The Socialist government of President Francois Hollande heeded
calls to make French industry more competitive internationally.
Heeding calls to make French industry more competitive
internationally by reducing labor costs, the Socialist government of
President Francois Hollande said Tuesday that it would cut payroll
taxes for businesses.
To make up for the revenue shortfall, the government plans to
raise the main sales tax, the value-added tax, to 20 percent from
19.6 percent, while also making budget cuts
But the government stopped well short of adopting the broader
range of changes that an expert panel had recommended to the
Hollande government a day earlier in a report that called for a
"competitiveness shock" to the French economy.
And yet, the government's plan to cut payroll taxes by a total of
EUR 20 billion, or $25.6 billion, over three years is "a cultural
shift for the French Socialists," said Gilles Moec, an economist at
Deutsche Bank in London. "They've always looked with suspicion on
the idea that there was a labor-cost problem in France."
Prime Minister Jean-Marc Ayrault, after a meeting of officials to
discuss the economy, issued a statement Tuesday saying the
government had to act because "France has known 10 years of
industrial stagnation." If the trend were allowed to continue, he
added, the country's decline "would be a certainty."
The centerpiece of the plan announced by Mr. Ayrault is a payroll
tax cut that will lower the cost of labor for French companies. In
theory, at least, that would encourage new investment and
reinvigorate exports. The first EUR 10 billion of the tax break will
be applied to businesses' 2013 taxes when they file in 2014, and it
will be apportioned over three years.
The second EUR 10 billion of tax breaks will be applied in
installments of EUR 5 billion each over the following two years.
The size of the payroll tax reduction is in line with the
recommendation of a government-commissioned report prepared by a
panel led by Louis Gallois, a former chief executive of European
Aeronautic Defense & Space. The report offered an array of proposals
meant to revive the stalled French economy.
But the government chose to spread the reduction over three
years, rather than the one or two years Mr. Gallois had recommended
for maximizing its impact. And it rejected Mr. Gallois's proposal
that the share of payroll taxes paid by employees be reduced by EUR
10 billion.
Paying for the measures will require the government to break a
vow by Mr. Ayrault made in September that there would be no increase
in sales taxes under Mr. Hollande's five-year term.
That increase could prove highly unpopular on the left, as sales
taxes are among the most "regressive" levies a state can impose,
with the burden falling disproportionately on the poor, who spend a
higher portion of their income than the rich do.
The value-added tax will rise in January 2014 to 20 percent from
the current 19.6 percent, but the minimum V.A.T., on basic needs
like food, will fall to 5 percent from 5.5 percent.
The "intermediate tax," which covers things like restaurant meals
and home renovations, will rise to 10 percent from 7 percent. All
told, those taxes are to raise EUR 10 billion.
The government's economic package announced Tuesday includes an
additional EUR 10 billion of unspecified spending cuts atop the EUR
30 billion in cuts Mr. Hollande had previously announced.
Mr. Hollande won the French election in June, and the confidence
of many investors, with a campaign promise to bring France's 2013
budget deficit down to the E.U.-mandated standard of 3 percent from
about 4.5 percent this year. But many economists and some of his
allies on the left have argued that cutting spending and raising
taxes will risk weakening the economy further at a time when the
euro zone is in recession and the global economy faltering.
The focus on cutting labor costs "is an economic misdiagnosis,
it's a social error," Jean-Claude Mailly, secretary general of Force
Ouvriere, one of France's more militant unions, told Europe 1 radio
on Tuesday. It will lead to "social dumping," he said, because the
Germans will feel obligated to cut their own labor costs. "It will
never end," he added.
"I prefer the other measures proposed in the Gallois report," he
added, "on innovation, research -- things that don't have an
immediate payoff, but do over 30 years."
The International Monetary Fund forecast Monday that the French
economy would expand just 0.4 percent in 2013, after 0.1 percent
this year. Mr. Moec, the Deutsche Bank economist, said the
government's action would probably have little immediate economic
effect.
"I don't want to diminish the symbolic significance of what
they've announced today," Mr. Moec said, "but the impact will
probably be less than what the government would like to
communicate." For one thing, he noted, businesses are already facing
a tax increase next year, "and this will partially just offset
that."
The government has been struggling to answer critics in the
opposition and in business who have been calling for decisive action
to right the economy. Mr. Hollande's latest move is much more
business-friendly than those announced in September, when he
alienated many of the country's elite by announcing that he would
raise the tax rate on all income exceeding $1 million a year to 75
percent from the current 41 percent.
The government said Tuesday that it was also creating a EUR 500
million fund to aid small and midsize businesses that are facing
financial difficulties. And it said it would seek to implement
unspecified new "green taxes" worth at least EUR 3 billion by 2016.
Investors took the measures announced Tuesday in stride. The
Paris benchmark CAC-40 stock index gained 0.6 percent in afternoon
trading, in line with other European markets.
