Guernsey must prepare for the future following the Government Business Plan debate. Treasury minister Lyndon Trott explains the fiscal and economic reforms The need for change

AT THE end of 2002, the then Advisory and Finance Committee published its report entitled Future Corporate Taxation Strategy, which set out the need for significant changes to the tax regime.

The main need for change was, and remains, the need for the island to remain internationally competitive.

The same issues were also facing other competing jurisdictions, such as Jersey and the Isle of Man, which have also needed to adopt new taxation regimes.

The changes needed would be challenging. Put simply: doing nothing was not an option, as it would lead to the inevitable and irreversible economic and social decline of the whole island.

The consultation process

From the start, it was essential that everybody in the island, no matter their age or background, became involved. Firstly because it was so important and, secondly, because no one, certainly not politicians, has a monopoly on good ideas and all ideas needed to be put on the table.

Therefore, an important and very rewarding part of developing the strategy was the public consultation process that was carried out over two years. This was true democracy working at its best, with more than 1,300 people attending presentations, over 1,500 copies of the second consultation document issued and 500 responses received from the widest possible range of people and organisations.

This level of engagement meant that people were better informed and the final proposals were considerably better. Although the core proposals remained in place, there were significant improvements and refinements at the end of the process. It also gave a sense of confidence that government was really listening.

It is also very important that the overwhelming majority of businesses and representative organisations, for all areas of the finance and non-finance sectors, have given, and continue to give, the strategy very positive support.

Strong endorsement for the strategy has also been received from Rosemary Radcliffe, one of Europe’s most respected economists. As part of an independent working group, she said: ‘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.’

It is with this in mind that the strategy involves a two-stage process, which means that any adverse impacts can be minimised. Furthermore, it means that we can learn from what happens, not only here but elsewhere. The world is an ever-changing place and the island is now very much part of the global economy. Maintaining flexibility and the ability to respond has, and always will be, key to our continuing success.

The main proposals involve putting into place a taxation regime that is compliant with emerging international standards and remains internationally competitive, thereby safeguarding the economic prosperity of all business sectors. That means businesses in the finance and the non-finance sectors and of all sizes.

By achieving this, islanders, present and future, will continue to have the best possible opportunities to be employed in safe, secure and well-paid jobs.

Adoption of the so-called ‘zero-10′ tax regime will deliver a simple and easily understandable sytem that will allow island businesses to remain competitive.

However, in order to continue to fund essential public services, taxes in other areas will have to be increased. The strategy adopted by the States, has, as far as possible, made sure that those who will benefit from the new strategy will make the biggest contribution.

The increase in social security contributions will mainly have an impact on employers and those employees who are earning well above the average. More than three-quarters of those employed will see no increase.

Increases in property taxes will be more targeted towards business premises. Increases in domestic properties will be much smaller.

Increases in other indirect taxes, such as duty on petrol, alcohol and tobacco, will be phased in and, by and large, merely bring these taxes up to their levels, in real terms, of a decade or so ago. By comparison with other jurisdictions, they will remain low.

Personal income tax will remain at 20% after personal allowances and no new taxes, such as capital gains or inheritance, will be introduced. Mortgage interest relief will continue to be given in full on amounts up to £400,000 in respect of a person’s principal private residence.

By way of example, the following are provided:

A couple, each earning £20,000 per annum as employees with a mortgage of £150,000, will pay less than 50p in extra tax per worker, per week.

A couple, each earning £50,000 per annum as employees and with a mortgage of £450,000, will have additional tax this year of £1,701. This is approximately £16 per worker per week. Next year, an additional £632 charge will be felt. That is approximately £6 per worker.

A couple, each earning £80,000 per annum as employees with a mortgage of £750,000, will have an additional tax charge of £2,156. This is approximately £21 per worker. Next year, an additional £5,550 tax charge will be felt. That is approximately £53 per worker.

Overall, after the changes, a typical married couple in Guernsey will pay total taxes of about 17% of their total income. In the UK, the same couple would be hit by an overall rate near to 29%.

During the past two years, much has been made of economic growth.

Many of the comments made have, unfortunately, been somewhat misleading and in certain cases bordering on the scaremongering. The strategy now adopted by the States does not set out to increase either the island’s population or the number of office blocks built on green-field sites. Guernsey will not become another Hong Kong. The agreed strategy is about ensuring business is given a supportive environment that allows it to continue with modest and sustainable growth at a target of 3% per annum.

It is a policy that encourages continuing evolution, not radical expansion.

If future economic performance is in line with the average of the past 10 years and there is continuing success in restraining public sector expenditure in line with RPI, then a regressive and potentially damaging general goods and services tax can be avoided.

The States has once more endorsed this approach, this time as part of the Government Business Plan.

A key part of the strategy has always been, and will remain, that those who are already vulnerable in our society should be protected and assisted.

Public sector expenditure restraint

Much of the consultation process and the resultant strategy naturally concentrated on the strength of the economy and levels of taxation. However, a very important element of the total package that has been put together is control of public sector expenditure.

After all, the more that is spent delivering essential services, the more has to be raised though taxation from individuals and businesses. That obvious fact has sometimes been forgotten.

Therefore, while it is clearly essential that public services continue to be of a high standard, they must be provided in as effective and efficient a manner as possible.

Sometimes, hard decisions will have to be taken.

Public sector expenditure can and indeed must be controlled and efficiencies delivered but sensibly such control, the States has resolved, will allow for annual increases in line with inflation.

Since the States of Deliberation approved the Future Economic and Taxation Strategy in June 2006, there has been increased business confidence and activity. The economy, in all-important areas, continues to flourish.

An important part of the strategy is the continued growth in the income tax received from employees, which is called 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 2007 continue to be very encouraging and show strong growth.

Seven years ago, about a third of the total income tax came from ETI.

Today, nearly half comes from this source.

Public sector expenditure, which until recently increased by a staggering annual average of 6% in real terms, has been brought under control. Implementing the vitally important Economic and Taxation Strategy will be challenging, but there is reason to be confident in the future. The States has decided upon a course of action that is both sustainable and prudent.