PARIS (MNI) – The French government is unlikely to follow the
recommendation of employers for massive tax hikes to pay for a reduction
in payroll charges aimed at boosting competitiveness, the French
business daily Les Echos reported Wednesday, citing government sources.

Instead, officials are leaning towards a two-point increase in the
standard value-added tax to 21.6%, which would net E12.8 billion and be
used to provide relief on payroll charges for lower-end wages, the
newspaper said.

Social payroll charges for wages up to 1.6 times the minimum wage
are already subsidized by the government. The additional VAT receipts
could extend this exemption to levels up to double the minimum wage.

The VAT hike, which would not apply to the reduced rate of 5.5% for
foods and other basic necessities, could be delayed for several months,
which would spare consumers until after the presidential elections and
perhaps boost consumption in the meantime.

Trade unions and opposition political parties oppose any VAT hike
on grounds that it is the least progressive of all taxes and would hit
consumers hard at a time when inflation is undermining real income
gains.

The employers association Medef had called for a bigger VAT hike
and a rise in the CSG tax on investment earnings to finance a steeper
reduction in social payroll charges. Whether the government intends to
hike the CSG as well is unclear at this stage, Les Echos said.

Even the announcement of an imminent VAT hike would be a daring
move by President Nicolas Sarkozy, who is still lagging in surveys of
voters’ intentions with three months to go before the presidential
election.

Addressing unions and employers convened for a “crisis summit” on
Wednesday to debate strategies for boosting competitiveness and
protecting jobs, Sarkozy highlighted the devastating impact that the
recent slowdown in economic growth has already had on employment.

Public employment programs were bolstered by some E500 million last
year. “But the rapid evolution of the situation obliges us to go further
and faster,” Sarkozy said in his opening remarks at the summit. “We
cannot wait until the elections to decide.”

Sarkozy also noted the country’s exploding trade deficit and rising
unit labor costs to underscore the need to boost competitiveness. Much
of the difference between labor costs in France and Germany can be
explained by the higher social charges in France, he argued.

The president said he was well aware that unions and employers
would probably not sign on to all the government’s proposals, which are
expected to be unveiled at the end of this month. “You have your
convictions, I have mine,” he said.

Consensus should be easier to reach on a second agenda item, namely
greater public incentives for employers to keep staff on payroll with
reduced hours rather than resorting to layoffs. This would follow a
practice widely used in Germany during the last recession.

The use of reduced hours (Kurzarbeit) in Germany was six times
higher than in France at the peak of the crisis, Sarkozy noted,
proposing to simplify the red tape for employers. He also called again
for better professional training for jobseekers.

Sarkozy reiterated his determination to introduce a tax on
financial transactions, which officials estimates could bring E500
million this year and up to E1 billion in coming years, Les Echos
reported.

–Paris newsroom, +331 4271 5540; email: ssandelius@marketnews.com

[TOPICS: M$F$$$,MFX$$$,M$X$$$,MGX$$$]