French business leaders have taken heart from the fact that a long-awaited report on competitiveness will not be quietly buried. But the government's plans to offer businesses tax relief linked to the size of their payrolls scarcely amount to the 'shock treatment' to lower labour costs many had called for.
Published on 5 November after some delay, the report, which was authored at the government's request by a prominent industrialist, Louis Gallois, contains a total of 22 proposals designed to boost the competitiveness of French industry. On the day following its submission, France's prime minister, Jean-Marc Ayrault, outlined the government's response, presenting a lengthy document called the 'Pact for growth, competitiveness and employment'. It contains 35 government actions that largely overlap with the proposals of Mr Gallois who, to Mr Ayrault's relief, has declared himself broadly satisfied.
For anyone interested in understanding the causes of the decline of French industry over the past decade the Gallois report makes interesting reading. It provides a succinct diagnosis of the widening of the competitiveness gap - particularly relative to countries such as Germany, Italy and Sweden - and of the wide range of measures that could reverse this trend.
Some of these have little chance of gaining acceptance by France's socialist government. One striking proposal, for example, was that more research should be carried out into the potential exploitation of France's substantial shale gas deposits, but in drawing up its national pact the government has pointedly ignored this environmentally sensitive issue. The impact of the statutory 35-hour working week was omitted altogether.
Otherwise, many of Mr Gallois' proposals are very much what one would expect from a left-leaning, technocratic French industrialist. Several foresee reinforced state intervention, with a number of pages devoted to the need for a more forceful European industrial policy. The report also airs traditional French views on competition policy, world trade and exchange-rate targeting.
But none of this should detract from the important fact that at the heart of both the Gallois report and the government's 'pact' is an analysis of the origins of the French economy's lack of competitiveness that accords real importance to high labour costs. This is despite the propensity of many on the French left, including from within the government itself, to treat this as a false issue.
Thus, on the question of how best to provide a competitiveness boost to French industry, Mr Gallois proposes the urgent reduction of social security charges weighing on business by as much as €30bn (1.5% of GDP). And ideally, he says, this "shock" should be implemented within the space of a year. The report suggests the cuts could be paid for mainly through a two percentage point increase in the contribution sociale généralisée (CSG), the quasi-income tax contributing to the financing of the social security system, with cuts to public spending to follow over the medium term.
The government's proposals are a tad more complicated. Instead of reducing social security charges, Mr Ayrault has announced the introduction of special tax credits for businesses from 2014 onwards. In 2014 these credits will be worth €10billion, increasing to €15billion in 2015 and amounting to a cumulative €20billion (or around 1% of GDP) in 2016.
These will be part-financed by an increase in taxes eventually amounting to €10billion. Thus, VAT rates will go up on 1 January 2014: the standard rate will be raised from 19.6% to 20%; the intermediate rates applying to restaurants and housing renovation will go up from 7% to 10%; and the minimum rate applying to foodstuffs and energy will be reduced from 5.5% to 5%. In addition, a new ecological tax will be put in place in 2016. To finance the remaining €10billion worth of tax credits, unspecified cuts in public expenditure will be made in 2014 and 2015.
To ensure that the tax credits are used to good effect - that is, to encourage investment, job creation, training, research and innovation - the government will introduce new methods of corporate supervision, including the obligatory presence of employee representatives on company boards. This aspect of the plans promises to be extraordinarily complicated and adds to the general impression that the government has rushed out its proposals pending a more thorough review of social security financing next year.
The measures will certainly not provide any competitiveness boost to industry in the short term. Mr Ayrault declared that by 2017 they will help create more than 300,000 extra jobs and raise GDP by 0.5%, although the numbers appear to have been plucked from the air. Given the pressure on the government to bring down France's budget deficit, and the likelihood that economic weakness will already lead to revenue shortfalls and pressure to slash spending, it is open to doubt whether these plans will survive the coming year intact.