France to raise VAT to fund company tax breaks

President Hollande is under pressure to improve the French economy President Hollande is under pressure to improve the French economy

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The French government has said it will raise value added tax and cut public spending in order to fund tax credits for firms that keep jobs in France.

The 20bn-euro (£16bn) plan comes after a government-commissioned report by industrialist Louis Gallois called for big cuts in payroll taxes.

Mr Gallois, the former boss of aerospace group EADS, urged President Francois Hollande's administration to improve competitiveness.

The IMF also called for similar action.

In its annual review of the French economy, the International Monetary Fund said on Monday that France should ease employment laws to make it easier to both hire and fire workers, as well as cut payroll taxes to encourage employers to hire more staff.

Prime Minister Jean-Marc Ayrault said the government was adopting nearly all the measures recommended in Mr Gallois' report, which was published on Monday.

Mr Ayrault said "ambitious and courageous decisions" were required, adding: "France needs a new model."

Falling exports

Mr Gallois was asked by President Hollande to investigate what was holding France back, as part of a "competitiveness pact", looking at why the French economy has fallen behind rivals such as Germany and suggesting reforms that could help address the gap.

Mr Gallois suggested laws should be changed to make the creation of start-up businesses easier. But his main proposal was to cut French payroll taxes by 30bn euros (£24bn) in two years.

The government has not gone that far, but it has undertaken to cut public spending by 10bn euros and raise another 10bn by increasing VAT from 19.6% to 20% from 1 January 2014.

The middle rate, which applies to restaurant food, will rise from 7% to 10%.

This will fund tax credits that will be available from next year.

The lowest rate of VAT, which applies to food bought in shops and domestic energy bills, will fall from 5.5% to 5%.

The high tax burden on French firms is frequently cited as one of the main reasons for France's loss of competitiveness in recent years. It now accounts for just 13% of eurozone exports, compared with 17% a year ago, and its unemployment rate stands at 10.2%, as against Germany's 6.9%.

Growth 'overshadowed'

On Monday, the IMF also suggested the French government should make working hours more flexible, limit future rises in the minimum wage and reduce unemployment benefits during economic upturns to provide a greater incentive to look for work.

"[France's] growth outlook is being overshadowed by a significant loss of competitiveness," the IMF said.

Last month, the IMF cut its growth forecasts for Europe's second-largest economy to 0.1% this year and 0.4% in 2013, from 0.3% and 0.8% respectively.

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