France will ease payroll taxes by €20 billion over three years, funding that with spending cuts and sales tax rises.
The moves are a tougher than expected response to business leaders' demands to reverse years of industrial decline.
The government, under pressure to bring down high labour costs but wary of shifting too much of the tax burden onto households, will offer companies tax credits from next year and raise consumer taxes from 2014.
Prime Minister Jean-Marc Ayrault revealed the measures at a news conference.
He said the government aims to raise €10 billion through small rises to consumer taxes and save a further €10 billion through public spending cuts over the next few years.
The measures went much further than had been expected in answering a call by industrialist Louis Gallois for a €30 billion cut to payroll taxes in a government-commissioned review submitted yesterday.
"France is not condemned to the spiral of decline. But we need a jolt at a national level to regain control of our destiny," Ayrault said. "This is about giving our companies room to manoeuvre,'' he added.
Whereas the proposal by Gallois, former head of aerospace giant EADS, on cutting payroll taxes would only have benefitted profitable firms, the offer of tax credits will also apply to companies who make too little to pay tax.
The tax credits should equate to a temporary 6% cut in companies' labour costs. BNP Paribas economist Dominique Barbet said the main advantage of offering tax credits rather than directly cutting social charges was that it would limit the volatility of fiscal income for the state.
The general value-added tax rate will rise from January 2014 to 20% from 19.6% and the special VAT rate on restaurants will rise to 10% from 7%. For the longer term, the package proposes a new green tax from 2016.
The package also contains incentives for investment in innovation, small businesses and training to try and restore lagging competitivness that has seen France's share in global export markets slide in the last two decades.
Industry leaders have lobbied hard in recent weeks for cuts to the high payroll taxes they say keep them at a competitive disadvantage against foreign rivals and are a factor driving France's trade deficit to a record €70 billion last year.
Gallois called in his report for ''shock therapy'' to remedy the long decline, setting a challenge for President Francois Hollande, who has been criticised in opinion polls for being too timid in tackling the economic crisis.
The International Monetary Fund weighed in yesterday, warning in a yearly report on France that the government must undertake bold reforms to boost competitiveness like its trading partners Italy and Spain - or risk falling behind them.
Hollande is under pressure to fix the problems that have left exporters floundering as Germany, helped by low labour costs and a culture of innovation, racked up a €158 billion trade surplus in 2011.
He also needs to ensure there is no impact to France's strained public finances from the tax credit plan, as he battles to slash the public deficit to below a euro zone ceiling of 3% of economic output next year.
The president, who had scrapped a rise in VAT to 21.2% proposed by his predecessor Nicolas Sarkozy as a step towards lowering labour charges, is under scrutiny from financial markets and investors trying to gauge his economic credibility. Moody's rating agency is due to update its position on France this month.
Business leaders have complained in recent weeks that Hollande, who raised taxes on the rich and on companies in his 2013 budget, does not have their best interests at heart.
