (their boundaries have been defined according to the same general principle), their demographic size varies substantially from one department to another. The least populated department (Lozère) had 34 times fewer inhabitants than the most populated (Nord) in 2021.

MUNICIPAL LEVEL: France has the second-highest number of municipalities in the OECD after the United States. French communes account for 26% of all municipalities in the OECD and 40% in the EU. Their average size is well below the OECD average (around 10 250 inhabitants). Additionally, 94% of French municipalities have fewer than 5 000 inhabitants, and even 85% less than 2 000 inhabitants. However, the status of “new municipality” (commune nouvelle), reactivated by a law in 2015 in order to promote municipal mergers, is gaining momentum. This arrangement allows the municipalities abolished in a merger process to remain and retain some specificities, such as a delegate mayor, a town hall (annex), an advisory council.

HORIZONTAL COOPERATION: The preferred response to municipal fragmentation has been inter-municipal cooperation (IMC). IMC has a long tradition in France as the first municipal syndicates were created in 1890 and they developed over the next decades, giving rise to urban districts and urban communities in 1966. The main push was, however, law no. 92-125 of February 1992, which promoted IMC as integrated territorial projects with own-source taxation powers (EPCI à fiscalité propre), which can take various forms such as “communities of communes,” “communities of cities” or “agglomeration communities.” In 2014, the law NOTRe simplified this complex system by setting up a minimum threshold for IMCs (15 000 inhabitants instead of 5 000), resulting in a decrease in the number of IMC structures with own-source tax from 2 456 in 2013 to 1 255 in 2022. Today, all French municipalities are part of an EPCI à fiscalité propre, except four that benefit from a derogative legislation (the island of Yeu, the island of Bréhat, the island of Sein and the island of Ouessant). These structures range in size from 22 metropolises (greater than 400 000 inhabitants), 14 “urban communities” (communautés urbaines), 227 “agglomeration communities” (communautés d’agglomération) and 992 “communities of municipalities” (communautés de communes), mainly located in rural areas for the latter. In 2021, around one third of the national population lived in an urban community, one third in an agglomeration community and one third in a community of municipalities. With their own taxing powers, these structures form a quasi-fourth subnational level of government.

To this administrative structure was added, since eight years, the status of “Métropole”, created by the 2014 law for the Modernisation of Territorial Public Action and Metropolises (MAPTAM) for the largest urban areas, with differentiated legal status according to the cities. There are 22. Among them, Paris, Lyon and Aix-Marseille-Provence (AMP), which already had a specific status since the 1982 PLM law, received different ad hoc governance structures - i.e. different structure, responsibilities and resources. Additionally, in 2016, the “Métropole de Lyon” substituted the urban community of Lyon within the Rhône department. It is the only Metropolis that has the competencies of a department, such as social spending and secondary schools. The reform of the status of Paris also merged the municipality and the department into a new community with special status, called “Ville de Paris”, including 132 municipalities. The law 3DS, adopted in February 2022, reforms the AMP (92 municipalities members) to simplify its governance. It notably grants “communities of communes” with competencies of proximity (compétences de proximité) and establish a mechanism to rebalance the financial relations between the Metropolis and its municipalities.

STATE TERRITORIAL ADMINISTRATION: France has maintained, at both regional and departmental levels, a strong administration led by prefects, as well as local directorates of various ministries placed under their authority, called “deconcentrated services”. According to the Constitution, the prefect is the direct representative of the prime minister and every minister at the departmental level. The prefect plans and implements government policies. The prefect is responsible for national interests, administrative supervision, compliance with laws and public order. Prefects are also the local representatives of the National Agency for the Cohesion of Territories (ANCT).

The creation of ANCT, by law, reflected the central government’s action to support subnational governments in order to promote their projects while taking into account current challenges (e.g. cohesion, digital, ecological and demographic transition). The ANCT facilitates subnational government access to resources needed to carry out projects, notably by providing them with engineering resources (e.g. studies, forward-looking workshops, training, co-financing of project managers). It also implements programmes to strengthen territorial cohesion by directing public investment towards small and medium-sized towns, disadvantaged areas, the development of circular economies, industrial renewal (particularly in rural areas) and the provision of local public services (services publics de proximité). The ANCT is also strongly involved in the digitalisation of territories through the establishment of dedicated infrastructure and supporting different uses (from the fight against illiteracy to the development of new technologies).

As a coordinating authority for European funds, the ANCT has a "European Cohesion Centre", whose the main role is to monitor and lead authorities responsible of managing the funds. In addition, two other bodies monitor the use of European funds: (i) the state-region "Interfund" Committee, co-chaired by the Prime Minister and the President of Régions de France, which ensures the coordination of actions carried out by the various actors involved in the management and control of funds; (ii) the national partnership consultation body (INCOPAP), which reports to the national partnership on the implementation of the funds. This body is co-chaired by the ANCT and Régions de France, bringing together around one hundred representatives of the central government (including the managing and coordinating authorities of the funds), local authorities, social partners and civil society actors. The INCOPAP meets as often as necessary, in particular for the purpose of drawing up strategic and progress reports required by the European Commission. It monitors the implementation of the funds in France and addresses questions and requests from the national partnership regarding the implementation of the funds.

According to Article 72 of the Constitution, subnational governments may “take decisions in all matters arising under powers that can best be exercised at their level”. This article is interpreted as giving a “general clause of competence” to all levels of subnational governments. After different reforms (1982-83 decentralisation laws, 2003-04 laws and 2010 territorial reforms), the Law NOTRe of 2015 finally clarified the distribution of competences across levels of government. The general clause of competence was removed for regions and departments, while it remains for municipalities. Some asymmetry has been introduced by recent reforms, applying mainly to metropolises and special status metropolises such as Paris, Lyon and AMP, in addition to pre-existing asymmetry between overseas regions, Corsica and other regions. The “Ville de Paris” gained additional powers in the fields of traffic management, public parking, and additional police powers, among others, while the Lyon Metropolis gained competencies in social affairs.

Regions and departments have “specialised responsibilities”. In particular, regions are responsible for regional economic development, territorial planning, environmental protection, non-urban transportation, high schools and vocational training. They have also been given competences for the management of European funds. They manage the European Funds for Regional Development (FEDER), a share of the Social European Funds Plus (FSE+) and delegates of credit for the European Funds for Maritime Affairs, Fishery and Aquaculture (FEAMPA). However, they lost their competences on apprenticeship. Departments are “chef de file” regarding social affairs, focusing on social solidarity, territorial cohesion, secondary schools and rural municipalities. With the law 3DS of February 2022, departments will have the possibility to transfer the financing of social benefits (RSA) to the central government, on a voluntary basis. The department of Seine-Saint-Denis already contracted a recentralisation of the RSA with the central government, as it has also been done by three overseas territories (Mayotte, Guyana and Reunion). The Law NOTRe also entitles any subnational governments to manage national roads voluntarily, with a priority given to departments, in cooperation with the region.

Municipalities are today the only local level that benefits from the general clause of competence, giving them explicit freedom to act in the best interest of the local population and allowing them to respond to the day-to-day needs of local citizens. As a result, they have diversified responsibilities, covering mainly urban planning, housing, environment and elementary schools. The law 3DS provides municipalities with additional competences on windmills and “communities of communes” on water. Municipalities also carry out some responsibilities on behalf of the state (civil registration, electoral list). Several competences are shared between the different subnational levels but also with the central government (education, social affairs, roads, etc.). A reform is currently on going based on the recommendations of the “Public Action Committee 2022” (CAP 22) to streamline the territorial administration, reduce overlapping and better monitor the effectiveness of public actions at the national and subnational levels.

Besides IMC bodies, which provide joint services on behalf of member municipalities, municipalities can also use local public companies that have separate legal status. At the end of June 2021, they were 1 355 in France, which represented 4% of the total number of local public companies in Europe. These companies cover various areas, such as urban planning, housing, tourism, transports, energy, waste management and water.

Main responsibility sectors and sub-sectors
SECTORS AND SUB-SECTORS	Regional level	Intermediate level	Municipal level
1. General public services (administration)	Internal administration	Internal administration; Support to rural municipalities	Municipal administration; Administrative services delegated by the central government (civil register, electoral issues)
2. Public order and safety		Departmental fire and emergency services	Municipal police
3. Economic affairs / transports	Regional spatial planning; Regional transport plans; Regional train lines; School and inter-urban transportation; Civil airports; Non-autonomous harbours economic development (aid schemes to SMEs, innovation, internationalisation), R&D; Management of EU funds	Rural development; Secondary roads; Sea and fishing ports	Municipal roads; Local public transport; Local economic development
4. Environment protection	Environmental protection planning; Regional parks and preservation areas; Energy saving; Water protection	Water protection	Waste management; Sanitation; Windmills; Water (communities of communes)
5. Housing and community amenities	Housing subsidies	Housing subsidies and management	Land use planning and urban planning; Building permits; Housing subsidies and management; Drinking water
6. Health			Public health (vaccination)
7. Culture & Recreation	Cultural heritage and monuments; Museums; Artistic training	Culture; Libraries; Museums; Archives; Historical buildings; Tourism	Culture; Sports; Archives; Museums; Libraries; Tourism
8. Education	High schools (building and technical staff); Vocational training; Job training programmes; Support to universities and R&D	Secondary schools (building and technical staff)	Nursery schools; Pre-schools; Elementary schools (building and technical staff); Extra-curricular activities
9. Social Welfare		Social welfare for families, children, disabled people, elderly people, social insertion	Social welfare (jointly with departments); Support to families and youth

Scope of fiscal data: regions, departments, communes, primary and secondary schools, and local government agencies.

SNA 2008

Availability of fiscal data: High

Quality/reliability of fiscal data: High

GENERAL INTRODUCTION: The financial autonomy of subnational governments is guaranteed by the Constitution. Article 72-2 mentions that subnational governments may receive revenues from various kinds of taxes and may have the autonomy to set the base and rate within certain limits set by law. It also states that any transfer of competences from the state must be matched by a corresponding transfer of financial resources and give equalisation constitutional status. The organic law of 29 July 2004 on financial autonomy further defines the own resources of subnational governments and sets a minimum threshold for each category of subnational government (ratio of fiscal autonomy) – in principle, they cannot be inferior to their 2003 value.

Subnational government expenditure by economic classification
	Dollars PPP / inhabitant	% GDP	% general government	% subnational government
Total expenditure	5 478	11.7%	19.0%	100.0%
Inc. current expenditure	4 222	9.0%	16.0%	77.1%
Compensation of employees	1 710	3.7%	27.7%	31.2%
Intermediate consumption	1 064	2.3%	42.6%	19.4%
Social expenditure	551	1.2%	4.1%	10.1%
Subsidies and current transfers	810	1.7%	23.4%	14.8%
Financial charges	24	0.1%	4.0%	0.4%
Others	63	0.1%	26.9%	1.2%
Incl. capital expenditure	1 256	2.7%	53.8%	22.9%
Capital transfers	218	0.5%	43.9%	4.0%
Direct investment (or GFCF)	1 039	2.2%	56.5%	19.0%

EXPENDITURE: Driven by the decentralisation process that occurred in the past decades, subnational government expenditure have significantly increased in France, from 8% of GDP in 1980 to 11.7% in 2020. However, the share of subnational government expenditure in GDP and public expenditure in France remains below the OECD average in 2020 (17.1% and 36.6% respectively) and EU27 average (18.3% of GDP and 34.3% of public expenditure). The “municipal block” (municipalities and IMC structures) makes up the bulk of subnational government spending (54.9% in 2020), followed by the departments (32.6%) and the regions (12.5%). Within the “municipal block”, IMC entities represented 15.2% of spending. In 2020, the weight of staff expenditure in subnational government spending was in line with the EU27 average (32.1%) but the share in public staff spending is well below the EU27 average (53.6%).

To further involve subnational governments in national fiscal consolidation policy, the public finance programming act 2018-2022 limited their annual increase of current expenditure to 1.2%, in order to achieve EUR 13 billion in savings during the five-year period. This contractualisation between the state and the largest subnational governments (i.e. 321 regions, departments, large cities and IMC entities) was initially set for 2018-2020 (Cahors contracts), but it was suspended temporarily in 2020 in light of the COVID-19 pandemic.

France also stands out for having green budgeting exercises at all three levels of subnational government: regional, departmental, and municipal. At the regional level, the regions of Bretagne, Grand-Est and Occitanie have launched a green budgeting practice based on the I4CE (Institute for Climate Economics) methodology, which is a methodology that aims to help governments assess their green spending and thus re-orientate them towards climate transition. The departments of Alpes-Maritimes and Mayenne have also carried out a green budgeting exercise. At the municipal level, several municipalities have also adapted the climate budgetary assessment methodology to their specific contexts (e.g. the city of Lille and the Metropolis of Lille, the City of Paris, the Eurometropole of Strasbourg and the municipality of Clermont-Ferrand).

DIRECT INVESTMENT: Investment is a key function of French subnational governments. Subnational government investment accounted for 56.5% of public investment and 2.2% of GDP in 2020, above the OECD average (respectively 54.6% and 1.9%) and EU27 average (54.4% and 1.8%). The share of investment in subnational government expenditure is also significant. 57.4% of subnational government investment is carried out by the “municipal block”, of which 39.2% by municipalities in 2020, while departments and regions accounted for 19.2% and 23.4% respectively. The priority areas for investment were economic affairs and transport (31.4% of subnational government investment in 2019), followed by housing and community amenities, education, general public services and recreation, culture and religion.

Subnational government investment may be implemented through public procurement, concession contracts and public-private partnerships. The bulk of subnational government investment is done within the framework of contractual arrangements involving all levels of government, which are called state-region planning contracts covering seven-year cycles (Contrat de Plan État-région, CPER). They constitute a tool between the central government and regions, which allows funds to converge in structuring projects for regional development and territorial equality and to reinforce the coherence of public policies at the level of each region. There are also interregional state-region plan contracts (CPIER), which aim to finance projects that have a leverage effect on local investment and to ensure the implementation of public policies beyond regional borders. The projects within these contracts target six areas defined as “investments in the future”, which are: multimodal mobility, higher education, research and innovation, ecological and energy transition, digital technology, innovation, sectors of the future and territories.

Subnational government expenditure by functional classification
	Dollars PPP / inhabitant	% GDP	% general government	% subnational government
Total expenditure by economic function	5 519	11.1%	-	100.0%
1. General public services	998	2.0%	26.6%	18.1%
2. Defence	0	0.0%	0.0%	0.0%
3. Security and public order	167	0.3%	20.4%	3.0%
4. Economic affairs/transports	1 088	2.2%	34.6%	19.7%
5. Environmental protection	420	0.9%	83.8%	7.6%
6. Housing and community amenities	451	0.9%	83.6%	8.2%
7. Health	40	0.1%	1.0%	0.7%
8. Recreation, culture and religion	521	1.1%	72.9%	9.4%
9. Education	787	1.6%	29.7%	14.3%
10. Social protection	1 047	2.1%	8.5%	19.0%

Economic affairs and transports has recently become the largest spending item (19.7% of subnational government expenditure), slightly ahead social protection and general public services. This is notably due to the transfer of competences on transport to regions. Education ranks fourth, while it is the leading spending item of subnational governments in the OECD on average (14.3%). Health and defence are very marginal as they remain functions of the central government. Subnational governments account for the bulk of total public expenditure in environmental protection (83.8%), housing and communities amenities (83.6%) and recreation culture and religion (72.9%). Most of social spending is done by the departments. Half of their spending goes to social protection as they are in charge of social assistance and RSA. Regions, for their part, are the primary contributors to education expenditure (vocational training and high school education) and to transport. Finally, municipal spending focuses on urban planning, urban services, elementary schools (buildings, maintenance and running), sport and cultural infrastructures and youth policy.

Subnational government revenue by category
	Dollars PPP / inhabitant	% GDP	% general government	% subnational government
Total revenue	5 394	11.6%	21.8%	100.0%
Tax revenue	2 725	5.8%	18.9%	50.5%
Grants and subsidies	1 804	3.9%	-	33.4%
Tariffs and fees	795	1.7%	-	14.7%
Income from assets	53	0.1%	-	1.0%
Other revenues	17	0.0%	-	0.3%

OVERALL DESCRIPTION: France stands out for the importance of tax revenues in total subnational government revenues compared to the OECD and EU27 averages (50.5% vs. 42.4% and 40.1% respectively). By contrast, the share of grants and subsidies is lower: 33.4% vs 41.2% in the OECD and 46.6% in the EU27. The share of each source of revenue is quite balanced by level of subnational government. In 2020, tax revenues accounted for 70.8% of departmental revenue, 68.6% of regional revenue and 56.8% of municipal revenue, while grants and subsidies amounted to 31% of municipal revenue, 27.9% of regional revenue and 25.3% of departmental revenue. There has been several fiscal reforms in recent years regarding the decentralisation process. In 2010, an important tax reform took place as well as a reform of equalisation mechanisms. In addition, a significant tax reform took place in 2021 to compensate municipalities for the revenue loss associated with the gradual removal of the residence tax (taxe d’habitation) between 2018 and 2023. Another reform was also introduced in 2021 to reduce the impact of the COVID-19 pandemic on regional governments’ finance (see below).

TAX REVENUE: Although accounting for a large part of subnational government revenue, subnational government taxes represented 5.8% of GDP and 18.9% of public tax revenue in 2020, which is below the OECD average (7.2% of GDP and 32.3% of public tax revenues in 2020), as well as the EU27 average (7.2% of GDP and 27.1% of public tax revenues). One feature of the French subnational tax system is the importance of own-source tax revenue compared to shared taxes. The successive decentralisation laws, the 2010 local finance reform (i.e. abolition of the local business tax) and the 2021 tax reform (i.e. abolition of the residence tax) have however increased the level of shared taxes, leading to less tax autonomy. The 2010 reform led to a process of tax “specialisation” between subnational government tiers. While all subnational governments benefitted from the same four local taxes before the reform, the abolition of the residence tax follows this process by transferring the share of property tax on building from departments to municipalities, in addition to the share they already had. Departments are compensated by a share of VAT.

Among the shared taxes are the internal consumption tax on energy products (TICPE, shared with regions and departments), a share of the special tax on insurance contracts (TSCA) and, to a lesser extent, the tax on network companies (IFER). Since 2018, regions also benefit from a share of VAT to compensate for the removal of the state grant (DGF – see below) and an additional share since 2021 to mitigate the economic consequences of the pandemic on their finances. Departments, EPCI and the City of Paris also receive a share of VAT since 2021 to offset the loss of their property tax (see below).

Since the abolition of the residence tax, the system of own-source taxes is based on three main local taxes: the property tax on building (TFPB), the property tax on land (TFPNB) and a territorial economic contribution (CET). Subnational governments have tax-setting power over these taxes, but the rates have to comply with limits established centrally, and they have no autonomy to set the tax base. Property taxes (both on land and buildings) stood for 55.1% of subnational government tax revenue and 27.8% of their total revenue in 2020, representing a major source for municipalities and departments until 2020. They amounted to 3.2% of GDP, one of the highest levels in the OECD (vs. 1.0% of GDP on OECD average). However, it is expected to decrease due to the abolition of the residence tax (80% of proceeds in 2021 to full abolition in 2023). As a compensation, municipalities will receive a share of the property tax on building from departments and departments a share of VAT (see above). Equalisation mechanisms have also been implemented to neutralise these transfers between municipalities.

All subnational governments receive the CET, which replaces the local business tax and is paid by companies. The CET comprises a real estate tax (CFE) (5.5% of subnational government tax in 2020), received by EPCI, and the corporate value-added tax (CVAE, 12.9%), received by municipalities, EPCI and departments since 2021. CVAE proceeds, which are based on the value-added of local companies one or two years before, have been replaced by a share of VAT for regions in 2021. Other own-source taxes include the tax on property transfer duties (DMTO) (10.6%), which represents a high share of departments’ revenue, a transport contribution, a waste tax, a tourist tax, a tax on electricity, etc.

GRANTS AND SUBSIDIES: Transfers from the central government have three purposes: (i) compensation (in case of transfer of powers or abolition of tax revenue), (ii) equalisation (reduction of income disparities) and (iii) orientation (development of sectoral policies). Current grants accounted for 85.5% of total grants, while capital grants amounted to 14.5% in 2020. The most important grant is by far the general-purpose operating grant (Dotation Globale de Fonctionnement - DGF), which comprises several sub-components. It represented 56.1% of all grants and subsidies in 2020, and accounted for 12.7% of municipalities’ revenue and 17.9% of IMC’s revenue. Regions do not receive DGT proceeds since 2018 and are compensated with a share of VAT.

The annual finance law governs the vertical equalisation mechanism that, applicable to all subnational governments, is set on a yearly basis. Transfers to local governments through the DGF and other transfers have been reduced between 2014 and 2018 in line with fiscal consolidation policies. In return, equalisation grants have been strengthened to support the weaker subnational governments.

There are several other equalisation grants (vertical and horizontal) in France. (i) Vertical equalisation mechanisms include the grant for urban solidarity and the grant for rural solidarity. (ii) Horizontal mechanisms comprise equalisation funds for departments (one based on the property transfer duties and the other one based on CVAE) and the equalisation fund for inter-municipal and municipal resources (FPIC). The replacement of CVAE by a share of VAT for regions since 2021 goes along with a new regional equalisation fund based on VAT. The 2022 financing bill also reforms the financial indicators on which the allocation of equalisation grants and funds is based to better assess the wealth of territories (i.e. fiscal and financial potential, fiscal effort, coefficient of fiscal integration).

The main capital expenditure grant, the VAT compensation fund (FCTVA), is a tool for the central government to support local investment. The FCTVA has been reformed by article 251 of the 2021 financing law to simplify and computerise its allocation.

OTHER REVENUE: Municipalities are entitled to receive fees from commercial services, mainly for local public services. They can set the rate of these fees. At the subnational level, the revenue from fees accounted for a larger percentage than the OECD average in 2020 (13.3%) and the EU27 average (10.3%).

Property income represents a small share of subnational government revenue (1.0%), below the OECD average (2.0%), although they own physical and financial assets, including shares in local public companies.

Subnational government fiscal rules and debt
	Dollars PPP / inh.	% GDP	% general government debt	% SNG debt	% SNG financial debt
Total outstanding debt	5 545	11.9%	8.1%	100.0%	-
Financial debt	4 813	10.3%	7.7%	86.8%	100.0%
Currency and deposits	0	-	-	0.0%	0.0%
Bonds / debt securities	956	-	-	17.2%	19.9%
Loans	3 857	-	-	69.6%	80.1%
Insurance pensions	0	-	-	0.0%	-
Other accounts payable	732	-	-	13.2%	-

FISCAL RULES: Local authorities are subject to the principle of balancing their expenditures and revenues by section (operating and investment), which is specified in Article L.1612-4 of the General Code of Subnational Governments (GCSG). They are also subject to judicial review by the Regional Chambers of Accounts, which are the regional network of the national audit institution, Cour des Comptes.

DEBT: Subnational governments are able to borrow without approval from the central government, but long-term borrowing is restricted to investment (“golden rule”). In the aftermath of the banking crisis, the legal framework for borrowing was strengthened through the 2013 Law on the separation and regulation of banking activities (e.g. foreign-currency borrowing, regulation of floating-rate borrowing, use of swaps) in order to reduce financial risks. The law led to the creation of the Agence France Locale (AFL), i.e. an entity owned by the French subnational governments themselves and dedicated to their funding. It distributes loans to its members by raising funds in the capital markets (pooled financing). At end-2019, 352 French subnational governments were shareholders of the AFL. The AFL granted EUR 978 million of loans in 2019, to around 170 subnational governments. French regions and municipalities can also issue bonds for investment projects. The region Ile-de-France and the City of Paris notably issue green and sustainable bonds through their respective Euro Medium Term Notes (EMTN) programs.

The outstanding debt of subnational governments accounted for 11.9% of GDP and 8.1% of total public debt in 2020, below the OECD average (27.9% and 20.2%, respectively) and the EU27 average (13.9% and 15.4%, respectively). Financial debt (“Maastricht debt”) accounted for 86.8% of total subnational government outstanding debt, the remaining part being composed of other accounts payable (commercial debt, arrears). Within financial debt, bond financing is still limited, although it significantly increased to account for 19.9% of total financial debt in 2020, up from 8.9% in 2016, compared to 80.1% for loans.

TERRITORIAL MANAGEMENT OF THE CRISIS: Subnational governments have limited competences in health, as it is a state responsibility, although they had an important role during the pandemic (e.g. purchase of masks, establishment of vaccination centre). The regional health agencies (ARS), which are deconcentrated administrative institutions of the French central government, are responsible for the implementation of health policy at the subnational level. The government reinforced ARS powers during the COVID-19 pandemic by entitling them to manage the crisis instead of prefects. The law 3DS strengthened the role of subnational government representatives in ARS boards (with three vice-presidents being subnational elected officials instead of two).

During the health emergency (état d’urgence sanitaire), prefects have been entitled to take measures “strictly necessary and proportionate to sanitary risks” within their territories (departments or regions). Mayors were also authorised to take stricter measures if justified by the local situation, given their general police powers.

EMERGENCY MEASURES TO COPE WITH THE CRISIS AT THE DIFFERENT LEVELS OF GOVERNMENT: Subnational governments have taken several support measures during the pandemic, especially regions which have core responsibilities in economic development. Regions financed EUR 500 million of the National Solidarity Fund, in addition to the state, to support SMEs affected by the pandemic. Regions also implemented local funds to sustain local companies, in cooperation with departments and EPCI, such as the EUR 44 million Resistance fund of the region Grand Est. Departments played a relevant role given their social responsibilities. They provided associations with assistance, equipment and extraordinary funds in some cases (e.g. the Solidarity proximity 2020 fund in La Manche). Municipalities ensured the continuity of essential public service provision during the pandemic, in particular for solidarity actions.

To support subnational governments in their response to the pandemic, the central government compensated municipalities that recorded tax revenue below their 2017-2019 average, with a special grant in 2020 and 2021. It also suspended the 1.2% limit on increase of current expenditure in 2020. The central government also established a EUR 950 million grant to support green and health investment at the municipal level, a EUR 650 million fund to support energy transition of buildings at the municipal level and a EUR 300 million fund at the department level. In addition, it partially refunded the purchase of masks for all subnational governments (EUR 215 million in May 2021).

IMPACTS OF THE CRISIS ON SUBNATIONAL GOVERNMENT FINANCE: Subnational revenue decreased by 4.3% between 2019 and 2020. This was mainly driven by the fall in tax revenue and tariffs and fees, not fully compensated by the increase of state transfers in 2020. However, these figures largely vary among subnational governments. At the regional level, the negative impact of the pandemic should be alleviated in 2021-2022 as the CVAE, which is based on the value-added of companies one or two years ago, has been replaced by a share of VAT. At the department level, most of the revenue relies on property transfer duties (DMTO), which are linked to the real-estate market, and showed resilience during the crisis. Municipalities’ revenue was more severely impacted by the drop in tariffs and fees in 2020 (e.g. for extracurricular activities).

Subnational expenditure slightly decreased in 2020, since most of the spending for the purchase of health equipment was compensated by the closing of infrastructure and the cancellation of events during lockdowns. However, this figure also largely varies among subnational governments. Departments were the most exposed to spending increase in 2020 due to their social welfare responsibilities. Regions also increased their expenditure to support local economic actors during the crisis. By contrast, expenditure was more stable for the municipal block, particularly for small municipalities that spent less in transport, housing, culture and sport in 2020.

For the first time in five years, French subnational governments registered a deficit in 2020. Subnational debt increased by 6.9% in 2020, especially for regions and departments. Bond issuance increased by 63.8% between 2019 and 2020.

ECONOMIC AND SOCIAL STIMULUS PLANS: The central government first launched a EUR 470 billion support plan to protect employees and companies (especially very small enterprises and SMEs). This included a EUR 5.8 billion solidarity fund (1.7 million companies benefited from the fund), EUR 120 billion of state-guaranteed loans (600,000 companies were granted a state-guaranteed loan), exemptions from social security contributions for very small enterprises and SMEs that have been administratively closed (representing EUR 3.9 billion), deferrals of social contributions (2 million independent workers benefitted since March 2020, representing EUR 6.9 billion, and over 800 000 employers also benefited, representing EUR 18 billion) and partial activity schemes (8.8 million employees were in partial activity in April and 4.5 million in June, representing a total of EUR 19.5 billion).

The government also launched the EUR 100 billion France Relance plan, which focuses on territorial development. The plan aims to support subnational governments in their post-COVID-19 recovery. EUR 30 billion is allocated to the environment and energy transition, EUR 34 billion to business competitiveness and EUR 36 billion to territorial cohesion to reduce inequalities. France has obtained EUR 40 billion from European funds to finance this plan. A regional steering and monitoring committee has been set up in each region, co-chaired by the regional prefect and the regional director of public finance (DRFiP). A monthly summary of the committee’s work is sent to the secretary general in charge of the recovery plan. The departmental prefects have also formed a departmental recovery plan committee.

Contracts have also been established to allow subnational governments to be involved in the financing of the recovery plan in order to leverage the central government’s action. Planned activities and financing of recovery plans are integrated into regional recovery contracts, called Contracts for the Recovery and Energy Transition (CRTE), which are signed between the central government and regions and cover a six-year period. Contracts are concluded with inter-municipalities or groupings and must include at least one public inter-municipal cooperation establishment (EPCI). CRTEs define the priorities of recovery at the subnational level and support implementation. They are based on the mobilisation of all territorial actors, both public and private. They also allow subnational governments to integrate environmental transition in their priorities. The central government thus offers subnational governments support in defining and implementing territorial projects through a bottom-up approach. In order to achieve the targeted objectives of the contracts, the ANCT and its partners (e.g. Cerema, Ademe) also offer supporting tools, in particular engineering support to allow the most vulnerable territories to take part in the process.

This is complemented by the EUR 34 billion France 2030 investment plan, which includes EUR 30 billion in subsidies and EUR 4 billion in equity capital for businesses. Working with territories, the plan aims to stimulate investment in industrial competitiveness and technology.

In addition, as part of its Ségur Health Plan launched in May-July 2020, the central government has created a EUR 19 billion investment plan for health. EUR 14.5 billion of this plan are managed by the ARS and subnational governments in order to define regional strategies and prioritise projects between 2021 and 2029.