Valls Pledges Tax, Spending Cuts to Boost French Economy

France’s new Prime Minister Manuel Valls pledged to cut taxes and spending to improve France’s competitiveness, as he promised to get Europe’s second-largest economy growing again.

He also said the European Central Bank’s policies are too restrictive and put the economy at risk.

“The recovery is there but it’s fragile, we must tend to it like a flame,” Valls said today in a 47-minute address to parliament, a week after being appointed by President Francois Hollande. “The efforts we’re making to cut our deficits, the structural reforms we’re undertaking for the competitiveness of our companies, must not be swept aside by a euro rate that’s too high.”

The former interior minister, who was promoted after the Socialist Party was routed in municipal elections March 30, said he’d eliminate payroll taxes on those making the minimum wage, cut payroll taxes for almost everyone else, and reduce the corporate income tax. He said he’d fund the cuts through eliminating layers of local government and by shrinking health spending, bringing jeers from some of his party’s lawmakers.

Valls, 51, who in the past has described himself as a reformer in the mold of former U.K. Prime Minister Tony Blair, said France would respect its budget targets, adding that he wants to open a dialog with the country’s European partners about a “proper balance” between reducing deficits and nurturing growth.

“The European Central Bank is leading a monetary policy that’s less expansionist than its American, British and Japanese counterparts,” he said. “It’s a subject that’s going to be at the heart of the next European elections, and I want to confront it head-on.”

Confidence Vote

Valls’s speech will be followed by a vote of confidence, which he’s assured of winning even though about 100 Socialist lawmakers have written to Hollande criticizing his proposed spending cuts.

The Socialists and their allies have 291 lawmakers in the 577-seat National Assembly, and the letters’ signatories have said they will back the government, albeit grudgingly.

Valls laid out some details of Hollande’s so-called Responsibility Pact -- first unveiled on New Year’s eve -- to cut 50 billion euros ($69 billion) in state spending by 2017 to fund reductions in payroll taxes.

Valls said he’d cut 30 billion in labor and company taxes by 2016. Besides eliminating payroll taxes on those making the minimum wage, which is 1,445 euros a month, he said he’d cut payroll taxes by 1.8 percentage points for those making up to 3.5 times the minimum wage.

A surcharge on corporate income tax that had been introduced by former President Nicolas Sarkozy will be eliminated in 2016 and the corporate income tax rate will be cut to 28 percent in 2020 from 33 percent.

Spending Cuts

On the spending side, local governments and public health insurance will each have to decrease their spending by 10 billion euros, the central government will make 19 billion euros in cuts, with the rest of the 50 billion euros in reduction coming from greater efficiencies, Valls said, without providing details.

He also said he wanted to merge local governments to cut the number of mainland French regions to 11 from 22 now, and to eliminate electoral councils in the country’s 101 departments by 2021.

The French state, including social security, is budgeted to spend 380 billion euros in 2014.

Force Ouvriere, one of France’s three largest unions, issued a statement after the speech to reiterate its opposition to the “Responsibility Pact,” saying the government wasn’t demanding anything in exchange for cutting company taxes.

More Time

Last May, the European Union gave France an extra two years -- until 2015 -- to narrow its deficit to below the required 3 percent of gross domestic product threshold. Hollande last week signaled he may seek another extension.

“There can be no question of undermining growth that is just returning,” Hollande said in the televised address March 31 when he appointed Valls, adding that Europe must accept that France’s “contribution to competitiveness and growth will have to be taken into account with respect to its commitments.”

France’s public deficit amounted to 4.3 percent of GDP in 2013 instead of the 4.1 percent target set in September, national statistics office Insee said this week. The 4.1 percent goal had already been watered down from the 3.7 percent 2013 deficit Hollande had promised in April last year.

The commission, the EU’s executive arm, must decide whether to relax targets introduced over the past three years under rules demanded by German Chancellor Angela Merkel.

Avoiding Greece

The limits are intended to stop governments running up the kind of debt that forced Greece to ask for two bailouts since 2010 and fueled turmoil across the region.

Dutch Finance Minister Jeroen Dijsselbloem, who heads meetings of his euro-area counterparts, called on France to stick to its deficit-reduction plans, signaling his opposition to Hollande’s bid to slacken the pace of austerity.

EU Economic and Monetary Affairs Commissioner Olli Rehn urged France to take the “necessary structural reforms” this year, saying it’s “essential that France acts decisively.”

German Finance Minister Wolfgang Schaeuble signaled yesterday during a visit to Berlin by his new French counterpart, Michel Sapin, that he may be willing to grant France some fiscal breathing space.

‘French Arrogance’

Valls replaced Jean-Marc Ayrault, who had been prime minister since Hollande’s May 2012 election. Hollande responded to his party’s poor showing in the municipal elections by selecting what he called a “government for combat” with 16 ministers, compared to 20 in the previous government.

Barcelona-born Valls ended his speech on a personal note, touching on why he became a French citizen at 20.

France has this arrogance to believe that what’s done here holds for the rest of the world,” he said. “The famous ‘French arrogance’ that our neighbors talk about is in fact the immense generosity of a country that wants to surpass itself.”

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

To contact the editors responsible for this story: Alan Crawford at acrawford6@bloomberg.net Vidya Root

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