France’s government has promised 20 billion euros (US$25 billion) in tax credits to businesses as part of a “competitiveness pact” that it hopes will spark innovation and lower unemployment — but falls short of calls in a recent report for a “shock” to the economy.
The announcement of the plan on Tuesday came a day after a government-commissioned report — by Louis Gallois, former head of Airbus parent EADS — said the country’s ailing economy needed a big kick to stay globally competitive.
French Prime Minister Jean-Marc Ayrault said the government’s plan, which includes a 500 million euros fund to help struggling small businesses, would put the country “back at the heart of the world economy.”
“This new French model will consist of finding a way back to creating jobs and will no longer be financed by permanent deficits,” he said.
However, the government plan has fallen short of some of the recommendations in the Gallois report and raises fears that the administration of French President Francois Hollande is not doing enough to revitalize the economy.
For example, the 20 billion euros tax credit is to be implemented over three years — with 10 billion euros available next year and the rest split over the following two years. Gallois recommended in his report that the breaks should happen over one or two years to have the maximum effect.
The measure also takes the form of an income tax credit, rather than a reduction in the social charges employers pay on salaries, as Gallois had suggested. The government said that its method is designed to have immediate impact, while deferring payment until 2014 when next year’s tax bill comes due. However, that assumes that companies will start spending and hiring right away in anticipation of the credit.
France faces several major economic challenges, including an unemployment rate of 10.8 percent, and labor regulations that make firing so difficult it has discouraged hiring. Growth has ground to a halt, and several major companies have announced thousands of layoffs in recent weeks.
Gallois warned in his report that the biggest problem in France is that because of high labor costs, companies have to slash prices in order to compete. Without high profit margins, companies have very little to invest in product innovation and quality. Ayrault promised that the pact would give companies more room to maneuver and address this problem.
The government’s plan focuses on small businesses, often the motors of innovation and employment. It calls for small businesses to receive special help to compete internationally, and billions of euros in a new public investment bank will be reserved for smaller companies.
The government also promised to reduce red tape and to limit changes to its tax and other policies over the next five years.
Half of the money will come from spending cuts between 2014 and 2015, but Ayrault did not detail what would be cut. The rest will come from new taxes, including a hike to most sales taxes — apart from basics like food which will benefit from a cut — in 2014.