THE strong emotional reaction against external borrowing was irrational, according to Treasury minister Charles Parkinson.
His view follows last week’s States decision not to back his department’s plans to borrow externally £175m. to fund the capital programme. At least one deputy is now planning to vote against the waste plant so that other projects can go ahead first.
‘There’s obviously a strong emotional reaction against external borrowing,’ said Deputy Parkinson, who has been accused of missing the mood of the public on the issue.
‘It’s irrational really, because if you borrow from your own savings you lose the interest you would have earned on them.
‘If you have savings and borrowings, the only cost is the difference between interest on the borrowings and savings, but unfortunately I couldn’t persuade the States.’
The costs of the projects and their timings will now change as a result of the States decision, he said. In the run-up to the debate, Deputy Parkinson said his department wanted to ensure there was a capital list in place with funding for it.
‘From a Treasury point of view, as long as that balance is maintained we can work around it, but as a department we think the decision reached is sub-optimal.
‘We would have preferred to have a fixed cost of capital for the solid-waste strategy and we’d developed a programme for the works that take account of the capacity of the construction industry, etc. It was well thought through.
‘A delay will mean certain facilities will not be on loan as early as we hoped.’
The warning of delay has hit home hard with Deputy Mike Hadley, who had backed external borrowing. He believed the States had agreed a package of more than £320m. of developments without the funding to deliver.
‘As with many other deputies I will now have to decide which projects will have to go on the back burner. I will vote against the waste solution that is being put before the Assembly in July as this development will make it impossible to deliver the new school at Les Beaucamps, the development of phase 6 of the hospital and other urgent projects without a long delay.’
Les Beaucamps primed Page 4
Article posted on 30th June, 2009 - 2.30pm
15 Article Comments
I have a certain amount of sympathy for Deputy Parkinson. What he was proposing was a legitimate way of dealing with the funding crisis, but I still think internal borrowing was a better idea.
CP is quite right that internal borrowing will result in loss of earned interest on our savings. He is also right that this needs to be offset against the cost of borrowings.
However, the crucial point for many Islanders is that we are not selling our souls to a commercial lender. We are not exactly living within our means but the internal borrowing compromise is the next best thing.
Commercial lenders lend money so they can make a profit and for no other reason. Commercial borrowing is therefore bound to be the more expensive option and any interest we pay to them is money down the tubes.
Another concern about commercial borrowing is that it can be addicitive – like a spendthrift credit card holder the States would inevitably be tempted to borrow just a little bit more (or maybe repay just a little bit less) over time.
We do need to make sure we commit to repaying our internal borrowings in full – set a dealine and stick to it.
We need to accept that we cannot spend on capital projects like we used to. I think most of us a re prepared to take a bit of short term pain if it gets us out of this hole.
Above all we need to increase our revenue stream. Find an alternative to zero 10 as quickly as possible.
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my problem with this “debate” is that it seems to have been argued on principles (debt vs no debt)rather than on the question which option produces the best financial result.
Presumably, any borrowing incurred would have been fixed at a relatively low interest rate. Our “savings” however are likely to be on variable rates of return which will only increase as interest rates work their way back up. So by borrowing internally, are we not risking the result that our lost interest will be an increasing amount year on year, when we could have borrowed externally at a fixed rate?
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“We need to accept that we cannot spend on capital projects like we used to.”
What the Fallaize amendment seems to have achieved is prioritisation by the back door. I’m not sure if this was a planned consequence of his amendment but it is certainly a welcome one.
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TL
The answer to the question that ends your 11.09am post of today, is yes.
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From a purely economic point of view borrowing is the correct route and with interest rates so low now would be the time to borrow. Also to a degree from a social point of view repaying the debt over the useful life (user pays) seems to make sense as well. However whilst borrowing may offer a better reward in the long term, as CD alludes to when he says ‘that debt is addictive’, it does come with its own risks. I am afraid to say that with a few notable exceptions I do not feel that the current house has shown the responsibility required to be trusted with sourcing borrowing in a restrained manner. Kids in a candy shop come to mind.
It is very sad indictment on the current States that I and I believe many others are relieved that they did not allow borrowing purely because I do not feel that they can be trusted to act responsibly and once Pandora’s Box was open it would never be shut.
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Well put Mike.
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Surely borrowing internally makes economic sense. OK, interest rates are currently low but that means that the our (the taxpayers) money in the rainy day fund is making no profit (even losing money) so it makes sense to spend it! Surely this is our rainy day? It is difficult to get an low fixed rate loan (say for a mortgage) as lenders are expecting the market to rise in the future. Would the States have been able to fix a low interest long term loan – I never heard them say that they would!
The island can start saving again for when the interest rates increase and the money will not be going on high interest payments which we would have had to pay out in the future.
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merlin
I think you will find that the rainy day fund can be invested in almost anything.
I was surprised on reading some of the more speculative areas where the money could be put.
The recent stock market rise should ensure a healthy rise in the rainy day fund.
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But why not just spend less? There are only 60,000 people in Guernsey; it’s like a small town!
Spend what you can afford – and what you really need. Not what the building industry or aggrandised ‘politicians’ (read ‘town council’) want.
New schools, runway, waste plant, government offices, court buildings, airport. After the euphoria of construction, what good will this really do us? (And have we ever achieved value for money with a single States project?)
Why not maintain what we’ve got, like the rest of the world do?
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JamieC
I have to take umbridge with your post dear man.
What on earth do you think the politicians, sorry, Town Council, will do if they use common sense and do the sensible thing?
My word – they won’t be able to procrastinate ad-infinitum and then change the name of their Departments to something else following an expensive review that tells them they are hopeless. Then after the review they will still be hopeless, but blame the hopelessness on the previous Department they used to manage however that was not their fault.
No no, being sensible just wouldn’t cut the mustard.
I would be interested to know the average size of a town council administrative board compared to the bunch of clowns that run this place.
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I think it would be difficult to compare our states with a town council, as each town council is just a resresentative of a bigger government.
i am completely against external borrowing, or any kind of borrowing. for one main reason that all money is debt, even the money we all think we own, all has to be repaid to a bank at some point, with interest. that interest in ‘legal tender’ does not yet even exist. even if every single pound, dollar, euro, whatever currency was paid back in full to each bank, we would still have a massive amount of debt to pay, which the only way to pay it would be to take out yet another loan to create more money just to pay the debt from the original loan.
these kind of problems will never cease to exist untill the way that money is created, along with inflation, taxes and any other money we need to pay out is really looked at by the every human. everything just needs to stop, because we do not need it.
these capital projects are ones we simply do not need, the only thing they will benifit are the poeple who dont have regular jobs, and they can just sit back watching themselves be more and more in power (or rich, money=power) with somehow everybody else(the taxpayers)being their slaves to pay debt.
its about time people started waking up to the way we treat each other, along with such competitive lifestyles where being the ‘best’ matters something. when really it doesnt.
but we all seem far to comfortable to do anything about it, and seem to enjoy our lifestyles far to much.
unfortunatley we just cant do anything.
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No mr Parkinson they were not wrong to reject the thought of a big loan.
I do believe, you were either not around or maybe too young to understand how we were left in a mess, when last we borrowed.
The way the banks were to us makes scrooge look like an angel. memories run deep.
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JamieC
I’m sure it’s only 20,000 tax payers these days to foot these bills..
We need to mend and make do for a thew years, We (Guernsey) just don’t have the income anymore..
We need to learn how to live withing out means and that is going to be a very hard leson to lern.
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Deputy Parkinson is a welcome voice of reason in an otherwise fond pageant. It’s such a shame he is standing down at the next election.
He is the only deputy to have tackled the challenges created by zero-10 which is to his credit as he did not want it in the first place!
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There is no doubt that CP is a good Accountant but he does appear to be too used to getting his own way and maybe not too practiced at taking people with him when presenting his ideas.
I have always wondered why he has not investigated a payroll tax as a method of raising additional taxes. This would not hurt the voter a only employers would be liable to pay it. If you follow the way that Bermuda uses this tax to raise revenue then it can be banded accordin to the size of the employer and various sectors (tourism, fishermen, taxi drivers, horticultiure etc.) can be exempted thereby ensuring that nobody is asked to pay way beyond their means.
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