Fitch: France labor tax cuts may be credit suportive
- President Hollande's announcement of new labour tax cuts and his public commitment to press ahead with structural economic reforms is potentially supportive of competitiveness and medium-term growth in France, although assessing their likely impact will require further clarity on details and implementation, Fitch Ratings says. Furthermore, it is not yet clear how the proposed tax cuts would fit within current fiscal plans.
- The 'responsibility pact' to cut labour costs for companies as they hire more workers was the most significant point of the 14 January speech. The idea is to phase out employer family welfare payroll contributions by 2017, saving French companies EUR30bn a year (or 1.5% of 2012 GDP), according to government estimates. Further details will be given in the spring of 2014, with a scheduled vote of confidence in parliament on the government in the context of this new 'responsibility pact'. Fitch believes the risk of the government being outvoted is small.
- The move to cut labour costs follows a tax rebate for companies, announced in 2012, is worth EUR20bn to firms from 2015 onward. Cutting non-wage labour costs would help improve competitiveness and, to the extent it adds to medium-term growth prospects, support the AA+/Stable sovereign rating, which we affirmed in December. French firms have some of the highest non-wage labour costs in the EU and relatively low profit margins.
- However, while this week's announcement is another step towards addressing structural economic challenges, it is unlikely on its own to fully offset the risks associated with the relatively slow pace of structural reform. The OECD said in a government-commissioned report in November that recent reforms were welcome, but that "France has recorded no significant improvement" in its external competitiveness since the crisis.
- The 'responsibility pact' to cut labour costs for companies as they hire more workers was the most significant point of the 14 January speech. The idea is to phase out employer family welfare payroll contributions by 2017, saving French companies EUR30bn a year (or 1.5% of 2012 GDP), according to government estimates. Further details will be given in the spring of 2014, with a scheduled vote of confidence in parliament on the government in the context of this new 'responsibility pact'. Fitch believes the risk of the government being outvoted is small.
- The move to cut labour costs follows a tax rebate for companies, announced in 2012, is worth EUR20bn to firms from 2015 onward. Cutting non-wage labour costs would help improve competitiveness and, to the extent it adds to medium-term growth prospects, support the AA+/Stable sovereign rating, which we affirmed in December. French firms have some of the highest non-wage labour costs in the EU and relatively low profit margins.
- However, while this week's announcement is another step towards addressing structural economic challenges, it is unlikely on its own to fully offset the risks associated with the relatively slow pace of structural reform. The OECD said in a government-commissioned report in November that recent reforms were welcome, but that "France has recorded no significant improvement" in its external competitiveness since the crisis.