France’s Socialist government announced the first real-terms increase in the minimum wage for six years on Tuesday, but limited the rise to 0.6 percentage points above inflation as it sought to balance election promises with fears of damaging employment.
It also confirmed it would introduce a 3 per cent tax on company dividends, increase wealth and inheritance taxes and abolish a tax “shield” – or ceiling – for the wealthy in its effort to meet its targets of cutting the budget deficit to 4.5 per cent of gross domestic product this year and 3 per cent in 2013.
But the government also signalled a freeze over the next three years in nominal terms in a swath of public spending, saying the budget deficit effort would be balanced between tax increases and spending cuts.
Business leaders, the conservative opposition and even German government leaders have criticised early moves on the economy by President François Hollande as being contrary to reforms required to restore France’s badly diminished competitiveness and flagging growth.
But Mr Hollande has been scrupulous in meeting key election promises such as boosting the minimum wage and restoring the right for some workers to retire at the age of 60 – while pledging to hit France’s obligations on its public finances.
Michel Sapin, labour minister, said the minimum wage would rise by 2 per cent to €9.40 an hour from July 1, of which 1.4 per cent was accounted for by inflation. It is the first time the base wage, which affects one in six workers, has been raised above inflation since a 0.3 per cent boost in 2006, before former president Nicolas Sarkozy in effect froze it in real terms.
Mr Sapin said there would be no further increase in January, the usual date for an annual revision.
Laurence Parisot, head of Medef, the employers’ federation, who strongly attacked the government’s tax and spending plans last week, expressed relief that the increase had not been greater. Trade unions had demanded a 5 per cent boost.
“It shows [the government] has understood the reality of the economy today and the top priority which is jobs, jobs and jobs,” Ms Parisot said.
But the CGPME, which represents small and medium-sized businesses, said it was a “political decision that will have negative economic consequences”, adding to France’s already high labour costs and threatening investment and employment.
“It is feared that this measure will translate into the destruction of tens of thousands of jobs among the least qualified,” it warned.
The threat of growing joblessness was underlined by figures showing unemployment would rise to 9.9 per cent in France proper by the end of the year from 9.6 per cent in the first quarter, with the figure hitting 10.3 per cent including the country’s overseas territories, up from 10 per cent in the first quarter.
Insee, the state statistics institute, said the economy was set to avoid recession this year. But it will record no growth in the first half before a weak recovery in the second half leads to 0.4 per cent growth for the year as a whole – well below levels needed to staunch the rise in unemployment. The forecast was a shade below government and IMF projections of 0.5 per cent growth this year.
Meanwhile Jérôme Cahuzac, budget minister, said the new government would save €1bn over the rest of this year by freezing government departmental spending as part of extra economies of between €7bn and €10bn required to hit this year’s deficit target.
In the first clear indication of where the government will seek spending cuts as it goes on to meet the 3 per cent deficit target next year – and eliminate the deficit in 2017 – prime minister Jean-Marc Ayrault told a meeting of ministers on Monday that a nominal freeze would be applied over the next three years to central and regional government spending.
The exceptions would be in education, justice and security, and debt interest and pension commitments.
A supplementary budget for 2012 is due next week. Mr Cahuzac said it would include the dividend tax, to be levied on companies paying out to shareholders, raising €800m-€1bn a year. He said it was “acceptable” given that the country’s top 40 companies had paid out €45bn in dividends last year.
He said a promised marginal tax rate of 75 per cent on incomes above €1m a year would not be introduced until the beginning of next year 2013.
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