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Cablegate: Pm de Villepin's Plans for Social Economic Growth

This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 03 PARIS 006311

SIPDIS

PASS FEDERAL RESERVE
PASS CEA
STATE FOR EB and EUR/WE
TREASURY FOR DO/IM
TREASURY ALSO FOR DO/IMB AND DO/E WDINKELACKER
USDOC FOR 4212/MAC/EUR/OEURA

E.O. 12958: N/A
TAGS: EFIN ECON ENRG PGOV FR
SUBJECT: PM DE VILLEPIN'S PLANS FOR SOCIAL ECONOMIC GROWTH

Ref: (A) Paris 5936; (B) PARIS 5694

1. SUMMARY. Prime Minister de Villepin unveiled the second
phase of his economic plan, the key feature of which is the
retention of the French social model. This second set of
measures, which adds new budget spending, is unlikely to
have real positive effects on economic growth before 2006.
Measures in favor of employment miss the supply-side aspects
of labor issues. END SUMMARY

--------------------------------------------- -------------
PM Supports "Social Economy", but also Competitiveness and
Work
--------------------------------------------- -------------

2. On September 1, Prime Minister De Villepin announced
economic measures (that would have been introduced by
Finance Minister Thierry Breton in other circumstances), a
week before the expiration of the 100-day deadline that he
set upon taking office in June. The second phase of his
plan for a "social economy" is supposed to stimulate faster
economic growth, while preserving the benefits of the French
welfare model. De Villepin said "our social model answers
the profound concerns of the French, but, in a fast changing
world, we urgently need to modernize it to continue to keep
ahead." He insisted that he wanted "to promote growth for
everyone, which restores people's purchasing power, which
generates jobs. I also want it to be more attractive and
easier to work in France than to live on welfare." He said
that all his time would be devoted to the French, and
stressed: "we are in a difficult time, a difficult
situation. All my energy, all that of government, will be
dedicated to the interests of our compatriots." He argued
that the drop in unemployment in July, to below 10% for the
first time in about two years (ref A), "proved that we can
win the battle of employment," and that already 30,000 new
contracts ("contrats nouvelles embauches" - ref B) were
signed in a month. As part of a move to modernize the
French model, Prime Minister de Villepin doubled the amount
of new spending to 9 billion euros for economic
competitiveness, a better recognition of labor, and
purchasing power.

------------------------------------------
Cutting and Reforming Income Taxes in 2007
------------------------------------------

3. The government will resume income tax cuts, which were
frozen in 2005, at a cost of around 3.5 billion euros in
2007. Tax cuts notably include an increase in rebates to
the lowest-income earners, at a cost of 1 billion euros by
2007. De Villepin said "the reduction in income tax will
resume in 2007 with 2006 revenues (source of information for
2007 income taxes) as part of a tax reform."

4. Tax cuts will be combined with a reform of the French
income tax system, effective January 1, 2007 to make it more
transparent and readable, in a way to help "each French
citizen see clearly and immediately which portion of his
income is going toward the good functioning of the country."
The reform will reduce the number of tax brackets to four
from seven with the highest marginal rate reduced to 40%
from 48.09%, and is supposed to increase the take-home pay
for the middle class. For example, a single person earning
30,000 euros a year will have a 15% tax reduction.
Nonetheless, the 20% and 10% deductions that are
automatically granted to wage-earners will be replaced by a
10% deduction, and overall deductions per income tax payer
will be limited to 8,000 euros in the general case.

5. De Villepin did not make direct comments about the
wealth tax, but said that its reform was not a priority. He
asked Finance Minister Thierry Breton and Budget Minister
Jean-Francois Cope to find from which point "the wealth tax
loses its legitimacy and its efficiency" and also "to set a
new maximum tax reduction" in order to avoid tax flight.

-----------------------------------------
Returning Money to Low-income Individuals
-----------------------------------------

6. The government will not cut the speed limit on highways
as it had initially proposed to reduce surging costs of
rising oil prices. Instead, several million low-income
households will receive a 75-euro check to help cope with
the surge in heating-oil costs following the rise in oil
prices.

-----------------------------
Encouraging Work and Mobility
-----------------------------

7. In a move to make "work more attractive and easier in
France than living off public assistance benefits," De
Villepin promised extra money to reward unemployed people
who find jobs. The GOF will extend the 1,000 euro earned
income tax credit (EITC) not only to long-term unemployed
who return to work (as proposed in June) but also to all
recipients of minimum incomes and allowances. EITC will be
paid on a monthly basis in 2006, no longer at the end of a
12 or 18 month-period. All former and new EITC
beneficiaries (potentially 8.8 million people) will also
receive 150 euros a month during a year, a cost for the
government of 500 million euros in 2005, and of 1 billion
euros in 2006 to be funded by extra-receipts from the tax on
petroleum products.

8. Separately, on September 12, Thierry Breton announced
two measures to increase the mobility of workers in France
(while scolding that 500,000 vacancies are available in
construction and restaurant sectors):
- a 1,500 euro bonus to the unemployed and those earning
minimum incomes who accept moving more than 150-200
kilometers from home to find jobs.
- a tax cut on rent revenues to landlords who move out to
accept a job far from home. The two measures will be
introduced in the 2006 budget.

9. De Villepin warned the government would toughen up its
welfare system, crack down on abuse, and penalize those who
refuse offers of jobs or training.

--------------------------------------------- ------------
Increasing Investment in Public Transportation and Social
Housing
--------------------------------------------- ------------

10. De Villepin announced a 10 billion euro increase in
public spending on rail and road projects in 2006, to be
partially funded by privatization receipts and speeding
fines. The government estimated that these projects would
attract an additional 5 billion euro in private spending.
The government will also release state-owned land to build
20,000 new homes in the Paris region to alleviate France's
housing crisis. Some homes on land that had been set aside
for Paris's failed bid to host the 2012 Olympics games to
the city may be used, if municipal authorities agree, to
build 3,000 temporary and student housing units within 18
months. De Villepin encouraged the use of revolving
mortgage loans, and announced the extension of zero-interest
rate loans ("pret a taux zero") to more private real estate
investors.

-------------------------------------------
Respecting the EU Budget Limit of 3% of GDP
-------------------------------------------

9. De Villepin vowed to respect the EU stability and growth
pact budget limit of 3% of GDP, which the government GOF has
ignored since 2002, saying the government will continue its
effort to cut spending to reduce the budget deficit to below
3.0% in 2006. He said that the government would obtain 4
billion euros from the sale of government stakes in three
toll highways (Autouroutes du Sud de la France, Autoroutes
Paris-Rhin-Rhone and Societe des Autoroutes du Nord et de
l'Est de la France) to fund new spending and cut public
debt. On September 5, the government notified the European
Commission it would have a 2005 budget deficit of 3% of GDP.
In a press release, the Finance Minister indicated that "the
forecast of 3% of GDP is based on 1.5-2.0% GDP growth." GDP
growth of 2% may allow "the government to reduce the budget
deficit to below 3% of GDP." Budget issues will be analyzed
septel.

--------------------------------------------- ---
Businesses Clamor for Lower Labor Costs and More
--------------------------------------------- ---

10. Laurence Parisot, the new President of the French
employers association ("Mouvement des Entreprises de France"
- MEDEF) welcomed the Government plans, but said she hoped
"a next step would be lowering labor costs," a huge
impediment to job creation as payroll taxes paid by
employers remained high in France. In a recent radio
interview, she asserted it is her objective to reduce the
unemployment rate to 5% in five years. She indicated her
willingness to participate actively in the next unemployment
insurance negotiations organized by the Unemployment
Insurance Agency. She suggested the minimum income
("Salaire Minimum Interprofessionnel de Croissance - SMIC")
should be set "independently from political action," saying
that last increases in SMIC were above what small and medium-
sized companies could afford. She also invited the
government to be more ambitious on the wealth tax reform.
------------------------------------------
PM's Additional Comments on Future Reforms
------------------------------------------

11. On September 3, in a summer meeting of the ruling party
UMP in the Atlantic costal resort La Baule, De Villepin said
"for 2005, we want economic growth to get as close as
possible to 2%, and I think all our efforts could help us
reach that. I hope growth will exceed 2% in 2006."
Interestingly, he said he would announce, in coming weeks,
reforms to modernize the state and cut costs to boost growth
"offering a true vision of the future."

--------
Comments
--------

12. The measures announced by De Villepin on September 1
target the poor and the middle class. They may also
encourage a portion of the unemployed to seek work.
However, the De Villepin's plan does not address the supply-
side. Hiring is heavily dependent on labor costs (including
payroll taxes), labor flexibility, qualification
requirements in some sectors, and labor regulations.

13. In the short term, but not certainly before 2006,
economic growth may benefit from an increase in consumption
through a decrease in unemployment, an increase in private
and public investment, and additional related spending.
Income tax cuts, which are a long-standing promise to
voters, might help restore some consumer confidence, but
they will not have any tangible economic effect before 2007,
when they become effective. END COMMENTS.
STAPELTON#

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