IoD Comment on 2016 Guernsey Budget

IoD Comment on 2016 Guernsey Budget

Last week Gavin St Pier presented the 2016 Budget Report before the States. The headline, in what he noted was the last Budget of this term, was that this is a 'Budget for health: the health services of the islands; and the future health of public finances'.

But just how healthy are those finances? Whilst it is right to acknowledge that "Guernsey PLC" is not a company it and therefore we, do still have to live within our means. We have to get to a point that States income is sufficient to cover its expenses, hopefully with some left over for a "rainy day". We still appear to be some way from reaching that point. 

Looking at the overall picture, 2015 is expected to result in a deficit of £20m, described as "sobering" in the report. The report goes on to say this is considered to be principally cyclical, but there is little tangible evidence for that. Indeed, the three year budget through to 2018 (a helpful development) shows a further anticipated deficit of some £14m over that period. And there is no mention of the previous review which pointed to a potential additional deficit of up to £95m per annum by 2025, assuming a constant population. 

It is also noted in the report that the General Revenue Account Reserve is expected to be "substantially exhausted" by the end of this year, with only limited options for its replenishment. We have a forecast deficit for the next three years which may be bigger than we expect and the reserve that would have been used to fund any deficit will be gone by the end of the year.  As such, we should be doing something to address the shortfall now, rather than put it off.

It is right to note in any case that the maximum tax take is limited to 28 per cent of GDP and at 25 per cent for 2016 there was limited room for raising more revenue. So the report focuses more on the need to diversify the tax base, the States having turned its back on GST, rather than increasing it.

And looking at the income proposals, the options are limited because of that narrow tax base, as the report is at pains to point out on a number of occasions. The usual suspects of alcohol, tobacco and fuel have all been increased, the latter in a way that addresses a shortfall caused by us using less fuel than we used to! There is no mention of  car tax, which was the subject of some speculation recently.  

There has been a limited diversification of the corporate income tax base with an expansion of the 10 per cent band of corporate income tax to include custody services. And the 20 per cent band will now apply to the importation and/or supply of hydrocarbon oil and gas. It will also include large retailers, those with a taxable profit of more than £500K per annum, which has been introduced in the Isle of Man without offending EU requirements.

The latter addresses the most commonly cited example of the problems associated with our zero 10 corporate tax regime, which may help in any debate over this at the upcoming election. This is not a good time to create further uncertainty in relation to our corporate tax regime. And where UK based high street retailers are adding 20 percent VAT to their turnover and keeping it, most would agree it not unreasonable for them to give back 20 per cent of their profit. 

In the area of personal tax, allowances have been frozen for another year, an apparent consequence of that inability to broaden our tax base. The report acknowledges a potential competitive issue with the UK having increased its personal allowances significantly in recent years. But they do also have 20 per cent VAT in the UK, higher property taxes, etc. 

The IoD is a strong supporter of diversity, and the Budget includes a welcome change in approach to personal allowances which removes differences between married, unmarried and same sex couples. That is perhaps undermined at the same time by changes which limit the availability of couples allowances to everyone from 1 January 2016 but this is at least unfair to everyone equally.  

The IoD is also supportive generally of targeted incentives, such as the reduced £50,000 tax 'cap' for new Alderney residents. Whether it is effective remain to be seen, as is rightly acknowledged in the Budget report.

The elephant in the room is what real alternatives are there if GST is off the table and what are the implications for an Island with a reducing working population and a rapidly ageing demographic if there are none?      

Turning to states expenditure, the headline is the £8.2m increase in the HSSD budget. It is after all a "Budget for health". A report commissioned by the States has identified significant future savings in this area. Whether these can actually be found at a time of increased demand for health care services remains to be seen.  

For other departments there is a real terms freeze in their budget,  but this 'austerity very light' will still leave many feeling there is more that can be done to bring down States spending, justified or not. The Budget Reserve for pay awards of £3m next year, rising to £6.8m in 2017 and £12.1m in 2018 is one example.  

In order for T&R and the States to gain Island wide support for the necessary diversification of the tax base it appears a political reality that more needs to be done on controlling expenditure. The States may genuinely feel there is nothing more that can be done without significantly impacting services but this is an argument many have not yet accepted.   

So overall, this was a Budget for our health, at least in terms of what that department has been given to spend on us. There have been changes in approach over this term that bode well, and there are some positive detailed measures announced in this report. But whether enough has been done to address some of the fundamental challenges we are facing as an Island is another matter.