We hope for the best, but must plan for the worst

I’m a Guernseyman and I don’t like this economic nightmare any more than you do.

But the truth is Guernsey faces an unprecedented challenge – the recovery of our community, and of our economy, from the impact of Covid-19.

As we approach the 75th anniversary of our Liberation, it is impossible to think of a more significant issue that we have faced since then.

Economic well-being is integral to our community’s well-being – in fact, to every community’s well-being.

Our economic recovery is essential because we are dependent on that economic recovery to help us fund public services – health, education and the States pension alone make up over 60 pence in every pound of States expenditure.

Our economic recovery will be driven by our fiscal response to the Covid-19 pandemic.

On 6 April 2020, the International Monetary Fund stated that ‘fiscal policies are at the forefront of responding to the Covid-19 pandemic. Fiscal measures can save lives, protect the most-affected people and firms from the economic impact of the pandemic, and prevent the health crisis from turning into a deep long-lasting slump. As the shutdowns end, broad-based, coordinated fiscal stimulus – where financing conditions permit – will become more effective in fostering the recovery.’

In short – we need to invest in our future, and on a scale we could not have imagined just three months ago.

The global economic view has gone from ‘will there be an impact on global growth from the impact on manufacturing supply chain’ to ‘will there be a global recession this year’ to ‘how deep will the recession be’ to ‘this is the worst economic downturn since the depression of the 1930s’. All in three months.

The duration and magnitude of the economic shock as a result of this unprecedented situation is highly uncertain all over the globe.

We know that the economic shock will be bad. It is a matter of how bad.

The States’ economic modelling indicates that at this stage the States of Guernsey have an immediate requirement of up to £250m. in order to fund the short-term 2020 implications of Covid-19.

This includes £170-190m. in respect of general revenue comprising financial support schemes for businesses, the reduction in the States’ revenues, the increase in the States’ expenditure and the reduction in the States’ operating income.

That includes our airline’s requirements of £23-27m., the provision of overdraft facilities for trading assets to finance losses and cash flow, and the financing cash flow as payments to the States are deferred.

And this number will increase very rapidly if an extension of some business support measures is necessary, or the impact on taxation and other income is even greater than currently forecast.

Undoubtedly there will be an impact on the States’ financial position for many years to come as the global and local economic climate improves.

There will be a need for the States to play a decisive and active role in facilitating the economic recovery and the wider community recovery.

The provision of up to an additional £250m. is needed in order to fund the longer-term implications of Covid-19 on the States’ finances and to enable economic recovery.

We need to start planning for recovery now. So we need to have the financial firepower to start that recovery investment now.

As the world has shown, there is no alternative to government financing of the economy and the community during this period of enforced economic inactivity.

Guernsey is no exception to this new rule.

The initial modelling indicates that the effect on general revenue in 2020 is in the range of £72-82m. – this is not resulting from specific financial decisions made by the States or the Policy & Resources Committee, but rather it is the impact on the budgeted position as a result of Covid-19.

This comprises of a £60-70m. reduction in States revenues (income tax, fuel duty, document duty, etc), a £6m. increase in income support scheme payments, and £6m. decreasing operating income (private patient fees, Beau Sejour, etc).

We are facing a fall in employment, as firms seek to cut costs to mitigate the fall in demand or are forced to close. Some forecasts fear unemployment rising to 2,000 people.

We are facing a fall in average earnings, due to a combination of lower demand for labour and lower inflation.

We are facing lower interest rates, in line with market expectations and with the Bank of England’s decision to cut rates to a record low of 0.1%.

There is likely to be a fall in profits in the financial services industry, the engine of our economy, partly driven by lower interest rates; and a much sharper fall in non-finance sectors due to reduced demand and supply chain disruption.

Many firms and individuals are already experiencing extreme economic hardship.

And we must act to mitigate against our vulnerability to any reduction in the inter-connectedness of the global economy, and any permanent reduction in travel that will pose further challenges for sectors that rely on visitors.

In short – we face series of inter-connected economic problems that we will need to try to solve.

The overall problem is that we face a loss of our own revenues at the same time as a requirement to fund our economic recovery.

Funding our economic recovery is likely to require funding of structural changes to the economy, funding measures to increase competitiveness, and deploying funds to economic development that hitherto would have shocked this Assembly and our community.

All this whilst funding higher social spending from lower revenues.

Raising taxes in such conditions is economically counter-cyclical, it will hinder our competitiveness, and it will impact on hard-working people and families.

This means we are going to need flexibility of financing that can come only through borrowing – short term and long term. I don’t like it but it is a fact.

We need to tear up the parameters of the fiscal framework – originally brought in when I was chief minister in 2009 – to guard against unsustainable borrowing. No one is as disappointed with that necessity as I am.

But one golden rule still applies. We can borrow only what we can afford to pay back.

So how do we propose to do it?

For the immediate requirement of up to £250m., a short-term facility of a revolving credit facility or similar for a period of 2-3 years is being considered.

There is a need to get this facility in place very quickly – we are incurring substantial expenditure and losing revenues now and would need to start liquidating assets over the next two months if such a facility is not available.

This will enable proper consideration of the most appropriate funding mechanism for the immediate impact, which may include using existing reserves (which would then be liquidated at the appropriate time) or converting into longer-term debt.

For the longer-term facility or combination of facilities, all options will be considered for the form of borrowing and its term including, but not limited to, an institutional bond issue, a retail bond issue, or a private placement.

Short-term borrowing such as a revolving credit facility, although subject to fluctuation and market conditions at the time of entering into a facility, is currently expected to have a rate in the region of LIBOR [which is currently around .625 of a %] plus a margin of 0.8-1%.

The rate for longer-term borrowing will be dependent on market conditions at the time of entering into a facility and the duration of the borrowing, but current expectations would be for a rate of 1.5% to 2.5%.

The Policy & Resources Committee is actively exploring the possibility of raising capital from the local community via the issuance of a retail bond. In a similar way to war bonds, such a bond would allow island residents who wished to support the island to do so using cash that might otherwise be in bank accounts earning little or no interest.

Early indications are that such a bond could have a maturity of 7-10 years, have an interest rate of between 1.7% and 2.4%, with a minimum investment of around £1,000 and could raise up to £50m. – although all this requires much more consideration.

Thought could be also given as to advantages and disadvantages of any such retail offering carrying any local tax concessions.

Realistically, the full impact of this pandemic and its recovery can be funded in only two ways – either by completely emptying our available general revenue reserves and funds or by borrowing. Under either approach, future budgets would need to include provision for either servicing the borrowing or rebuilding reserves.

The Policy & Resources Committee is recommending that the States approve borrowing in order to respond to the specific crisis and enable the States to invest in order to facilitate a swift and successful recovery.

The alternative would require radical austerity of spending cuts and tax increases to balance the budget, which would prolong the recessionary period. That is not the way in which our community or our economy will recover.

But for the avoidance of any doubt, the Policy & Resources Committee has not changed its view and does not think that funding Guernsey’s public services through borrowing on a routine basis is either desirable or realistic for an economy of our size.

As part of the recovery work, and in line with the previously agreed fiscal review, there will be a need to fundamentally review all aspects of our revenues and taxes.

At this stage, nothing should be ruled out unless it would be counter-productive by negatively impacting the island’s competitiveness, which would put further jobs (and resulting income tax revenues) at risk.

It has been suggested that it may be possible to sell a stake in our trading assets (both the incorporated and currently unincorporated assets) to private investors, which could raise funds and also provide other benefits.

The Policy & Resources Committee believes that such options should not be dismissed out of hand without further consideration. Any such decisions will require considerable thought and debate by the States and our community. Accordingly, it is not a short-term fix which will avoid the need to borrow.

Putting in place a short-term borrowing facility now means that this decision can be properly considered once there is more certainty with respect to the likely 2020 and future years’ position, and in light of the recovery strategy and plans that will follow, along with the resulting implications for the States’ finances.

What external scrutiny of the borrowing would there be?

The Policy & Resources Committee has in place an independent expert advisory panel made up of professionals in the fields of economics and fiscal strategy to provide independent challenge and advice and to help support the whole recovery process.

This will ensure strong governance and provide the States and the taxpayer with independent assurance through periodic reports and updates on progress.

The development of a recovery strategy and plan by the States is a priority, and a critical component will be the availability of funding for focused public sector interventions, whether they are broad-based fiscal stimuli designed to promote wider economic recovery or targeted measures specifically for those industries and businesses particularly impacted by the pandemic.

There will also be a need for government to play a key role in facilitating economic recovery through judicious prioritisation and use of the public sector capital investment programme.

The current programme is likely to look very different.

It is critical to know if the States has the willingness to borrow in order to facilitate the recovery strategy which is currently in development.

Guernsey’s recovery would be very different if the ability to borrow was not one of the key ‘tools in the box’. This would inevitably see the States having to increase taxes substantially and introduce austerity measures at a time where investment will be in the best interests of the island’s economy.

So the question is not whether we can afford to borrow £500m. to fund our route through this crisis – although the answer to that is yes, we can.

The real question is, can we afford not to do this?

Think of the hard-working families in our community who work hard and pay their fair share of taxes.

Think of the small businesses, the self-employed, the entrepreneurs of today and tomorrow.

Think of the significant employers who provide jobs and who invest in our community.

Think of the future for our workforce and our children in a world where the economic rules have changed for the long term, possibly forever.

Can we afford not to do this?

No, we cannot.