OUR VIEW ON THE TAX REVIEW GREEN PAPER

“AS THINGS CURRENTLY STAND”  

These four words are crucial to this week’s Tax Policy debate.  If we do not materially address current and projected States’ expenditure on delivering what we provide and how we deliver it, and whether in fact we should be providing it at all, then the whole debate will be focusing on answering completely the wrong questions, and in totally the wrong order.   The debate must be very wide-reaching.  We must ask uncomfortable questions instead of avoiding them like we have done over the past two or three terms of the States. 

On page 19 of the Green Paper there is a reference to the history of social security in paragraph 8.23 which states: “The social security contributions system as it exists today has evolved over time as a result of successive changes, each independently justifiable, but which in succession have resulted in some marked inequities”.  We are in danger of making the same mistake here by addressing a long-term structural deficit through focusing disproportionately on just one element of the range of possible solutions.  Even worse, we are considering the potential ramifications of pulling that one lever alone, with only the implications of that action being presented in order to make a decision about the future direction.

It is very hard, therefore, for the Assembly to entertain a deeper exploration of tax increases in the absence of a full picture of the potential, and the appetite, for the removal or reduction of any existing services, as well as carrying out a serious examination of how taxation policy can be used as an enabler for increasing economic activity, and indeed the converse of how tax policy can actually deter increased economic activity.          

It goes without saying that nobody likes paying additional tax.  Neither do we, as our Party manifesto made very clear.  We owe it to all taxpayers to try to firstly avoid tax rises, and if that proves impossible, to minimise any tax rises which prove unavoidable.  Nobody wishes to see frontline services cut either, which was also part of our Party manifesto.  The focus must therefore be not only on how, but also on whether we are actually trying to deliver the right things in the first place.  

The Party’s clearly stated position is that we wish to see all stones fully turned before we can support any tax rises. But what does that actually mean?  Which stones should we be looking under in the first place?  What questions must we then ask when those stones are turned?

Let’s face facts.  We do not know and will not be able to know exactly what potential savings can be made until there has been a proper review of each potential area of savings.  Neither does P&R.  And neither does each States Committee responsible for each relevant area.  In some cases, the information may be close to being readily available, but again, is anyone prepared to ask the uncomfortable questions?

These answers cannot possibly be known before this week’s tax debate, but they must be known before P&R come back to the Assembly with whatever Policy Letter emerges from the outcome of  this week’s debate on the Green Paper.      

The island needs a wide-ranging “top-down” holistic economic strategy debate.  P&R really needs to   commission detailed analysis for consideration by the Assembly when the future Policy Letter is debated.   Let’s not get hung up on the cost of such detailed analysis.  Whatever it costs (within reason) will be money well spent in helping to reach the right decisions.  The terms of reference for the detailed analysis must be clearly defined and then members of the Assembly will at least be armed with vital information before making the eventual big tax decisions – arguably the biggest decisions that it will need to make as they will shape Guernsey’s finances for decades to come.   We need to know what exactly it is that we need and want to fund going forward, so that we will know what levels of taxation are required to fund it.      

Challenging what we do, how we do it and whether we should be doing it at all are absolutely fundamental questions, and if we do not ask them now – right now – then quite frankly they are unlikely to ever get asked.  

The following list is not exhaustive, but we believe that these are the questions that must be asked.  They are not proposals – how could they possibly be when we don’t yet have the information?  But we believe that they are the right ones to be asking the Assembly to at least consider and debate, in order to reach the big tax decisions. 

In no particular order:

Borrowing

£66m of the £87.4m projected annual revenue deficit from 2025 relates to funding infrastructure.  We know that there has been a massive underspend on infrastructure over the past decade (as a percentage of GDP), and this cannot continue.  It simply has to be funded.  But is £66m a year (2% of GDP) the right number?  Is funding it from revenue account the best way?   This £66m figure represents 76% of the projected annual deficit needing to be funded. 

 If the infrastructure funding was financed by long-term fixed-rate debt, which is cheaper than ever before, then £66m a year can be drastically reduced. For example, if a £300m infrastructure loan was taken out for 30 years at a fixed interest rate of 1.5% per annum, the annual repayments (capital and interest) would be around £12.5m a year. That would chop more than £53.5m a year off the annual deficit needing to be funded, reducing it massively from £87.4m to £33.9m.  Whether or not a £300m loan is sufficient is obviously to be debated, but after 10 years (which is after the end of the next 2025-2029 Assembly term) more than £76m would already have been repaid.  It could also be structured by way of a bond, and indeed over a longer period, so there are many alternatives to the existing proposal of funding it via the revenue account.                     

States Property Portfolio

This is seemingly worth at least £2 billion. Much of it is surplus to requirements and generates no or negligible rental income.  Explore selling off what is not required.  Look at entering into partnerships with developers if appropriate (and sell off a partial interest). Look at selling off some States housing to tenants. There is some States property which is ideal for either “more affordable” housing or for building more care homes (which we are clearly going to need), so sell it to third parties.  What is the point of the States holding onto unwanted and unneeded real estate?  It isn’t even on the States’ balance sheet!  Retain what is needed of course, although even sales and leasebacks could be considered where appropriate.  

Raising cash from surplus real estate to fund x years of future infrastructure spending is logical and would remove £66m a year from the £87.4m projected deficit.  This might be preferable to borrowing now to fund the infrastructure spend, although the current low fixed interest rates may not be available for too long.

States Trading Entities

It would appear that the States’ trading entities (excluding Aurigny which is being addressed separately) are currently leaking at least £30m a year in terms of EBITDA losses.  That’s £30m a year which taxpayers are subsidising.  Furthermore, they have no money to fund their required capital expenditure to address those EBITDA losses.  Should we be commercialising those that aren’t already commercialised?  Should we be looking at part-privatisation (which Jersey did with JEL, floating off 49% of it on the stock exchange but keeping 51%, thereby retaining control?).  Outside investors would then be funding those businesses instead of the Guernsey taxpayer.  Let’s face facts – States’ ownership of most (not all) of those businesses is hardly in the taxpayer’s best interests if it results in the taxpayer having to subsidise them by more than £30m a year. 

Civil Service

Public sector reform and digitisation is already under way, and there is new leadership at the top.  Is the civil service as efficient as it could be?   Are the right KPIs in place to assess employee performance?  Are civil service vacancies fully open to employees from the private sector?  Are the procurement processes up to scratch?  Are too many under-performing employees merely “moved sideways” as opposed to being removed?  How many would like to take voluntary redundancy or reduce to a 4-day week (taking a pro-rata remuneration reduction)?  Could we do more to help civil servants to retrain for administration roles in the private sector rather than “seeing out their time” until retirement? 

Public Sector Pension Scheme

There are very complex arguments to be had over whether the £1.6 billion deficit is more like a £250m deficit, depending on what accounting standards are used, and this goes way beyond the scope of this article.  Nevertheless, the scheme is clearly in deficit to a substantial extent, even if the lower figure is used.  Should we explore longevity swaps to cap the States’ risk exposure on longevity?  To what extent has the “new” CARE scheme (approved several years ago) even been used for pre-existing employees, or are they all still on final salary schemes?  Did the CARE scheme changes even go far enough? 

Discrimination Legislation

Real clarity is urgently needed over exactly what costs relating to this information are already in the Baseline figure, and what exactly is intended to be funded by the estimated £50m (referred to by Deputy Trott in the 2020 debate) in relation to “equal pay for equal work”.   The next stage of the legislation may well have been deferred, but should it be formally removed altogether?  Are members of the States clear about what benefits it will bring, what the full cost impact assessment is (not just for the States but for all employers), and whether we actually need it in anything like the form proposed?  What would the impact be if we do not bring it in?  Should we explore replicating the already-implemented Jersey legislation?  Further vital debate is needed.

Zero-Budgeting

Should all States departments move to zero-budgeting, so that the practice of spending the remaining budget one year to ensure that it is secured for the next year is eradicated?

Benefits

Many islanders have strong views on the level of benefits payable by ESS.  In the eyes of some we are far too generous in certain areas, and not generous enough in others.  It is undoubtedly time for a comprehensive review of what gets paid, to whom, and on what conditions.  Have we made “not working” a lifestyle choice for some, while not being able to pay enough for those in greater need?    Can we do more to get the unemployed back into work?  Have we got it quite right when some occupants of social housing are deterred from earning more money which would cause them to breach social housing earnings thresholds, which in turn ultimately prevents them from moving into their own homes?  We must address any such poverty traps caused by the benefits system.      

Population Management

It is essential that we address the population management issues as a matter of urgency, otherwise we are in danger of losing large chunks of not just our hospitality industry, but also other important sectors.  We all know that we need to grow the working population to counter the demographic timebomb, but we have to be able to fill existing vacancies.  What level of population increase is acceptable?  We must retain control by being able to turn the immigration and population growth tap on and off, although recognising that people will only come if there are jobs for them to do.  Suspending elements of the Population Management Law for a year at a time could be explored, whilst keeping it there (tweaked ideally) to quickly reintroduce it if we need to.  It is a law which was designed to keep people out, which is clearly not fit for purpose when we need to attract and retain key workers.   

 Affordable Housing

Clearly the Population growth question also has big implications for the affordable housing problem – we must get on with building more affordable homes as a matter of urgency – the right type at the right price.   In that regard, should we abolish GP11 immediately?  This would remove that particular development obstacle to speed up the increase in supply of new affordable housing to help keep young islanders here so that that we don’t also need to replace them with imported workers.       

WHAT ABOUT GENERATING MORE REVENUE?

Investigating Offshore Renewable Energy

When was the last time that the States seriously investigated the viability of exploiting offshore tidal or wind energy in Bailiwick waters to generate our own electricity, becoming less reliable on the French supply cable, and even for exporting surplus electricity?   Many of the vital elements needed for tidal and wind power generation are in our favour, but have we been lazy in not really driving it as an initiative?  Were we simply too comfortable sitting back and relying on the finance industry to bother with exploiting the potential of renewables?  We should certainly be fully investigating the viability before ruling it out.   There are many major companies who would fund it if it is viable, producing substantial dividends for the Island.

Attracting Tax-Generators

We need to keep attracting new wealthy Open Market residents by ensuring that the tax regime remains attractive to them in a very competitive market, and we must ensure that we are attractive as possible to entrepreneurs who will create new jobs here, especially in industries which will help us to diversify the economy.  These people will directly and indirectly generate substantial tax revenue.  Are we doing enough to attract them?

SUMMARY

All of these topics need to be fully considered and debated.  Amongst them there are numerous ways to cut costs and generate additional revenues.  Nobody has said that it will be easy, but simply voting for tax increases without challenging the status quo would in our view just be taking the easy option to the detriment of taxpayers.  Furthermore, if we do not make these challenges now, then avoiding future tax increases down the line will become even harder.

This week’s debate, as set out in the terms of reference for the Green Paper, is about how best to raise £75m of additional tax revenue if – and only if – it is actually required.    

The Assembly needs to agree the direction of travel which this Assembly wishes to take, otherwise, the debate on the Tax Review Green Paper merely answers questions which are based on the fiscal position “as things currently stand”, without any consideration of whether that status quo is even desirable or viable.

This article sets out the major areas where we think potential cost savings and changes to the way in which we do things exist, which in turn can have a material impact on how much additional tax revenue might – and we stress might - need to be generated.     We believe that there are real opportunities to reduce the projected structural deficit if we want to.  The Assembly will need to pivot from a “spend and worry later” mentality to a more considered approach.  Reduce costs, grow the economy and invest in Guernsey’s future.  But this will depend on individual deputies and committees. If we do not adopt this approach and continue to come to the States demanding more money or expensive regulatory or other legislation, then the only option will be to raise taxes.      

DEPUTY JOHN DYKE

DEPUTY NICK MOAKES

DEPUTY BOB MURRAY

DEPUTY SIMON VERMEULEN

MEMBERS OF THE GUERNSEY PARTY

*Note:  Deputy Mark Helyar is not a signatory to this document due to his role as Treasury Lead on Policy & Resources Committee