A fiscal storm is brewing

THERE are two very different sorts of calm.

THERE are two very different sorts of calm.

The first is the result of all being well with the world. There’s no need to panic, everything is in equilibrium – relax. The other is the calm before the storm.

I’ve long felt that the almost spooky inactivity of the States since April’s general election fell into the second category rather than the first. With the publication of the delayed Budget for 2013 I think we can see the first signs of that storm making landfall.

Why do I think there is a tempest on the horizon? It’s the economy, stupid. We really have had all of the ingredients for a perfect storm. The zero-10 tax strategy blew a hole in our public finances just before a world economic meltdown came along to severely hamper efforts to grow our way out of that problem. All this is a recipe for austerity ahead.

Of course, it won’t be like the austerity in Greece, any more than poverty in Guernsey is the same as that in India or sub-Saharan Africa. But how bad something seems is largely dictated by what you are used to, and by Guernsey standards some very tough choices lie ahead.

That won’t be helped by widely disparate views within the States over how to respond.

Thank goodness we don’t have political parties, but I perceive three different factions when it comes to balancing our books.

I reckon about 40% of deputies are in the ‘cut your cloth’ faction. They will regret the need to slash public services but will be willing to do so to fill the black hole.

There are about 30% in the ‘public-services-are-vital’ faction who will be willing to make small cutbacks but will look to raise extra revenue rather than savage health, social security or educational provision.

The other 30% form the ‘populist alliance’, voting the easy way on each issue. So they will probably oppose both tax rises and spending cuts. ‘Doesn’t add up? I don’t care so long as I don’t upset anyone.’

It will be fascinating to see how the dividing lines open over the budget. There are two areas of potential conflict: the revenue-raising measures and the departmental allocations.

At first glance little seems to have been done to get more cash in beyond indirect taxes going up by inflation and tobacco duty by RPI plus 3%.

‘No new taxes and no big tax increases to fill the black hole’ seems to be the philosophy.

Not true. The ‘proposal’ to phase out mortgage tax relief would be a big tax rise for thousands of islanders.

If it goes ahead those with large mortgages would see income tax payments increase in 2014 and, within seven years, most mortgage holders will be thousands of pounds worse off.

It’s all well and good to say removing the relief should lower property prices – it probably will – but that’s cold comfort to those who have already bought and calculated what they could afford, taking the relief into account.

What’s worse is that taking cash out of homeowners’ pockets will further dampen the economy, just like putting up the rate of income tax. It may be fairer in the long term but it’s very bad news in the medium term. One can only assume the reason T&R didn’t choose the far fairer/gentler option of simply freezing the allowance at £400,000 and letting it wither by inflation is because Guernsey simply can’t afford this path.

In fact, the black hole will be even bigger than first predicted this year. Next year it should reduce, but only if all departments meet their target for spending reductions.

That’s a big ‘if’.

Health and Education are going to really struggle and if they manage it is bound to be at the cost of important services. So get ready. Either we are going to see hugely unpopular spending cuts or else more bombshells such as the removal of mortgage tax relief in future Budgets. Perhaps both.

We shouldn’t be surprised. Not only does the States need to fill the black hole, it also needs to allocate far more cash for capital spending if the island’s infrastructure isn’t to deteriorate slowly.

In total, we are at least £60m. short of where we need to be. Money doesn’t grow on trees and rapid economic growth looks unlikely, so the only place to get that cash is from you and me.

Hang on to your hats, folks. There is a storm coming and structural damage is highly likely.