Extra VAT pays for payroll costs cut

PRESIDENT Sarkozy's plan to raise VAT to cut job costs has been attacked as "socially unjust, economically ineffective and, proposed at this time, not very democratic" by a former prime minister and praised as "politically audacious" by his present prime minister.

Speaking to the nation, Sarkozy revealed a series of measures to boost the economy that included raising VAT 1.6% to pay for a €13 billion cut in company social charges; a new financial transactions tax; the setting-up of a new state investment bank; an easing of building permit restrictions, and a push to get companies to take more young people on training schemes.

Companies would also be given more room to negotiate locally to create flexible working hours - a blow to the 35-hour working week - and, using Germany as his guide, Sarkozy said the result would be "jobs, jobs and more jobs".

Germany was mentioned more than a dozen times in his speech and it came just hours after it was revealed in Germany that chancellor Angela Merkel would be actively campaigning for Sarkozy in the forthcoming presidential election.

Sarkozy, himself, did not say explicitly that he would be running for re-election in three months but said he had an "appointment with the French people" and it would for them "to judge my record".

While Europe was "no longer at the cliff edge" and the budget deficit would be held to 5.4% instead of the predicted 5.7% he said France still needed a president and not a presidential candidate.

The increase in VAT - it will be raised in October to a new record 21.2% on products that are not minimum rated - would not, he believed, have any impact on prices but the rise would bring in €10bn to compensate for the cut on cotisations socials paid by companies.

Businesses will no longer pay charges on employees being paid between 1.6 and 2.1 times the Smic minimum wage and Sarkozy said it "made no sense" that companies had to pay for social policy. The cuts in payroll costs were to "reduce the cost of employment" to "keep factories in France".

A much touted financial transaction tax would be introduced from August - even if France had to go it alone - and the 0.1% levy will bring in €1.3bn. He said he wanted to create a financial "shockwave" to set an example.

The construction industry could be boosted with the announcement of an easing of building restrictions to allow a 30% increase in size of any building.

Youth unemployment will be tackled with a move to make companies with more than 250 staff increase their intake of trainees or apprentices. The present mandatory 4% level will be increased to 5%.

Former Socialist prime minister Laurent Fabius said the VAT rise was "socially unjust, economically ineffective and, proposed at this time, not very democratic".

Prime minister Francois Fillon said Sarkozy had shown his "determination to act for the French people" and it was to his credit he had proposed "audacious" policies that transcended the political calendar.

Employers' body Medef said that the job measures were "rather favourable for the economy".

Front de Gauche leader Jean-Luc Melanchon said the "measures to be paid for by workers are to be introduced immediately, but all those that could impact on all those who have the means to pay are delayed until after the election".

Screengrab from TF1