France boosts minimum wage as spending freeze bites

2 per cent increase takes effect July 1
By Jean-Baptiste Vey and Leigh Thomas
||Last Updated: 06/26/2012

PARIS (Reuters) — France's new government announced a cosmetic two per cent increase in the minimum wage as it seeks to soften the blow from tax hikes and spending freezes to the struggling economy.

President Francois Hollande is pushing for Europe to refocus away from austerity towards measures to boost growth and is relying at home largely on planned tax increases to shrink the public deficit within a target of 4.5 per cent of gross domestic product by the end of 2012.

His five-week-old Socialist government will drop one billion euros ($1.25 billion) of planned spending this year, on top of a three-year spending freeze that kicks in 2013, Budget Minister Jerome Cahuzac said.

Eager to show that belt-tightening is not its sole concern, the government agreed to raise the minimum wage from July 1 by two per cent, although the increase fell far short of union demands.

Prime Minister Jean-Marc Ayrault told cabinet ministers that overall spending at ministries and regional government departments would be frozen from 2013 for three years, excluding debt costs and pensions.

Cahuzac said this year's freeze would affect all departments except the education, justice and interior ministries. "A billion euros which should have been spent between now and the end of the year will be frozen," he told BFM television.

French state spending for 2012 is expected to total around 360 billion euros, but the government is due to announce revisions to its budget bill next Wednesday to reflect flagging growth that is hitting revenues.

The adjustments will follow a national audit office report on public finances expected to show the country struggling to meet a 2013 deficit goal of three per cent of GDP.

Hollande aims to compensate for the 60,000 public sector jobs he has promised to create over five years by not replacing all workers who retire.

His plans for Europe include channeling unused EU structural funds into investment and joint European infrastructure project bonds.

The government has ruled out a broad austerity drive such as those under way in Italy and Spain on the grounds that it would hit the middle classes hardest and weigh heavily on consumer spending, the traditional engine of the French economy.

Consumer confidence was stable in June compared with May, bringing a recovery underway since December to a halt, figures from the Insee national statistics institute showed. The confidence measure remains far below its long-term average.

Labour Minister Michel Sapin said the two per cent increase in the minimum wage would work out to 0.6 per cent after taking into account inflation since the last increase in January.

"We had to allow the most fragile workers on the minimum wage to benefit from this additional purchasing power," Sapin told a news conference.

Some 1.6 million workers, or nearly 10 per cent full-time workers and 25 per cent of those in part-time jobs, earn the minimum wage, which will be raised to 9.4 euros per hour.

The government is seeking a delicate balance between boosting workers' purchasing power without discouraging companies from taking on staff at a time when unemployment is already at a 13-year high.

Among the tax increases being prepared, Cahuzac said a new three per cent tax on company dividends would be put in place in coming months and a tax-free threshold for money inherited from or gifted by relatives would be lowered.

The government will also scrap a sales tax increase due to come into effect in October and a tax shield for the wealthy, which he said cost the state around 800 million euros in lost revenues in 2011.

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