French pay higher taxes for jobs plan

Swingeing tax increases were announced yesterday by the French Prime Minister, Alain Juppe, to help pay for his government's job creation programme and keep the budget deficit under control. He also foreshadowed cuts in public spending, some of the largest of which will fall on France's powerful defence sector.

From 1 August, the standard rate of VAT will rise from 18.6 per cent to 20.6 per cent - one of the highest rates in Europe outside Scandinavia. Company profits tax will increase by 10 per cent to 43.3 per cent - second only to the rate applying in Germany - and there will also be a 10 per cent increase in the wealth tax for 1995 alone.

The standard rate of VAT applies to most goods and services, including clothes, cars, petrol and consumer durables. Most foodstuffs and goods regarded as basic necessities (but not fuel and power) are taxed at 5.5 per cent.

To soften the blow, Mr Juppe announced rises in the minimum wage, pensions and certain social security payments, to take effect from 1 July. The minimum wage will rise by an inflation-beating 4 per cent.

The tax and benefit changes were the major element of a paper on employment and public spending which Mr Juppe presented to the press in Paris yesterday. The proposals, seen as emergency measures to combat a "calamitous" economic situation, are to be submitted to a full Cabinet meeting next week, chaired by President Jacques Chirac. They then go to the National Assembly for debate before the summer recess.

When Mr Juppe presented the new government's policy programme at the end of last month, he concentrated on job creation and was widely criticised for not indicating how it would be paid for. He at once promised a mini- budget for the end of June (after the municipal elections).

His decision to make this first public presentation of his mini-budget to the media illustrates the efforts the new government is making to "sell" policies that are likely to be unpopular with voters at large, but popular with financiers and the markets. Yesterday the franc held steady through his announcement, and the stock market rose slightly.

The Bank of France also anticipated a welcome for Mr Juppe's package by abolishing the emergency short-term interest rate it had introduced when the franc came under pressure during the international currency crisis this year.

Mr Juppe's reception elsewhere was less warm. While finalising his plans, he met representatives of all France's major trade unions and employers' organisations.

Trade unionists argued that a rise in VAT particularly affected the poor. They objected to the lack of any rise in family allowances, and to planned cuts in some employers' contribution rates on the grounds that the money would boost company coffers, not job creation.

Employers' objections centred on the planned increase in company profits tax, the rise in the minimum wage - and the likely knock-on effect this will have in pressure from other employees - and the lack of any overall reduction in employers' taxes. The waiving of employers' contributions will only apply when they take on long-term unemployed people, and only for one year.

Some of the loudest squeals, however, have already come from the powerful defence lobby. Yesterday, Mr Juppe indicated that, at President Chirac's insistence, some of the biggest spending cuts would fall on the defence ministry.