€20 billion tax break for French businesses

Kieran Corcoran reports on an attempt to revitalise the French economy

The French government has announced that it will offer €20 billion (£16 billion) of tax credits to businesses, reducing the cost of labour and strengthening the French economy.

Prime minister Jean-Marc Ayrault has announced the measure alongside 34 other initiatives designed to make the French economy more competitive. They largely follow the recommendations of a state-commissioned report by Louis Gallois, industrialist and former chief executive of leading European aerospace company EADS. Ayrault claimed the measures would put the nation "back at the heart of the world economy", and find "a way back to creating jobs".

They also fall in line with recommendations from the International Monetary Fund's annual report on the French economy advising labour market reform and cuts to public spending, which is currently equivalent to 56 per cent of France's GDP.

"A move in the right direction"

The tax break will apply to charges faced by businesses on salaries. €10 billion will be made available in 2013, with a further €5 billion in both 2014 and 2015. It is hoped that the money saved by the tax credit, which represents a 6 per cent cut in the price of labour, will boost investment and employment. Sophie Blégent-Delapille, Head of Corporate Taxation at Deloitte in Paris, described the proposal as a "move in the right direction." She told The Gateway: "The cost of employment in France is very expensive because of social security charges. This proposal will mean more profits for companies, and they will be free to do what they want with this increased profitability."

Chop and change

The tax break will be financed by €10 billion of cuts to public spending, the standard VAT rate from 19.6 per cent to 20 per cent, and raising its reduced VAT rate from 7 to 10 per cent.

The business-friendly policy marks something of a shift in direction for the French socialist party - the Socialists campaigned against a very similar policy proposed by the Sarkozy administration. The government has, however, placed a progressive spin on the changes by simultaneously reducing VAT on essential goods such as food from 5.5 per cent to 5 per cent.

President François Hollande ruled out increased VAT and public spending cuts in his election campaign, but has evidently decided it's worth reversing his previous position to buoy up France's ailing businesses, which have long been losing out to their German neighbours.