France eases labor costs via tax credits, VAT hike

Tue Nov 6, 2012 3:34pm EST
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By Catherine Bremer and Emmanuel Jarry

PARIS (Reuters) - France is to grant 20 billion euros in annual tax credits to companies as a way of lowering labor costs, in a tougher-than-expected response to calls from business leaders to reverse decades of industrial decline.

Responding to a call by industrialist Louis Gallois to slash labor charges that put firms at a competitive disadvantage, Prime Minister Jean-Marc Ayrault said tax rebates would be set in proportion to payrolls and funded by higher sales tax rates and spending cuts.

The measures fall short of the 30 billion euro ($38.40 billion) cut to payroll taxes that Gallois urged in a government-commissioned report, but business leaders said they package went in the right direction, even if they would have preferred direct tax cuts.

Economists said the Socialist president, Francois Hollande, was sending the right message to outsiders concerned that France's record-low bond yields might understate its economic fragility compared to Germany.

"France is not condemned to the spiral of decline. But we need a jolt at a national level to regain control of our destiny," Ayrault said.

"France must win back its role as a great industrial power."

The government will offer 10 billion euros in rebates next year, and increase that amount by 5 billion in 2014 and 2015 to a permanent annual level of 20 billion euros, equivalent to a 6 percent cut in labor costs.

To finance that, the main VAT rate will be raised to 20 percent in 2014 from 19.6 percent today, and a reduced rate that applies to restaurant bills and property repairs will rise to 10 percent from 7 percent, raising a total of 6 billion euros.   Continued...

French Prime Minister Jean-Marc Ayrault speaks during a news conference to outline the Socialist government's plans for restoring industrial competitiveness in response to Gallois' commissioned report at the Hotel Matignon offices in Paris November 6, 2012. REUTERS/Philippe Wojazer