As lawmakers look for possible solutions to U.S. fiscal woes, many chief financial officers hope President Barack Obama and Congress turn to an approach like the Simpson-Bowles proposal, according to a survey of more than 900 chief financial officers.
The Global Business Outlook survey found that that 63 percent of companies prefer a plan like the Simpson-Bowles proposal, named after Alan Simpson and Erskine Bowles, co-chairs of the National Commission on Fiscal Responsibility and Reform.
Obama created the commission in 2010 to suggest ways to improve the U.S. fiscal situation.
By supporting a proposal like the Simpson-Bowles, a majority of CFOs are saying they see a combination of raising taxes and cutting government spending as the best solution to the nation’s fiscal troubles. Such a solution would mean higher taxes for the CFOs’ companies. Simpson-Bowles pairs every $2 of spending cuts with $1 of tax increases.
CFOs of firms in a variety of industries — including manufacturing, construction, retail, technology, banking and finance — contribute to the Global Business Outlook survey.
The survey has been conducted by Duke University and CFO magazine for 67 straight fiscal quarters. It spans Europe, Asia, Latin America and the United States, although much of the data related to the U.S. fiscal situation came from U.S. firms only. The most recent survey concluded Dec. 7.
‘Fiscal cliff’ dangers
Simpson-Bowles would do a better job of targeting necessary spending cuts than simply allowing arbitrary cuts to occur as a result of plunging over the so-called fiscal cliff, according to John Graham, a professor of finance at Duke University’s Fuqua School of Business in Durham, N.C., and director of the Global Business Outlook survey.
Also, the fiscal cliff would raise tax rates across the board, which would discourage investment and work, he says. By contrast, Simpson-Bowles would get most of the increased tax revenue from reduced deductions, and not higher rates.
“In fact, Simpson-Bowles proposes lower tax rates, which might encourage growth,” says Graham. On the other hand, Simpson-Bowles proposes higher tax rates on dividend and capital gains income, which might discourage investment to some degree, he says.
Allowing the U.S. to plunge over the fiscal cliff could cause serious economic repercussions, according to Graham.
“The business community and financial markets will lose faith in the ability of the U.S. political process to solve important problems,” he says.
The survey found that 70 percent of CFOs will reduce hiring if the nation goes over the fiscal cliff. Going over the cliff also would hurt businesses for years to come, according to the CFOs. More than two-thirds expect their companies to be in worse shape five years from now unless lawmakers reach a deal by Jan. 1 and stop short of falling over the fiscal cliff.
A slow 2013
Even if a solution is implemented, spending will be cut and tax collections will increase. That likely means a slow 2013 for the economy, says Graham.
CFOs worried about the fiscal cliff already are planning for a soft economy next year, according to the survey. As a result, they expect the following for the rest of 2012 and throughout 2013.
- Shrinking bonuses. Among firms paying bonuses in 2012, nearly 40 percent will reduce their payouts this year.
- Stalled business spending. CFOs plan to increase capital spending by just 2.5 percent next year, which is down from 7.3 percent in the spring. This will be the fourth straight quarter that spending plans have declined.
- Stagnant employer contributions to health care. Eighty-four percent of companies say their 2013 contributions to health benefits will remain below prerecession levels.
In addition, the U.S. CFO Optimism Index dropped to 51 out of 100 in the third quarter, down from 60 in the spring. Compare that to Europe, where, even with the European debt crisis, optimism actually increased. Optimism in Latin America is much stronger. And outside of Japan, there is a lot of optimism in Asia as well.
U.S. CFOs cite many concerns related to the decline in optimism, including:
- The fiscal cliff.
- Weak consumer demand.
- Concerns about governmental policies.
- Intense price pressure.
- Difficulty maintaining profit margins.
- Health care costs.
- Attracting and retaining skilled workers.
- Employee morale.
We would like to thank John Graham, D. Richard Mead Jr. Family professor at The Fuqua School of Business at Duke University in Durham, N.C., for sharing his latest Duke University/CFO magazine Global Business Outlook quarterly survey.