Island could end up being £1bn. in debt

Policy & Resources’ initial plan, which the Assembly will vote on next month, would approximately double States debt from its current level of £330m.

The senior committee has warned that it will need to defer the next phase of development at the Princess Elizabeth Hospital and the creation of a post-16 campus at Les Ozouets unless the States agrees to borrow at least £200m. And P&R has now told deputies that States borrowing could climb higher still – possibly smashing the £1bn. barrier – with large investments expected in housing and electricity.

‘The Guernsey Housing Association may also require additional long-term funding to enable it to finance the development of the States’ affordable housing programme,’ said P&R in its policy letter on tax and spending.

‘Although the exact level of funding required is not yet known, an indicative amount of £100m. has been assumed.’

The States has also approved a new electricity strategy which anticipates the need for capital investment of more than £600m. over the next 25 years.

The funding of electricity investment has not been agreed, but it is likely that some of the financing would need to be guaranteed or underwritten by the States.

The States has a policy under which debt is meant to remain at less than 15% of the size of the island’s economy as measured by GDP.

Guernsey’s current debt-to-GDP ratio is less than 10%, which P&R said was ‘considerably less than other similar jurisdictions’, such as Jersey (16%), Bermuda (42%) and Malta (59%).

The proposal to borrow £350m. would take the island’s debt levels to about 18% of GDP by the end of 2026. P&R recognises this breaches the current fiscal policy framework ‘marginally and temporarily’.

Additional borrowing of £100m. for GHA housing would increase the debt-to-GDP ratio to approximately 20%.

‘This debt will, however, come with a direct income stream that would repay both the interest expense and the principal sum, without putting additional expense on the States underlying financial performance,’ said P&R.

‘Gross debt levels would remain well within the current credit rating headroom, assuming liquidity remains strong. However, consideration would need to be given to the fiscal framework as including this debt on the States balance sheet would breach the 15% of GDP limit.’

Adding further borrowing of £400m. for electricity infrastructure would take the debt-to-GDP ratio to approximately 30%.

‘This is still within the borrowing headroom based on advice received and is also comparable to other jurisdictions,’ said P&R.

‘The debt would be affordable if a user pays model was adopted, therefore creating an income to cover the cost of the debt.

‘This level of borrowing is, however, significantly more than the limits set in the fiscal policy framework.’

P&R has told the States it would be better to borrow more than use reserves to fund capital projects following advice from ratings agencies that doing so would help protect the island’s credit rating.

The proposals on borrowing will go to the States next month as part of P&R’s third attempt to secure deputies’ backing for a goods and services tax and other tax changes.