French president promises tax breaks to companies that are hiring

PARIS (Reuters) — President Francois Hollande on Tuesday tied a promise to ease the tax burden on French companies to their readiness to invest in France and to hiring young and old workers, who have been hardest hit by high unemployment.

Aiming to make companies more competitive and cut unemployment now running at around 11 per cent in France, Hollande pledged last week to offer some 30 billion euros ($44 billion CAD) of cuts in labour charges and simplify regulations in return for more hiring.

Business groups have opposed fixed hiring targets.

In a New Year's address to business leaders and unions on Tuesday, Hollande provided further details, saying that companies would have to commit to investing in France and would have to hire as a priority young and older workers in order to qualify for the labour tax break.

"Companies must commit to invest more in France and relocate their activities as much as possible at home," Hollande said in a speech billed as the official launch of his so-called "responsibility pact".

The government will hammer out detailed targets in the coming months in talks with unions and business leaders, due to start on Jan. 27.

Hollande also urged employers and unions to present options by the end of this year on how to improve France's notoriously brittle industrial relations. He suggested the creation of staff representative bodies with a say in the running of a company — a move towards German-style Mitbestimmung, or co-determination.

The attempt by Hollande to cajole business into more hiring through labour charge cuts is part of what commentators see as a more centrist stance being adopted by the president to revive the euro zone's second-largest economy.

The shift in policy has been overshadowed in the past week by interest in Hollande's private life following reports of an affair with actress Julie Gayet.

The "responsibility pact" recalls the 1998 "alliance for jobs" which Germany's Social Democrat ex-chancellor Gerhard Schroeder launched with unions and business in his first term.

While that alliance produced only modest results in terms of new employment, analysts have noted that it prepared the way for the more sweeping labour market reforms in Schroeder's second term, accredited with transforming the German economy.

Business "asphyxiated"

Though French businesses cautiously welcome Hollande's pact, they are wary about getting tied down to specific targets.

Pierre Gattaz, president of employers' union Medef, said France's private sector could create one million extra jobs if given such relief, but insisted that committing individual sectors to specific targets, as suggested by Hollande last week, was unworkable.

"I am not talking about written commitments," he told France 2 television.

"One million jobs, that is the consequence of the package of measures we expect — and which we expect in 2014, moreover. Companies are being asphyxiated and terrorized by a political mood that was difficult for them in 2013," he said.

Hollande has said that firms would be completely exonerated from contributions to family benefit funds by 2017 — a volume of tax breaks put at around 30 billion.

However he also suggested the cost of the measures to the government could be partly offset by replacing 20 billion euros ($29 billion CAD) of tax credits already promised to companies from this year — in other words, the net new impact of the moves could be as little as 10 billion euros ($14 billion CAD).

France has some of the highest state spending and taxes in the world, with public spending currently around 56 per cent of national output — some 12 points higher than that in Germany — and a total tax burden at over 40 per cent of output. French corporate margins are the lowest in the euro zone, according to Eurostat data.

Hollande has said he is ready to find an extra 50 billion euros ($74 billion CAD) worth of cumulative spending cuts over the three years, a move that would slow down the projected rise in spending. He is looking at cuts in France's complex system of local government and its vast welfare system.

However Gattaz proposed that Hollande go further and completely freeze spending until the end of his mandate in 2017 at a current level of around 1.2 trillion euros.