President Nicolas Sarkozy on Sunday announced a battery of economic measures the scope of which has never before been undertaken by a president facing an imminent re-election contest.
Speaking during an hour-long interview broadcast live across eight television channels and relayed by several radio stations, the French president presented a raft of reforms to be rushed through parliament in the weeks ahead, ranging from a hike in VAT, a go-it-alone ‘Tobin tax’ and the effective end of the 35-hour minimum working week, all of which are to be introduced after the elections.
While still not officially declaring himself candidate in the two-round elections that begin in April, he provided the clearest hint yet that he will. “I have an appointment with the French [people], I will not shy away from it,” he said. That was also as close as he got to recognising the imminence of the elections, given that most of the programme was taken up with the presentation of wide-ranging measures that will mostly enter into affect after the second and final round of the vote on May 6th.
Enlargement : Illustration 1
Perhaps the most significant announcement was that of a future 1.6% rise in VAT, from 19.6% to 21.2%, along with - and in compensation for - a reduction in welfare contribution charges paid by employers and which would, without the VAT hike, represent a shortfall for the public purse of some 13 billion euros. The project for what has become known in France as the “social VAT”, so-called because it shifts part of the social security burden from businesses to consumers, was justified as providing a boost for the competitiveness of French companies by reducing their labour costs. It is, however, a measure that was previously opposed by Sarkozy himself, as late as October last year (see video page 2).
The president’s second major announcement concerned what is effectively the ending of the 35-hour working week, which was first introduced by the socialist government of Prime Minister Lionel Jospin in 2000. This is to be replaced by the introduction within companies of “agreements on competitiveness” (accords de compétitivité), which will allow business to negotiate with staff representatives a reduction in working hours and/or a reduction of salaries.
While leaders of the major French unions have already said they will refuse to take part in negotiations on the issue, coming so close to the forthcoming presidential elections, Sarkozy made clear he was ready to force the measure through. “Prime Minister François Fillon will be writing to the social partners as of tomorrow morning to ask them to negotiate them [the agreements] over the coming two months,” he said on Sunday. He warned that if there was an “ideological blockade” of the reform, the government would carry it through relentless.
The French president also announced a rise of 2% in a welfare contribution payment, the contribution sociale généralisée, the CSG, applicable to financial profits, along with a new 0.1% tax on financial transactions – the so-called ‘Tobin tax’ – and a loosening of urban planning laws, justified as providing a boost to employment in the construction industry.
See pages 2 and 3 for detailed analysys of the new measures.
VAT: + 1,6 % AS OF OCTOBER 2012
Appearing to dismiss the fact that he may be ousted from office by the outcome of the presidential election in May, Nicolas Sarkozy proclaimed that he planned implementing the rise in VAT, applicable to the great majority of goods and services sold in France, on October 1st. The 1.6% increase, to 21.2%, will represent one of the highest VAT rates in the European Union (see a EU-wide comparative table here). Currently, Spain applies a VAT rate of 18%, Germany 19% and Belgium and Italy 21% (although the Italian government envisages increasing this to 23%).
The measure is aimed at bringing in yearly an extra 11 billion euros into the public purse and which, along with the 2% rise in CSG payments, will compensate the similarly announced decrease in employers’ labour charges.
Sarkozy dismissed criticism that this transfer of part of the tax burden from companies to the general public would result in a jump in the cost of living. “I do not believe that there will be a rise in prices because these products are in extreme competition,” he said. “Competition will maintain prices.” He cited the example of a similar measure introduced in Germany in 2007. “They had no increase in prices, competition is such that the risk of inflation does not exist.”
Yet little more than three months ago, Sarkozy dismissed the idea of a “generalized” increase of VAT rates. Speaking on French TV channel TF1 during a programme last October 27th entitled ‘In face of the crisis’, (see video extract immediately below), he said “in no situation” would he make such a move. “For a quite simple reason,” he explained. “It would weigh on the purchasing power of the French [people], it would weigh on the consumption of the French [people], and it would be unjust. And I have the duty of ensuring justice. It would be easy, but unjust.”
In an apparent contradiction to the assurance that the VAT hike would be absorbed by down-pricing by manufacturers and retailers, the French President said on Sunday he hoped the nine-month delay in introducing the VAT increase would encourage a boost in consumption before an expected price-rise, as it had done in Germany. “This measure will only enter into effect on October 1st, we hope that it will trigger purchases,” he commented.
However, the comparison with Germany, one of many made throughout the interview, is a limited one. The 2007 increase in VAT was from a comparatively low 16% to 19%, still lower than that applied in France. Furthermore, given the uncertainty of the outcome of this year’s presidential election, consumers are unlikely to be convinced of the likelihood of the VAT rise, which is opposed by Socialist Party candidate and election frontrunner François Hollande. He has described the measure as “a bad principle” that used “a bad instrument”.
While France teeters on the brink of a recession, with household purchasing power falling, an increase in VAT is not only in danger of further stifling consumption and deepening a recession, it will also worst affect the living standards of low-income families. It follows a hike already announced earlier this month concerning the lowest VAT rate, rising from 5.5% to 7%, and which is applied to the hotel and restaurant trade, non essential foodstuffs, transport services and books. Added to this is a new tax, voted through parliament last month, on sugared soft drinks, and a recent rise in taxes on tobacco and alcohol.
Former socialist Prime Minister Laurent Fabius, speaking after Sarkozy’s interview on Sunday, described the measure as a “triple mistake”. Speaking on Radio J , he said: “An economic mistake because it will weigh down consumption, increase prices. A social mistake because it is the whole of the lower-income and middle classes who will pay. A democratic mistake because you don’t announce that less than 100 days before an election.”
Eva Joly, candidate for environmentalist party Europe Écologie Les Verts, agreed. "It is a very bad idea. Increasing VAT means a decline in purchasing power, and that weighs on everyone, and in particular those who are the most vulnerable," she said in an interview this weekend with French television channel Canal Plus.
Centrist candidate François Bayrou, who favours increasing VAT by two full points but in the context of a review of public finances, criticised "a rise of nearly two points which will be without any effect".
Meanwhile, some members of Sarkozy’s ruling UMP party went as far as to call the rise in VAT "suicidal". UMP Member of Parliament Lionnel Luca, in an interview with the NouvelObs news website, said: "It's a suicidal reform. We are three months away from the presidential elections, and the ensuing legislative lections, and we are going to announce [price] increases to people? I can't manage to understand the intelligence behind the move."
13 BILLION EUROS SHAVED OFF EMPLOYERS' WELFARE CONTRIBUTIONS
Nicolas Sarkozy dismisses the term 'social VAT' as having "no meaning", even wrongly claiming that he had never used the term. As French daily Le Monde reported Monday, he employed the phrase in a book he authored and which was published during his successful campaign for the presidency in April, 2007. The label is indeed the essence of the measure he announced on Sunday, since the rise in VAT is designed to offset lowering the social security contributions employers pay on salaries of between 1.6 and 2.1 times the minimum wage.
According to the president’s office, this salary bracket represents 97% of agricultural workers, 82% of those working in the automobile industry, and two-thirds of industrial employees.
Investment banker Georges Ugeux, who publishes a blog on the website of Le Monde, described the move as a gift to companies which "looks like using the tax-payer’s money to satisfy an electoral base" before the presidential election.
"This is an acquiescence to requests from the [French employers’ organisation] Medef. He could at least have reduced social security contributions for new, small and even medium-sized companies. The amount [of contributions] would have fallen drastically," he wrote.
And while employees will be hit by the rise in VAT, their net salary will be of no help since employee social security contributions will remain unchanged.
Sarkozy repeated the same argument over and over again: the cost of labour in France is too high and it is necessary to "stop weighing salaries down with charges that penalise employment." In fact the cost of labour in France and in Germany is relatively comparable, as the Cour des Comptes, a court that acts as the national audit office for France’s public finances, has shown. But the share of social security contributions paid by employers is indeed larger in France.
Broadly speaking, this money goes to finance social benefits – in this case, the family policy arm of France’s Social Security system.
So, by introducing a 'social VAT', the president would indirectly set in motion a major overhaul of how France’s Social Security system is financed, just months before the presidential election.
A 'social VAT' was, Sarkozy argued, "the only credible response for stopping delocalisations," adding: "France is losing its industrial blood." However, to be sure of creating the competitive shock that those who back 'social VAT' aspire to, this would probably have required a much bigger lowering of employers’ social security contributions.
Another problem, according to Eric Heyer, an economist at French economic observatory OFCE, is that there is no guarantee that employers will reflect paying lower social security contributions in the prices they charge.
"Companies will have to play the game and pass on the entire fall in contributions in their prices before tax, which is far from given," he said, adding that nor would France’s European neighbours stand idly by. "This is a strategy that could yield results in the short term, but in reality it is neither cooperative nor viable."
In another measure, Sarkozy, portraying himself as the protector of industrial employment, promised to set up a bank to finance industry with capital of "one billion euros". But such a bank already exists, called Oseo. Sarkozy’s announcement may have been a response to Socialist Party presidential candidate François Hollande, who last week announced the creation of a publicly-owned bank to help small and medium-sized businesses.
In his broadcast the president also took over Bayrou’s slogan, "Made in France", and referred back to a politically embarrassing episode in the 1997 election, when the socialist presidential candidate, then-Prime Minister Lionel Jospin, appeared powerless to intervene when car maker Renault announced the closure of a factory at Vilvorde in Belgium.
"I don’t accept things like that are inevitable, I will not be like Monsieur Jospin saying 'faced with Vilvorde, there is nothing we can do'," Sarkozy said.
Nor did he flinch from making promises that might be hard to keep. Referring to workers at the Lejaby lingerie factory at Yssingeaux in Auvergne, which is under threat of closure, he said: "I say to them that we are working on their situation. We won’t let the Yssingeaux site down. I won’t let the people at Lejaby down. I hope that in a few days we will have found a solution."
The French president made similar comments in February 2008 to workers at the Arcelor Mittal steel mill at Gadrange in north eastern France. The plant was later closed.
RE-NEGOTIATING SALARIES AND WORKING HOURS
On the controversial subject of working hours, Sarkozy on Sunday laid down an ultimatum for the unions. “Prime Minister François Fillon will be writing to the social partners as of tomorrow morning to ask them to negotiate” agreements on competitiveness and employment “over the coming two months,”
Should the talks fail, the government would take the matter upon itself, he said. That would be just under a month before the elections.
The idea of these agreements would be to allow companies to reduce salaries and/or working hours. Currently, any such substantial change in employment contracts can only be obtained with agreement from each individual employee.
Here again, Sarkozy said he draws inspiration from the way German trade unions and employers co-manage corporate relations. But he omitted to mention that in Germany, as Adelhaid Hege, researcher at economic and social research institute IRES, told financial daily Les Echos on December 27th 2011, "this type of agreement gives trade unions relatively significant sight of the company’s business, for instance of its investment strategy".
French trade unions appeared set to oppose the move. "Any such negotiation would be particularly tough," Jean-Claude Mailly, general secretary of the Force Ouvrière trade union, warned on Sunday, raising the question of whether Nicolas Sarkozy was seeking to begin his re-election campaign on a show-down with the trade unions.
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English version: Sue Landau and Graham Tearse
(Editing by Graham Tearse)