LEAD: Sarkozy increases VAT to finance pre-election labour reforms

Jan 29, 2012, 22:03 GMT

Paris - Three months before France's next presidential elections, President Nicolas Sarkozy on Sunday unveiled a series of measures aimed at tackling unemployment, including a controversial hike in value-added tax (VAT).

In an interview carried live on six television channels, Sarkozy said he would increase the VAT rate from 19.6 per cent to 21.2 per cent in October, in order to help pay for a a 13-billion-euro (17-billion-dollar) reduction in employers' social security charges.

The government blames high employer social security charges - about twice as high in France as in Germany - for driving up labour costs and causing companies to offshore their production.

'I want France to remain a country of production, I want us to keep our factories,' Sarkozy said.

He also announced the establishment of an 'industry bank' to finance investment by small businesses and new rights for companies to negotiate directly with workers on adjustments to working hours where necessary to avoid job losses.

Unemployment has emerged as the top issue for voters in France's two-stage, April-May presidential election.

Sarkozy, who has yet to announce that he will seek re-election but is already in campaign mode, promised at the start of his mandate in 2007 to achieve full employment within five years.

Instead, the number of jobless has grown by over 700,000. Unemployment is running at close to 10 per cent, the highest level in 13 years.

A poll published Sunday in Le Journal du Dimanche weekly showed only 22 per cent of French people trusted Sarkozy to act on unemployment, compared with 46 per cent for his Socialist rival, presidential frontrunner Francois Hollande.

Sarkozy said he was convinced the VAT increase, dubbed a 'social VAT' would save jobs.

He rejected accusations by opposition parties and trade unions that the tax would increase prices and hurt the purchasing power of ordinary citizens.

'What purchasing power do you have if you lose your job?' he asked.

Sunday's interview was seen as critical to Sarkozy reviving his reelection hopes.

Opinion polls show him winning only between 23 and 25 per cent of votes in the first round of the election on April 22, compared with between 28 and 31 per cent for Hollande.

If no candidate wins an outright majority, the two top candidates will face off in a second round. Polls show Hollande would easily defeat Sarkozy in such a case.

Faced with the prospect of defeat, Sarkozy has begun to express regret for some of his past actions.

'Do I have regrets? Yes,' Sarkozy said Sunday. 'Will I explain them when the time comes? Yes.'