French president François Hollande has bowed to massive pressure for business tax cuts to pull France’s economy out of slump and stave off industrial decline, ditching a core element of his socialist platform.
Company taxes will fall by €20bn a year equal to 1pc of GDP, to be phased in gradually by 2015 under a convoluted system of rebates.
Premier Jean-Marc Ayrault said it amounted to a 6pc cut in unit labour costs, enough to close the gap with eurozone rivals. "France is not condemned to a spiral of decline, but we need a national jolt to regain control of our destiny," he said.
The mid-rate of VAT for restaurants and services will jump from 7pc to 10pc. The top rate will rise slightly to 20pc. Spending cuts will plug the revenue gap in order to meet the EU’s 3pc deficit target.
Critics call it the most humiliating U-turn in French politics since François Mitterrand abandoned his disastrous experiment of "Socialism in one country" under a D-Mark currency peg in 1983.
Mr Hollande came to office vowing lower VAT rates to protect the buying power of workers, and called business tax cuts a "gift to the rich". He imposed €10bn of fresh taxes on firms just weeks ago in his 2013 budget, a move that set off a revolt by business leaders.
The French National Assembly was in uproar on Tuesday as Gaulliste deputies derided the volte-face as a confession of misrule for the past six months.
His plan comes a day after French industrialist Louis Gallois delivered a report calling for "shock therapy" to halt the relentless decline of France’s eurozone export share, and the loss of 60,000 industrial jobs each year. He recommended deep cuts in payroll levies to bridge the gap in labour costs with Germany.
"President Hollande is finally starting to back away from some of his economically dangerous campaign promises," said Christian Schulz from Berenberg Bank.
Mr Schulz said the French leader has faced his "Schröder moment", reaching out like Germany’s Social Democrat Chancellor Gerhard Schröder a decade ago to a respected businessman to provide cover for reform.
Less clear is whether Mr Hollande will try to tame the Leviathan state, now Euroland’s biggest at 56pc of GDP. Such a move would entail a head-on clash with the socialist party base. "The new measures do not come anywhere close to what France would need to do to arrest its trend decline. He will need to go much further to end the maladie française," said Mr Schulz.
Pressure is mounting from all sides. The International Monetary Fund warned this week that France risked being left behind by Italy and Spain as they embrace root-and-branch reforms.
Mr Hollande appears to have been stung by accusations that his government is "anti-enterprise". The corporate lobby MEDEF said last month that investment was collapsing, and warned of capital flight in tones reminiscent of attacks on Leon Blum’s leftist Popular Front in 1936.
The new plan adopts most of the 22 proposals in the Gallois Report, including a state bank to steer cheap credit to exporters, though it falls short of Mr Gallois’ call for a €30bn cut in payroll levies.
Jean-François Copé, the Gaulliste leader, said the Hollande package was "hyper-complex, bureaucratic, and wholly inadaquate". Business leaders said it helps but comes too late reverse a collapse in profit margins as recession looms.
The tax reform aims to switch the burden from wealth creation to consumption, a trick used by Germany to carry out its "internal devaluation" within EMU. The policy was pioneered by Margaret Thatcher, a detail that France’s socialists prefer to keep quiet.
For Mr Hollande, it has been a painful wake-up from the utopian reverie of his first months in office. "Exercising power today is very hard. You don’t get any breaks, of any kind," he confessed.