PARIS France will ease payroll taxes by 20 billion euros over three years, funding that with spending cuts and sales tax rises, in a tougher-than-expected response to business leaders' demands to reverse decades of industrial decline.
The Socialist government, under pressure to bring down high labor costs but wary of shifting too much of the tax burden onto households, will offer companies tax credits from next year and raise consumer taxes from 2014.
Prime Minister Jean-Marc Ayrault, unveiling the measures at a news conference, said the government aims to raise 10 billion euros through small rises to consumer taxes and save a further 10 billion through public spending cuts over the next few years.
The measures went much further than had been expected in answering a call by industrialist Louis Gallois for a 30 billion euro ($38.35 billion) cut to payroll taxes in a government-commissioned review submitted on Monday.
"France is not condemned to the spiral of decline. But we need a jolt at a national level to regain control of our destiny," Ayrault said.
"This is about giving our companies room to maneuver."
Whereas the proposal by Gallois, former head of aerospace giant EADS EAD.PA, on cutting payroll taxes would only have benefitted profitable firms, the offer of tax credits will also apply to companies who make too little to pay tax.
The tax credits should equate to a temporary 6 percent cut in companies' labor costs. BNP Paribas economist Dominique Barbet said the main advantage of offering tax credits rather than directly cutting social charges was that it would limit the volatility of fiscal income for the state.
The general value-added tax rate will rise from January 1, 2014 to 20 percent from 19.6 percent and the special VAT rate on restaurants will rise to 10 percent from 7 percent. For the longer term, the package proposes a new green tax from 2016.
The package also contains incentives for investment in innovation, small businesses and training to try and restore lagging competitiveness that has seen France's share in global export markets slide in the last two decades.
Industry leaders have lobbied hard in recent weeks for cuts to the high payroll taxes they say keep them at a competitive disadvantage against foreign rivals and are a factor driving France's trade deficit to a record 70 billion euros last year.
Gallois called in his report for shock therapy to remedy the long decline, setting a challenge for President Francois Hollande, who has been criticized in opinion polls for being too timid in tackling the economic crisis.
The International Monetary Fund weighed in on Monday, warning in a yearly report on France that the government must undertake bold reforms to boost competitiveness like its trading partners Italy and Spain - or risk falling behind them.
"France has lost its competitiveness due to being weighed down by taxes," Thierry Breton, chief executive of IT services group Atos (ATOS.PA) and a former finance minister and head of various telecoms and technology firms, told BFM TV.
With his approval ratings as low as 36 percent, Hollande is under pressure to fix the problems that have left exporters floundering as Germany, helped by low labor costs and a culture of innovation, racked up a 158 billion euro trade surplus in 2011.
Car makers Renault (RENA.PA) and PSA Peugeot Citroen (PEUP.PA) were both in talks with unions on Tuesday, the former seeking a deal on pay and conditions to cut costs and the latter readying to close a plant near Paris and axe 8,000 jobs.
Hollande also needs to ensure there is no impact to France's strained public finances from the tax credit plan, as he battles to slash the public deficit to below a euro zone ceiling of 3 percent of economic output next year.
The centre-left president, who had scrapped a rise in VAT to 21.2 percent proposed by his predecessor Nicolas Sarkozy as a step towards lowering labor charges, is under scrutiny from financial markets and investors trying to gauge his economic credibility.
Moody's rating agency is due to update its position on France this month.
Business leaders have complained in recent weeks that Hollande, who raised taxes on the rich and on companies in his 2013 budget, does not have their best interests at heart.
Laurence Parisot, head of the Medef employers' group, said late on Monday that businesses needed a freer rein. "We need to give them enough room to maneuver and trust them," she said. ($1 = 0.7823 euros)
(Additional reporting by Vicky Buffery; Editing by Jon Boyle)