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Tuesday, Nov 6, 2012 8:15 PM UTC

France to give businesses $25 billion tax break

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France to give businesses $25 billion tax breakFrance's Prime Minister Jean Marc Ayrault is seen at the end of a press conference he gave after a meeting on the competitiveness, at Matignon, in Paris, Tuesday Nov. 6, 2012. Economists agree the situation in France is urgent. The world's No. 5 economy has been fading for years — its share of global GDP has halved since 1990 to 2 percent — and the debt crisis and the global recession have exacerbated the problem. (AP Photo/Thibault Camus)(Credit: AP)

PARIS (AP) — France’s government has promised €20 billion ($25 billion) in tax credits to businesses as part a “competitiveness pact” that it hopes will spark innovation and lower unemployment – but falls short of calls in a recent report for a “shock” to the economy.

The announcement of the plan Tuesday came a day after a government-commissioned report by Louis Gallois, former head of Airbus parent EADS, which said that the country’s ailing economy needed a big kick to stay globally competitive.

Prime Minister Jean-Marc Ayrault said the government’s plan – which includes a €500 million fund to help struggling small businesses – would put the country “back at the heart of the world economy.”

“This new French model will consist of finding a way back to creating jobs and will no longer be financed by permanent deficits,” he said.

However, the government plan has fallen short of some of the recommendations in the Gallois report and raises fears that the Socialist administration of President Francois Hollande is not doing enough to revitalize the French economy.

For example, the $20 billion tax credit is to be implemented over three years – with €10 billion available in 2013 and the rest split over the following two years. Gallois recommended in his report for the government that the breaks should happen over one or two years to have the maximum effect.

The measure also takes the form of an income tax credit, rather than a reduction in the social charges employers pay on salaries, as Gallois had suggested. The government argues that its method is designed to have immediate impact, while deferring payment until 2014 when next year’s tax bill comes due. That, however, assumes that companies will start spending and hiring right away in anticipation of the credit.

France faces several major economic challenges, including an unemployment rate of 10.8 percent, and labor regulations that make firing so difficult it has discouraged hiring. Growth has ground to a halt, and several major companies have announced thousands of layoffs in recent weeks.

France has largely sidestepped the massive budget cuts and reforms undertaken by its neighbors, despite having one of the world’s highest proportions of state spending. Unions and companies are currently in discussions to overhaul the labor market – but the issues are so touchy in France that it’s unclear how far they’ll go.

Gallois warned in his report that the biggest problem in France is that because of high labor costs, companies have to slash prices in order to compete. Without high profit margins, companies have very little to invest in product innovation and quality. Ayrault promised that the pact would give companies more room to maneuver and address this problem.

The government’s plan focuses on small businesses, often the motors of innovation and employment. It calls for small businesses to receive special help to compete internationally, and billions of euros in a new public investment bank will be reserved for smaller companies.

The government also promised to reduce red tape and to limit changes to its tax and other policies over the next five years. France has a very complex tax code – a major thorn in the side of companies, especially small ones that spend tremendous resources to figure out what they owe.

Half of the money will come from spending cuts between 2014 and 2015. However, Ayrault did not detail what would be cut. The rest will come from new taxes, including a hike to most sales taxes – apart from basics like food which will benefit from a cut – in 2014.

The new measure follows a similar plan by former President Nicolas Sarkozy to lower the tax burden on companies via a blanket increase in sales tax. At the time, the Socialists campaigned against the plan and one of their first moves in office was to scrap it. The new government’s plan is similar, but lowers the sales tax on basic necessities, a move the Socialists hope will ensure the poorest people aren’t unduly burdened.

More SARAH DiLORENZO.

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