A radical, more sustainable, alternative to P&R’s proposals?

THIS week, I have been mainly thinking about Guernsey’s Tax Review.

For those of you with sufficient grey hair, you’ll recognise my homage to The Fast Show. This will be my only intentional attempt at humour this month.

As promised before Christmas, I’m focusing on the tax review. It’s a serious subject, so I’ll be eschewing my typical flimsy attempt at mirth, well, to a degree.

I’m an economist, so apologies, a lot of the points I’ll be making today will be of the interminably infuriating ‘on the one hand…’ variety. A lot of these issues are not black and white.

A final caveat, criticisms are of policy, not personality. From my vantage point, Guernsey’s politics has an unpleasant tinge to it. I have no wish to be dragged into that.

It was why I had originally intended to pursue a Swiss-style path of neutrality around the tax review, other than throw in a sarcastic criticism or two from these pages. But having founded a fledgling financial and fiscal sustainability think tank, the International Sustainability Institute (which as regular readers will know, I shamelessly plug in these pages each month), meant the tax review was a bit difficult to stay away from.

We were asked for our views and, as the published purpose of the ISI is to develop sustainable research and thought, it seemed sensible to publish a paper on an alternative approach. As I happen to have strong views on how to radically change the whole tax system, it also seemed a good way to get it off my chest.

So tomorrow, the ISI is publishing Long Term Fiscal Sustainability – Guernsey’s Tax Review: A Sustainable Approach? It considers what I believe to be some overlooked underlying economic issues that are material to the tax review, and presents a radical, more sustainable, alternative to P&R’s proposals.

There’s been political criticism of ‘the commentariat’ for not bringing forward positive alternative suggestions, so I hope it’s welcomed in those same quarters for making a positive contribution.

Having read the details of Policy & Resources’ policy letter, as I promised to do, the immediate concern that sprang to mind was the lack of economic thinking built into the proposals. As a result I don’t believe they provide a sustainable solution to the problem that P&R set itself.

I was happy to accept the invitation to speak at the No To GST event on Monday night to bring these concerns to a wider audience. I’m on record as not being against GST in principle, which I’m not, and hopefully my support was the more compelling for that. There’s no hypocrisy at play, as you’ll see, I’m not personally supportive of P&R’s GST proposals, and in principle I’m in favour of a territorial corporate tax regime. Indeed, a territorial tax is a component of the proposals we publish tomorrow.

I wrote in these pages early last year that I believed we should have introduced a territorial corporate tax in 2011 when we had the chance. We had it all worked out, that is, all the technical issues that existed at the time were sorted. The UK had our back. We were poised, but bottled it.

So what if Jersey and the IOM were dragging their feet? They’d have eventually followed us. It would have got the ‘tax haven’ monkey off our back, and I believe that alone would have given our finance sector a boost.

All this I said on Monday night. Well, I sort of did. A lot’s changed since then, technically and politically, and it’d be harder to introduce. But global minimum rates of corporate tax are on their way, and the principle of territorial tax is sound.

There’s been a lot of commentary about the States’ profligacy on these pages and the need to cut spending. Emotionally, I side with this camp, but it’s not quite as clear cut as all that. Like I said, I’ve looked at the numbers.

Most of the (but, importantly, not quite all) spending growth in recent years has been driven by health and pensions and a lot (but, importantly, not all) of this is driven by demographics.

Yes, demographics is causing the cost of public service to rise so it’s doubly important to recognise the rest of it needs to be kept in check. The track record here isn’t quite as bad as some portray, but there’s still room for improvement and, yes some will pile on for me saying this, but social spending can be kept in better check by less generous rises.

As an aside, Guernsey’s not alone in this. Unreformed, public pension provisions will bankrupt many governments in western Europe. But publics don’t want to know. The French president Emmanuel Macron is on about his third attempt to reform the French schemes and has settled for trying to raise the French state retirement age to a whopping 64.

There are two sides to our fiscal coin. For sure, demographics is causing the cost of public services to rise. Agreed. But weak economic growth is making the future less affordable. And to be frank, economics is the real missing part of the jigsaw of P&R’s proposals. Lack of growth is an underlying issue no-one’s been talking about.

Between 2009 and 2021, economic growth averaged just 0.6% per annum, but public spending grew by 2% per annum. In simple terms, economic growth just hasn’t kept pace with public spending, and it’s made public spending more unaffordable.

The painful truth is that Guernsey’s economic performance over the last decade or so has been weak. It’s been worse than the UK, and the UK has a whole host of structural issues of its own to deal with. The finance sector, the ‘engine of growth’ of the economy, shrank between 2009 and 2021. That’s the nub of the problem.

There are many reasons for this. Lack of population growth, poor productivity growth and fiscal drag (and others no doubt). It’s too big a topic to get into too much detail today but consider the following:

Guernsey’s population growth hit a wall around 2011. Whether this was a demand or supply issue is immaterial, it had an impact. £100m. or so worth of GDP of impact. The workforce is some 930 fewer than if net immigration had continued at trend rates.

Another few hundred million pounds-worth of GDP has been lost because, at 1% per annum, productivity growth has been half historic rates. Why? Causality is difficult to prove, but I imagine the several-fold increase in the finance sector’s compliance costs might have been a contributory factor. Whatever the causes, trend growth of the finance sector has evaporated.

And finally, fiscal drag. The technical term given to the contractionary impact of the rising of the tax burden without increasing headline rates of tax. We’ve had plenty of that. Fuel duty, excise duty, TRP, fees and charges all rising. Freezing, then removal of allowances. Child, mortgage relief, pension, personal allowances.

The net result is that the total burden on individuals, that is personal tax, social insurance, excise, document duty, fuel duty, fees and charges etc, rose from £583m. to £680m. between 2009 and 2021 in 2021 money. A rise of 18% in real terms. Or put another way, after taking inflation into account, the tax burden on individuals has increased by nearly a fifth. Personally, I’m pleased to see that both sets of politically-authored alternative proposals acknowledge the problem of the rising tax burden on individuals.

Like I said, I’m not philosophically opposed to GST, but given the significant increase in personal tax burdens since the introduction of zero-10, it is imperative that no stone is first left unturned before any further increase in the personal tax burden.

But back to growth or the lack thereof. The point I was making is that we have a growth problem that sits alongside the ‘demographics is causing spending to rise’ problem. This isn’t to go all Liz Truss. But without a recognition that growth is a problem, there is little hope of making any ends meet in the long run.

Introducing GST at 5% isn’t going to change this. We need to improve growth and boost competitiveness. It’s the lack of appreciation of this issue that leads me to having concern with the sustainability of P&R’s proposals.

P&R’s review leaves open the possibility of further increases in the rate of GST. The ISI report is clear on this point. On the current path, ie, projecting forward current trend rates of spending and economic growth, we estimate that GST of 15% will be required to balance the books by 2040.

To take issue with the proposals is not to take issue with the central premise that spending pressures because of demography are increasing. Nor is it to take issue with the fact that there is a structural deficit. There is one clearly. We calculate it in a different way but our estimates are of a similar size to that estimated by P&R. For now, the deficit is being mitigated by spending of the reserves built up in social security’s investment funds. They’re still plentiful, there is a little breathing space.

Neither is it to take issue against the proposals to suggest there is no need to balance the books long term. P&R’s social media last week, that S&P’s downgrade meant that their proposals had to be voted through, was broadly just the argument ‘Something must be done, this is something, therefore it must be done’. Not overly compelling.

We publish the ISI’s proposals tomorrow. Spoiler alert, we propose a flat rate of tax of 12.5%, together with revising the corporate tax regime. We’re a think tank, so we have the luxury of not needing to worry about the transition process from one regime (our current regime) to another (our proposal). No matter. I believe our proposal is an attractive and sustainable approach that would boost Guernsey’s competitiveness.

The presentation is 11.45am tomorrow at the OGH. Book via Eventbrite, if there’s still tickets left.

Finally, an addendum. I personally query the distributional fairness of P&R’s proposals. If the problem is we need to raise more revenue, what is wrong with everyone paying more? That is, everyone doing their bit according to their ability and circumstance? The graphic that shows who pays more and less under the proposed approach just makes the review look like a bribe to 70% of the population. A textbook case of ‘tyranny of the majority’. Especially when a new form of payment has to be created, complicating the regime, just to make sure everyone gets the bribe.

Other notions of distributional fairness seem to have been given little weight. I found it a bit of a jaw-dropper to register that working families and single parent households end up with the highest tax burden in P&R’s proposals. Mildly perverse.

These are the very people doing most to help the demographic problem, by having children. Families and single parents should be supported by the tax system, not penalised by it.

• Tickets for tomorrow’s presentation (Guernsey Tax Review: Presenting a radical, more sustainable, approach) are available at www.eventbrite.co.uk.