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ContentsThe European Experience 29

Belgium 30Czech Republic 31France 32Germany 33Hungary 34Ireland 35Italy 36Netherlands 37Poland 38Russia 39Slovakia 40Spain 41Switzerland 42United Kingdom 43

Introduction 2

Commentary 3A Global Success Story? 3Big Spending no Route to Popularity 4Government as Partner vs. Government as Burden 6

Paying the Bill 8The Case for Tax Rises 10Value for Money 11

The Americas Experience 12Argentina 14Brazil 15Canada 16Chile 17Mexico 18United States 19

The Asia-Pacific Experience 21Australia 22China 23Hong Kong 24India 25Japan 26Singapore 27


IntroductionHopes are high, and indications are promising, that the global recession that began in 2008 is technically now over. And, like all the similar global economic crises that have preceded it, it casts a long shadow. The potential consequences of the recession in reduced opportunities for growth, lost jobs, new and increased regulatory frameworks and a simple reluctance on the part of many people to boldly seize opportunities and risks that only two years ago they would have considered a minor matter, will be with us for some time.

The consequences for public finance and taxation are equally challenging, as governments work to manage and reduce the debts that many have incurred in their stabilization efforts.

To coincide with KPMG’s latest European Tax Summit1, we have commissioned an international study, examining the views of businesspeople around the world on the success or failure of their governments’ economic stimulus programs, and on the best way to deal with the resulting public debt. The effect on future tax initiatives is at the core of this discussion.

Our researchers spoke to nearly 600 senior corporate decision makers from 26 countries. Their responses revealed a clear divide between the US, Europe and the Asia-Pacific countries on the value of government intervention, but much agreement on what tax and spending policies governments should adopt in future.

These views on taxation are important, because they represent the considered opinions of influential people, who governments often turn to for advice. The extent to which they will be reflected in actual policy decisions is something that can only emerge over time.

This report summarizes the results of our survey, and offers some insights into the possible future direction of public revenue policy around the world. We hope it will be of value to policymakers, businesspeople, tax directors, CFOs and commentators, indeed anyone with a keen interest in the future development of global commerce and the role taxation should play in it.

Ernst GröblHead of Tax, EMEA Region

1 The 2010 KPMG EMEA Tax Summit in Prague, September 29 to October 1, 2010.

2 | PAYING THE BILL


By the standards of past international economic crises, the response of governments to the global crisis that broke in 2008 was swift, effective, and broadly successful. In varying degrees around the world, governments stepped in to increase public spending, boost the supply of money in the economy and guarantee the health of important commercial enterprises. It was a concerted wave of public intervention in economic life that has not previously been seen outside times of war.

The immediate results are apparent in the speed with which many economies have returned to growth, or have resumed something approaching the levels of growth that they were enjoying pre-2008. But even for the most resilient of economies, there is a price to be paid for government intervention on this scale, in public debt that must be serviced and ultimately repaid.

For many, especially those who are not convinced that government stimulus programs were indeed a major contributor to avoiding depression, this price may be too high2.

As the generators of wealth from which the means to pay this price must come, businesses across the world clearly have an interest in what happens next. So, to discover what view businesspeople are taking of the efforts that their governments have made to keep their economies afloat, and how they think the resulting debt should be handled, KPMG’s Global Tax practice commissioned a research project covering nearly 600 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

A Global Success Story?

Commentary

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

Australia

Belgium

Brazil

Canada

Chile

China

Czech Republic

France

Germany

Hong Kong

Hungary

India

Ireland

Italy

Japan

Mexico

Netherlands

Poland

Russia

Singapore

Slovakia

Spain

Switzerland

UK

US

2 In this document, we use the phrase “government stimulus programs” to include all forms of government-led intervention with the aim of maintaining or boosting economic activity to counteract the effects of recession. This includes increased borrowing to support increased spending and bridge deficits as well as more formal intervention programs.

This report summarizes the responses we received. It provides some insight into the views businesspeople are taking of the effectiveness of interventionist policies, and their expectations for future policy on public revenues and taxation.

PAYING THE BILL | 3


Big Spending no Route to PopularityLast year, in an international study of business strategies for managing and surviving recession3, we found that there was a clear divide between the businesses of Europe and North America, and those of the Asia-Pacific countries.

Put simply, Europeans and Americans saw the crisis as a matter primarily needing decisive government action, while Asians, Chinese, and Singaporeans, although they thought

ChileArgentinaIndiaSwitzerlandRussiaMexicoSingapore

governments had an important role to play, were much more likely to see a route to recovery through businesses consolidating, regrouping and expanding into new markets.

If the increase in public debt over 2008 levels is a measure of the size of the stimulus programs that governments put in place, then it seems that governments broadly shared the views of their businesspeople.

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39%European businesses who believe they are out of recession, 39 percent say this is due to a recovery in exports, and a further 39 percent believe it is down to a recovery in consumer spending.

Change in net debt as % of 2008 level4

3 “Never catch a falling knife” KPMG International, 2009

4 Source: Economist Intelligence Unit. The EIU is the source of all public net debt information in this document.

4 | PAYING THE BILL


The countries with the largest increases in net debt are those where government intervention was most demanded: Ireland, Spain, the UK, Australia, the Czech Republic, and the US. China, Japan, Singapore, Russia and India seem to have been relatively restrained in their spending, matching the less interventionist preferences of their businesses.

But if the governments of Europe and the US thought that the size of their

interventions would bring them some support, they were sadly mistaken. This year’s survey shows that among the European businesses who believe they are out of recession, 39 percent say this is due to a recovery in exports, and a further 39 percent believe it is down to a recovery in consumer spending. Only 24 percent attribute recovery to their government’s stimulus package.

In the Americas, increased consumer spending was the main contributor to

recovery for 45 percent, followed by reduced interest rates, chosen by 41 percent. Government stimulus packages came third, chosen by 34 percent.

Among Asia-Pacific respondents, however, government action is the clear winner, chosen as the main contributor to recovery by 74 percent of respondents, with consumer spending second, on 48 percent, and export recovery third on 41 percent.

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Recovery in exports 39%Consumer spending recovery 39%Reduced interest rates 28%

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In EMEA and Americas the private sector has driven growth. 74% of ASPAC companies feel the recovery is driven by their governments’ stimulus packages5

5 Source: Q. What have been the most important factors driving this recovery? Base: All who believe they are out of recession (283)

Government stimulus package 74%Consumer spending recovery 48%Recovery in exports 41%

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PAYING THE BILL | 5


ChileSwitzerlandSingaporeRussiaHong KongChinaNetherlands

Percentage of respondents very or extremely concerned about public debt levels6

5% 5% 5%

10% 10%

20% 20%

25% 25% 25%

35% 35% 35%

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55% 55% 56%

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Government as Partner vs. Government as BurdenIt is possible, of course, that respondents from the Asia-Pacific countries are reacting favorably to their governments’ actions precisely because the impact on levels of public debt has been relatively low.

Many of these countries were touched relatively lightly by the effects of the recession, and some are now reporting growth rates comparable with those experienced pre-2008. If people in the Asia-Pacific countries are seeing good results from relatively low levels of additional public expenditure, then we might expect them to approve of this and want it to continue.

Conversely, in those countries where businesspeople are most concerned

about the levels of public debt their governments have incurred, we might expect low levels of support for stimulus programs and a clear desire for them to be brought to a close as rapidly as possible. This is especially true if they are not thought to have been particularly successful.

This hypothesis is partly borne out by our research, but not completely. There are high levels of concern about public debts in most of the large European economies and the US. Concern is generally much lower in China, India, Russia and Singapore (Argentina and Japan stand out as exceptions, most likely due to their particular histories of major economic difficulty).

IndiaHungaryCanadaMexicoAustraliaBelgiumBrazil

SpainPolandItalyArgentinaFranceGermanyJapan

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6Source: KPMG International, May/June 2010

6 | PAYING THE BILL


But when we asked people how soon government stimulus plans should be withdrawn following a return to growth, a subtly different picture emerged. In India, China, Russia and Singapore, as we might expect, there were majorities

in favor of keeping these programs going for a year or more once growth had returned. In the US and Canada, there were majorities in favor of withdrawing them immediately.

Slovakian and US businesses are most keen to remove the fiscal stimulus quickly on returning to growth – Russia and Ireland prefer to wait the longest7

In many European countries, however, there was significant support for keeping government support programs in place for six months or longer, despite the high levels of concern expressed in these countries over public debt. There is clearly an ambivalent view among Europeans, who do not welcome the prospect of higher taxes or public spending cuts to pay down public debts, but are anxious over the possible impact

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on recovery of a rapid withdrawal of government support.

It’s interesting to compare this with our earlier finding, that European respondents place their governments’ stimulus packages only fourth in the list of factors promoting recovery. Perhaps this result reflects a general lack of confidence in the prospects for further recovery, and a wish to keep in place

anything that might possibly contribute to future growth.

European businesspeople do understand the cost of this approach, but given the perceived threats to their prosperity from new competitors in Asia Pacific and declining markets in the US, it appears to be a price they are prepared to pay.


PAYING THE BILL | 7


Paying the BillRaising revenues outside the tax systemFor those who wanted governments to concentrate on raising revenues outside the current tax system, the most favored option globally and regionally was to sell off public assets. This was chosen by 38 percent in Europe, 48 percent in the Asia-Pacific countries and 36 percent in the Americas.

A popular option was to increase levies on foreign companies. This was the second most popular choice globally, and was equal first in the Asia-Pacific countries alongside selling public assets.

Third most popular globally was increasing direct fees for public services, chosen by 37 percent.

Other options, including increasing cost efficiencies and raising exports, were not popular solutions, possibly because they were seen as too long term to be of much help in dealing with the immediate need for revenues, or things that governments should be doing anyway.

The overwhelming message from respondents to our survey is that they do not want to pay down public debt through increased taxes. Seven out of 10 said that debt should be reduced primarily through cuts in public spending, rising to 77 percent among Europeans.

Public spending is more popular among Asia-Pacific respondents, but even here, 54 percent chose cuts in spending as their preferred method of reducing public debts.

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).

Votes for and against cuts in public sector pay were balanced fairly evenly among countries, with Ireland scoring a remarkable 100 percent in favor, and only 12 percent choosing this option among the French.

Cuts in defence spending were surprisingly popular, but it is hard to draw any general inferences from this, since so much of a country’s perceived need for defence arises from local circumstances and history. Nevertheless, it’s interesting to note that the Irish were again most keen on this form of saving, with 83 percent in favor, followed by the Swiss on 82 percent and respondents from the UK on 75 percent. Least in favor was Argentina on only five percent, followed by Brazil on 11 percent, Russia on 18 percent and India and Italy on 20 percent.

Support for public investment in infrastructure held up well in most countries. There were majorities in favor of maintaining this area of 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.

54%Public spending is more popular among Asia-Pacific respondents, but even here, 54 percent chose cuts in spending as their preferred method of reducing public debts.

8 | PAYING THE BILL


Paying the BillWhere should the spending axe fall?8

Public infrastructure investment

Respondents Country %

411 Total 24%

18 China 61%

10 Japan 50%

6 Hong Kong 50%

7 Singapore 43%

11 Russia 36%

17 Spain 35%

18 Ireland 33%

24 USA 33%

19 Hungary 32%

10 India 30%

32 UK 28%

15 Czech Republic 27%

17 France 24%

18 Netherlands 22%

11 Switzerland 18%

12 Canada 17%

27 Germany 15%

13 Belgium 15%

15 Italy 13%

16 Mexico 13%

15 Australia 13%

19 Argentina 11%

20 Slovakia 10%

15 Poland 7%

18 Brazil 6%

8 Chile

Public sector pay


411 Total 53%

18 Ireland 100%

16 Mexico 94%

7 Singapore 86%

10 Japan 80%

32 UK 78%

19 Hungary 68%

18 Brazil 67%

15 Poland 60%

10 India 60%

15 Australia 60%

20 Slovakia 55%

13 Belgium 54%

6 Hong Kong 50%

17 Spain 47%

11 Switzerland 45%

11 Russia 45%

12 Canada 42%

27 Germany 41%


19 Argentina 37%

15 Italy 33%

24 USA 33%

18 China 33%

8 Chile 25%

18 Netherlands 22%

17 France 12%

Welfare payments


411 Total 34%

18 Ireland 83%

24 USA 58%

18 China 56%

11 Switzerland 55%

32 UK 50%

7 Singapore 43%


18 Netherlands 39%

17 France 35%

15 Poland 33%

15 Australia 33%

19 Hungary 32%

13 Belgium 31%

10 Japan 30%

17 Spain 29%

19 Argentina 26%

20 Slovakia 25%

12 Canada 25%

15 Italy 20%

10 India 20%

27 Germany 19%

16 Mexico 19%

18 Brazil 11%

11 Russia

8 Chile

6 Hong Kong

Defense spending


411 Total 47%

18 Ireland 83%

11 Switzerland 82%

32 UK 75%

8 Chile 75%

17 Spain 71%

7 Singapore 71%

16 Mexico 69%

18 Netherlands 61%

27 Germany 59%

24 USA 58%

12 Canada 58%

13 Belgium 54%

20 Slovakia 50%

15 Australia 47%

17 France 41%


6 Hong Kong 33%

10 Japan 30%

18 China 28%

15 Poland 27%

19 Hungary 21%

15 Italy 20%

10 India 20%

11 Russia 18%

18 Brazil 11%

19 Argentina 5%

Calls for cuts in public spending are hardly a new phenomenon in times of economic difficulty. But in some countries, the strength of opinion shown here in favor of reducing public sector remuneration packages is remarkable, and it is interesting to look for a correlation between this and the changes that have taken place in the private sector in these countries.

For many in these countries, labor force reductions, changes in contracts resulting in reduced job security, improvements in efficiency and increased competition have all been major

Source: Q. You said that revenues should be diverted to debt repayments from public spending, which areas of public spending do you think should be cut?

Base: All selecting Code 5 at Q12 (411)

factors in the development of international commercial life in the past decade. It is arguable that these influences have not been equally felt in the corresponding public sectors.

While business was booming, this was perhaps not a major priority for businesspeople. But with business poor and public debt a growing issue, it appears that businesspeople in these countries are now looking for government employees to implement the same improvements in efficiency and reductions in cost that they have had to accept in the recent past.


PAYING THE BILL | 9


The Case for Tax Rises

Raising revenues from the tax systemAmong the small number of respondents who thought that revenues should be raised through existing tax systems, the clear priority was to explore all options before resorting to increases in tax rates or new taxes.

Globally, seven out of 10 chose closing exemptions and loopholes in existing tax legislation, and increasing enforcement action against tax evasion, as their top priorities.

These two options were especially popular in Europe, chosen by 83 and 80 percent of respondents respectively, but although they were the most popular options in the Americas, the level of support was much lower, at 57 percent for more action against tax evasion, and 43 percent for reducing exemptions and loopholes. There are a number of possible explanations for this; different experiences that businesses in these two regions have had in their dealings with the tax authorities could be one.

More international co-operation on challenging tax havens and scrutinizing transfer pricing was also a popular option

in Europe (chosen by 70 percent) and in the Asia-Pacific countries (59 percent). But, again, it was not a favored option in the Americas, supported by only 26 percent of respondents, who ranked it alongside raising tax rates on personal incomes and introducing new taxes on consumption, environmental damage and land use.

If taxes do need to be raised, then the preferred option in Asia–Pacific and Europe is new or higher indirect taxes (62 percent and 63 percent respectively), followed by taxes linked to the environment (47 and 46 percent). Higher taxes on corporate profits were chosen by 37 percent in Europe, 32 percent in Asia-Pacific, and 30 percent in the Americas, making it the most popular tax-raising option among American respondents.

Higher taxes on larger personal incomes were relatively popular in the Asia-Pacific countries, chosen by 44 percent and well ahead of a more general rise in income taxes, which attracted support from only 18 percent. But elsewhere, higher taxes on higher incomes were the least popular option, chosen by 26 percent in Europe and only 13 percent in the Americas. A focus on taxing the rich is clearly not seen as a sensible solution to public debt issues in these regions.

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.

For many of the countries surveyed, Ireland, Spain, the UK, the US, France, Italy and Japan among them, it is far from clear that reductions in public spending would be enough, by themselves, to make significant reductions in levels of public debt.

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

There was a moderate amount of support among our respondents for tax rises if these were ring-fenced and used specifically to pay back debt. Globally, 19 percent supported this idea, making it third most popular option after cutting public spending and finding means other than increased taxation.

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

But a general tax rise was not a popular choice for any of our respondents. Only one percent globally chose this as an acceptable means for governments to manage their debts.

This group may be a small minority among their peers and competitors, but they do seem to be well-attuned to the thinking of many governments on tax policy. A majority (55 percent) of those in favor of a rise in taxation preferred a rise in indirect taxes to all other options, and it appears that this view is shared by governments.

Over the past decade, KPMG has documented a slow global move away from taxes on corporate incomes and towards indirect taxes. That move seems to be accelerating this year. As at the beginning of August 2010, we have noted plans by 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.

10 | PAYING THE BILL


Tax rate preferencesFor all the debate that rages around the world on where countries should set their tax rates to be fair and competitive, the broad consensus among the respondents to our survey seems to be that rates in their country should be more-or-less where they are now, or perhaps a bit lower.

This view emerged from answers to three questions, asking what people thought was the most appropriate rate of corporate profits tax, consumption tax (VAT or GST) and higher rate personal income tax for their country.

Taking 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 percent9.

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 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 favor 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. The differences arise when we consider what different cultures believe it is appropriate for governments to do, and how this activity should be funded.

Value for MoneyIt is rare that we get such a strong result from an international survey of businesspeople. The vote against general increases in taxation is as clear as it can be. Unfortunately, there is every indication that businesses are going to be disappointed in their desire for the bulk of revenue raising to come from public spending cuts.

The world seems to be set for a period of tax rises, focused on consumption

taxes, and likely to include new environmental levies, real estate taxation and possibly increased personal income taxes as well. The arithmetic of public finances demands it. But as a price for avoiding the worldwide depressions that have wrought havoc in the past, some might say that, done fairly and with restraint, this represents very good value.

9All actual average figures taken from KPMG’s Corporate and Indirect Tax Rate Survey 2009

PAYING THE BILL | 11


The Americas ExperienceThe Southern American states in our survey seem to have come out of the problem years in reasonably good shape.

Chile has the lowest level of public sector debt of any of the countries we have polled, and a comparatively high level of satisfaction with government action. Argentina, given its history of financial difficulty, is showing good signs of recovery, and Brazil is thought to be on course to become one of the five largest economies in the world.

But the closer we get to the US, the stronger the effect of that economy’s difficulties on the surrounding countries. Both Mexico and Canada have stayed relatively untouched by recession, but both have been adversely affected by the problems experienced by their most significant neighbor.

There is admiration in many corners of the world for the US Government’s stimulus program,

which seems to have played a very influential role in keeping many economies, not just that of the US, from more serious recession. Investments in the US auto industry, for example, are now seen to be reaping benefits, and the backing provided for US financial institutions has played a major part in promoting stability.

However, US businesspeople are realistic in their assessment of the burden of public debt they will have to deal with, and many do expect higher levels of taxation in one form or another.

Just as the US stimulus program has had an impact on economic activity beyond its borders, so we might expect the US solution to the problem of elevated public debt to have an influence elsewhere. The particular blend of spending and fiscal measures that the US eventually chooses to help manage its problems is of profound interest to the rest of the world.



Argentina

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ArgentinaDespite being one of South America’s largest economies, Argentina has been buffeted by some exceptionally difficult economic challenges in recent years. Yet it has managed to retain its place as one of the G20 largest economies in the world.

According to 79 percent of Argentinean businesses, a revival in exports has driven the country’s recovery out of recession – only Hungary has a more optimistic view of the effect of exports on recovery.

An upsurge in consumer spending is seen as a significant contributor by 43 percent of respondents and 36 percent welcome the reduction in interest rates. The Government’s stimulus package is credited by just 14 percent of businesses as having an impact on the recovery.

However, there is ambivalence towards the fiscal stimulus, in that that respondents still want to retain it, at least in the short term. 30 percent want to see the package remain in place for at least another year, although a similar number (35 percent ) believe the stimulus should be withdrawn as soon as the recession ends.

Argentina’s current debt level stands at 48 percent of GDP, a figure that has remained level since 2008, and it is absolutely clear what businesses think the Government should do about this. Most of the respondents (95 percent) would like to see cuts in public spending and 25 percent want the Government to service the debt and look to meet interest payments at the same time. It is interesting to note that all the respondents agree that the ‘do nothing’ option is not desirable.

There is less consensus when it comes to exactly where these cuts in public spending should be made. The most popular area (37 percent) is public sector pay, while 26 percent want a reduction in welfare payments. Public sector infrastructure is the target for 11 percent of businesses, with only five percent wanting the Government to cut spending on its defence programme.

Recovery in exports

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36

Reduced interest rates

Government stimulus package

43

Q: What have been the most important factors driving this recovery?

Base: All who believe they are out of recession (14)

14%The Government’s stimulus package is credited by just 14 percent of businesses as having an impact on the recovery.



BrazilWith exports continuing to boom, Brazil is expected to become one of the five largest economies in the world in the coming decades. It is surprising therefore, that only 18 percent of businesses in Brazil believe that rising exports are the reason for the strength of the economy.

Greater credit is given, by 41 percent of businesses, to the impact of the Government’s stimulus package. However, an even higher percentage (53 percent) believes it is the resurgent housing market that is driving growth.

This confidence in the performance of the economy is reflected in the views of 35 percent of Brazilian businesses, who believe that the Government should quickly move towards withdrawing fiscal stimuli and allow the economy to function normally, now that the worst effects of the downturn have receded.

Only 10 percent of businesses indicate a more cautious reaction is required, believing that these supporting interventions should be maintained for at least the next two years.

Despite this confidence, there is still a good deal of concern over the level of public debt in Brazil. A significant number of respondents (40 percent) see this as a reason for concern. The Brazilian public debt in 2010 is estimated to be in the region of 44 percent of GDP, an increase of 14 percent against 2008 levels. This compares favorably with many of the world’s leading economies, but Brazilian business clearly wants to see further improvement.

The prevailing opinion that this debt should be actively and aggressively managed by the Government. An overwhelming 90 percent of businesses

want public spending to be cut, rather than increasing taxation, while only five percent want the Government to merely concentrate on meeting interest payments.

According to 67 percent of Brazilian businesspeople, public servants should be targeted for pay cuts, while 11 percent believe that the country’s welfare commitments should be reduced. A decrease in defence spending is also called for by 11 percent of businesses.


Housing market recovery


24

53

29



41




CanadaCanada is one of the world’s wealthiest G8 nations and is also one of the top 10 trading nations in the world.

However, due to the global recession, the Canadian government decided that a stimulus package for the economy was necessary for sustained growth.

This economic stimulus is generally applauded by the Canadian respondents to the survey, as 40 percent credit it with steering the country away from the risk of recession. House prices have remained steady throughout the period and this is highlighted by 30 percent of respondents in Canada as a contributory factor in the recovery.

A reduction in interest rates and an increase in consumer spending are two further market moves recognized by 40 percent and 20 percent of respondents respectively as important recovery drivers.

On the question of continuing the economic stimulus, 55 percent of Canadian businesses are happy to see an immediate withdrawal of the fiscal stimulus measures, while 30 percent believe they can end once six months of growth has occurred, and only 10 percent would prefer a withdrawal after 12 months of growth.

Currently standing at 74 percent, the public debt is 15 percent higher than its 2008 level, and this is of considerable concern for 25 percent of respondents. There are some calls, from 25 percent of businesses, for taxation to be increased to pay back the national debt. But there is also a school of thought,

from 20 percent of respondents, which suggests that increased tax revenues are a natural product of growth in the economy which will automatically lower the debt.

However, the largest vote, from 60 percent of respondents, is for public spending cuts. There is a body of support amongst Canadian respondents (58 percent) for further cuts in defense spending. Public sector pay cuts are sought by 42 percent of respondents; 25 percent would like to see welfare payments cut and 17 percent would cut public infrastructure investment.


20

30

40





40




Chile

35%National debt in Chile currently stands at three percent, an impressive decrease of 35 percent compared to 2008.

Chile has performed better than any other Latin American country through the latest recession and, in terms of national debt, is out-performing the rest of the world.

The major free-trade agreements which Chile has signed with countries including China and India, which have done much to drive significant economic growth.

While the increase in Chilean exports is credited by 36 percent of businesses as a factor in fighting the global recession, the reduction in interest rates is recognized by 50 percent of respondents as one of the most important factors. The Chilean Government’s fiscal stimulus plan has, according to 43 percent of businesses, also contributed to the recovery. The other major factor pointed to by 36 percent of businesses is the increase in consumer spending.

Such has been the success of the Government stimulus measures that many businesses (40 percent) want this to remain in place for at least the next year, with five percent believing it should remain for the next two years. However, 25 percent of businesses think that the Government should withdraw these measures immediately.

National debt in Chile currently stands at three percent, an impressive decrease of 35 percent compared to 2008. Not surprisingly, Chilean businesspeople appear satisfied with this situation, with only five percent indicating major concern.

However, opinion is split as to how the Government should deal with the debt. 40 percent of Chilean businesses would like to see a cut in public spending, while 20 percent advocate an increase in taxation, the proceeds of which can

be used to service the debt. 15 percent believe taxation to be unnecessary, but think the Government should decrease the debt through other means.

Where cuts in public spending are called for, it is in defence that most businesses believe the Government axe should fall. 75 percent of respondents want defence spending to be reduced, a figure surpassed by only two other participating countries in our survey, Switzerland and Ireland. Public sector pay is also targeted by 25 percent of respondents, but there is no desire for spending on either public infrastructure projects or welfare payments to be reduced.


36 3643

50




Recovery in exports




MexicoEconomic reforms, which have included a determined effort to reduce public debt, have enabled Mexico to come through the global recession relatively unscathed.

A sizable cut in interest rates has supported the financial sector, alleviating much of the pressure on the country’s economy.

This reduction in interest rates is perceived by 70 percent of Mexican survey respondents as one of the most important factors in steering the country out of recession. Economic recovery in Mexico, inevitably, will be influenced by how the United States fares in the coming years, but the increase in Mexican exports is a good indicator of sustainable growth, a fact highlighted by 60 percent of respondents. The rise in the strength of the Peso against the US Dollar has also helped in the recovery, according to 40 percent of Mexican businesses.

A low level (20 percent) of respondents acknowledge the effectiveness of the Government fiscal stimulus measures. Nevertheless, 80 percent of businesses want it to remain in place, with only 15 percent advocating an immediate withdrawal once there is a return to growth. 35 percent want the measures to continue for six or 12 months, and 10 percent think two years would be safer.

Today, public debt stands at just under 40 percent of GDP, which represents a 10 percent increase on the 2008 level. The Mexican Government has done much to reduce this debt, yet 35 percent of Mexican respondents are very or extremely concerned about this. Taxation increases are necessary, according to 20 percent of respondents,

but 40 percent disagree, preferring other means of raising revenues. However, the most popular means of repaying the debt is, for 80 percent of respondents, a cut in public spending.

Public sector pay is the target for the vast majority of Mexican businesses – 94 percent, one of the highest percentages across all countries surveyed. 19 percent believe the country’s welfare program should be cut, whereas spending on homeland defense is the preferred option of 69 percent of respondents.

70%This reduction in interest rates is perceived by 70 percent of Mexican survey respondents as one of the most important factors in steering the country out of recession.


60

30

40

70


Recovery in exports

Change in value of the currency





United StatesIn 2007, the United States faced immense challenges in its financial sector with the collapse of the sub-prime housing market. The financial fall-out spread quickly around the world. Urgent fiscal support measures were introduced to stabilize the economy and these have been maintained by the new US administration.

The US continues to play a leading role in coordinating the global response to the recession, as well as helping to shape new international rules on bank supervision and regulation.

Although 41 percent of US business respondents believe their Government’s stimulus package has been an important factor in recent growth, a greater percentage (77) suggest that the increase in consumer spending is a key driver of recovery, while 45 percent of respondents point to the reduction in interest rates as a contributing factor.

The steady growth in the housing market is cited by 18 percent of US businesses as a recovery factor, with 14 percent citing an increase in export activity.

With the US economy showing signs of stabilization, if not recovery, 65 percent of respondents want the stimulus measures to be stopped immediately, although some (23 percent) advocate a delay of six months, and 13 percent would like to see them in place for 12 months.

Currently standing at 54 percent of GDP, public debt has been kept under reasonable control by the US administration, although this is 44 percent higher than at 2008, a fact of great concern to 70 percent of those surveyed.

Views on how the debt should be reduced are varied. 10 percent of respondents want the government to do nothing, 18 percent want to pay interest payments only. The same number favor increased taxation,

whereas 28 percent would like non-taxation measures to be adopted. But the largest group, 60 percent of respondents, call for public spending cuts.

US military commitments overseas are enormous, but 58 percent of the US business community want to see cuts in the defense budget. A similar percentage argue for reductions in some of the country’s more controversial social welfare programs, while 33 percent propose cuts to public sector pay and spending on public infrastructure projects.




18

77

41



45




Australia

China

Hong Kong

India

Japan

Singapore



The Asia-Pacific ExperienceThe countries of the Asia-Pacific region have been relatively lightly touched by the recession. Growth has slowed, but is now picking up, to the extent that China was reported in August 2010 to have overtaken Japan as the world’s second largest economy.

Economic support from governments has been substantial in each of the Asia-Pacific countries we have surveyed, and is expected to continue for some time. Government involvement is much more popular in this part of the world than in either Europe or the Americas, and is thought by many of our respondents to have played a major part in keeping their economies in good health.

Since public debt levels are generally low by world standards, concern over this issue among businesspeople is also relatively low. Nevertheless, in each of the countries in our survey there is a sizeable minority that is very concerned about levels of debt and wants to see action to bring them down.

Given the high levels of spending on infrastructure that exist in many countries in the region, particularly China, we should probably not be surprised that this very visible form of public expenditure is high on the list of spending that business people want to see cut. Public sector pay, which seems to be an issue in all parts of the world, is also a popular area for spending reductions.

Tax increases are not high on the priority list for Asia-Pacific businesses, and observers might be forgiven for thinking that businesspeople in the region would be surprised to be presented with a higher tax bill in the short to medium term. Only time will tell whether or not their confidence is well-founded.



Australia Unusual among the countries in our survey, the Australian economy has not suffered a recession. The economy slowed down, but a government stimulus program assisted in cushioning the downturn and maintaining growth.

Nevertheless, Australian businesses take a mixed view of the value of their government’s economic stimulus program. Just over half (53 percent) acknowledge that it has had a beneficial impact, making the program the largest factor in driving growth, after a revival in exports (33 percent), and reduced interest rates (27 percent).

There are concerns over the rapid rise in levels of public debt; Australian net debt has increased by 51 percent since 2008, placing it fourth in the world in terms of debt increase, after the UK, Spain and Ireland.

But this still leaves Australia with debts at a relatively low 22 percent of GDP, placing it alongside China towards the bottom of the global league table.

Only 35 percent of Australian respondents said they were very or extremely concerned at the level of increase in their country’s debt, and 45 percent did not see this as a problem at all.

Despite this, Australian businesses do want to see some action to reduce public debts. There was no support for the suggestion that the debt should simply be accepted, but 30 percent thought that increases in tax revenues as a result of a revival in economic activity would automatically provide the means to pay back loans, so no specific action was needed.

A more active response was demanded by 75 percent, who wanted to see

public spending cut, focusing on public sector pay (60 percent) and defence spending (47 percent). As in many other countries, tax rises to raise additional revenues were very unpopular. Even those designed specifically to pay back debt were supported by only 15 percent.

Australia held a Federal Election on 21 August 2010 and neither the Labor Party or the Coalition gained enough seats to govern. Currently, Australia is facing its first hung parliament in 70 years and the prospect of a lengthy period of political uncertainty.

51%There are concerns over the rapid rise in levels of public debt; Australian net debt has increased by 51 percent since 2008.


33

53


Recovery in exports

2727






ChinaPublic debt is not a major problem for the Chinese economy, and although the economy has yet to resume the very high levels of growth that were achieved in the years prior to 2008, Chinese businesses are reported to be enjoying levels of demand and profitability that other economies would struggle to match.

It is clear from the recent history of Chinese economic development that Government and business are closely intertwined. So it comes as no surprise that two-thirds of our Chinese respondents see the Government’s stimulus program as the main factor driving recovery, and 85 percent want it to continue for at least six months.

However, two-thirds also saw a recovery in consumer spending as equally important in the Chinese recovery. It is possible that some were referring here to a recovery in consumer spending outside China, but only 33 percent cited a recovery in exports as a significant factor.

This suggests that the Chinese Government’s drive to increase consumer spending among its own people as a potentially strong source of demand is meeting with some success. If it is this program that is encouraging consumers into the arms of Chinese businesses, then it is no surprise that Government support should be so widely welcomed.

Chinese net public debt stands at 19.3 percent of GDP, having increased by a modest 20 percent over 2008 levels. Nevertheless, some sectors of business expressed high levels of concern over these debts, and 90 percent wanted to see cuts in public spending.

Of these, 61 percent wanted cuts in spending on infrastructure projects,

perhaps reflecting some anxiety over the sheer scale of the infrastructure creation, renewal and improvement deemed necessary by the Government if China is to continue to grow.

Despite the relatively low level of social security support in China, 56 percent opted for a reduction in welfare payments. A third opted for a reduction in public sector pay, and 28 percent chose a reduction in defence spending.


67



33

67

42


Recovery in exports




Hong Kong Businesspeople in Hong Kong seem even more enthusiastic about their Government’s economic stimulus program than their colleagues on the Chinese mainland.

Fully 81 percent of Hong Kong respondents said that the Government stimulus package had been the most important factor in their recovery (second only to Singapore in their approval of Government actions) with 56 percent citing a recovery in consumer spending and 50 percent pointing to a recovery in the housing market.

Although 10 percent want the stimulus program to end rapidly, twice the proportion on the mainland, 30 percent would like it to remain in place for a year, and 15 percent want it to continue for at least two years.

There is no evidence of high levels of concern over public debt among Hong Kong businesspeople, with only 10 percent saying they are very or extremely concerned. This is despite a 41 percent rise in net debt as a percentage of GDP since 2008, bringing Hong Kong’s public debt up to 19.5 percent of GDP, very close to the 19.3 percent figure for the mainland.

This relaxed view extends to ideas for Government action on tax. Just over a third (35 percent) think that no action is necessary, and tax revenues will pick up as the economy grows. There is some support for increasing public revenues outside the tax system (45 percent) but little for an increase in taxes (15 percent).

Only 30 percent would support cuts in public spending, placing Hong Kong firmly at the bottom of the league table

of those in favor of spending cuts. Of these, half are looking for cuts in infrastructure spending and half for cuts in public sector pay.

On this evidence, Hong Kong seems to be confirming its long-held reputation as an entrepreneurial hub, but with significant added confidence from the economic support provided by the Chinese Government.


4450

56

81




Recovery in exports




India2009 saw a significant slowdown in India’s economy, as well as a large deficit in GDP. But the Indian Government’s economic stimulus program, combined with a revival in domestic demand, has meant that the country has escaped relatively unscathed from the worldwide recession. GDP is reported to be growing by seven percent by the end of the 09/10 financial year.

81 percent of Indian businesses see the fiscal stimulus as the key driver of the economic recovery. Other factors highlighted as significant contributors are the upsurge in exports and greater consumer spending, which are thought by 44 percent of respondents to be important elements of the recovery. Also credited with aiding the resurgence are the reduction in interest rates and a re-energized housing market, as seen by 38 and 31 percent of businesses respectively.

Although the signs of economic recovery seem clear, there is still a degree of caution being shown by respondents to the survey. Only 20 percent believe that fiscal stimulus measures should be withdrawn immediately, while 45 percent would prefer the Government to maintain the package for at least another year. Some would prefer an even longer period of financial stimulus, with 10 percent wanting a two-year package following the end of the recession.

Public debt currently stands at 60 percent of GDP, an increase of five percent against 2008 levels. The debt appears to be one factor in the apparent caution of Indian businesses, with 25 percent of respondents being very concerned about the level of debt in the country. 20 percent present a more sanguine attitude, believing that debt should be dealt with through greater tax revenues as the economy grows, and that the country should focus more on meeting its interest payments. However, 40 percent want the Government to raise

revenues through means other than taxation.

Half of Indian businesses want public spending to be cut, with public sector pay being the target for the majority of respondents (60 percent). Another 30 percent call for a reduction in public infrastructure investment. With India currently investing heavily in a wide range of infrastructure projects, as well as the pressures generated by the continuing growth in population within all the major cities, this may prove problematic.

60%Half of Indian businesses want public spending to be cut, with public sector pay being the target for the majority of respondents (60 percent).



Recovery in exports

38

81



44 44




JapanJapan has suffered in recent years from one of the deepest recessions in post-war history. But there is evidence of a measure of recovery, driven by the combined effects of the Japanese Government’s fiscal stimulus measures and an upsurge in exports.

73 percent of Japanese respondents to our survey believe the Government’s stimulus package is a key driver behind the economic recovery, with 55 percent suggesting that the increase in export sales has fuelled it. The increase in consumer spending in Japan is an important factor for 18 percent of respondents. But only nine percent of Japanese businesses see the reduction in interest rates as an important contributor to the recovery, probably because rates have been very low for some years, so further reductions are not thought significant.

In response to the question of how long the Government should maintain the stimulus measures after a return to growth, 30 percent of businesses are in favor of retention for a year, with 30 percent preferring withdrawal of support after six months following a return to growth. 35 percent of respondents, however, suggest it should be withdrawn as soon as Japan is out of recession.

Japan’s public debt is the highest in the world, currently standing at 199 percent of GDP, a 16 percent increase on the 2008 level. This is of very great concern to 65 percent of our respondents in Japan, a relatively small number given the size of the debt, but possibly explained by the fact that much of Japan’s public debt is held internally rather than by overseas investors.

How the Government should manage this large debt appears to be more problematic for our respondents. Extra taxation is the most popular means, supported by 60 percent of Japan’s business community, followed

by making cuts in public spending which is advocated by 50 percent of respondents. Dealing with the debt as a long-term burden with a focus on meeting interest payments is favored by 35 percent, while 30 percent want the Government to raise revenues through non-taxation methods.

Public sector pay levels are given the highest vote for cuts, with 80 percent believing this to be the best means, although a good many (50 percent) want to see reduced funding for public infrastructure investment, with defense and welfare payments being highlighted by 30 percent of Japanese businesses as worthy of spending cuts.

18%The increase in consumer spending in Japan is an important factor for 18 percent of respondents.


9

18


Recovery in exports

73



55




SingaporeDespite being geographically small, Singapore’s economy is ranked among the world’s most business-friendly, with many multi-national companies having bases there. It has even been suggested, by the BBC, that Singapore could become the world’s fastest growing economy in 2010.

The Singaporean business community gives great credit to the government stimulus package, with 87 percent of respondents stating this as a major factor in Singapore faring well during the global economic downturn. 73 percent believe it is the level of consumer spending that has boosted the economy and 53 percent put the recovery down to a boom in the housing market. A reduction in interest rates is also cited by 20 percent.

But the businesses of Singapore throw doubt on whether the government stimulus should now be withdrawn, with 55 percent of respondents wanting the package to remain in place for the coming 12 months, and 32 percent believing it is only needed for another six months. Only nine percent call for an immediate withdrawal.

Singapore national debt currently stands at 110 percent of GDP, an increase of ten percent on the 2008 level, but this appears not to be a problem for the Singapore business community, with only five percent registering concern over this level of public debt.

This may be because the national debt figure needs to be set alongside Singapore’s strong fiscal balance sheet, substantial accumulated balances and lack of foreign debt as a measure of the country’s economic strength.

The largest single holder of government debt in Singapore is the Central Provident Fund Board (CPF), which is “a social security savings scheme jointly supported by employees, employers and the Government. CPF members are employees and self-employed persons in Singapore.10 ” Other holders of Singapore Government debt include financial institutions required to purchase it as part of their prudential norms.

It is therefore hardly surprising that 45 percent of Singapore businesses want the government to do nothing further to lower the debt, believing that tax revenues are likely to rise, which will reduce the debt automatically. An equal percentage of respondents are not in favor of raising taxes.

Nevertheless, the survey suggests 23 percent would like to see the government focus purely on meeting interest payments, with 32 percent calling for public spending cuts. The most popular target for 86 percent of businesses is public sector pay. Defence spending is also too high, according to 71 percent, while reductions in public infrastructure investment and welfare payments are suggested by 45 percent of respondents.11



10 Source: CPF website11 It should be noted that in Singapore there is no public welfare system per-se. Welfare payments primarily

comprise payouts from the CPF accounts of its individual members, who are required to participate in this social security savings scheme.

40

53



73

87


Recovery in exports



Belgium

Czech Republic

France

Germany

Hungary

Ireland

Italy

Netherlands

Poland

Russia

Slovakia

Spain

Switzerland

United Kingdom



As we might expect with such a diverse set of economies, the experience of recession in Europe has varied from a relatively mild reduction in growth in Poland, through to quite severe recessions in Ireland and Spain.

The reactions of governments to these problems has been equally mixed, ranging from the very extensive and prolonged interventions in the economy that have been seen in the UK and Germany, to predominantly fiscal programs in the Czech Republic and Italy.

We noted in the main commentary that there seems to be an ambivalent attitude to government intervention among European businesspeople, with many sceptical about the value of intervention programs but nevertheless reluctant to see them withdrawn.

The European Experience

This is despite the cost of these schemes in increased public debt, which has been particularly high among the European countries, possibly greater in proportional terms than anywhere else in the world.

In the following country-by-country reports, we look closely at the results of our survey for the European states. There is clearly a majority in favor of cuts in public expenditure, as there is in the rest of the world, but Europe stands out for its apparent willingness to accept higher levels of taxation, especially indirect taxation, than we have found elsewhere. We believe it is very likely that taxation will play a significant part in Europe’s medium to long term response to the recession.



BelgiumBelgium was hit hard by the global financial crisis. The economic downturn led to the Belgian government putting fiscal stimulus measures in place to support its important financial sector.

The country has since seen a general election which was won by the Flemish Nationals and the (French-speaking) socialist party. 40 percent of the respondents believe it was the outgoing government’s fiscal stimulus measures that have ensured a return to economic stability.

Belgium is a large exporting nation, principally in the auto industry, and the recovery in export sales is seen by 40 percent of respondents as an important driver of recovery. An equal number of respondents consider the fall in the value of the Euro, followed by a strengthening of the Euro against the US dollar, as an important contributor.

Belgian businesses are unsure as to when the government should withdraw its stimulus package, with 35 percent in favor of an immediate stoppage following a return to growth. 30 percent suggest the government should wait at least six months, 20 percent argue for 12 months and 10 percent prefer to leave the measures in place for two years after a return to growth.

Compared to other nations surveyed, Belgium’s national debt levels are high and this has hampered recovery. It currently stands at 100 percent of GDP, a 12 percent increase on the level in 2008 and this appears to be of major concern to 35 percent of respondents.

Opinion is split within the Belgian business community as to how to

manage the debt. The majority, 65 percent of those responding, want to see public spending cuts. Taxation is not a popular option. Only 5 percent support an increase in taxation, while the remaining 20 percent, believe that other means should be sought.

A high percentage (54 percent) believe Belgium’s defense budget should be cut, and a similar percentage advocate lowering public sector pay, while reductions in welfare payments are called for by 31 percent of respondents.

35%Belgian businesses are unsure as to when the government should withdraw its stimulus package, with 35 percent in favor of an immediate stoppage following a return to growth.


30

4040 40


Recovery in exports






Czech RepublicThe Czech Republic’s entry into the European Union has done much to stabilize the economy, with recent growth being led by exports to fellow EU countries, most notably to Germany.

Although not totally immune to the global financial slowdown, an increase in Czech consumer spending and generally low inflation and interest rates have kept the country away from serious economic troubles.

The upsurge in exports has helped to balance the country’s trade deficit and this is credited by 56 percent of Czech businesses as a factor in the country’s performance, while 11 percent put it down to consumer confidence. A similar percentage see the reduction in interest rates as a significant contributor.

Respondents are generally ambivalent about the fiscal measures that the Government adopted at the outset of the global recession and 55 percent of them call for an immediate end to the measures now that growth has returned.

However, some urge greater caution, with 15 percent believing the measures should stay in place for at least six months or a year and five percent suggesting a continuation for two years.

The Czech Republic’s public debt has increased 50 percent from the level in 2008 and currently stands at 40 percent of GDP, and this is of concern to 75 percent of respondents. When asked what the Government should do about the debt, none believed a “do nothing” attitude should prevail. Servicing the debt through interest payments alone was the preferred

option of 10 percent of Czech business respondents, with 10 percent wanting increased taxation to pay back the debt. However, 25 percent argue against taxation and advocate other means of raising revenue.

As far as public spending cuts are concerned, an even split of 40 percent of the respondents are in favor of reductions in public sector pay, welfare payments and defense spending, while 27 percent call for less money to be spent on the country’s public infrastructure.


56

1111

22

Recovery in exports

Other






FranceA large public sector and relatively high levels of Government involvement in business are familiar characteristics of French economic life, so it is possible that the comparatively modest increase in Government spending in the country will not have registered particularly strongly among those businesses that responded to our survey.

Only nine percent chose the Government’s stimulus package as an important factor driving recovery, placing this a poor fourth after a recovery in consumer spending and in the housing market (both on 36 percent), and a reduction in the value of the currency (18 percent).

Nevertheless, more than half (55 percent) of respondents wanted to see stimulus measures withdrawn immediately the economy returned to growth, placing the French second only to the Dutch among those in the larger European economies anxious for rapid Government cutbacks.

At 84.4 percent of GDP French net debt is among the highest in Europe. It has increased by 25 percent since 2008, more than Germany, Italy or the Netherlands, but less than half the increase experienced in the UK or Spain.

High levels of public debt have been a fact of life for French businesspeople for some time, but even so 55 percent described themselves as very or extremely concerned at the increase in debt since 2008. They do want to see Government action to bring debt levels down, as evidenced by only 5 percent saying that the Government should simply seek to service the debt, and none at all choosing to rely just on increased tax revenues arising from general economic recovery.

Increased taxation is not a popular option, supported by only 15 percent. The favored choice, selected by 85 percent of respondents, is a cut in

public spending, but France stands out as the country of all those surveyed that is least keen on a cut in public sector pay, supported by only 12 percent. Only 24 percent would like to see less public infrastructure spending, 35 percent want cuts in welfare payments, and 41 percent would choose cuts in defence spending.

The French Government would appear to have a very difficult task ahead if it is to meet the demands for debt reduction and at the same time maintain the levels of public spending businesspeople feel are necessary.


36 36

18

9


Market recovery






GermanyWith the largest economy in Europe, and the fourth largest in the world, Germany was hit very hard by the global financial downturn. But, helped by a massive economic stimulus plan by the Government in early 2009, and the country’s enormous underlying exporting power, steady recovery is being achieved.

30 percent of German respondents to our survey credit the stimulus package as an important driver of the recovery, but 70 percent believe it is the rapid rise in export sales that has accelerated growth.

The last 12 months have also seen an increase in consumer spending, acknowledged by 50 percent of German businesspeople, while it is the fluctuating fortunes of the Euro that is the key factor in the recovery for 30 percent of respondents.

Now that the worst of the recession is over in Germany, 48 percent of businesses believe an immediate withdrawal of the stimulus plan is necessary, although a more conservative approach is called for by 25 percent of respondents who think a six-month delay would be prudent, with 20 percent suggesting withdrawal in a year’s time.

Although business confidence is relatively high, the level of the country’s public debt is of deep concern for 56 percent of those completing our survey. Currently standing at 78 percent of GDP, this is an 18 percent rise over the 2008 level.

To manage the debt, 68 percent of respondents want to see public services cut. Others (23 percent) see extra taxation as the best course of action, while 18 percent oppose this and want revenues to be raised by other means. 13 percent of respondents feel

there is no need to do anything further and that the debt will automatically be reduced as growth is maintained.

Cuts in the pay of public servants is the target for 41 percent of German respondents, while a higher percentage (59 percent) want cuts in the defense budget. There is also some support for cuts in welfare assistance (19 percent) and public infrastructure investment (15 percent).

68%To manage the debt, 68 percent of respondents want to see public services cut.


70

30

50

30

Recovery in exports







HungaryAs one of the newer members of the EU, Hungary has continued to demonstrate economic growth, although it suffered a severe setback during 2008-09 in the wake of the global financial slowdown. However, recovery has begun, driven mostly by strong exports in the opinion of 80 percent of respondents to the survey.

In agreement with the IMF and the EU, the Hungarian Government delivered a rescue package to restore financial stability, but this is not considered a factor in the recovery by any of the respondents. Rather, it is the reduction in interest rates that is more beneficial, according to 60 percent of those surveyed.

The Hungarian Forint has generally performed well against other currencies and is another factor contributing to the recovery for 40 percent of respondents, and this has increased consumer confidence, according to 20 percent.

There is no clear consensus as to how long the Government’s fiscal stimulus measures should remain in place. The most popular view, favored by 45 percent of the Hungarian business community, is for it to be removed quickly following the return to growth, but 20 percent suggest that a delay of six months would be safer, and 10 percent advocate a delay in withdrawal for another year. Yet this is obviously an uncertain proposition for some, with 20 percent not putting a timescale on this at all.

The Government has done well in keeping public debt at 51 percent of GDP, a level only 11 percent higher than in 2008, yet this is still a problem for 25 percent of respondents. Nonetheless, it is clear how the majority (95 percent of respondents) want the debt to be reduced: through cutting public spending. Taxation is not a popular course of action for 50 percent who

would prefer other revenue-generating methods instead, and 10 percent argue for meeting interest payments only.

As to where the cuts should come, 32 percent of businesses target public infrastructure and welfare payments, with 21 percent choosing defense spending. But public sector pay levels appear the most popular means for 68 percent of respondents.

68%But public sector pay levels appear the most popular means for 68 percent of respondents.


20

60

40

80

Recovery in exports







Ireland The Irish economy was one of the first to experience the effects of global recession following several years of strong growth. As was the case in a number of countries, an overheated property market and rapid credit expansion have been cited as the primary reasons for the economic downturn in Ireland.

As a consequence, the Irish government has faced the twin challenge of both a steep decline in tax revenues and the need to make significant cuts in public spending. Notwithstanding progress to date (widely applauded by a range of international commentators) inevitably there remains a significant budgetary deficit. In positive contrast, a strong performance in foreign direct investment has helped sustain exports and maintain high skills employment in many sectors. With Ireland now officially out of recession exactly one third (33 percent) of respondents give credit to the Irish governments actions in moving quickly to address the economic situation.

However, it is a recovery in consumer spending, which 67 percent of respondents see as most significant in determining the extent to which there is a sustained return to growth. The housing market, after a sharp fall in property prices, is now showing signs of some stabilisation and this, together with a continued strong export performance is seen by a third (33 percent) of respondents as being fundamental to continued recovery.

The continuing need to address Ireland’s public debt liabilities is seen as crucial to sustained growth. Currently standing at 76 percent of GDP (and significantly higher than in former years) this is clearly an issue for our respondents, 70 percent of whom register deep concern about the level of the deficit.

The universal challenge of tax increases in the face of weak consumer demand is as applicable in Ireland as anywhere – with 45 per cent of those surveyed expecting further tax raises. In terms of where government should focus its efforts in reducing public expenditure, an emphatic 100 percent indicate a preference for public sector pay cuts. Meanwhile 83 percent support cuts in social welfare payments and 33 percent opt for a reduction in public investment in infrastructure.

Q: What do you think will be the most important factors in determining when there is a return to growth?

82

4753

82

Recovery in exports


Continuation of the government stimulus packageHousing market recovery

Base: All who do not believe they are out of recession (17)



ItalyItaly has been hit badly by the recession, due both to a sharp fall in exports and also to the effect of the recession on its main trade partners.

Beleaguered by the country’s high public debt, and conscious of the need to keep debt and budget deficits under control, the Italian Government has been cautious and has put in place a limited fiscal stimulus package. Among the most significant measures has been an extension of the existing scheme to supplement low level wages (the Cassa Integrazione Guadagni) to help tackle unemployment, and an expansion of Government sponsored loan schemes for small and medium enterprises.

There have also been some measures to support the country’s important financial sector, but in general, Italian banks are thought to have weathered the recession reasonably well. A reliance on more traditional banking practices than have been seen elsewhere has meant that the banks have needed relatively little assistance .

Despite its limited nature, this stimulus package is thought by 20 percent of respondents to our survey to be a key factor in Italy’s economic recovery, but a higher proportion (40 percent) of businesses think that lower interest rates is the most important driver. The same number point to the steady increase in consumer spending in Italy as one of the key elements in the country’s recovery.

Although the level of fiscal assistance provided by the Government has been low, 33 percent of Italian respondents felt it should stay in place for at least another year. A higher percentage (38 percent) believe it should be withdrawn straight away, now that the economy is growing once more. Only 10 percent would like it to stay in place for a two-year period.

There is much more to worry businesses in the high level of public

debt. This is a major topic of political debate, and standing at 121 percent of GDP and up 14 percent on the 2008 level, it is of considerable concern to 53 percent of respondents.

But raising taxes to reduce the debt is opposed by Italian companies. Cuts in public spending are the most attractive proposition for 71 percent of businesspeople, while ten percent want the Government to focus more on meeting interest payments. Only five percent of Italian respondents believe the current steady growth will produce sufficient tax revenues to cut the debt directly.

Answering the question of which areas of public spending need to be cut, the main target, for 33 percent of respondents, is public sector pay, followed by defense spending (20 percent), welfare payments (20 percent) and public infrastructure projects (13 percent).


40

2020

40




Other




NetherlandsOver the past decade or so, the Netherlands economy – the 16th largest in the world – has had a GDP well above the European average. However, the country has suffered during the global financial downturn, with falling export sales and a weak Euro.

To stabilize the economy, the Government has intervened to prop up the financial sector. While 17 percent of survey respondents deem this to be an important contributory factor in the country’s recent recovery, the same number of respondents identify market recovery and other factors as key drivers. Conversely, 17 percent do not see any specific reason for the improvement.

There is more agreement on the importance of the increase in levels of consumer spending and this is welcomed by 33 percent of Dutch respondents.

While there is a general desire among the business community (60 percent) for the Government stimulus package to be immediately withdrawn now that growth has returned, there is still a proportion (30 percent) who believe the stimulus should be maintained for another year to further embed growth.

The Netherlands public debt in 2010 stands at 66 percent of GDP, an increase on the level in 2008 of 14 percent. While this compares moderately with other surveyed countries, it is still of considerable concern to 20 percent of the Dutch respondents.

Apart from ten percent of respondents who want to see the Government focus on meeting its interest payments while accepting the public debt as an inevitability, there is overwhelming

support from 90 percent of Dutch businesses for public spending cuts to be administered.

At the beginning of August 2010, the Dutch Government withdrew its troops from Afghanistan and this might have prompted 61 percent of the business respondents to the survey suggesting cuts to defense spending. 39 percent want to see a reduction in welfare payments, while 22 percent believe cuts in both public infrastructure projects and the pay of public servants are necessary.

33%There is more agreement on the importance of the increase in levels of consumer spending and this is welcomed by 33 percent of Dutch respondents.


33

171717



Market recovery

Other




PolandUniquely, Poland is the only EU country to have avoided going into recession during the latest global downturn. It has continued its GDP growth, with steady exports and a healthy domestic market.

20%Poland elected a new president in 2010, a political change that 20 percent of respondents believed has had a positive effect on the economy.

However, Poland has suffered from a knock-on effect as the recession has hit its trade partners and neighboring countries, and the Polish Government has had to introduce specific fiscal measures to counter the threat of recession.

As a country that has yet to adopt the Euro, 40 percent of Polish respondents to the survey cite the strength of the Zloty against other global currencies and its popularity among foreign exchange markets, as a factor in Poland’s stability. This strength has encouraged the Polish Central Bank to follow the European and global trend towards lower interest rates. This pleased 40 percent of Polish businesses, while another 40 percent cited the buoyant housing market as a significant factor in maintaining economic health.

Poland elected a new president in 2010, a political change that 20 percent of respondents believed has had a positive effect on the economy. Another 40 percent suggested that continuing export success is an important factor.

There is a difference in opinion as to when the fiscal stimulus measures introduced by the Government should be lifted. 30 percent of respondents argue for an immediate withdrawal, now that sustained growth has returned, while others (25 percent) would like them maintained for a further six months. Interestingly, 30 percent of Polish businesses counsel caution and want the measures to stay in place indefinitely.

Poland’s debt level, currently standing at 51 percent of GDP (15 percent up on 2008), is a worrying factor for 50 percent of respondents, yet there appears to be no appetite for extra taxation to deal with this, with 45 percent wanting means other than taxation. Cuts in public spending are advocated by 75 percent of Polish respondents, while 20 percent view the debt as repayable simply through a strengthened economy.

Cuts in public sector pay is the favored target of 60 percent of respondents, with 33 percent calling for Poland’s welfare commitments to be reduced, and 27 percent wanting to see defense spending cut.


40 4040 40


Recovery in exports






RussiaSince the collapse of the Soviet Union, Russia has made a rapid transition into a market-based and globally integrated economy. Growth has averaged seven percent annually for over a decade and GDP is the sixth largest in the world.

Russia has suffered in the latest global recession and respondents to the survey have identified what they see as the most important drivers of recovery. Equal numbers of respondents (29 percent) have highlighted four key factors: an upturn in exports; the Russian Government’s significant fiscal stimulus in 2009; the Government’s decision to lower interest rates; and a change in the value of the currency.

14 percent of businesses say it is a resurgence in market activity that is contributing to the country’s more buoyant economic standing, together with greater access to credit and increased consumer spending.

Russian businesses remain cautious however, about how long the fiscal stimulus measures should stay in place. 35 percent of respondents argue for another 12 months and 25 percent advocate a six month wait following a return to growth, while 25 percent are unsure as to exactly when the measures should be withdrawn.

The Russian public debt is low in comparison to many other countries, currently standing at seven percent of GDP, a figure only eight percent higher than 2008. Russian business appears to be reasonably happy with this, as just 10 percent show real concern over this level of debt, yet it is clear that extra taxation is an attractive proposition.

A more favorable option, for 30 percent of respondents, is to raise revenue through other means and, while 10 percent assume tax revenues will reduce the debt automatically, 55 percent believe public spending should be cut.

A reduction of investment in the country’s public infrastructure is suggested by 36 percent of Russian business respondents, with 18 percent calling for a scale down in defense spending. But the highest percentage (45) of respondents believe that public sector pay levels need to decrease.




2929 29

Recovery in exports


29




SlovakiaSlovakia is one of the newest members of the EU, joining in 2004. Having adopted the Euro as its currency in 2009, the country’s GDP is expected to grow (according to the estimates of the National Bank of Slovakia) by over 1.5 percent in 2010.

An increase in exports is seen as the key driver in the country’s recovery from the global recession by 42 percent of Slovakian respondents. 25 percent believe a rise in consumer spending is a major contributory factor and the same number consider market recovery to be important in driving economic strength, with industrial production returning to almost pre-recession levels. Only eight percent of businesses see the stimulus package put in place by the Government as having a telling impact on recovery.

With the country seemingly coming out of recession, Slovakian businesses are very keen for the government to cease its fiscal stimulus support, with some 75 percent believing this should happen immediately upon a return to growth. This is the highest percentage of respondents across all countries in our survey seeking a swift end to fiscal stimulus. Only 20 percent are in favor of stimuli remaining in place for a further six months, and no respondents want them to remain beyond this time.

According to Economist Intelligence Unit estimates, Slovakian public debt now stands at 38 percent of GDP, an increase of 31 percent on the 2008 level. This is of great concern to 75 percent of Slovakian businesses.

It would appear that the business community is unanimous on the best way of dealing with this: 100 percent of respondents want the government to

cut public spending in order to address the national debt. The only alternative course of action considered by our respondents was raising revenue through means other than taxation, and this only by 10 percent.

55 percent of Slovakian businesses target public sector pay as an area where these spending cuts should fall. A reduction in defense spending is the choice of 50 percent of respondents; 10 percent call for public infrastructure spending to be cut and 25 percent would like to see a reduction in welfare payments.


42

8

2525

Recovery in exports


Market recovery





SpainThe Spanish economy was particularly badly affected by the recession, and although most of the countries in our survey had officially returned to growth at the time our interviews took place, Spain was one of the six still to turn the corner12.

Perhaps more importantly, 95 percent of the Spanish businesspeople interviewed said that they still felt their sector was in recession, making them the most pessimistic of all those surveyed. So, rather than ask these people what factors have been most successful in promoting recovery, it seemed appropriate to ask them which measures they expected to be most effective.

As we might expect in a recession initiated by a crisis in the property market, which then hit consumer confidence very badly, the most important factor for these people was a recovery in consumer spending. This was chosen by 61 percent of respondents. Second on the list were a recovery in exports and in the housing market, both chosen by 28 percent.

Continuation of the Government’s stimulus activities came fourth, chosen by only 17 percent of respondents. But even though this suggests some scepticism over the value of Government action, only 25 percent of respondents wanted to see the program withdrawn immediately after a return to growth. Just over a third wanted it to be maintained for six months, and 30 percent were prepared to see it remain in place for up to two years.

Our Spanish respondents were relatively unconcerned about the effect of this additional spending on levels of public debt. Less than half (45 percent) said they were very or extremely concerned, placing them well below their counterparts in Italy, France, Germany, the UK or Ireland.

This may be because Spanish public debt currently stands at 67 percent of GDP, lower than that of any of the major

European states except the Netherlands. Nevertheless, it has reached this level after increasing by 69 percent since 2008, a rate exceeded only by Ireland, and our respondents did want to see evidence of Government action to keep debt under control.

As with most other countries, the most favored method was a cut in public spending, led by cuts in defence spending. Public sector pay was also a popular target for cuts, and the Spanish were more prepared than any other Europeans to see cuts in infrastructure spending, an option chosen by 35 percent of respondents.

67%This may be because Spanish public debt currently stands at 67 percent of GDP, lower than that of any of the major European states except the Netherlands.

Q: What do you think will be the most important factors in determining when there is a return to growth?

61

17

28 28


Recovery in exports


Continuation of the governmentstimulus package

Base: All who do not believe they are out of recession (18)

12 The others were Singapore, Japan, Hungary, Italy and Ireland.



SwitzerlandSwitzerland has a high per capita GDP, a large financial sector, is one of the most stable economies in the world and, as a consequence, has been less affected by the financial downturn than many other countries.

22%22 percent point to the reduction in interest rates as beneficial and the same proportion of businesses view the Government’s fiscal support package as a important driver.

Consumer confidence in the economy is high and spending has risen, which 56 percent of Swiss business respondents view as critical to the recovery. Switzerland is a major exporter of chemicals and electronics and the growth in export sales is credited by 44 percent of respondents as a key factor in Switzerland’s economic upturn. 22 percent point to the reduction in interest rates as beneficial and the same proportion of businesses view the Government’s fiscal support package as a important driver.

Despite Switzerland now being out of recession, the business community shows a degree of caution when it comes to withdrawing the fiscal support package. 25 percent of respondents call for it to be removed immediately but the majority suggest a longer period of support. 20 percent want it to remain in place for the foreseeable future, while 15 percent believe it can be withdrawn in a year’s time and 35 percent want withdrawal in six month’s time.

Compared with other countries, Switzerland’s public debt is low at 44 percent of GDP, which is an increase of only eight percent on the 2008 level. Swiss businesses seem happy with this, with only five percent registering concern over the debt and a similar percentage calling for taxation measures to counter it.

35 percent of respondents are confident the debt will automatically be reduced through tax revenues gained through economic growth, and 15 percent

believe extra revenue can be raised through non-taxation methods. But the most popular course, according to 55 percent of Swiss respondents, is to cut public spending.

Although the Swiss armed forces participate in various peacekeeping missions around the world, cuts in spending on defense is advocated by 82 percent of businesses. Welfare payment reductions are called for by an above average 55 percent, while 45 percent are keen to see public sector pay levels cut. A smaller number (18 percent) believe public infrastructure investment should fall.


56

22

44

22


Recovery in exports






United Kingdom Among businesses in the UK, top of the list of factors driving recovery is low interest rates, chosen by 72 percent, followed by a general recovery in consumer spending, chosen by 61 percent. The broad range of measures implemented by the Government, including short term fiscal easing, large-scale assistance to the banking sector and the injection of money into the economy through the Bank of England, which we refer to collectively as the stimulus package, comes only third in the list.

Nevertheless, 72 percent of respondents did not want the stimulus package withdrawn immediately after a return to growth. Nearly half (48 percent) wanted to wait for six months and the remainder were prepared to see the package remain in place for up to two years.

This result may have been distorted by the election which was taking place at the time of the research, in which discussion focused on how long the Government should continue to support the economy. But it’s clear that many UK businesspeople are quietly acknowledging the value of Government support, even if they see other factors as more immediately important.

This has not prevented rising levels of concern over public debt. UK public debt has risen by 51 percent over 2008 levels, to stand at 80 percent of GDP.

Seven out of ten of the respondents from the UK were very or extremely concerned at this level of debt. This places the UK alongside the US and Ireland in terms of business anxiety over public borrowing, and second only to respondents from the Czech Republic and Slovakia.

This result suggests that reducing public debt must be a higher political priority for the UK Government than for Governments in many competing countries. According to UK respondents to our survey, the preferred way to do this is very clear; 80 percent say public

spending should be cut, with 78 percent wanting a cut in public sector pay, and 75 percent wanting a cut in defence spending.

UK businesses are prepared to see some rises in taxation, with 65 percent agreeing that taxes should rise, but only if this extra money is used specifically to pay back public debt. A suggestion that there should be a general rise in taxation meets with virtually no support at all.


72

44

6156




Recovery in exports




Notes



Contacts

Ernst GröblHead of Tax, EMEA Region KPMG in GermanyT: + 49 (89) 9282 1464 E: [email protected]

www.kpmg.com

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Publication name: Paying the Bill

Publication number: 100928

Publication date: September 2010

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