French President Nicolas Sarkozy confirmed his intention to increase value-added tax and the investment revenue tax in October in order to finance a reduction in employer payroll charges. He also said he would impose a tax on financial transactions most probably starting in August.
It is reported that the primary motivation for this set of reforms is not to counter the financial crisis itself but rather to protect jobs. After last year’s series of austerity measures Sarkozy announced that public deficit declined from 7.1% of GDP in 2010 to 5.4%. This goes well beyond the set target of 5.7%.
The French Government argues that by increasing the standard VAT rate by 1.6 points to 21.2% and increasing by two points the CSG rate for investment earnings will raise €13 billion that will be used to free lower incomes up to just above double the minimum wage from the payroll charges employers pay to help finance family support payments.
The target seems to be that of reducing high labour costs in an effort to make domestic producers more competitive.
It is believed that these measures will have no bearing on prices and therefore consumers thanks to competition amongst producers.
As to be expected the proposed tax to be imposed on financial transactions was opposed by the players in the financial sector who warned against going ahead with this plan. The French Government argued that it was only fair that the sector makes a contribution and that it would encourage other countries to follow. This is similar to the line taken by the European Commission.
Finance Minister Francois Baroin said that sovereign bonds will remain tax-free and that 0.1% will be levied on equities transactions and 0.01% on derivative products.
The arguments for increasing the VAT rate are not as convincing considering the economic recession. However the Government argues that this was on the cards for quite some time and it is only a matter of when rather than if. For months Sarkozy has persistently argued on the need to reduce deficits and debt. Economic growth this year is expected to be extremely disappointing so lowering the deficit to 4.5% of GDP will remain a challenge.