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France's Valls wins parliament backing for tax and spend shake-up

France's Prime Minister Manuels Valls arrives for the first cabinet meeting of the new government at the Elysee Palace in Paris, April 4, 20
France's Prime Minister Manuels Valls arrives for the first cabinet meeting of the new government at the Elysee Palace in Paris, April 4, 20

By Leigh Thomas

PARIS (Reuters) - New Prime Minister Manuel Valls won a vote of confidence in parliament on Tuesday after unveiling planned tax and public spending cuts, vowing to bring France's public deficit down while resisting outright austerity.

In a keynote speech to the National Assembly after being chosen last week by President Francois Hollande, Valls said an over-strong euro was damaging economic recovery, complaining that the monetary policy of the independent European Central Bank was "less expansionist" than that of its international counterparts.

Deputies backed his government by 306 votes to 239 in a test of his authority that, despite grumbling from leftist allies that he is too centrist, was never in question given the absolute majority of ruling Socialists in the lower house.

"I am all for respecting our commitments, for budgetary rigor but not for austerity ... I do not want to harm growth, otherwise our deficits won't fall and neither will unemployment," he told parliament before the vote.

"Yes, we must put our public finances right, but not destroy our social model or public services - the French people would never accept that," he said, adding: "We will explain that to our European partners."

He confirmed an expected package of 30 billion euros ($41 billion) in payroll tax cuts on companies by 2016, and said a revenue tax on companies, known as "C3S", would be scrapped by the same date, handing six billion euros back to business.

A temporary surtax on the main corporation tax would be abolished in 2016 and the standard rate of corporation tax would be cut gradually to 28 percent from 33 percent, he said.

He also announced 5 billion euros of reductions in payroll charges and tax cuts largely aimed at low earners.

"Too much suffering, not enough hope, such is the situation in France," Valls said at the start of his speech. "The main thing is to restore the French people's confidence in their future."

The proposed tax cuts seem to make it more difficult for France to meet its pledges to European neighbors to cut its deficit. German and EU officials this week said France should not be granted more time to bring its deficit down from 4.3 percent of Gross Domestic Product last year to an EU target of 3 percent in 2015 as promised.

"We should continue the reduction of the deficit. It's necessary for the credibility of the country, and to maintain the healthy financing conditions we have today," Bank of France governor Christian Noyer told LCI television in response to Valls's speech.

Valls, who earlier on Wednesday told Socialist deputies that further savings might be required in a supplementary budget to pay for the tax cuts, did not spell out whether France would be able to hold to its 2015 deficit promise.

Noyer, who is also a member of the European Central Bank governing council, said any tax breaks must be financed by budget cuts "and not by other taxes. That's absolutely crucial".

Saxo Banque analyst Christopher Dembik said that, based on the figures given by Valls, the EU target was impossible.

"France will in coming weeks have to negotiate with European partners a new postponement - which, given existing statements out of Brussels and Frankfurt - is not a done deal," he said.

HANDOUTS?

Opposition conservatives immediately dismissed the plan as an attempt to spend France's way back to economic recovery that was doomed to fail.

"Welfare spending will rise and in the end, your social pact will become a pact of handouts," Christian Jacob, floorleader of the main center-right UMP party in the National Assembly, said in reply to Valls.

He said the Socialist government had ruined France's credibility by repeatedly begging the European authorities for more time to bring down the deficit.

"You will pay a high price: the price of humiliation under the yoke of Brussels, and the price of higher interest rates that will penalize French growth," Jacob said.

On the public spending side, Valls said central government would bear around 19 billion euros of the total 50 billion euros in savings to be achieved by 2017, with local authorities and the health insurance fund each saving 10 billion euros.

In a surprise announcement that could add to long-term potential savings, Valls proposed that France shake-up its complex system of local government, halving the number of regions from the current 27 by 2017.

Valls was appointed to run a reshuffled government after the ruling Socialists suffered a rout in local elections where both mainstream conservatives and the far-right National Front made strong gains.

Dozens of lawmakers on the left wing of the Socialist Party urged Valls to do more for working class voters but signaled they would not risk dissolving parliament by voting against him.

Hollande's Socialists have 291 seats out of 577 in the lower house. Valls' chances of winning the vote were boosted when the minority Greens party, which dropped out of the cabinet last week, said most of its deputies would back him.

(Additional reporting by Nicholas Vinocur and Alexandria Sage; Writing by Mark John and Andrew Callus; Editing by Paul Taylor, Giles Elgood and Peter Graff)

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