.An image grab taken from French TV France 2 on April 3, 2013 shows French president Francois Hollande gesturing as he delivers a speech following the Cabinet meeting at the Elysee Palace in Paris. France's embattled government was forced to go on the defensive on April 3, 2013 over an explosive tax fraud scandal involving a Jerome Cahuzac former budget minister

His complicated private life aside, the biggest challenge facing President François Hollande is to deliver on his promise of dynamic reforms to charge up France’s struggling economy.

Mr Hollande’s public embrace of what has been dubbed “supply-side socialism” is generating as much pressure on him as the public’s demands to explain his apparent love affair with a film actress.

The president, almost two years into his five-year term, repeated on Tuesday in a speech to corporate and trade union leaders his commitment to a “responsibility pact” with business to cut taxes, public spending and red tape to boost growth that he acknowledged was “too feeble to create jobs”.

But after 20 months of tax increases, stagnant growth and record unemployment, Mr Hollande’s government has a job to convince a sceptical business community that it is serious.

Nicolas Bouzou, an economist who runs an economic and financial advisory business, says the promise to finance cuts in employer labour costs via a reduction in public spending – not alternative taxes – is a breakthrough in France. “We have never seen that before.”

But he adds: “What is clear is that [the government’s] credibility is zero. The announcements themselves will have no impact on confidence. What counts is action.”

Mr Hollande, determined to achieve as broad a consensus as possible, has embarked on negotiations between employers and unions for a deal on his proposals – an exercise that looks set to last at least two months.

He has sown some disquiet among business leaders by insisting on “measurable” conditions in terms of employment, especially of young and older workers, in return for cuts in labour costs.

But he has also declared he is prepared to push through changes by decree, not laborious legislation, and signalled that the first cuts in taxes could be seen next year.

His headline pledge is the removal of €30bn-35bn in charges employers pay on salaries that finance a big chunk of the family welfare system. Equivalent to about 6 per cent of labour costs, this is important for French companies, which suffer from the lowest profit margins in Europe – in part because they are forced to pay about 60 per cent of net salaries in social charges and other employment taxes.

The government already has in place a tax break for companies aimed at trimming labour costs, set to be worth €20bn next year. One way or another, this will be superseded by the €30bn-35bn cut.

Whatever the outcome, the net new cut in labour costs will be at most worth €15bn and will not take full effect until 2017.

Mr Hollande’s other big promise is to cut public spending by €50bn – about 2.5 per cent of gross domestic product – between 2015 and 2017, on top of a €15bn cut this year.

Widespread anger over high taxes has prepared the way for such a reform as people now recognise that to lower taxes you have to lower public spending, says Mr Bouzou. “The policy of the past two years has vaccinated the French against socialism,” he jokes.

Complicating the effort to create room for tax cuts is the commitment to meet the EU-designated target of reducing the budget deficit to 3 per cent of GDP in 2015, already delayed by two years. With France’s public debt standing at about 95 per cent of GDP, there is little room for manoeuvre, even if Brussels was open to a further delay.

“We have to get the trajectory of the debt going down. If we hit another downturn at this level, it would be dangerous,” said a government insider.

Mr Hollande has identified the social welfare and health system, which accounts for about 45 per cent of total €1.2tn public spending, and the multi-layered system of local administration as principal targets for cuts. But details have yet to be spelt out and implementing cuts will be politically fraught.

Other potential reforms include loosening France’s 3,000-page labour code, reducing copious administrative restrictions on business and opening up competition in areas such as transport, retail and the legal profession.

Mr Hollande has overseen a modest relaxation of labour market regulation, but going further would arouse union opposition. He first promised a “simplification shock” to cut red tape last year with little to show for it so far. The government has made some moves to liberalise restricted markets but remains tentative, recently pulling its punches on opening up the taxi business to full competition.

Nicholas Dungan, senior fellow at the Atlantic Council and author of a recent report comparing competitiveness in the French and US economies, credits Mr Hollande with undertaking more reforms than his centre-right predecessors. But he remains cautious about the latest policy shift.

“There remains a long way to go and Hollande is certainly not yet in the mould of the socialist reformer such as Gerhard Schröder in Germany a decade before,” he says.

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