PARIS (MNI) – French President Nicolas Sarkozy on Sunday confirmed
his intention to hike the value-added tax and the investment revenue tax
in October in order to finance a reduction in employer payroll charges.
He also said he would impose unilaterally a tax on financial
transactions, starting in August.
Speaking on prime-time television, Sarkozy also unveiled measures
to boost housing construction, finance small businesses and create more
training positions for young people.
The primary motivation for this battery of reforms rolled out three
months ahead of the presidential elections is not to counter the
financial crisis itself but rather to protect jobs, he said.
After two packages of austerity measures last year, Sarkozy proudly
announced that the public deficit declined from 7.1% of GDP in 2010 to
5.4% or “perhaps” 5.3% — undershooting once again the official target
of 5.7%.
“Today, I think we can say, cautiously, that the elements are in
place for financial stability in the world and in Europe,” he said,
predicting that Greece’s problems with its creditors would be resolved
“definitively” in the coming hours or days. “Europe is no longer on the
brink of the abyss.”
Lifting the standard VAT rate by 1.6 points to 21.2% and increasing
by two points the CSG rate for investment earnings will raise E13
billion that will be used to exonerate lower incomes up to just above
double the minimum wage from the payroll charges employers pay to help
finance family support payments, Sarkozy explained.
The goal of the measure is to reduce high labor costs — a
“specifically French issue” — in order to make domestic producers more
competitive and allow them to maintain or expand payrolls, he said.
“There will be no increase in prices” for consumers in the end,
thanks to competition among producers, he claimed. “I am persuaded it
will save jobs; it’s the only credible response.”
While Sarkozy conceded that the “entire financial sector” had
warned him not to go ahead unilaterally with a financial transaction
tax, he argued that it was only fair that the sector make a contribution
and that it would “provoke a shock” that would encourage other countries
to follow.
Finance Minister Francois Baroin has said that sovereign bonds will
remain tax-free and that 0.1% will be levied on equities transactions
and 0.01% on derivative products.
To help overcome the housing shortage rapidly and create jobs in
construction, Sarkozy announced that building limits on a parcel of land
would be expanded by 30%. Sanctions on large firms that do not fulfill
quotas for apprenticeship positions will be doubled, he said.
An “industry bank” is to be created with E1 billion in capital to
help finance small business, he said, borrowing one of the platform
pledges of his Socialist rival in the presidential elections, Francois
Hollande.
To create more flexibility in working hours and “turn the page” on
the 35-hour work week introduced by a previous Socialist government,
employers and workers will be allowed to reach accords modifying hours
and pay at the company level without government ratification, he said.
Even though government officials have been preparing public opinion
for a VAT hike for weeks, the move remains puzzling for several reasons.
First the timing. The competitive benefit of cheaper labor is not a
recent discovery. Why wait until the final months in office to introduce
a painful structural reform whose benefits will be felt only over the
longer term? Why only a moderate VAT hike for a likely modest gain in
competitiveness?
Sarkozy explained that the government previously had its hands full
with other major reforms, but that the economic crisis and the loss of
industry jobs had now made a response urgent: “If we don’t do anything,
it will continue.”
Second the trade-off. For long months now Sarkozy has hammered on
the need to reduce deficits and debt. As economic growth this year is
widely expected to be extremely disappointing, lowering the deficit by
nearly a full point to 4.5% of GDP will remain a challenge. If
government revises down its growth assumption in line with the consensus
next month, it will exhaust the precautionary cushion built into this
year’s budget.
Any further downside economic surprises would require further rapid
fiscal adjustments. A VAT hike is a reliable way to mobilize revenues
quickly. By using this option for longer-term gains, the government
would sacrifice heavy ammunition to keep consolidation on track.
Besides the success of last-year’s budget efforts, Sarkozy offered
another response, namely that by deferring the VAT hike until October,
consumers will have the chance to anticipate major purchases, which
would be a “motor for growth”. At least for the short term.
Finally, the media exercise was almost surrealistic in the sense
that the incumbent who is trailing in the voter intention polls
announced measures that would be applied months away, as if the
elections this spring did not exist or could not derail the projects.
Here Sarkozy underscored repeatedly his current role as “head of
state” and the urgency of continuing the reform course. While still
refusing to declare his candidacy for re-election, he did note that the
deadline is March 6 and that he remained “very determined.”
“It’s coming…” he said.
–Paris newsroom +331 4271 5540; email: ssandelius@marketnews.com
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