Hollande scraps tax breaks on overtime

France’s socialist government is tearing up one of the key labour market measures introduced by former centre-right president Nicolas Sarkozy under his once-winning slogan: “Work more to earn more”.

The reimposition of income tax and social contributions on overtime as part of a supplementary 2012 budget going through the socialist-controlled National Assembly this week is the latest in a series of partial reversals of Sarkozy-era reforms since François Hollande won the presidency in May.

Mr Hollande is fulfilling an election promise to reintroduce the taxes for all but companies employing fewer than 20 workers, driven by the need to meet France’s commitments to reduce the budget deficit – and the belief that it undermined job creation.

Jean-Marc Ayrault, prime minister, told the assembly on Tuesday: “When you know that an overtime hour costs less than a regular hour, do you believe that an employer has an incentive to hire? Of course not. We must put an end to this anti-employment measure.”

The move has provoked a furious reaction by the opposition. François Fillon, prime minister under Mr Sarkozy, said on French television: “Today we are making more rigid an economy that is already more rigid than other European economies. It is truly the opposite of what we should be doing in times of crisis.”

Mr Sarkozy scrapped the levies on overtime after he came to power in 2007 as part of a campaign to overturn the effects of France’s statutory 35-hour working week – introduced by a socialist government more than a decade ago – and to boost workers’ earning power.

An estimated 9m workers took advantage of the measure at an overall cost to the state of €4.5bn in foregone revenue last year.

The move follows a number of other actions taken by the new government that have unsettled business leaders. The budget measures include scrapping a move by Mr Sarkozy to reduce employers’ heavy labour costs by shifting some of the financing of social welfare from employment charges to value added tax.

The supplementary budget includes €7.2bn in new taxes, including a big increase in wealth taxes, and €1.5bn in spending cuts. Mr Hollande has also reinstated the right of some workers to retire at 60, which Mr Sarkozy raised to 62, and given a small real-terms boost to the minimum wage, frozen by the former president.

But Mr Hollande has also responded to business concerns by signalling he is willing to address the issue of labour costs and other labour market rigidities which are now being debated with industry and trade union leaders.

With unemployment rising this year to 10 per cent of the workforce, the debate over labour market reforms has become a critical issue, with Mr Hollande pledging to increase the level of employment during his five-year term.

Mr Sarkozy laid heavy blame for France’s declining competitiveness on the 35-hour week, but he never abolished it. In fact, overtime and multiple exemptions built into the legislation mean many French workers do significantly more. OECD figures for 2011 show the average annual hours worked in France at 1,475, below the eurozone average of 1,573, but ahead of Germany on 1,411.

A study by the French Economic Observatory published on Tuesday said the tax exemption on overtime did lead to a net suppression of hiring during a period of low growth and high deficits, estimating the loss of potential jobs at 30,000 in 2011.

But it said the measure made sense when it was introduced, at a time when unemployment was falling and increasing hours worked by existing employees helped companies overcome potential labour shortages.