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Chairman's Blog - The Perfect Storm

Chairman's Blog - The Perfect Storm

 

Why is there a structural deficit?

For several years the finance industry, and in particular the banking sector, bank rolled Jersey.  They were good times.  And let’s remember that the finance industry is an export industry, it has relied to an extent on the import of qualified and experienced professionals, but it has provided employment for thousands and paid handsome tax on profits in the good times.

When 0/10 was introduced it was a necessary though unwelcome change.  Necessary in response to EU pressure to protect the jobs, business and, yes, the tax revenues generated by the finance industry; unwelcome because it made raising taxes from all businesses more difficult.  A shift in the tax burden to personal and/or indirect tax was inevitable.  There is absolutely no doubt that 0/10 was a better alternative than maintaining a 20% corporate tax rate and seeing Jersey’s finance industry destroyed.  Better for everyone.

The trouble is that the move to 0/10 coincided with the banking crisis, a long and deep global recession, increased regulation and a prolonged period of low interest rates, all of which have hit our economy and tax revenues. For a while it seemed the only industry that was flourishing was the compliance industry!

Then add a third factor, the ageing population in Jersey, and you have the perfect storm. And whilst business confidence and economic activity are back on a positive trajectory, it’s clear that the good old days are not going to return. The world has moved on and Jersey will have to work hard to maintain the standard of living we have enjoyed on the back of a successful finance industry.

What is the remedy?

So what has our government been doing in response to these challenges?  I would argue that the situation called for three key responses, and that so far the States have responded pretty well on two of the three, but much more is needed on the third.

Firstly, the tax system needed to be reengineered.  With the introduction of 0/10 – a smart move that has protected our finance industry– tax revenues had to be found in other areas.  The States introduced GST in 2008 and have steadily been raising personal taxes.  Tax rises are never popular but needs must. The problem of how to raise tax from foreign owned businesses is perhaps the last step that is needed to create a robust tax system, and this should be a priority.

Secondly, investment was needed into growing and diversifying the economy, both within the finance sector and in other areas such as tourism and digital.  Again, we saw action on this front with a major review into the finance industry that has shaped our strategy for the coming years, and the establishment of Digital Jersey and Visit Jersey.  Such investment in our future must continue, so that we can identify and respond to both threats and opportunities.

Regrettably the third area that needed to be addressed has been neglected, being to cut States spending.  What is needed is reform of our State sector to make it modern, lean and efficient and to scrutinise what areas of government activity might be unaffordable or better left to the private sector.  In fact, States spending rose sharply in the years following the introduction of 0/10 in 2008. This means that the tax rises we have seen to date are proving inadequate, and more are on the way.

Encouragingly, recently it appears that more reality is being built into income projections, and in addition, the spending needed to cater for an ageing population is being factored into expenditure forecasts.  This is welcome, even if it makes for uncomfortable reading.  The 2016 – 19 draft MTFP doesn’t shy away from telling us what extra spending will be required, and the cuts and tax rises that will be needed to balance the books.  It is crucial that the spending cuts and improved efficiencies that are now long overdue are delivered, and fast. 

Jersey’s low, broad and simple tax base is fundamental.  What attracts entrepreneurs and businesses to locate to Jersey is a blend of stability, robust laws, flexible and appropriate regulation, transport links and of course quality of life, with low taxes definitely also in the mix. 

There is a danger that we are moving away from this.  The top rate of tax on company profits will soon be higher in Jersey than in the UK, and the gap between the UK and Jersey in terms of personal tax burden is quickly narrowing.  We need to be very careful about introducing new taxes and charges to pay for open ended benefits that may well prove unaffordable.  The charge for long term health care is potentially one such charge. Could the health care charge be another?  Bringing in these so-called charges and introducing them gradually disguises the fact that these are tax rises and they risk making Jersey uncompetitive before very long. 

The IOD would like to see real progress on savings and efficiencies in the States before any further tax rises are introduced.  This is not just for the benefit of IOD members but for the benefit of everyone in Jersey. It’s now time for our civil service to deliver, not just tinkering at the edges but driving through root and branch reform. We believe that significant cost reduction is possible without swingeing cuts to front line services and without scaling back on areas of investment that are so crucial to our future.

Wendy Dorman
Chairman, IoD Jersey Branch