AS THREE members of the Committee for Economic Development, it is worth reminding ourselves that the committee’s mandate includes the promotion and development of all sectors of the Guernsey economy. Somewhat lost in the tax review debate is the voice of what we could loosely describe as the ‘real economy’– the butcher, the baker, the candlestick maker, along with tourism, retail, services and the self-employed.
Policy & Resources have a hugely difficult task ahead of them, on the back of two years of Covid, which has had a catastrophic effect across most sectors of Guernsey’s economy, coupled with the pre-existing structural deficit that had not been adequately addressed by previous versions of Policy & Resources and/or Treasury & Resources.
We entirely support their efforts to solve a structural deficit that was not of their making. This Assembly, like all previous Assemblies, has had its ‘honeymoon period’ and this and the next year are the heavy lifting years.
We recognise that Guernsey has an ageing population, which will lead to increased demand for health care, state pensions and long-term care. This will lead to increased pressure on States expenditure in the future.
However, we have significant concerns about GST as a fix for the hole in the public finances, due to the impact that it will almost certainly have on middle-Guernsey and real economy businesses.
We have noted the concerns raised by the retail and tourism/hospitality sectors in relation to the potential negative impact that the introduction of GST will have on these sectors. It is critical that local retailers face a level playing field with online retailers. We cannot support a GST which puts local retailers at a disadvantage. The administrative burden of GST on small local businesses also needs to be considered.
The tourism and hospitality sectors have been hit hard by the impact of the Covid-19 pandemic, which has dramatically reduced the number of visitors to the island and led to difficulties in recruitment. A GST will increase operating costs in the hospitality sector and could make us a less attractive destination to visit.
A GST tends to hit the poorest households hardest as these households spend a higher proportion of their income on necessities. We recognise that some of the options in the tax review make changes to social insurance and personal tax allowances that will mitigate some of this impact for the lowest-earning households, but consideration also needs to be given to the negative impact on middle income households who, at a time of escalating costs of living, will see their incomes squeezed if GST is introduced. It is a fact that GST is a tax on taxed income.
Fundamentally, any shortfall in the public finances can be addressed either by reducing States expenditure, increasing States revenues, increasing economic activity or some combination of the three. There are no quick fixes or easy answers and we agree that a sustainable solution to balancing the States’ books over the long term needs to be found. While borrowing to fund capital investment may be entirely appropriate, we nonetheless need to live within our means and ensure that government expenditure does not routinely outstrip government income.
Options that involve expenditure restraint should include reducing the size of government and improving efficiency within the public sector. And those efficiency drives must extend to all incorporated companies such as Aurigny, Guernsey Electricity and Guernsey Water.
While expenditure restraint and public sector efficiency clearly has a role to play, it is unlikely to be sufficient by itself to meet the scale of the challenge, which means that options to raise additional revenue need to be considered.
We do need to consider whether fees and charges should be levied for some public services and whether some public services could be provided by the private sector. But we also accept that some core services like health care and education should primarily be funded from general revenue.
The Covid message
Implicit in the messaging from the last two years was the world was going to Build Back Better. The hope from that miserable period was that out of the ashes of the economy would grow a better world. Build Back Better was first adopted by the UN in 2005 and came into political use through the Covid period, the Guernsey version being the previous Assembly’s adoption of the Revive and Thrive document. And what did Revive and Thrive consider? The central message was:
‘We will work in partnership to recover our economic prosperity, build on our inclusive community values and capitalise on our many strengths to make Guernsey a safe haven based on sustaining health, wealth and community.’
It was a message of inclusion, take all the community into the new world of a post-Covid positivity where all parts of our community would be considered. The expectation was that Guernsey would really build back better and the post-Covid opportunity would be for all.
The Covid reality
What we didn’t fully understand at the time was that house prices would go through the roof, interest rates would rise and energy prices would increase massively. Average rental prices on the local market are now around £1,650 a month and the housing crisis in Guernsey is having a real impact on those coming up behind us.
We would argue that the extra imposition of GST on these already stretched islanders who have little voice will be an act of impoverishment for many and, without doing real work on the socio-economic impact of what has happened since the adoption of the Revive and Thrive document, would be irresponsible.
Getting to a tax strategy that could work
The first trick is to fully understand the problem and to ensure policy letters that come to the States fall in order of importance and can properly inform a future tax strategy. Relevant workstreams include the Population and Immigration Policy Review and our committee has a Skills Strategy that we will bring to the States this year, jointly with the Committee for Education, Sport & Culture. There is the Housing Action Group that should indicate where the issues within housing lie. However, it’s currently rather disjointed as to which policy letters will come to the States Assembly and in what order.
But if we are to advise a sensible order should look something like this:
Population Policy will inform the size of a future population;
Housing Strategy will agree where that future population is likely to live;
Skills Strategy will inform the shape and the skills required for that future population;
Tax Strategy will be informed by the Population, Housing and Skills Strategy.
To do anything else, to rush something out simply to meet a self-imposed tax review deadline in July 2022, is unnecessary and we would encourage Policy & Resources to delay the final conclusions of the tax review until such a time when all 40 members of the States of Deliberation have the relevant, fact-based information in front of them so that they can make an informed decision.
Promoting economic growth
Our view is that additional tax revenues can and should be generated by promoting economic growth by growing the working age population to provide local businesses with the labour and skills that they need to be able to thrive.
It is estimated that there are currently approximately 1,500-2,000 job vacancies across the finance, retail and hospitality sectors. Those unfilled vacancies constrain businesses’ ability to develop and grow – with a consequent loss of tax revenue. Increasing the working age population would also help to address the balance between the numbers of working age people and the number of economically inactive people.
Economic Development is playing an active role in the Population and Immigration Policy Review and the findings of this review should be factored into the tax review. Our firm belief is that even relatively small increases in the working age population could make a material contribution to increased tax revenues.
Income tax/social insurance contributions
As a general principle, our view is that, if the tax burden on the population is to be increased, the regime should be seen to be fair, with those with the broadest shoulders bearing more of the burden of any increased revenue raising. In other words, higher earners should contribute more than lower earners and consideration needs to be given to the balance of the contributions made by households, corporates and non-residents.
Policy & Resources has announced that it will be carrying out further investigations into the role that corporate tax could play. We welcome this development, particularly in the context of wider initiatives on corporate tax reform being led by the OECD. It is critical that the wider impact of any new corporate tax proposals and opportunities to increase revenues from the corporate sector are investigated, while ensuring that the island’s competitive position is not adversely affected. We believe that such opportunities exist.
As we started this letter so shall we end. Policy & Resources have a hellishly difficult job on their hands dealing with the costs of the pandemic and managing the structural deficit that previous committees chose not to address.
There’s not a rational islander that doesn’t understand where we are – it’s clear that any right-thinking citizen of the island, along with all politicians, knew these days were going to come. Structural deficits and pandemic bail-outs cannot be ignored and this is the Assembly that will have to conduct the heavy lifting on the matter.
Our counsel to all deputies and Policy & Resources is that this is not the day and this is not the hour for GST. We would advise them to do this in the correct order and if it means delaying the tax review then so be it.