THE Conservative party conference starts on Sunday and George Osborne may take some comfort from a new KPMG report that supports the case for austerity, though he may find it too radical in other ways. Meeting the Deficit Challenge is a comprehensive analysis of the historical evidence on deficit reduction. It concludes that decisive, front-loaded public spending cuts are the best answer to a ballooning deficit. KPMG cites Alberto Alesina and Silvio Ardagna’s 2010 NBER working paper and argues that spending cuts are not only more benign in their effects on growth than tax rises, but expansionary, improving confidence and bringing strong positive effects on private investment.
Conservatives with pet budget priorities may not be consoled, however. Tuesday’s leaked letter by Liam Fox to David Cameron protested against cuts to the armed forces. But a KPMG survey of senior corporate decision makers released alongside their report found that 75 per cent of those surveyed in the UK supported defence cuts to help reduce the deficit, the third highest level of support for such cuts in the world, well above the global average of just 47 per cent.
In Ireland, where the national deficit has grown even worse with yesterday’s announcement of the Anglo Irish bailout bill, KPMG found that the business community is eager for action. Not only did they show the world’s highest percentage of support for welfare and defence cuts to reduce the deficit – 83 per cent backed each – but there was a remarkable 100 per cent consensus that Ireland’s public sector pay bill must be slashed.
Perhaps most refreshing of all is KPMG’s look to the medium term, which suggests “a radical re-engineering of government” to reduce costs. The report recommends “exploring new opportunities in areas like infrastructure privatization”. Paul Kirby of KPMG in the UK argues “private involvement may need to go deeper into the heart of government”, including schools. If so, today’s austerity could be just the start of far larger changes in our relationship with the state.