‘GST package is closest, but none will raise enough money’

They found that each of Policy & Resources’ three packages – which contain different levels of tax, spending and borrowing – would fail to provide enough money for capital projects or leave a hole in States finances or both.

The three economists, who were appointed by P&R in August, did not study alternative tax and spending plans previously put forward by other deputies, but using the economists’ assumptions, those plans would also have left the island in the red.

‘Overall, we find that Guernsey, which has historically had a strong fiscal position, has recently been travelling on an unsustainable fiscal path.

‘Financial reserves are on a downward path, investment in the capital stock is very low by international standards and the substantial shortfall in revenues has recently grown.

‘Against the panel’s definition of fiscal sustainability, requiring capital expenditure of 3% of GDP, none of the three scenarios outlined in the funding and investment plan are sufficient to place Guernsey’s finances on a sustainable pathway back to long-term permanent balance or deal with immediate capital pressures,’ they said in a report published today.

However, they advised deputies that backing P&R’s plans would ‘go a considerable distance towards rectifying the situation’ and that any further adjustments needed to bring public finances back into balance ‘may be relatively small’.

They said that P&R’s preferred plan, known as scenario three, which includes a goods and services tax and borrowing another £350m., would come closest to dealing fully with the States’ financial challenges.

It falls short only because of a difference of opinion over how much the States should spend on capital projects. Current policy is for 2% of GDP per year, approximately £70m. a year, whereas the economists recommend 3% of GDP, approximately £105m. a year.

‘Scenario three funds the proposed capital programme in its entirety, with capital spending of approximately 2.7% of GDP through to 2032 without the depletion of financial reserves,’ said the panel.

‘Scenario three is the only scenario that achieves funding of the proposed capital programme and it is the only scenario that manages to maintain a stable level of financial reserves, meeting one of the panel’s measures of financial sustainability. It proposes increasing the net revenue position by a figure in the same region as the panel’s estimate of the continued historic deficit.

‘However, it does not quite achieve a level of revenues consistent with the panel’s assessment of the capital spending levels required to maintain a stable capital stock. For this reason, this scenario also just fails to meet the panel’s definition of sustainability.’

Current projections indicate a hole in States finances of up to £100m. a year by 2040. The panel advised that action should be taken sooner rather than later.

The panel was chaired by Dr Matthew Agarwala, an economist at the Bennett Institute for Public Policy at Cambridge and the Tobin Centre for Economic Policy at Yale.

Other members were former Bank of England economist Professor Francis Breedon and former States economist Dr Andy Sloan, who lives locally.