This Is Guernsey

Continuing his series on the new tax regime, Treasury and Resources minister Lyndon Trott gives an insight into the Policy Council’s States report entitled, Implementation of the Economic and Taxation Strategy, which is published tomorrow In earlier articles I have covered the origins of 0/10, the unprecedented period of public consultation that followed and the actual decisions of the States in June last year.

I have also highlighted the key objective of the strategy, which is and will remain, the desire to maintain a healthy economy.

To achieve that objective the States resolved to adopt a two-stage approach in order to greatly reduce the likelihood of economic slowdown and to provide a further opportunity for refinement and reflection after a period of real experience of the new taxation environment post 2008.

Rosemary Radcliffe CBE, who is one of Europe’s most respected economists, has assisted us with the development of the strategy throughout, as part of an independent working group. This is what she has to say about the approach.

‘In our view it is appropriate to adopt a phased approach to public finances along the lines agreed by the States. The island has substantial accumulated reserves and therefore it is not necessary, or desirable from an economic point of view to move immediately to a balanced budget provided that it is recognised that, in the medium term, steps may need to be taken to correct any structural deficit.’

So what does this mean for the average person such as you and me?

Well, in stage one until 2011/2013, or if you prefer the medium term, the States will run a budget deficit funded by the use of up to half of the contingency reserve, which represents a relatively small part of the Bailiwick’s overall reserves.

Increases in existing indirect taxes and Social Security contributions are an important part of the overall strategy. The increases in Social Security will be targeted principally at employers and as a result three quarters of workers will notice no difference in their pay packet.

An essential part of the strategy is the continued restraint on public sector expenditure and the maintenance of economic growth at a sustainable level. The draft Government Business Plan that was debated last December was very clear in confirming this approach with the States deciding that one of its key priorities is ‘to increase revenue income by 3% above RPI, which is 3% in real terms and contain expenditure to RPI or less’.

The Independent Working Group has also stated that, ‘The objective of seeking to maintain previous levels of economic growth was to be applauded.’ They further state, ‘Overall the implications for economic growth in Guernsey are reasonably favourable.’

But what are those previous levels of economic growth? Well, over the last decade, growth in the island has averaged about 3% after taking into account inflation. By way of the same comparison, UK economic performance this year is likely to be about 2.75%.

Economics is not, however, a precise science and events outside of our control may well affect our performance and will continue to make this whole process challenging. As can be seen from the professional commentary, the States has decided upon a course of action that is both sustainable and prudent at this time.

That means that in stage two, after taking into account economic performance, international events and our neighbour’s experience with its Goods and Services Tax, the States will be ideally placed to evaluate and produce an overall package, which sustains the island’s economic position and delivers a balanced States budget.

An important part of the strategy is the continued growth in the income tax received from employees, which we call ETI. Since the turn of the century, despite increases in personal tax allowances, ETI income has grown by £63m., an average of 7% per year in real terms. The figures for 2006 continue to be very encouraging and show strong growth. Seven years ago we received about a third of our total income tax from ETI. Today we receive nearly half from this source.

Probably the most important aspect of the whole strategy is the control of public expenditure. I anticipate this will be where most of the debate in the coming weeks will focus. So how well has government done so far this term? Well in 2004, prior to the change in the machinery of government, States year on year spending rose by an eye watering 3.5%, after inflation. In the period 2000 to 2002 expenditure grew by a staggering annual average of 6% in real terms. Last year States spending fell by 3.3% after inflation. This year the States has directed expenditure must not exceed RPI.

Over the next few months, as we all continue to contemplate the changes due on 1 January 2008 which are necessary to keep our islands the thriving community they are, I ask that a particular point be kept in mind. A typical married couple in Guernsey will pay total taxes, after the changes, of about 17% of their income.

In the UK the same couple would incur an overall rate nearer to 29%.

As well as discussing further the latest economic data, in the next article I will also be answering the most often asked questions of the whole strategy.

Article posted on 10th May, 2007 - 12.00am