France in need of 'shock therapy' and lower taxes

France's President François Hollande called for a “pact on increased competitiveness” (AFP)

France needs “shock” therapy to break its downward economic spiral, including a substantial cut in payroll taxes, the government was told today.

A dire official report by the former boss of Airbus and the French railways – hotly disputed even before it was presented – suggests 22 remedies to restore France's collapsing competitive position in Europe and the world.

Louis Gallois, one of France's most respected businessmen, said that the country needed a "competitiveness shock … to stop the slide [and] the stagnation", which has lost 750,000 industrial jobs in a decade.

Mr Gallois proposed a €30bn (£24bn) cut in the high payroll taxes paid by employers and employees to finance the welfare state. The shortfall should be made up by other income and consumption taxes but largely by cuts in spending, he said.

The Gallois report, which was commissioned after the left won the spring and summer elections, presents President François Hollande, right, and his Prime Minister, Jean-Marc Ayrault, with a serious dilemma. Mr Hollande has rejected advance talk of shock economic treatment and called for a "pact on increased competitiveness" to be negotiated by unions and employers.

The President's poll ratings have slumped into the mid-30s, partly because he is accused by both right and left of dithering in the face of rising unemployment and a stagnant economy. But the Gallois report, by placing the emphasis on cutting social charges, is likely to deepen, rather than ease, tensions between unions and employers.

Payroll taxes or social charges which fund unemployment pay, healthcare and pensions, add 40 per cent to the average French wage bill. Cuts in these taxes have long been championed by the right but little has been done by successive centre-right governments. A sharp cut in taxes is dismissed by most trade union leaders as an attack on the welfare state.

Mr Gallois said that €30bn, the equivalent of 1.5 per cent of GDP, should be chopped from the total payroll bill – €20bn from employers' contributions and €10bn from payments by employees. His report also called, less controversially, for government action to boost research and good design; more democracy in the workplace; more public-private investment partnerships; and a relaxation of red tape for small businesses.

One other proposal in the Gallois report will be deeply controversial, however. He suggests that France, which has few energy resources of its own, cannot afford to ignore its vast potential reserves of "shale" gas. Mr Hollande has already ruled out licences for the underground explosions needed to release these reserves.

The retreat of French industrial strength, which began in the 1970s, has accelerated in the past decade and has now reached a "critical level", the report says. France has lost competitive ground compared with Germany but also compared with Sweden and Italy.

Senior members of the government will meet today for a first "seminar" to discuss the report.