RPT-Hollande likely to shrug off "shock therapy" review

* Competitiveness review to recommend cuts to labour costs

Socialist government has ruled out any radical action

* Govt to respond to Gallois report on Tuesday

By Catherine Bremer and Emmanuel Jarry

PARIS, Nov 5 (Reuters) - The French government is expected to play down a review on Monday that will prescribe taking an axe to payroll taxes and softening labour laws to reverse a long slide in competitiveness that has eaten away at exports and bled factory jobs.

Any expectations that the widely-leaked government-commissioned report by industrialist Louis Gallois would bring big reforms have been snuffed out in advance by the Socialist government which has ruled out ``shock therapy'' proposals.

Industry leaders, who say shouldering some of the highest labour charges in the world puts them at a disadvantage against foreign rivals and is the cause of a ballooning trade deficit, have joined forces to demand a radical shake-up.

The Gallois report will suggest hacking 30 billion euros ($38.54 billion) off payroll contributions over two to three years, balancing that with public spending cuts and higher consumption taxes, according to leaks in French media.

But President Francois Hollande's aides say shifting more of the tax burden onto households is out of the question at a time when the country is grappling with its toughest austerity budget in years in order to meet deficit-cutting goals.

Hemmed in by his pledge to cut the 2013 deficit to 3 percent of economic output from 4.5 percent this year, Hollande has limited his language to promising a ``competitiveness pact'' to put French industry on the road to recovery.

Any immediate action is set to be limited to measures that would not affect labour costs, like fresh investment in innovation and training.

``We cannot simultaneously restore public finances and impose a competitiveness shock - a massive and immediate transfer of employer payroll taxes onto taxes,'' said a government source.

With growth stalled for three quarters and unemployment at a 13-year high, Gallois will recommend slicing 20 billion euros off social contributions paid by employers and 10 billion off those paid by employees.

The funds would be recouped in part by raising value-added tax and increasing a separate social levy that targets investment income as well as workers' pay. He may also suggest a green tax on diesel fuel.

The government has been cool to the idea of raising consumption taxes to reduce costs for employers. Hollande has already reversed a proposed VAT hike by predecessor Nicolas Sarkozy, which would have raised funds so charges to companies could be lowered.

The government will present its response to the report on Tuesday but is not expected to offer any action on labour costs ahead of a separate review on welfare financing in January.

Finance Minister Pierre Moscovici said last week that shifting more of the tax burden onto households too fast risked choking off domestic consumption, a key motor of French growth.

He rebuffed a call by the AFEP business association to raise VAT to 21 percent from 19.6 percent to enable lower labour charges. ``We are going to work on things which are not the cost of labour, such as innovation,'' he said.


Finding a solution to the lag in competitiveness that has left France trailing Germany in industrial exports, putting a strain on the economic balance between the euro zone's central economies, is Hollande's biggest challenge.

Where German trade is booming, France's share of euro zone exports has slid to 13 percent from 17 percent a decade ago. German unemployment is at 6.9 percent versus 10.2 percent in France, which has lost 750,000 industrial jobs in a decade.

Operating margins at French manufacturers have slid as those in Germany have soared, and the drop in profits has impacted spending on new technologies and innovation.

Meanwhile, impatience at what voters see as a plodding approach to fixing the economy has knocked Hollande's approval ratings to as low as 36 percent from over 60 percent when he took over from the conservative Sarkozy in May.

Dealing with new layoffs in the steel and auto industry and a record trade deficit of 70 billion euros in 2011, Hollande is working with unions to find ways to increase labour flexibility.

Yet his reluctance to take the kind of radical action that Gallois, ex-chief of aerospace group EADS, may advocate means Monday's report risks ending up stuck on a shelf alongside a similar review ordered by Sarkozy when he took office in 2008.

That report, by economist Jacques Attali, also called for an overhaul of labour laws and cuts to employers' social charges.

Elie Cohen, another economist who has long recommended raising consumption taxes to ease the burden on employers, said divisions in Hollande's team risked holding back change.

``Some in the government are well aware of the fragility of our industry and are pushing for change,'' he said. ``Others are obsessed by a growth model based on consumption, deficits and debt and cannot see how to get away from that.''