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UPDATE 1-France acts to bolster industry

Emmanuel Jarry
Tuesday, 6 Nov 2012 | 10:34 AM ET

* Govt unveils response to competitiveness review

* Package offers tax credits, spending cuts, VAT hike

* Socialist govt avoids shock therapy that business wants

PARIS, Nov 6 (Reuters) - France's Socialist government unveiled measures to bolster the struggling industrial sector and make exporters more competitive but Tuesday's package fell short of the shock therapy industry leaders are urging.

Prime Minister Jean-Marc Ayrault proposed new incentives for investment in innovation, small businesses and training and tax credits for companies keeping jobs in France, as a way of easing their costs in the current downturn.

Measures included 20 billion euros in tax credits over three years, an extra 10 billion euros in public spending cuts and a 10 billion euros increase in consumer taxes, two-thirds of which would be in VAT sales tax from Jan. 1, 2014.

Yet the package is not expected to attack the high payroll taxes that business leaders say keep them at a competitive disadvantage against foreign rivals and are a factor in their waning share of global export markets.

In a government-commissioned report submitted on Monday, Industrialist Louis Gallois called for payroll taxes to be slashed by 30 billion euros ($38.35 billion) within two years, with the difference made up by higher consumer taxes, to deliver the shock`` the business sector needs.

President Francois Hollande, criticised in opinion polls for being too timid in tackling the economic crisis, has said he prefers a steady path to better competitiveness to shock therapy.

''What the French economy needs is not a shock but therapy, a deep therapy, a drawn-out therapy,`` Finance Minister Pierre Moscovici told BFM television late on Monday.

Moscovici said the government would apply many of the 22 proposals in the Gallois report and spread them out over its five-year term to avoid a sudden jolt in consumption taxes that might hit households and stifle spending.

Gallois, the former head of aerospace company EADS, maintained that a shake-up is needed, telling RTL radio on Tuesday it was urgent to stem a decline that caused France's trade deficit to balloon to a record 70 billion euros last year.

His report set industry heads against a government reluctant to shift more of the tax burden from employers to households struggling with rampant unemployment and an austerity budget.

Business leaders, who have lobbied hard for a cut in labour costs and complain Hollande does not have their interests at heart since he hiked company taxes in his 2013 budget, may react angrily if they feel the measures do not go far enough.

''France has lost its competitiveness due to being weighed down by taxes,`` Thierry Breton, chief executive of IT services group Atos and a former finance minister and head of various telecoms and technology firms, told BFM TV.

UNDER SCRUTINY

With his approval ratings as low as 36 percent, Hollande needs to fix the problems that have left exporters floundering as Germany, helped by low labour costs and a culture of innovation, racked up a 158 billion euro trade surplus in 2011.

Car makers Renault and PSA Peugeot Citroen were both in talks with unions on Tuesday, the former seeking a deal on pay and conditions to cut costs and the latter readying to close a plant near Paris and axe 8,000 jobs.

Weekly magazine Le Point reported that the government's competitiveness package would offer temporary tax credits worth 20 billion euros to companies in exchange for guarantees they would keep jobs in France.

That would be compensated with consumer taxes including a rise in the VAT sales tax rate to 20 percent from 19.6 percent.

Given the extra VAT would land before the tax credits take effect, that could give strained public finances a temporary boost as Hollande battles to cut the public deficit below a euro zone ceiling of 3 percent of economic output next year.

Hollande is under scrutiny from outside, with Moody's rating agency due to update its position on France this month, yet he is leery of angering an already gloomy public with tax rises.

He has already scrapped a VAT hike that predecessor Nicolas Sarkozy proposed as a step towards lowering labour charges.

The International Monetary Fund warned on Monday that France must undertake bold reforms to boost competitiveness like its trading partners Italy and Spain - or risk falling behind them.

Laurence Parisot, head of the Medef employers' group, said companies needed lower labour costs and a freer rein. ''We need to give them enough room to manoeuvre and trust them.``