SITTING in Guernsey, the world economic turmoil can sometimes seem a million miles away.

It’s true that our own economy is sluggish with little growth, but it’s hardly Armageddon.

Unemployment remains low, our government is debt-free and there is no prospect of the sort of savage cuts in public services most other countries face.

But if we think it’s business as usual, we’re living in cloud cuckoo land.

Guernsey’s fiscal policy was established five years ago under very different circumstances.

When the island decided to stop taxing company profits, it gave up £100m. a year in revenues.

That plunged the States’ revenue budget into deficit.

The strategy for curing that problem was simple.

In the short term, the black hole would be covered by spending our reserves, but the budget would gradually be brought under control by a mixture of economic growth and spending constraint.

How has that policy worked? It started off very badly at the beginning of the current States term with measures like big increases in personal tax allowances and significant increases in spending, making deputies appear to be in denial of the budget deficit.

More recently, our politicians must be given credit for much greater control over spending, but that won’t be enough to cure the revenue shortfall.

On the other side of the equation we have a presumed 3%, real terms, growth in GDP. Given the world economic situation, that is looking more and more like pie in the sky.

And just to make things worse, Jersey and the IoM seem to have thrashed out a deal with the EU which, if we follow suit, will lose us even more in tax revenues than the original zero-10.

What’s the answer? There are several possibilities and none are particularly attractive.

To tackle a budget shortfall you obviously need to increase income, decrease expenditure, or both.

Let’s look at income first.

Here there are two main options.

The first is to break ranks with Jersey and the IoM over zero-10 and say: ‘It’s now unsustainable and we are going to go for a completely different corporate tax structure.’

We could, for instance, follow the territorial model Gibraltar is putting forward.

That would in theory bring in much more cash for the exchequer, but it’s a high-risk strategy. As I understand it, regulated banking businesses would pay 10% corporation tax under both models, but it would make us very uncompetitive with respect to the rest of the economy.

GST is an obvious soft target and would plug the gap very rapidly, but there are two big problems with it.

The first is that it is terribly unfair and regressive, hitting the poorest the hardest.

The second is that it tends to take heat out of the economy just as we need to stimulate it.

I have no doubt that Jersey’s introduction of a 3% GST, and then the increase to 5%, were factors which led to more subdued economic activity there than we’ve seen in Guernsey.

The third way to boost income is simply more of what we’ve seen over the last few years: brand-new charges like the toilet tax and increases in existing indirect taxes such as property rates. If this is the chosen route we are all going to hate it, but the States simply must bring in some protection for those on very low incomes.

Otherwise the measures used to cure Guernsey’s budget deficit will force many household budgets into the red.

The other side of the coin is reducing expenditure.

That means spending cuts going far beyond what we’ve seen so far. It also means using all of those savings to fix the budget shortfall and not to bring in new services.

As a passionate advocate of good public services I’ll find such an approach very hard to stomach, but political policies which deny economic reality benefit no one.

To put it into context, we are not talking about anything like the sort of austerity measures which the Greeks are having to implement, or even British-style cutbacks.

Our deficit is smaller and we have no interest to pay on national debt (although the pension deficit is very worrying), so the measures can be less extreme.

But for a community which is used to trotting out the mantra ‘of course we can afford it, we are a wealthy little island’, we really need a reality check. In the biggest economic trauma for generations, no one is an island.