Hollande Draws Heat From Business for Tax-Driven Pension Revamp

President Francois Hollande is drawing fire from French business leaders after his latest effort to revamp the nation’s economy leaned on what many of them say was all too easy: higher taxes.

Hollande’s proposal to fix France’s pension system -- under which working lives will be extended to 43 years by 2035 from 41 years currently -- banks on up-front savings coming from raising contributions to the system over the next four years.

The plan drew squeals from executives in a country where the current government and its predecessor have increased taxes by 70 billion euros ($93 billion) in the past three years and the economy has barely grown. France’s tax burden was 46.3 percent of gross domestic product last year, finance ministry figures show. It was the third-highest among developed nations after Denmark and Sweden in 2011, according to the Organization for Economic Cooperation and Development.

“We tax, we tax, we tax,” said Pierre Gattaz, head of France’s Medef business lobby, said in an interview yesterday. “Taxing is not reforming. This is the start of a lot of reforms. If we start by raising taxes to solve the first problem, we’re all going to be dead by the end of the year.”

Finance Minister Pierre Moscovici said last week that he understands that some people are “fed up” with taxes and promised that the government is shifting to spending cuts in its 2014 budget.

Two thirds of the deficit reduction effort will come from spending cuts in the 2014 budget, with a third coming from tax increases, Moscovici has pledged.

Pension Costs

While the retirement reform lifts pension costs, the government will reduce charges in other areas to prevent labor expenditures from rising, he said.

“A strong France needs strong business and this is why I am very attentive to the level of taxation,” Moscovici said yesterday in an interview. The goal is to “stabilize the level of taxation in France, especially for companies.”

The government also says that the effective retirement age is already rising because of changes to the system put in place by previous administrations. The effective retirement age will rise to 65 by 2035 from about 62 currently.

Prime Minister Jean-Marc Ayrault also announced this week that the government will re-link income tax brackets to inflation, easing the tax burden on households as salaries rise.

Not Enough

Even so, the changes are slow, said business leaders struggling to compete in a global economy. Corporate profit margins in France fell last year to the lowest since 1985. Profit at non-financial companies is less than 15 percent of gross domestic product, compared with about 25 percent in Germany, OECD data shows.

“The priority should be reforms improving the competitiveness of French corporations,” Societe Generale Chief Executive Officer Frederic Oudea said in an interview yesterday. “There’s too much emphasis on increasing taxes.” The government “could have done more” to improve the retirement system, he said.

Hollande’s challenge is also to convince France’s international partners that his efforts to overhaul the nation’s economy is advancing quickly enough, said the head of France’s second-largest bank by market value.

“It’s very important to send a very clear message to the international community to show that France can reform,” Oudea said. “We’re not there yet.”

Little Investment

The European Commission, which in May urged France to step up the pace of structural reforms, said yesterday it is evaluating the pension plan.

“The efforts which have been made or will be made up to 2020 will be essentially based on an increase in employers’ and employees’ contributions,” Simon O’Connor, a spokesman for Economic Affairs Commissioner Olli Rehn, told reporters in Brussels. “The government said these increases will be compensated by a fall in the employers’ contribution to the social-security system, but we don’t have details about this at the moment.”

French employers’ concerns remain. While Europe’s second-largest economy is showing signs of life, growth is coming from consumer spending and exports. Investments continue to decline.

After more than two years with barely any growth, GDP expanded 0.5 percent in the second quarter, more than twice the pace that economists predicted, according to a Bloomberg survey. Confidence among factory executives rose for a fourth straight month in August, national statistics office Insee said yesterday.

The worst outcome would be if the economy’s recovery dulled the impetus to fix its underlying problems, economists say.

“They made some steps in the right direction but I thought they would be much more ambitious,” Pierre-Olivier Beffy, chief economist at Exane BNP Paribas in London, said of the pension plan. “The worry is that the economic recovery will kill the will to reform.”

Before it's here, it's on the Bloomberg Terminal.