‘Borrow or risk being left behind’
Monday 2nd March 2009, 1:00PM GMT.
THE States must borrow money for vital infrastructure projects if Guernsey is to be competitive globally, according to former UK Minister of State for Trade Lord Digby Jones (pictured).
He warned that failing to complete projects essential for the sustainability and profitability of the island would be disastrous for its future.
‘If the island is going to compete then it can’t stand still. In these times that’s tantamount to going backwards. You cannot afford to be left behind by the rest of the world, especially by other low-tax jurisdictions,’ said Lord Jones, who was guest speaker at the Institute of Directors Guernsey branch dinner last Thursday.
‘Borrowing would bring Guernsey into the capital markets of the world and it does create a bond market too.’
In May, the States will debate which projects will take priority and how they will be funded. The island has never borrowed but might have to consider it if it is to achieve the big three on the States’ £400m. wish list – repairing the runway, improving mental health services and rebuilding Les Beaucamps High School.
But there is strong resistance to it from some in the House. In last Thursday’s States meeting, Housing minister Dave Jones said: ‘Borrowing is just deferred taxation for the next generation.’
However, Lord Jones said it did not matter if Guernsey had borrowed in the past or not, it needed to adjust to the challenges of globalisation.
‘There will be people who say, “I quite like Guernsey the way it was”, but that attitude is going to condemn the island to yesterday.
‘It’s not that these people are wrong or doing bad things, it’s just that the rest of the world is going to go straight past you. It would be a crying shame if Guernsey decided not to take part in it.’
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I feel it would be commercial suicide to borrow at these times of uncertainty. Things are changing on a daily basis. Industry is changing just as quickly. We have done well from finance in the past. There is no guarantees that this will be so for the future.
We are at the start of global harmonisation. We can’t rely on competing with others that offer the same packages only more conveniently.
I’ve no doubt that the states will wish to finance the Island up to the eyeballs cos they will get off on all the the good PR at completion. However, there no doubt will be big overspends and the cost to the Island will be experienced many years after the politicians have left their posts.
If we can’t afford it then we need to learn to live without. We are such a small Island and it is dangerous to compare us with elsewhere.
Business people like the Island for what it can do for them. Once this goes they tend to follow.
If push comes to shove we can rely on Jersey airport for longer haul flights. Guernsey never will be and never will have the need to have International links with the wider world.
I would like to see the airport built in a more convenient place on the Island. Whoever placed it where it is now quite possible placed it in the worst and most dangerous location on this Island.
It is a huge site. It is in a desirable location. I would be in favour of borrowing against the resale value of the land and using this money to support a new rebuild with all of our other major projects incorporated.
Three or four years from now we could have a new airport with much less health and safety issues to residents and also a direct electric shuttle or tram service into town.
We all need to concentrate on our actual needs. Greed is a thing of the past. At least for now.
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In my very humble opinion, it would be folly to borrow now:
If Guernsey does borrow then they will be forever in the hands of England.
Yes we like our Island as it was; we may be slow, but it is that charm that wins over most people.
To be ultra modern as his bloney Lorship would like is suicide.
Let him help sort out his own country before trying fancy tricks on our Island.
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Where exactly does UK Minister of State for Trade Lord Digby Jones have his head? He said: ‘There will be people who say,
“I quite like Guernsey the way it was”, but that attitude is going to condemn the island to yesterday.”
Ask any economist wether ‘yesterday’ was better than today and i’ll think their answer would be a resounding yes.
Lord Digby Jones then goes on to imply that if Guernsey does not borrow money then “the rest of the world is going to go straight past you.”
He’s probably right but he has the wrong perpective given where his head must be because from where mine is I see them passing us on their way down. Borrow money be damned raise the rates of income tax now, not later for the things we wish to aquire now. It’s the fairest and safest way. Otherwise we’ll all get the shaft.
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I’ve read comments here that bordered on the fantastic, but Paul’s utterances here surely must take the crown. As to the necessity of the airport, Guernsey’s economy famously rests on three pillars: financial services, tourism, and agriculture, and two of them are vitally dependent on the presence of an airport. I also don’t understand how the current placement of the airport should be “the worst and most dangerous location on this Island” and where “a more convenient place on the Island” should be found. The current site is roughly 2.000 by 600 meters, and you would need that much space, reasonably flat, someplace else, oriented along the prevailing wind direction, which would be east-west, and free of obstructions for at least a mile on each end of the runway. Pray tell me, Paul, where such a space is to be found elsewhere on Guernsey? One might, I assume, bulldoze flat the hinterland of Vazon Bay, but there is high ground all around. One might also pave over L’Ancresse Common and the golf course and partly fill in Ladies’ Bay. Neither of which would endear itself, in my estimation, to the people now living there. Or maybe Paul thinks of building an artificial island, like they do in Japan?
Jokes aside (and ignoring the fact that the current site IS the only suitable site for an airport), building a new airport anywhere else would mean giving up everything invested in the current site, including all the money spent on the new terminal. As for the idea of selling the current site to finance a new site, with the real estate market in the state it is in, borrowing the money wholesale from an Icelandic bank would probably be a less risky proposition.
Guernsey will have to invest in infrastructure, or watch it crumble into a state like that currently found in Zimbabwe or Guatemala. The sewerage situation must be addressed; the current system of effluent disposal, which is essentially “Dump it into the sea and let it be someone else’s problem” is a shameful state of affairs for a twenty-first century community. If that means money will have to be borrowed, so be it; not doing anything will be far more costly down the line.
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Paul….sane sensible thinking. I agree wholeheartedly with your comments. So should every other sane thinking Guernsey man and woman. Allowing Guernsey to be talked into borrowing heavily at this time would indeed be long term suicide for the island as would the totally unnecessary suggested expansion of the airport.
Surely that which is happening to our western world these days both financially and also in respect to airports/air lines and their woes is a huge lesson for everyone, including all States of Guernsey elected members. The world has gone mad, Guernsey does not have to join in……
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A lot of people trusted the likes of Sir Fred Goodwin to manage and direct the banking world.
Can we place too much confidence in the opinion of Lord Digby Jones?
Guernsey,for the sake of the next generation must learn to live within its means.
As Paul writes ‘if we can’t afford it we need to learn to live without’.
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Paul – interesting post indeed.
I can’t see the argument for not spending / borrowing in one breath, and advocating the relocation of the airport in another – are you serious???
One thing I do agree on Paul is that to borrow would be dumb.
The cost of paying a loan on interest does not make any financial sense to anyone. Guernsey would be at the whim of the lenders – never a good position to be in.
I advocate spending on tarmacadam repairs to the runway and leaving it well alone. There is no significant increase in traffic, and with the demise of the 146 then there is no substantial aircraft. In any case with the economic downturn being as severe as it is then the chances of increased air travel and consumer uptake is negated at least for the next 3 – 5 years.
Just because someone has ‘Lord’ in front of his name does not suggest he has any idea what day it is, never mind how to run an island.
I mean, look at Mark Thatcher – do you think he knows which way is up? Can’t read a map; can’t understand coo’s etc.
I propose the States looks at ways to consolidate and stop looking at ways to spend. First stop, drop 50% of the top brass in government as they are fairly hopeless – Trott can go, as can half the States senior management. You could easily drop half the Jurats for no cost.
Get a grip people…….
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So, according to Dave Jones it’s OK to guarantee the borrowing of private concerns – such as GHA, but not to borrow directly in the markets?
His particular department has overseen the rebuilding of much housing stock via the heavily borrowed (30-50 million) Housing Association.
For some reason, he is against any other minister doing something more direct. Very peculiar.
“Borrowing is just deferred taxation for the next generation” A change of heart, then. I wonder what sort of terms GHA got from RBS; what rates were agreed (it was all stitched up prior to the rate cuts). DJ might do us a favour by repaying RBS from funds borrowed in the markets at current rates. We (the states, and ultimately the taxpayer)are responsible for all the GHA debt, and gave them most of the land they have built on.
Currently, they are demolishing family homes to build one-bedroomed homes…because…there are too many under-occupied family homes…but the demand is for family homes…so we’re knocking them down…
Sounds like real value to me.
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Imagine, the island borrows say £100m, interest rates start an uptrend and we end up with a large debt to service costing millions each year, then we need to borrow for another project and pay millions more to service the debt. Eventually we have no option to borrow again as the interest paid out eats a big chunk of income. Along come the EU or UK and offer to bail us out, but with a big catch, we are forced to join the UK/EU as a province or similar.
Who would make a lot of money from the Island borrowing? Are they not, the finance industry, the local stock market directors? Are the people recommending borrowing in a position to make gains?
Beware of those suggesting Guernsey borrows money, as Deputy Jones says, Borrowing is just deferred taxation for the next generation.’
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Devils Advocate
If Guernsey issues a 25-year government bond at a fixed rate of interest, then that’s the fixed rate of interest that the States of Guernsey has to pay on that debt for the next 25 years. It wouldn’t be exposed to interest rate movements.
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Digressing slightly, can I ask a simple yet fundamental question? We have had 30 years of “prosperity” during which any criticism of the economy was met with “if you didn’t have us you wouldn’t have your schools, hospitals and essential services”.
Yet the schools, mental health services and airport runway are all things that, I believe, are not recent entrants to the capital expenditure wish list; certainly the schools have needed major work for many years and I think the others have been known about for longer than just a year or two. Plus all the other things that have been let slip and the fact that we still pour our sewage into the sea and our rubbish into holes.
How come all these projects are now on the list? What happened to this prosperity? Shouldn’t it have been funding at least some of these projects over the last 30 years?
On the subject of borrowing I agree with the caution in many of the posts above. I’m not sure how much I trust the “experts” – IOD etc – they got it wrong when they did their blue sky thinking at the time of 0-10, they got it wrong when they said delaying 0-10 by a year (and saving, was it £1m?) would lose us business, and the whole world of finance got it wrong which is why we have the credit crunch. I’m not denigrating the IOD etc as there are clearly some clever people there but I don’t think the finance experts think widely enough. I know we have to compete but we have to be sensible and wise as well – it’s a case of getting the balance right. There’s more to a community such as Guernsey than just getting the sums right.
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Yes, Valdubon. This ‘trickle down’ has served only to make our cars more shiny and refurbish our houses. That’s hardly the stuff of progression.
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OK, so we don’t borrow and sit on the rainy day fund for another few years while the economy ‘corrects’ itself.
That’ll give us all ample opportunity to carry on whingeing about the state of Guernsey’s infrastructure.
I’ve said it elsewhere, but the longer you leave these projects the more expensive they will get. If things need to be improved then we are ultimately going to end up paying for it at some stage, so why wait? Take advantage of low interest rates now.
What’s the difference between paying, say, £5 million in interest over the next 3 years and the cost of the runway resurfacing/extention going up by the same amount? (Don’t bother arguing what the cost of a loan will really be, this is for illustration purposes only!!)
The difference is that if we borrow now then real progress is being made rather than sitting around with our thumbs up our butts being all non-commital.
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The answer Valdubon is that during ‘the Halcyon Days’ the island’s elite wanted to have their cake and eat it. Vanity projects were always completed, mind you. Now, conveniently, the important things that need doing cannot be afforded because ‘the Halcyon Days are over’! Clearly the infrastucture should have been invested in back then, but too many people were busy getting rich or massaging their ego instead of looking after our island home.
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Well If we borrow (at a great rate at present), and ensure that the capital projects are undertaken by Guernsey companies that employ locally taxable employees then I’m all for it.
Excluding materials (which should be sourced locally where possible), you claw 20% tax straight back. You might reduce some unemployment (which reduces SS claims, creates more tax and SS contributions), you have more disposable income in the system which is spent in local shops and continues to buoy the economy just when it needs it / is beginning to need it.
I read somewhere (really can’t remember where). That every pound the government puts into a local economy, they will get back five pounds in tax and contributions excluding what is imported / exported. – Not sure how much I believe that tbh.
I would be quite confident that within 2-3 years, the capital expenditure would result in 30%+ of the cost being recouped through taxation, SS and the ongoing circulation of money.
So lets see …
1) Large list of projects that need to be undertaken.
2) Cheap credit
3) Recession / stimulus needed / needed soon.
4) Rising unemployment
5) Cheaper labor / materials during recession (probably)
6) low inflation currently
7) You get the benefit of the actual individual projects too :)
Seems a no brainer to me, mind you by the time the states decides, the recession will have been over for 6 years and interest rates will be at 20%!!
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Valdubon,
It is not up to business (any type) to be responsible for funding Guernsey plc. During the “30 years of prosperity”, we have all had 30 years of 20% tax and excellent employment levels.
Blaming business for any shortfall is as shortsighted as not realising that the users (us) should be paying for the things we want (higher taxes).
sorry bit off track there.
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Jamie
What you are not taking into account is the information provided by Giba that highlights how much better things have got. What Valdubon has raised is that the schools are still falling down and producing illeterate adults at a greater rate than our standard of living should be comfortable with, healthcare is expensive, there still will be sewage on the beaches for years etc etc.
All these things were here before. That’s not to say that there has been an explosion of consumerism and that has meant upgraded cars and houses, but the real essence of society is still stuck in the past. Including most of our politicians.
The people that have really benefited are those on the tops of the finance industry and the industry itself. It has been an exploitation of Guernsey’s historic ‘out of scope-ness’ with the UK and Europe that has seen the division between rich and poor get wider. I still don’t know why we should be proud of that.
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Jamie- I’m not blaming anyone, just observing by raising a question about why we didn’t manage to do all these essential projects when the money was flowing in – perhaps government should have been extracting more from the economy or should have got its priorities right then??? Quite how it would have extracted more money (and kept 20% tax etc) I don’t know but I’m being purely observational about history!
I am also saying that we need to be cautious about borrowing, not that we should reject it. The credit crunch is all about too much borrowing and leveraging so let’s be very careful as an Island when global economies are fragile and locally 0-10 is not going as well as planned – and we need to spend a lot of money on capital projects. Things could go badly wrong if we make the wrong decisions so let’s think very carefully and not automatically listen to business or indeed anyone – who, without being intentionally critical, don’t always get it right. Let’s listen to everyone, consider INDEPENDENTLY all the facts and options and come to a well-ordered decision that takes account of the needs of ALL the stakeholders in our community. Do you think the States can achieve that?
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This is all very odd. We are talking about borrowing for, I assume, capex projects, and seem to have forgotten we have a deficit touching nearly £60m per annum.
So what does Guernsey do, ignores the bleeding obvious; high cost of running the island, low taxation, bsuiness dribbling away, the failure of zero/1o – anyone remember the promise of 6% growth in the debates? We jump straight over all of the real issues and go straight into a construction spending programme.
I understand the politics of it. Bernie gets his incinerator, Carol gets her schools and Hunter gets his Mental Health – no political arguments and the problems saved up for the next generation.
This is al lbecoming a little bit insane!
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So it is a lose-lose situation? Spend now, next generation pays. Don’t spend now, next generation pays through poor infrastructure.
Of course, there is the argument that not investing and ultimately seeing a population downturn would benefit Guernsey. After all, it is massively over-populated which is a big reason for the need to upgrade.
In 50 years time, could there be just 30,000 people living here through the economic downturn and substandard local facilities? In a way that is a nice thought. Shame I’ll be dead by then. Bummer.
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Jackie, working with your £60m per annum deficit for the next 25 years, just to play with numbers.
£60m x 25yrs = £1.5bn
Average income tax contribution per annum from 20,000 islanders of £7,000 x 25 years = £3.5bn
That’s a surplus of £2bn in imaginary play money.
I don’t know what the real numbers are but it will be interesting to see how the States play this game should they put their balls on the line and opt to spend.
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It is obvious!! States members frequently want us to follow the UK in many stealth taxes, so why not just copy the 40% tax level for higher earners and reduce that deficit.
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DA
Haha. Don’t go there! Whenever I’ve mentioned it, people have made the sign of the devil and vowed “if they ever did that then I would leave Guernsey because it would have turned into a socialist state”.
You couldn’t make it up.
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DA/Russ
I have never had any problem with raising ETI. 40% is a bit high, but 25% would, by all accounts, go someway, if not all the way to cover the annual £60m shortfall.
All this needs to be resolved before we go anywhere near the borrowing discussion.
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I’m all for raising income tax a little if it will help stop all this faffing around.
Problem is that we have expert faffers running our island. Although I like to think that I did not vote for such people in the Vale!
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So why not introduce the inevitable GST ? A 5% rate of GST would raise around £50m a year using the same system as Jersey’s.
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David, I suppose it’s a political argument; pro ETI is as follwos:
1) ETI is easier to collect, the system is in place
2) Once the GST debate starts it will be amended into oblivion.
But no doubt any sniff of raising of ETI the usual suspects will be rolled out shouting ‘the banks might leave’!
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David.
GST would probably be introduced before income tax levels are raised.
Simply because GST would be paid by everyone including those that cannot afford it. Whereas raising income tax on the high earners and net worths would be unfair.
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GST and/or an Income Tax increase will eventually have to be introduced but our lords and masters are too lily-livered to come clean before the next election.
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Sorry, my timing was wrong yesterday.
Armageddon is on on our doorstep.
Today’s Press headline comes as no surprise; no tax regime in the world has ever announced a scheme such as Zero 10 without disclosing how they proposed to fund the shortfall.
Out Treasurey’s incompetence is matched by few other countries.
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Digby Jones is a rent-a-croney. His advise of borrowing what you don’t have, indeed spending in excess of current income is not a recipe for “future success” as Digby purports but the recipe for the current economic crisis and a recipe for future bankruptcy.
Far from “others accelerataing past Guernsey” these heavy borrowers, like Britain and America, are on a fast track to bankruptcy (just watch the next 2 years play out).
Go home Digby Jomes
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Roberto
Your comment of the 6 March suggests that the previous States had no idea how to fund the deficit arising from zero 10
The loss of the £80 million a year plus was to be funded by increased taxes on everyone else, a few million quid from the rainy day fund, the most optimistic of economic growth and low inflation.
Bit like betting your house on a rank outsider.
The money saved from the proposed delay of one year of introducing zero 10 (rejected by the States) would have come in handy as a help in overcoming the present fiscal crisis.
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