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FILE PHOTO - French Prime Minister Edouard Philippe arrives to attend a mass to pay tribute to French priest Father Jacques Hamel one year after he was killed by Islamist militants in an attack in the church, in Saint-Etienne-du-Rouvray near Rouen, France, July 26, 2017. REUTERS/Charly Triballeau/Pool


By Leigh Thomas

PARIS (Reuters) - French Prime Minister Edouard Philippe promised on Thursday an "unprecedented" increase in workers' spending power next year as the government struggles to strike a balance between tax relief and deficit cuts to roll out its reform agenda.

Emmanuel Macron's ratings have plunged since he won the presidency in May as his team works out the tricky details of implementing campaign promises such as labour reform and spending cuts.

The government has already had to ease the pace of some tax cuts after an audit in July showed the accounts inherited from its predecessor to be in worse shape than initially thought.

In his first major television interview after the summer break, Philippe said the government would go ahead on Jan. 1 with two-thirds of a planned cut in payroll contributions to the health system and jobless benefits.

After the 2 percentage point cut at the start of the year, a further reduction of about 1 percentage point would come in September or October 2018, he said.

"We believe that those who work and create wealth should get an increase in purchasing power. This, I believe, is unprecedented in terms of workers purchasing power," he said.

Despite the previous government's overspending, Philippe has pledged to honour an EU commitment to keep the budget deficit to no more of 3.0 percent of economic output for the first time in a decade.

The determination to rein in spending has contributed to Macron's popularity slide, polls show, but is necessary if long-profligate France is to win Germany's confidence and support for Macron's reform agenda of euro zone institutions.

The payroll contribution cuts would be financed by an increase in a broader tax covering everything from wages to capital gains and pensions, effectively shifting the burden from workers to retirees and wealthy owners of capital assets.


The pace of the cuts is only part of the equation, with the government due next week to hand in the final version of its plans to make labour market rules more flexible.

Close consultations with unions over the summer have so far kept them from getting restless but it would take only a minor communications misstep to trigger tensions once the reform's details are public.

Philippe acknowledged that plans for a broad-based cut in housing allowances, was "not intelligent" even though he said it had been written into the budget by the previous government - meaning it will have to be kept as it has been passed by parliament.

Times are unlikely to get easier any time soon for the government with plans to revamp the jobless benefits system in the coming months and launch a retirement reform next year, subject that has triggered mass demonstrations in the past.

"Real difficulties are on the horizon, there is a real risk of public opinion breaking down. The risks lie with reforms that we known the French are very reticent about," said political analyst Gael Sliman with pollsters Odoxa.

Playing in the government's favour is evidence that the economy is growing strongly, which gives it more slack as it balances its budget priorities while also putting voters in a better mood as it pushes its reforms through.

In the latest sign of the improving economy, industrial confidence rose this month to its highest level in nearly a decade, the INSEE statistics agency's monthly business morale survey showed on Thursday.

(Additional reporting by Jean-Baptiste Vey; Editing by Alison Williams)

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