Tuesday 29 September 2015
Minister for Treasury & Resources Deputy Gavin St Pier said:
"Through the prudent approach the States have adopted to public finances since 2012, including the substantive delivery of the Financial Transformation Programme, tight expenditure control within a 'no real terms' increase in spending' policy and broadening the corporate tax base, we are better placed this year to weather the cyclical decline in some revenues. This has enabled us to minimise the tax burden on hard-working Guernsey families, and to maintain our competitiveness as a good place to do business.
"However it is clear that unless we are prepared to make unplanned cuts in all other services we have no choice but to make a short-term investment in our health services in order to ensure our community can be assured it will receive the care that it wants and expects. Whilst it is now quite clearly evidenced that there are some significant savings to be made in re-organising the delivery of our health and social services, these simply cannot be unlocked immediately. For example, if we are to reduce costly bed days spent in hospital, we will first need to ensure that we have the appropriate resources to support patients in the community when they leave hospital. Therefore to meet the cost of that investment, we are raising revenue through some carefully considered and limited changes to corporate sector taxes, personal taxes and duties."
Background to Guernsey's fiscal position
If the 2016 Budget had been prepared on the basis of no changes to taxes and continuing the policy of maintaining the real value of the Capital Reserve, there would have been a deficit of £28million. The States has no reserves available to fund such a deficit as the General Revenue Account Reserve is projected to be exhausted in 2015 and the Core Investment Reserve is only available to be used in the exceptional and specific circumstances of severe and structural decline or major emergencies.
Proposed measures
Therefore Treasury & Resources is proposing to reduce the transfer to the Capital Reserve from £36.8 million to £18.3million, and is recommending some considered and limited tax changes in order to raise an additional ongoing amount of £8.2million to fund the necessary spending in health and social care. These measures are balanced between the corporate sector and personal taxes and duties:
Corporate Sector (£3million)
Extension of 10% Company Intermediate Income Tax rate to custody business (£0.5million)
Extension of 20% Company Higher Income Tax rate to the importation and/or supply of hydrocarbon oil or gas (£0.35million)
Extension of 20% Company Higher Income Tax rate to retail business carried on in Guernsey where the company has a taxable profit of more than £500,000 in a year from such business (£1.5million)
Commercial Tax on Real Property to increase by 2.5% in real terms (apart from the Retail category, frozen in real terms) (£0.65million bringing the total to £14.55million)
Personal Taxes and Duties (£3.05million)
No change in personal income tax allowances (£2million)
A 2.5% real-terms' increase in the duty on alcohol (£0.55million)
Domestic Tax on Real Property and Land rates to increase by 7.5%0% in real terms (£0.5million bringing the total to £5.7million) in line with the decisions taken by the States as part of the Personal Tax, Pensions and Benefits Review
Other (£2.15million)
A 6.7p increase in the duty on a litre of fuel (to restore the real value of the 'motor tax' element) - by reflating the 'motor tax' component of fuel duty from its 2008 value to today's, we can raise £2.15m, but given the fall in world oil prices, pump prices on Guernsey will still be considerably below their peak.
Investing in our community's health
Following the work jointly commissioned after last year's Budget by the Department and the HSSD and undertaken by BDO, there is now a clear base-lined and benchmarked budget for HSSD for the first time. This provides strong evidence to support the recommended additional £8.2m for HSSD in 2016, which is needed to deliver the current service model.
The BDO report also confirmed the work of others, namely, that (1) our health and social services are costly on a comparative basis to similar environments; and (2) there is an opportunity to re-model the delivery of our health and social services into a new service model at a substantially lower cost, with savings of up to £24m per year.
Minister for Treasury & Resources Deputy Gavin St Pier said:
"Ongoing commitment, determination and leadership at a political and staff level for an extended period will be required in order to deliver this change. It will also require the investment of resources to enable the release of the 'reform dividend' - with financial savings and service improvements - which reform must produce. This justifies the States' decision last year to accept Treasury & Resources' initiative to establish the Transformation and Transition Fund to enable this kind of reform."
Following the experience gained from the base-lining and benchmarking exercise with HSSD, the Treasury & Resources Department is also recommending that in 2016 a similar process is embarked on for the next two largest spending departments: Education and the Home Department.
Managing the shortfall in budgeted revenue
As set out in the Board's update to States Members on 16 September 2015, the anticipated 5% (or £20m) shortfall in budgeted revenues for 2015 is sobering. This position has had to inform the recommendations in the 2016 Budget.
Minister for Treasury & Resources Deputy Gavin St Pier said:
"Having regard to the available economic indicators and evidence, which illustrate that Guernsey's economy is performing better than for many years, we do not believe that this is systemic, but rather that the causes are principally cyclical due to the inherent time lags in some revenues. The 2016 position therefore can be managed by reducing the appropriation to the Capital Reserve by £19m to £18m.
"However such a reduction is unsustainable in the longer term if we are to maintain our capital assets and also comply with our fiscal and economic policy objective to invest 3% of GDP in our infrastructure. Therefore if the shortfall in revenues proves to be more persistent, the States will be required to take longer-term measures."
Maintaining a prudent and sustainable approach to our finances - 'living within our means'
The estimated shortfall in revenues compared to previous estimates means that:
without the cushion of the Contingency Reserve (Tax Strategy) painlessly to absorb such a shortfall, the States will be forced to make the decisions required to 'live within our means' - as many islanders expect
the 'excess' (i.e. above inflation) investment returns of the Core Investment Reserve have provided an additional £8m for the Capital Reserve, which partially offsets the reduction in the appropriation from General Revenue.
Following the work undertaken after last year's Budget in relation to the review of the working capital requirements and capital structures of our trading assets, Treasury & Resources is also budgeting for £10m to be received in 2016 as a return of capital from those assets which will also be transferred to the Capital Reserve.
Minister for Treasury & Resources Deputy Gavin St Pier said:
"These decisions vindicate the States' decisions last year to close the Contingency Reserve and establish the Core Investment Reserve. Those decisions have given Treasury & Resources the tools they need to ensure that we now live within our means when it comes to public finances."
We would have liked this year to be able to recommend increases in personal allowances, but realism must prevail. In the absence of GST or VAT, we simply do not have the same tax base as other jurisdictions with which our personal allowances are often compared - and to look at tax allowances in isolation, rather than the overall tax burden, is over simplistic and misleading."
Maintaining our competitiveness
Treasury & Resources also proposes extending the scope of corporate income tax to include large retailers, the importation and supply of hydrocarbon oils and gas and the provision of custody services, and it is intended to fully consult with business on the technical aspects of this latter proposal. Any changes will need to ensure that Guernsey remains both competitive and compliant with international standards.
Treasury & Resources will also continue to monitor international developments in corporate tax and in due course, if appropriate, will bring to the States further recommendations for change which balance the fiscal requirements of the States with the need to remain competitive and deliver growth in the economy by providing a stable platform in which business can thrive and prosper. In order the better to enable this, steps are being taken to improve data collection on corporate profitability.
Minister for Treasury & Resources Deputy Gavin St Pier said:
"An important part of maintaining the sustainability and future health of our public finances will be to grow the economy and the number of economically active people working in it as well as broadening and diversifying our tax base. This was discussed at length by the States during the Personal Tax, Pensions and Benefits Review. So with the agreed objective of greater diversification and sustainability to ensure the long-term good health of our public finances, but with the States having rejected the further development of GST, we have no choice but to look at the scope of all other existing taxes."
Supporting Alderney's economy
Given the fiscal union between Guernsey and Alderney, the economic difficulties Alderney faces are of direct concern to all in Guernsey. Whilst Alderney are taking steps to address this through their own economic development plans, the Treasury & Resources Department believes that introducing a lower 'tax cap' of £50,000 for new residents to the island may also support these plans.
Minister for Treasury & Resources Deputy Gavin St Pier said:
"We want to support Alderney, and our view is that the tax cap is worth trying. We will also consider what other fiscal incentives might be appropriate to encourage the establishment of new businesses and employment on the island. This work might also, in time, have application to Guernsey."
The Budget debate will be part of the October 2015 meeting of the States of Deliberation.
For more information see related pages.
