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A reform of the way France finances its welfare programmes, shifting the burden from employment charges to sales tax, is to be put to parliament in February in an attempt to enact the change before Nicolas Sarkozy faces re-election in April.
François Fillon, prime minister, said on Thursday that the proposal would be set out in detail by the centre-right government before the end of this month, after a summit on jobs and growth with employers and trade unions to be held by Mr Sarkozy, the French president, on January 18.
The sudden rush to adopt such a significant reform – strongly opposed on the left and viewed with concern by some on his own side – is widely seen as a big gamble for Mr Sarkozy. But confronted by rising unemployment, stalling growth and weak opinion polls, the president is keen to show that he is taking decisive action to confront the economic crisis.
The tax plan is the most significant of a series of initiatives the president has unleashed in the past week, including a move to accelerate the introduction of a levy on financial transactions and efforts to save jobs in industrial sites threatened with closure.
Mr Sarkozy, who first mooted the reform on New Year’s eve, argues that cutting France’s high labour costs is essential to stimulating job creation, repairing lost competitiveness and protecting industry against low-cost imports, which a higher sales tax would hit. The reform is strongly backed by French industry.
“Our goal is clear,” Mr Fillon said. “Our tax system must favour the creation of productive jobs in our land.”
The core of the proposed change is to cut the charges levied on employers and employees to help fund social security, health services and pensions and to recoup the revenue mainly by raising value added tax – leading to the reform being dubbed “social VAT” in France.
The examples most cited by the government are similar reforms in Denmark and, above all, in Germany. According to Eurostat figures, the hourly cost of labour in France has swung since 2000 from being 8 per cent cheaper than in Germany, to being 10 per cent more expensive.
“The German example is interesting because today Germany has the lowest unemployment rate, despite the crisis, and is one of Europe’s biggest exporters. It shows it took the right decision in lowering labour costs,” Valérie Pécresse, the budget minister, said on Thursday.
But François Hollande, the opposition Socialist party presidential candidate and Mr Sarkozy’s principal rival, has led opposition to the move, arguing that the required increase in VAT will hit the less well-off hardest and have “extremely serious consequences for growth”. Consumption is the main driver of economic growth in France.
The government has yet publicly to attach any figures to the reform. The indications are that the general rate of VAT, which stands at 19.6 per cent, will not carry all the burden of the proposed change, with a likely increase in other taxes taking up some of the burden.
But a significant increase in the base rate of VAT, publicly opposed by Mr Sarkozy himself as recently as October, looks inevitable if the reform is to be effective.
A study by Medef, the employers’ federation, suggested as a minimum scenario that reducing employment charges by €30bn would require an increase in VAT to 22 per cent, with an additional small increase in other taxes. It said a cut of €70bn would be needed to match equivalent employment charges in Germany – requiring VAT to jump to 25 per cent, the European Union’s maximum allowed level.
Such a steep tax rise seems out of the question so close to an election. Doubts also remain over whether legislation can be passed in time. But the government appears to be eyeing implementation in time for workers to see an increase, albeit small, in their monthly pay packet in April.