1% economic growth saves 1% on income tax

Debate on raising more tax revenue is far more complicated than criticising the size and cost of the public sector, says former Treasury minister and chief minister Lyndon Trott. Here he explains why.

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IT IS often said that there are two certainties in life – death and taxes. Personally, I favour neither, and I know in that regard I’m not alone.

As a former Treasury minister and chief minister, my job is to talk about the realities – the truth – and not what I think our community wants to hear. If you want a snake oil salesman, you need to look elsewhere, and we have a few to choose from.

The States are facing a series of enduring fiscal pressures both through challenges to the sustainability of existing services, particularly as a result of our ageing population, and the growing demand for additional services.

Government services are not free.

For example, it costs about £8,000 for each standard off-island knee replacement and up to £20,000 for more complex joint replacement surgery.

A year’s education for a single secondary school pupil costs on average more than £12,000 and it costs nearly £1,000 per week to keep a prisoner in custody.

The average cost of a Fire & Rescue call-out is £3,600 and the cost per day of a neonatal intensive care bed is £3,500.

This means that if you are on median earnings with an annual income of around £34,000 and an annual income tax liability of around £4,500, the income tax you pay covers the cost of a single pupil in the States’ secondary system for a little over one term and is enough to keep a premature baby alive for 31 hours. Health care costs money, but it is absolutely essential expenditure, and who would think otherwise? Guernsey currently collects only 21% of its annual GDP in revenues, compared with 26% in Jersey and 38% in the UK. Incredibly, the equivalent figure is more than 46% just across the water in France.

We collect approximately £720m. in revenues, or 21% of GDP, each year.

It costs nearly £2m. a day, or more than £80,000 an hour, to run public services such as Health & Social Care, education, the police service, fire service and so on.

Additional demands on public finances are estimated by some, in aggregate, at more than £100m. each and every year – and they are in relation to services that matter, often involving life-and-death choices, rather than vanity spending. Access to certain lifesaving drugs, which will simply bring us in line with the UK and which feature on the UK’s Nice register, will add an additional £8m. or so a year to the cost of public finances. Additional long-term care costs could be as much as £23m. each year, and States pension funding up to £18m., to ensure that our pensioners get a fair deal.

Many assume that we have a bloated public sector, yet as a percentage of our overall working population the size of our public sector is not in the least bit remarkable when compared with other similar jurisdictions, which take much larger chunks of their GDP to fund public services.

One of our structural problems is our economic dependency ratio.

This is the number of people who are economically active over those who are not.

As our population ages, this ratio deteriorates and has the potential to materially impact on our rates of economic growth – and that matters.

In fact, it matters a lot, and here’s why.

Economic growth alone will probably be insufficient to plug the funding gap.

However, 1% of economic growth raises more than £10m. in additional revenue.

If that growth is delivered in a sustainable manner, then we will benefit from it each and every year.

A 1% increase across the board in the headline rate of personal income tax from 20% to 21% would raise a similar amount.

Clearly, economic growth should be a strong focus for us all.

We have some very tough decisions ahead, and, in my view, it is essential that we make those decisions from an evidenced-based perspective.

n Footnote: This article was written before the latest Tax Review report was published last week. The figures included in it are correct and verified to the end of last year.

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