Sarkozy Increases Sales Tax to Cut Payroll Fees

French President Nicolas Sarkozy announced increased sales taxes and levies on financial incomes to fund a 13 billion-euro ($17 billion) cut in payroll charges in the opening volley of a re-election bid that requires him to erase a 20-point poll gap in three months.

The increase would amount to 1.6 percentage points and bring the rate of tax on most goods and services to 21.2 percent, Sarkozy said late yesterday in a national broadcast as he reversed previous opposition to the move. Under the plan, the government would use revenue raised to finance a cut in payroll costs paid by employers to boost competitiveness.

“We have to re-ignite growth,” Sarkozy said. “We have to catch up in Europe and in the world. Our market share is declining. If we continue to burden our companies with charges that aren’t theirs to pay, notably family charges, how can we compete?” he added in the interview.

By pressing an unpopular tax less than three months before the vote, Sarkozy is seeking to portray himself as a more capable economic manager than Socialist candidate Francois Hollande. Economic issues may be a handicap for Hollande, with 33 percent saying they find him convincing on cutting France’s budget deficit, according to a CSA poll published last week.

“The VAT is not a painless political tax and it certainly won’t be an asset for Sarkozy’s candidacy,” said Jerome Sainte- Marie, who heads Paris-based CSA’s public-opinion department. “Whatever measure he is proposing, voters seem to think they come too late, or they are too technical and nothing brings what they are looking for, which is change.”

Sarkozy Trails

The same poll showed Hollande’s lead over Sarkozy widening. He has the support of 31 percent of voters in the first round, 6 points more than Sarkozy and up from 3 points a month ago. His second-round lead rose to 20 points, at 60 percent, from 14 points.

Three months ago, in his previous national broadcast, Sarkozy rejected a sales-tax increase, saying “it will weigh on purchasing power and consumption and it would be unfair.”

“I won’t accept it and the prime minister won’t propose it,” he said on Oct. 27.

In the televised discussion with journalists, Sarkozy said the euro crisis was easing. “We can say -- with caution -- that we see elements of financial stability in France, in Europe and in the world,” Sarkozy said. “Europe is no longer at the edge of the cliff.”

Credit Rating

Sarkozy’s case as an economic steward got harder to make this month when France was stripped of its AAA credit rating for the first time by Standard & Poor’s. Sarkozy had promised in October to do everything possible to retain the top credit rating that one of his advisers called a “national treasure.”

French jobless claims jumped by 5.6 percent last year to 2.87 million, the highest since September 1999.

Sarkozy “has a clear and cold view of his term in office: the loss of jobs in industry and the rise of unemployment,” said Bernard Cazeneuve, a spokesman for the Hollande campaign. The problem is “all the solutions that he’s proposing he has already tried and so far their result has been calamitous.”

Sarkozy said he will declare his candidacy in due course, declining to say outright if he will run in the elections scheduled for April 22 and May 6.

‘Rendezvous’

“I have a rendezvous with the French people, I won’t shy away from my declaration,” Sarkozy said. “It’ll be soon.” He said he was in a “very determined state of mind” ahead of the vote.

Sarkozy also said that he’s preparing legislation that would impose a financial-transaction tax of 0.1 percent to take effect in France starting on Aug. 1.

Among other announcements was a plan to loosen labor laws to lengthen their workweeks beyond 35 hours and reduce them when the economy slows. French building rules will be eased to spur the construction industry, he said.

Prime Minister Francois Fillon will brief the media at 3 p.m. today on implementation of Sarkozy’s policies.

The value-added tax increase, which would echo one of the measures Germany used over the past 10 years to boost its own competitiveness, has been floated by Sarkozy since December. The plan is largely supported by economists and business leaders who say that it may help boost exports, growth and eventually job creation.

‘Shock’ Sought

The measures “are a step in the right direction, but what I’d like to see created is a shock of competitiveness,” PSA Peugeot Citroen (UG) SA Chief Executive Philippe Varin said Jan. 27.

France’s exports have lagged behind those of its major trading partners in the past decade. Between 2000 and 2010, shipments of manufactured goods to other countries rose 50 percent to $409 billion, according to the World Trade Organization. Germany’s exports rose 126 percent and Italy’s rose 72 percent.

To unions, though, the proposal represents a give-away to business at a time when unemployment is at its highest in more than a decade

“Social VAT is just another gift to the bosses, who are going to see their costs go down, while the workers aren’t going to see anything in their salaries,” said Farid Borsali, secretary general of the CGT chapter at a Peugeot factory near Paris. “Their purchasing power will go down.”

A BVA poll for BFM TV on Jan. 12 showed 55 percent of the French are opposed to the increase in sales tax, while 43 percent favor it. A CSA poll on Jan. 4 for communist newspaper l’Humanite said that 64 percent are against it and 33 percent in favor.

To contact the reporters on this story: Mark Deen in Paris at markdeen@bloomberg.net; Helene Fouquet in Paris at hfouquet1@bloomberg.net

To contact the editor responsible for this story: Vidya Root at vroot@bloomberg.net

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