OPINION: GST will not put island at a disadvantage

THANK you for the opportunity to respond to the recent column by Lord Digby Jones (Everyone must play their part, 14 December) and I extend my thanks to him also. He rightly highlights the need to address the growing demand on essential services – health, care and pensions in particular – and the urgency with which we must grasp what is, as he describes, a thankless task, but one that we cannot ignore any longer. I agree with him entirely that ‘waiting for something to turn up’ would be wholly irresponsible and would leave the next generation ‘inheriting an unqualified mess’.

He has sought to put forward his suggestions on how we could therefore deal with this problem now, and I am grateful to him for that. It is part of the constructive debate we want to have with the community in the run-up to the States decision at the end of January.

However, on the specifics of his proposals, I’m afraid I do not believe they would achieve his aim of addressing the growing deficit in as fair and progressive a way as possible while protecting our competitiveness as a place to do business, and I’ll set out here why that is by addressing some of his key points in turn.

Firstly, Lord Jones asserts that by not having a GST we enjoy a competitive advantage over our competitors, so we should instead introduce a tiered income tax system with a higher rate of 22% on income above £50,000, rising to 25% for higher incomes. In terms of competitiveness, I think the opposite is true. Yes, there are some who may see our GST or VAT-free status as a bit of a bonus but I’m not aware of any evidence that many people are choosing their travel destinations or making business decisions on that basis alone. In fact, I expect Jersey will feel having a GST makes little to no difference to its appeal to visitors or to those looking relocate their businesses, but having a GST means that those visitors are contributing towards essential services. A consumption tax of some form is so commonplace the world over, few visitors would be deterred.

By introducing a GST we put ourselves in line with our competitors, not at a disadvantage. However, if you’re looking to attract staff or businesses, having a higher rate of income tax than your competitors is a disadvantage, potentially a crippling one where many would dismiss Guernsey at a mere glance because they see ‘Jersey = 20% income tax, Guernsey = 25% income tax’. But the disadvantages of raising income tax in this way go much further than just how we promote ourselves.

We did look closely at income tax-based models and we understand why these may initially seem attractive. However, we are already incredibly reliant on income tax (and social security, which is again taken from individuals’ income). Taking more from this same source not only makes our revenues less resilient, but also puts more pressure on the same group of people.

Those who live primarily off their capital will still not be captured if we raise more money in the same way, but a GST will catch a contribution from this group.

A GST would also raise more from visitors to the island (£6m.) and from the financial services sector via an International Services Entity Scheme (£8m.). That’s £14m. that would need to come from households if we focus our solution around raising income tax.

The model proposed by Lord Jones would raise only £17m. Even if we incorporate the £19m. of net revenue-raising from Social Security Contributions included in the model presented by the Policy & Resources Committee, that’s still £19m. short of the £55m. raised by the model proposed. Realistically, if we were to meet the growing shortfall through higher income tax bands, they would need to be at much higher rates than what Lord Jones proposes.

On corporate tax, Lord Jones is right that this is an area where there is potential to raise more. That is why we commissioned an independent report to establish if and how this could be achieved. That report suggests we could raise up to £20m. more from businesses which is a significant contribution, but it also highlighted the importance of doing this carefully so as not to damage our business environment and risk losing jobs. We will be consulting with the other Crown Dependencies on this, because a common approach is an important part of maintaining our competitiveness. On his suggestion to extend the 10% corporate tax rate to non-finance businesses, it’s important to highlight that large retail, utilities and property development are already taxed at 20% and so is any profit distributed to local shareholders.

Extending the 10% rate to other domestic activity would raise less than £3m. And extending the 10% to more businesses within the finance sector – well, nearly all the employing businesses are already in the 10% bracket.

Reducing the cost of public spending is one area where broadly I agree with Lord Jones. We are proposing as part of our package, real-term freezes for most committee budgets in the coming years and a cut-down in government priorities. In fact, we are not proposing to close the whole deficit, forecast to reach around £100m. per year by 2040, through raising revenue measures in the Policy Letter. Nearly half of the gap will need to be closed through other means, including public spending controls and efforts to maintain the current size of the workforce (which currently is set to shrink).

But what remains could not be dealt with only by way of spending cuts without impacting essential services to an extent we don’t believe the community would tolerate. Lord Jones suggests a smaller saving of around 5% and in principle I don’t disagree.

But 5% means cutting more than £30m. from public services every year, and even spread across all public services it is unrealistic to think those relying on these services wouldn’t notice it.

If applied evenly across all services, that would include cutting £10m. from the budget for health services, £14m. out of pensions and benefits and £4m. out of education services, which would all mean making very difficult and unpopular decisions.

Government has been through more than one cost-cutting or efficiency programme and made savings in many areas, but they have not made much of a dent in bringing down the overall cost which continues to be driven up by pressure on health and pensions. I say that seeking only to give some perspective and not to be dismissive, because I do agree that there is potential for more savings and a need for the States to be much stricter on spending. Doing so, even if we did cut spending by 5%, still leaves a very big problem and how to deal with it comes back to how to raise revenue in a way that is fair, progressive and does not put us at a competitive disadvantage.

As part of his suggestion for cutting public spending, Lord Jones looks at more means-testing of benefits, and that certainly is one of the things we will need to do if the States is unwilling to raise revenue, but it will need to go much further than what Lord Jones suggests. On means-testing pensions specifically, he says there are thousands ‘who frankly don’t need the taxpayer to pay for them’. We estimate about only 15% of one and two-pensioner households (covering 800-900 pensioners) have a household income above £50,000, if we exclude their States’ pension and they receive around £9m. in pensions. That drops to £2m. for households above £100,000.

This means that to save a meaningful amount, means-testing would have to be set quite low. Many of these people will have factored their pension into their retirement plans, and their budgeting for their homes or their care may depend on it.

Is it in any way fair to simply take that benefit away when they have already made their contribution? Means-testing could be phased in so it doesn’t affect those already receiving their pension, but as people plan for their retirement years before they finish work, that phasing in would realistically need a decades-long run-in making it of little value is solving the far more urgent deficit we face. The introduction of secondary pensions may help take some of the pressure off the States pension so we may be able to look at this again in the future, but it will take generations for these changes to play out.

We have come to our recommendations after the best part of two years looking at many options and models, and speaking with islanders, businesses, and States colleagues. We have no great affection for a consumption tax on its own, but we do believe the package we’ve put together is our best way of raising the sort of revenue that will secure essential services so we can meet the growing demand, while protecting those on lower and middle incomes and remaining a competitive place to do business where our economy can continue to grow. I’d encourage people to look at the detail of the recommendations, which can be found online at ourfuture.gg/tax-review.

But I again thank Lord Jones for his suggestions. He has put his ideas out there constructively and positively, to stimulate debate and broaden the conversation on how we meet this challenge, and I hope he also welcomes the counter-arguments I have presented here.