France signals shift to tax cuts in boost to business

PARIS (AFP) - France's Socialist government is hinting it may appease discontent at tax rises by putting more stress on spending cuts in its fight to control the budget and boost growth.

The latest signs came with a new reform of the pension system, which was headed for a huge deficit by 2020, that raises charges for business and workers but has been widely criticised as a weak compromise.

The country has just emerged from recession. But analysts warn that this could be mainly because of heavy household spending on energy during a long winter, and business leaders are warning that the burden of taxes is becoming counter-productive.

Leading figures on the left have begun responding to this, and on Friday President Francois Hollande said "the time has come" to take a "tax pause" after one of his ministers warned of growing "tax discontent".

France has so far relied on tax hikes for about two-thirds of its fiscal adjustment. Most famously it hiked the tax rate to 75 percent on income above 1 million euros.

The reliance on tax hikes has also prompted warnings from the IMF and European Commission that it should focus more on cutting spending in order to avoid snuffing out the recovery.

Mr Hollande told the daily Le Monde that for businesses his administration is "committed to not increasing labour costs and amputating their margins." And Finance Minister Pierre Moscovici assured that some of the latest charges put on companies would be matched by other cuts in charges next year.

The president said "we're not going to take away with one hand what we've given them with the other by the tax credit." The 20-billion-euro tax credit is one of the key initiatives of Hollande's administration to improve competitiveness.

France's social welfare system is funded primarily by charges on labour, burdening businesses.

The previous conservative government under Nicholas Sarkozy shied away from taking a politically unpopular step of shifting part of the financing to the sales tax.

The pension reform, which avoids any major structural changes to bring the system back into balance, shows that Hollande's government is relucted to undertake bold reforms.

But business leaders said that is what is really needed.

"State spending at 57 percent of gross domestic product, that can't continue," said Pierre Gattaz, the head of the French employer's federation Medef.

"We must reduce the weight of state spending in the economy, do it fast and do it with resolve," he said.

The head of oil company Total, Christophe de Margerie, criticised the French "attitude problem" and called for "stop considering globalistation as a bad thing." A threat to nationalise a French plant owned by steel giant Arcelor Mittal to protect jobs raised concerns among foreign businesses.

But the architect of the nationalism plans, the minister responsible for rejuvenating French industry, put the blame on a lack of state direction for industry.

Arnaud Montebourg warned South Korea was about to overtake France in the nuclear energy sector "because they have a state ... which has structured their economic landscape."

The government also brushed off calls to get rid of the 75 percent tax rate, which Medef's chief called "dogmatic and which only serves to discourage investors and shareholders."

The latest purchasing managers surveys by Markit found that while business activity is picking up in the eurozone overall, it contracted at a faster rate in France this month.

A separate survey by France's INSEE statistical service worryingly found that companies expect to cut back investment.

French companies now expect to reduce investment by 6 percent this year, instead of a 4 percent cut they forecast in April.

While France posted surprisingly strong growth of 0.5 percent to bounce out of recession in the second quarter, economists say a boost in investment will be needed for a sustained recovery.

But a Medef leader also castigated French companies for a lack of initiative, noting many lacked projects to develop and expand their businesses.

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