UPDATE 1-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

PARIS, Nov 5 (Reuters) - The French government is expected to largely brush aside a review on Monday that will prescribe slashing payroll taxes and loosening 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 could spur 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, to be released to the media on Monday afternoon, will suggest hacking 30 billion euros ($38.54 billion) off payroll contributions over two to three years and 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.

``This report is a contribution. It's the government that governs,'' cautioned Social Economy Minister Benoit Hamon.

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.

``A shock causes trauma whereas a pact reassures,'' Finance Minister Pierre Moscovici explained last week.

The government may propose trimming labour charges for small firms in certain sectors, Fleur Pellerin, minister for small and medium-sized business, said on Sunday.

But the government's response to the report, due on Tuesday, is set to focus mainly on measures that would not affect labour costs, like 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 affects pensions, investments and rental income as well as workers' pay. He may also suggest a green tax on diesel fuel.

Hollande is wary of raising consumption taxes to cut costs for employers and has already scrapped a VAT hike which his predecessor Nicolas Sarkozy proposed for the same reason.

Michel Didier, head of the Coe-Rexecode economic think-tank, warned on Monday that French industry was on a ``slippery slope'' that could only be remedied by reducing the cost of labour.

But Moscovici has argued that shifting more of the tax burden onto households too fast risks choking off domestic consumption, a key motor of French growth.

He last week rebuffed a call by the AFEP business association to raise VAT to 21 percent from 19.6 percent to enable lower labour charges, saying the focus for now would be on areas like innovation over labour costs.


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.

French manufacturing margins have slid as Germany's 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 flexibility in a labour system that makes it hard for firms to hire and fire workers quickly to adjust to changing business cycles.

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.

Hollande is not expected to offer any real action on labour costs before a review on welfare financing in January, however.

``The worst would be for this to end up in our cemetery of buried reports,'' Le Figaro daily said of the Gallois review.

Economist Elie Cohen said divisions in Hollande's team over where to place the tax burden 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.''