Fitch: French Labour Tax Cuts Potentially Credit Supportive

Fri Jan 17, 2014 9:32am EST

LONDON/PARIS, January 17 (Fitch) President Hollande's announcement of new labour tax cuts and his public commitment to press ahead with structural economic reforms is potentially supportive of competitiveness and medium-term growth in France, although assessing their likely impact will require further clarity on details and implementation, Fitch Ratings says. Furthermore, it is not yet clear how the proposed tax cuts would fit within current fiscal plans. The 'responsibility pact' to cut labour costs for companies as they hire more workers was the most significant point of the 14 January speech. The idea is to phase out employer family welfare payroll contributions by 2017, saving French companies EUR30bn a year (or 1.5% of 2012 GDP), according to government estimates. Further details will be given in the spring of 2014, with a scheduled vote of confidence in parliament on the government in the context of this new 'responsibility pact'. Fitch believes the risk of the government being outvoted is small. The move to cut labour costs follows a tax rebate for companies, announced in 2012, is worth EUR20bn to firms from 2015 onward. Cutting non-wage labour costs would help improve competitiveness and, to the extent it adds to medium-term growth prospects, support the AA+/Stable sovereign rating, which we affirmed in December. French firms have some of the highest non-wage labour costs in the EU and relatively low profit margins. However, while this week's announcement is another step towards addressing structural economic challenges, it is unlikely on its own to fully offset the risks associated with the relatively slow pace of structural reform. The OECD said in a government-commissioned report in November that recent reforms were welcome, but that "France has recorded no significant improvement" in its external competitiveness since the crisis. France's average tax wedge for a childless, single worker earning the average French wage in 2012 was around 50%, second only to Belgium among OECD members. The previously announced corporate tax rebate would fill about half the gap between the French labour tax wedge and the OECD average at the median wage, according to the OECD. The precise interaction between the tax rebate and the phasing out of employer family payroll contributions has yet to be set out, although it will be clarified later in the spring. In the absence of further reform, tax cuts may not fully address the combination of a structural budget deficit and sluggish growth (we forecast real GDP growth of below 1% in 2014). Hollande did not outline how the new tax cuts will fit into the government's current fiscal plans. Fitch estimates that France's public debt was 93.7% of GDP at end-2013, more than double the 'AA' median of 39%. The fiscal deficit is also larger than the EU threshold of 3% of GDP. But he did reiterate the previous commitment to cut public spending by EUR15bn this year and up to EUR53bn in 2015-2017 (EUR18bn in 2015, EUR18bn in 2016, EUR17bn in 2017). We continue to believe the government will stick close to its budgetary targets, with the headline fiscal deficit reaching 3% in 2015, in line with the revised EU recommendation to eliminate the excessive deficit by then. Proposals on corporate and household tax reform, control of social security, and further reduction of red tape will be made before spring, according to Hollande. Details of local government reform, such as the abolition of the 'general competence clause' and the distribution of responsibilities among different layers of local government, will also be announced. Contact: Enam Ahmed Director Sovereigns +44 20 3530 1624 Fitch Ratings Ltd 30 North Colonnade London E14 5GN Ed Parker Managing Director Sovereigns +44 20 3530 1176 Mark Brown Senior Director Fitch Wire +44 20 3530 1588 Media Relations: Francoise Alos, Paris, Tel: +33 1 44 29 91 22, Email: francoise.alos@fitchratings.com; Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. Applicable Criteria andALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. 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