A STOCKMARKET tumble could put a strain on the island’s zero-10 tax strategy. Two of the most important factors behind making zero-10 a success are low inflation and growth in the economy.
The latest inflation figure, released yesterday, remained static at a high 4.9%, while falls in share prices are presenting the possibility of a global recession.
UK economist Rosemary Radcliffe, who advised the States on its zero-10 plans alongside former Board of Industry president John Roper, said the falls in US and European stocks this week were a major worry.
She had always stated that economic growth could solve the island’s problems, but that it would not be prudent to assume it would.
‘More recent developments have just highlighted that prudence is the name of the game and that it’s important to have alternative strategies. I’ve always tried to emphasise the importance of having contingency plans in place.
‘It looks like the US economy is slowing down and that it could go into recession. Even if it doesn’t, a slowdown seems almost certain for the next 12 to 24 months.
‘The strategy of doing whatever you can to promote growth is the right one, but the pay-off is likely to be less in the short term than some had hoped.
‘Global financial services are going to be going through a very sticky patch and that must impact on Guernsey’s ability for economic growth.’
Miss Radcliffe said it had always been important for Guernsey to look for alternative areas of revenue.
Controlling public spending was critical. A sales tax was an option, but one she had always been against.
The other, which she was pleased to see Guernsey had done, was the reformation of property taxation.
‘Compared to other areas, I always felt comparative properties in Guernsey were under-taxed and putting more on it will help to fill any black hole.’
She said the States’ target of maintaining economic growth at 3% above RPI was always a challenging one, especially now with economic circumstances being less favourable.
Mr Roper said zero-10 had always been designed as a long-term strategy and that ‘one crazy week’ in the markets should not be a sign that it was going to come off the rails and that our economy was going to falter.
Like Miss Radcliffe, he had warned against placing too much reliance on economic growth and, while he accepted Guernsey’s economy was likely to slow down, he still felt the island would remain strong.
‘With Guernsey’s financial-based businesses, its economy is largely insulated because it specialises in looking after the wealth, or the accumulated wealth, of the wealthy. If those people are not making as much money as they once were, they are even keener to see that wealth looked after better.’
But Mr Roper said the other side of the economy, such as construction and retail, would suffer if the UK was hit by a recession.
On Tuesday, the US Federal Reserve made its biggest rate cut for 25 years - 0.75% - to stoke up growth and bolster markets. However, worries remain that economic problems will spread and already many firms have reported lower profits and a worsening business environment
Stockbroker Chris Brock, managing director of Brewin Dolphin, said the markets were reacting to the fear of a US recession and the possibility that this could cause global recession.
‘The rate cut by the Fed ‘on Wednesday’ was welcomed by markets initially, but some commentators are concerned that this radical action is a sign that the US economy is in a worse state than was feared.
‘Opinions on whether the US is already in recession vary and this is producing the volatility in the markets. Lower interest rates should provide a huge stimulus for growth and this could result in better news flow on company earnings, which in turn would enable equity markets to resume their upward journey.
‘Our own economist, Mike Lenhoff, sees this as a consolidation phase, following which we should see another leg of the bull market. I don’t see all this affecting zero-10 too much as in my view the local finance industry is likely to continue growing despite these fears.’
Article posted on 24th January, 2008 - 12.00am
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