Foot Report: veiled threat or fair assessment?

THERE are two ways of looking at the advice from Michael Foot that Guernsey should tax its citizens more. It could be simply an objective conclusion reached by an expert in economics who was asked to consider our financial resilience. In other words - 'it's a political judgement for the States, but this is what I would do in their position'. The second, less sanguine interpretation is that HMG, through Mr Foot, is dictating how we should run our internal affairs. If it's the latter, then it really is the constitutional outrage some have claimed. But I'm not convinced. Let's look at the evidence.

Michael Foot was certainly not on a mission to attack Guernsey. His very positive comments about the island's financial regulation and its benefit to the City of London make that clear. He also praises the Crown Dependencies for their financial planning and for setting up contingency funds, urging the Overseas Territories to follow suit.

It's true that he encourages all nine territories under review to ensure their tax bases are wide enough to cope with 'economic shock'. In particular he quotes Deloitte as saying there is a compelling case for all the territories having some form of general consumption tax such as VAT or GST. That is a valid opinion from a set of consultants and such a tax would undoubtedly reduce the volatility and fragility of States revenues.

On the flip side, such a tax is regressive and hits the poorest hardest. Of course the rich would pay more because they spend more, but as a percentage of income, those on low incomes would be hardest hit because they spend all of their earnings/ pensions on daily living expenses. GST should be a very last resort, however attractive it might be to consultants focused purely on financial resilience rather than the impact on Mrs Le Page from Torteval. However, before we get all hot under the collar, the report makes clear that these are issues for the States to consider.

The real cause for concern should be over the UK Government's motives in commissioning the Foot Report. Once again there is a benign interpretation and a worrying one. There is no doubt that the Chancellor of the Exchequer's unilateral action was a very paternalistic one. The question is whether the UK wants to be a supportive parent or an overbearing one. There are two worrying but inconclusive hints in the text.

Firstly there's the focus on how the territories under review could cope within an increasing harmonised international tax regime. Was that a veiled threat to stop embarrassing the UK by out-competing other jurisdictions? Or was it just friendly advice that that's the way the world is going and that we should be prepared for it if we want to thrive in the new world order?

Secondly, and more worryingly, the report says, '... the UK's interest in the good governance of the jurisdictions means the UK should satisfy itself that each jurisdiction indeed has a framework capable of identifying and responding to external shocks and encourage local governments to undertake responsible adjustment programmes'.

This could represent a major broadening of the controversial 'good governance' clause of our constitutional relationship with the UK. This determines the limited range of circumstances where HMG can override our internal autonomy and it's always been presumed to specifically exclude fiscal or taxation matters. If that exclusion is now subject to dispute, then we should indeed worry about the erosion of independence.

Alternatively, Mr Foot may simply be saying that if any of the nine jurisdictions didn't plan properly for 'external economic shock' and became total basket cases, with mass soup kitchens, then the UK would feel some responsibility towards them. Therefore it has a legitimate general interest in avoiding such calamities by encouraging prudence. That's quite surprising, as I've always assumed they would take the view that having insisted on our autonomy, we could go whistle if we ever needed any financial help.

The important thing is to take a balanced view of this report. The worries about a lack of resilience are clearly aimed primarily at some of the less secure economies among the Overseas Territories. The report is overwhelmingly positive about the Crown Dependencies. Of course we must always be vigilant against incremental erosion of our autonomy, but we mustn't be petulant. What is the correct reaction to the Foot Report? 'How dare you?' No, rather it should be 'thank you for a fair and objective assessment'.