Compare and contrast, by Peter Roffey
Friday 27th September 2013, 5:00PM BST.
HERE’S a question. During a period of economic downturn, is it absolutely essential for the States to balance its books? Or is it more important to avoid structural damage to the island’s broader economy, even if that means depleting government reserves?
Obviously there is no definitive answer. Firstly, it’s a question open only to those prudent enough to have built up reserves during periods of relative plenty. Secondly, there clearly has to be some balance, with due regard paid to both protecting the economy and preventing government going bust.
The reason I even pose the question is that the States of Guernsey and Jersey seem to have taken totally different approaches on this issue and I think it’s worth looking at the relative merits of both policies.
Let’s look at Jersey first. They started with much bigger financial reserves than Guernsey. They have also been much quicker to return to surplus in their annual revenue account, with new monies now being paid into those reserves. So is it game, set and match to the Caesarean approach to fiscal policy during a recession?
Unemployment has grown far more in Jersey in recent years than it has here. Anecdotally, there have seemed to be more business failures in the bigger island too. And we have also recently heard the news that the total size of Jersey’s economy has shrunk back to 1990s levels. Is there a contradiction between Jersey’s good news on balancing the States’ books and the bad news on the broader economy? No. In fact, I think they are inexorably linked.
How have the Jersey States managed to ensure their income covers their expenditure? Well, they brought in GST at 3% and then later increased it to 5%. That instantly sucked cash out of the island’s economy and reduced consumers’ spending power. Coupled with other changes to income tax and social security, this has simply served to deflate Jersey’s economy just at a time when it really needed some stimulus. So while the States there can smugly point to their budget surplus, the real question is, at what cost to the economy in the longer term?
Turning to Guernsey, most expert commentators suggest that our economy, while certainly struggling, has fared better during the downturn than Jersey’s. One indicator of that has been the ongoing, relatively low unemployment rate. Perhaps more importantly, by avoiding too much structural damage, it might mean that Guernsey’s economy is in better shape to ride the upturn when, and if, it happens.
So has Guernsey got its fiscal policy absolutely right during the recession? Maybe, but that has yet to be proven. Just this week our T and R minister revealed that States income this year would be £10m. less than previously forecast. That in turn means that our government will have to take £27m. out of its contingency reserves instead of the predicted £17m. And even that is an overly optimistic statistic, because the amount budgeted for capital projects is woefully inadequate.
I started by saying that the option of using financial reserves to ensure a soft economic landing was open only to those who actually have them. By the same coin, the extent to which they can be so used depends on their size. Guernsey was probably guilty of not putting enough aside during the boom years and it can spend only what it has in the bank. Indeed, ideally the States won’t really want to use all of its rainy day fund – or even that part of it previously earmarked for the post zero-10 financial restructuring.
After all, who knows when the next recession may come along? It may be too soon to allow our depleted reserves to be fully replenished, particularly as any return to the real boom years seems unlikely – although I hope I’m wrong. So it’s far better to not use all the cash in our emergency account now.
OK – it’s time to come off the fence. Looking at the past five years, which of the two islands’ economic and fiscal policies do I support? On balance, definitely Guernsey’s. What’s the point of having strategic reserves and then being so loath to dip into them that you risk wrecking our economy?
I’m glad the States have chosen to avoid taking too much money out of the local economy and further cooling it at a difficult time. The caveat is that this policy can stretch only so far and it’s now time to balance our budget.