Seven Out Of 10 Business Leaders Globally Want Government Debt Reduced By Cuts In Public Spending

TORONTO  (Profitable.com)  With 72 percent of businesses concerned about their country’s level of public debt and 43 percent very or extremely concerned, a new survey from KPMG International shows that cutting public spending is the most popular method of managing the public debt.

According to research released today from KPMG International titled Paying the Bill, of the 538 business leaders surveyed from around the world seven out of 10 said that debt should be reduced primarily through cuts in public spending, rising to 77 percent among Europeans. Cutting public spending was also the top choice for the Americas (69 percent) and 54 percent for Asia- Pacific respondents.

Asked which aspects of public spending should be cut, public sector pay is the most popular option, chosen by 53 percent globally, followed by defence spending (47 percent) and welfare payments (34 percent). However, it is hard to draw any general inferences from this, since so much of a country’s perceived need for defence and welfare payments arises from local circumstances and history.

Votes for and against cuts in public sector pay varied widely among countries, with Ireland scoring a remarkable 100 percent in favour, and only 12 percent choosing this option among the French.

“Calls for cuts in public spending are hardly a new phenomenon in times of economic difficulty,” says Loughlin Hickey, KPMG International’s Global Head of Tax. “However, this enthusiasm for public spending cuts presents governments with a difficult political problem. Spending cuts are always hard to implement, especially in democracies and particularly when those having to bear the main impact are the government’s own employees.”

Support for public investment in infrastructure was well received in most countries-only 24 percent selected reducing these investments as an option to manage the debt. There were majorities in favour of maintaining infrastructure spending in all countries except Japan and Hong Kong, where views were evenly split for and against reductions in spending, and in China, where a remarkable 61 percent wanted to see infrastructure investment cut.

“Unless governments are comfortable simply accepting current levels of debt and working to meet interest payments, an option which was favoured by 16 percent of respondents to our survey, they will have no choice but to raise taxes in one form or another,” says Hickey.

However, and not surprisingly, the least popular option was taxation. Only one percent globally chose tax as an acceptable means for governments to manage their debts. The survey shows that a moderate number of respondents would support tax rises if these were just for the purpose of paying back debt, and were not part of general taxation. Globally, 19 percent supported this idea, making it the third most popular option after cutting public spending and finding means other than increased taxation.

The countries most keen on tax increases were the UK (65 percent in favour) and Japan (60 percent in favour). Least keen, with no support at all for this idea, were the Netherlands, Italy, Poland, Russia and Slovakia.

“Tax rate changes-new, increases, decreases-are options used by governments to alleviate their debt. Indeed, over the past decade, KPMG has documented a slow move away from taxes on corporate incomes and towards indirect taxes globally. That move seems to be accelerating this year,” adds Hickey. “At the beginning of August 2010, we noted plans by at least 10 countries to increase their rates of VAT or GST. A further two countries, China and India, plan to introduce new consumption tax systems between 2010 and 2013.”

The report also found that the broad consensus among respondents is that the corporate tax, consumption tax (GST/VAT) and personal income tax rates in their country should be more-or-less where they are now, or perhaps a bit lower.

With corporate taxation, 39 percent from the Asia-Pacific countries said it should lie between 20 percent and 30 percent, while 38 percent opted for 10-20 percent. The average preferred rate was 22 percent, just a little lower that the actual average among Asia Pacific countries which, at the time of the research, stood at 27.5 percent(1).

In Europe, there was an equally wide range of views, with 76 percent of respondents choosing something between 10 percent and 30 percent. The average chosen was 24 percent, a fraction higher than the actual EU average corporate tax rate of 23.2 percent.

Views in the Americas were more focused, with 36 percent opting for 20-30 percent and an average of 24 percent. This compares with an actual average rate for the Americas of 27 percent.

On consumption taxes, a majority of Europeans (55 percent) opted for a rate of 15-20 percent with an average of 17 percent. In the Asia-Pacific countries the largest group (48 percent) chose 5-10 percent with an average of 9 percent, and the Americans were split between 5-10 percent, and 15-20 percent, with an average of 12 percent.

The rates chosen for higher rate personal taxes told a slightly different story. Europeans were happy with rates of 40 percent plus, while Americans chose a wide range of options from 10-40 percent. Those in the Asia-Pacific countries were clearly in favour of lower personal taxes, with the largest group (34 percent) choosing a maximum of 10-20 percent.

“The evidence suggests that the basic contract between government and business is much the same in different parts of the world, in terms of levels of service provided for an acceptable level of payment,” says Hickey. “The differences arise when we consider what different cultures believe it is appropriate for governments to do, and how this activity should be funded.”

Methodology

KPMG’s international tax practice commissioned a research project covering 538 senior corporate decision-makers in 26 countries.

Independent researchers carried out telephone interviews in April and May 2010. Their respondents were chief executives and senior officers of companies in a wide range of industry sectors, with annual revenues ranging from less than US$ 1 billion to more than US$ 5 billion. The countries represented were:

Argentina Germany Russia  
Australia Hong Kong Singapore  
Belgium Hungary Slovakia  
Brazil India Spain  
Canada Ireland Switzerland  
Chile Italy UK  
China Japan US  
Czech Mexico  
Republic Netherlands  
France Poland  
     

A copy of Paying the Bill is available at: http://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/Pages/paying-the-bill.aspx

About KPMG International

KPMG is a global network of professional firms providing Audit, Tax and Advisory services. We operate in 146 countries and have 140,000 people working in member firms around the world. The independent member firms of the KPMG network are affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. Each KPMG firm is a legally distinct and separate entity and describes itself as such.

(1) All actual average figures taken from KPMG’s Corporate and Indirect Tax Rate Survey 2009

For further information: Carolyn Forest, KPMG’s Global Tax Marketing and Communications, cforest(at)kpmg.ca, (001) 416-986-2316