FRANCE: Government plans to push a sales tax hike to fund cuts in company tax ahead of the presidential elections. Finance Minister Francois Baroin says the cost of French labour is a major issue in the crisis affecting France

Record ID: 739653

  • Title: FRANCE: Government plans to push a sales tax hike to fund cuts in company tax ahead of the presidential elections. Finance Minister Francois Baroin says the cost of French labour is a major issue in the crisis affecting France
  • Date: 5th January 2012
  • Summary: PARIS, FRANCE (JANUARY 4, 2012) (REUTERS) PARIS SKYLINE WITH EIFFEL TOWER
  • Embargoed: 20th January 2012 12:00
  • Keywords:
  • Location: France, France
  • Country: France
  • Topics: Economy,Politics
  • Reuters ID: LVAAZ79U9VN5OMQ13LFRPAOH1DCR
  • Story Text: France plans to raise sales tax again before the April presidential poll to fund a cut in companies' social welfare contributions, French Finance Minister Francois Baroin said on Wednesday (January 4), in a move aimed at making French companies more competitive, a key theme of Nicolas Sarkozy's election strategy.
    President Sarkozy, who is trailing in opinion polls ahead of the election and is under fire from political rivals for failing to halt a rise in unemployment and debt, flagged the move in a New Year's Eve address, saying the cost of France's generous social welfare system could no longer be borne mainly by labour costs.
    "This crisis is so strong that we cannot wait for the presidential elections," Baroin said on French radio on Wednesday. "So yes, there will be actions taken, yes there will be a financial proposal which will be examined in parliament during February, to discuss a proposition which is aimed at boosting our growth. The question isn't about having another plan for budget tightening or not, it is no longer about making savings, it is about sustaining growth, and there aren't many ways of doing this. There is a French weakness, and that is the cost of labour, so we have to find the best project to solve this which is both politically and socially acceptable."
    Government ministers were spinning the planned tax increase - which would come on top of a rise in lower value-added tax rates this week - as a "social VAT" increase that would enable companies to cut their social welfare contributions, hoping it will go down well with French voters.
    Baroin did not say how much VAT would go up. The current standard rate of VAT is 19.6 percent.
    "No decision has been taken, the president set one objective, he asked the ministers affected to have a think before the presidential elections, at the perspectives for the social summit, which is a very important meeting, because we can't talk with the trade unions if we are not agreed on our diagnostic of the crisis. We are in an unprecedented crisis with economic and budgetary consequences on a national and european level, and we have to deal with all the consequences: on the cost of labour, on the taxes and costs which hike up the price, and the objective isn't 'the social VAT.' This isn't a political project, and this is a bad term for it."
    Household spending is typically a major engine of French economic growth and another increase in VAT could deprive the euro zone's second-biggest economy of momentum when it is already teetering on the brink of recession.
    On Jan. 1 France raised VAT rates for a range of essential products and labour-intensive services, to 7 percent from 5.5 percent as part of an austerity drive launched in November.
    VAT, which under European Union rules can vary in its standard rate between 15 and 25 percent, is already by far the biggest source of revenue for the French state.
    With the trade deficit expected to have hit a record in 2011 and the manufacturing sector haemorrhaging jobs, France's decline as a major economy is becoming a key theme in the election, in which Sarkozy is expected to seek a second term.
    With rating agencies poised to strip France of its prized AAA credit rating, Sarkozy has switched his election strategy on the economy from trying to convince voters only he can save them from a debt crisis to restoring France's international competitiveness.
    By casting the VAT increase as a way of making imports help foot the bill of France's welfare system, the government is capitalising on a widely held perception that low-cost products from countries with loose labour and environment laws are stealing market share from French manufacturers while escaping the high-cost of welfare contributions that French companies must bear.
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