Bloomberg News

Hollande Raises French Sales Tax, Signaling Economic Shift

November 06, 2012

President Francois Hollande will raise France’s main sales tax rates to finance a cut in payroll charges, throwing support behind businesses for the first time in a bid to counter a record trade deficit and revive growth.

By lifting the two highest value-added tax rates in 2014, Hollande is revisiting a policy he campaigned against in his successful bid to unseat predecessor Nicolas Sarkozy earlier this year.

Hollande is setting out his plan in a week where France is coming under pressure from the International Monetary Fund and the European Commission to improve its competitiveness as Europe’s sovereign debt crisis prompts neighboring Spain and Italy to overhaul their economies. The IMF said yesterday that France needs “serious structural reform” and the commission is slated to issue another report tomorrow.

The French government’s plan “moves in the right direction and sends the right message both to public opinion and the international community,” said Michel Martinez, an economist at Societe Generale in Paris. “It’s important that they’re shifting taxation from work to other areas.”

France’s main sales-tax rate will increase in January 2014 to 20 percent from 19.6 percent, while the second band on home renovations and restaurants will rise to 10 percent from 7 percent currently. A third rate that applies to food and energy will be cut to 5 percent from 5.5 percent in an effort to support the spending power of France’s poorest households, French Prime Minister Jean-Marc Ayrault said today.

Spending Cuts

The government will also seek to cut spending by an additional 10 billion euros ($12.8 billion).

In return, companies will receive a tax credit for all salaries between the minimum wage of 1,425.67 euros and 3,564.18 euros a month. While the credit will be in place starting next year, companies will only see the benefit on the tax bill they will pay the following year. In total, the reduction in charges to companies will be 20 billion euros and equate to a 6 percent cut in wage costs, Ayrault said.

“The French economy has been allowed to fall behind those of its European partners,” Ayrault told journalists in Paris. “The priority is to incite investment and give our companies room for maneuver.”

Hollande’s Shift

The comments and the plan amount to a shift in stance for a government that since coming to power in May has placed a levy of 75 percent on personal earnings of more than 1 million euros, increased the minimum wage and raised taxes by about 27 billion euros annually.

Even so, the measures falls short of the “competitiveness shock” called for by former Airbus SAS chief Louis Gallois in a report to Hollande yesterday, economists said. Opposition critics also say the plan is too complex, especially for small companies.

“There’s some genius in the finance ministry who has designed this to make it impossible,” former Sarkozy Environment and Energy Minister Jean-Louis Borloo said today in parliament. “The situation is urgent and companies need clarity. Why don’t we make it simple by just cutting charges?”

Sarkozy’s plan, announced Jan. 30, would have increased the main sales tax rate by 1.6 percentage points to 21.2 percent starting in October to fund a 13 billion-euro cut in payroll charges.

‘Confusing’ Message

“France is sending confusing messages,” said Thomas Costerg, an economist at Standard Chartered in London. “The lower social contributions will be welcomed as important to restore competitiveness but this comes after several corporate taxes have been increased” and most of the measures announced today will be “back-loaded, so companies will still have to pay high social contributions in the near term.”

Hollande’s goal is partly to get his plan through without alienating supporters among unions who helped put him in office. The president’s approval rating among French voters has dropped to 36 percent, according to a TNS Sofres poll taken Oct. 25 and 26. That’s down from 55 percent in May.

“The logic of cutting labor costs is an error of diagnosis and a social mistake,” Jean-Claude Mailly of the Force Ouvriere union said today on Europe 1 radio.

To contact the reporters on this story: Mark Deen in Paris at markdeen@bloomberg.net; Helene Fouquet in Paris at hfouquet1@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net


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