Guernsey Press

‘We must be honest about the reality we face'

Deputy Mark Helyar, Policy & Resources’ treasury lead, explains why this week’s tax debate is necessary

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Deputy Mark Helyar. (Picture by Peter Frankland, 30019741)

THIS week, States members will have the opportunity to guide overall policy on taxation for the next decade and beyond.

The proposals are in the form of a ‘green paper’ rather than a policy letter with fixed proposals and deal with general revenue taxation and social security contributions.

After the debate, firm proposals will be made to return to the Assembly in July 2022. The purpose of a green paper is to ensure we do not waste time developing plans for something which will be rejected. States members will be able to tell Policy & Resources where it wants to see priorities lie and what direction to take.

We’re at the beginning of the road, not the end (although, to labour this metaphor, it’s a journey we should have started a long time ago. Because we didn’t, we need to move forward at full speed.)

So, these are not fixed proposals for implementation at this stage. Once the policy direction is agreed by the States, detailed proposals would need to come back for formal approval or amendment and will not start to take full effect for several years.

The proposals are intended to redesign our tax base to ensure we are ready to raise additional revenue for fiscal pressures which we will face several years in the future.

There is currently no realistic option which doesn’t involve the need to raise additional revenue in the future, because current forecasts show that, even with tightening our belts and working quickly to improve our economy, more revenue is likely to be required to look after a larger proportion of our population who are living longer. The vast majority of those costs won’t arise from an over-inflated public sector or politicians wasting public funds on vanity projects (both of which we must be absolutely resolute in keeping under strict control), the real problem we face is a much higher demand for public services which are expensive to deliver.

A person on the median wage pays approximately £7,500 in tax and social security per year – but the grant paid by the States to cover one year of residential care subsidy costs approximately £27,000 and the cost of educating one secondary pupil is £8,900 per year. We are seeing, right now, a change in the make-up of our population: Fewer people of working age, more people in retirement needing those health and care services. It is simple maths.

So there are essentially two choices to make – the first, which is relatively easy, is whether to iron out unfairness and inconsistency in the social security system, particularly for the self-employed and non-employed. This is a relatively simple decision and it can be done in a revenue-neutral way or could have contributions raised to form part of the solution to the funding issues which we will face. It is unlikely in my view that members of the States could find much to disagree with in these proposals.

The second main decision is the controversial one, which has dominated the headlines, and that is whether to broaden our tax base by introducing GST. If deputies say ‘no’ to GST,

revenues would have to be raised by a combination of a health or income tax and/or social security – basically through taxes which are based on income and fall largely to the working age population.

So why has the committee reached the conclusion that a goods and services tax should be part of the solution, and is the least unpleasant of several unpleasant options? The main

criticism of GST (and my own) is its regressive nature, since it can disproportionately affect those who have the least disposable income. However, the proposals in the paper seek to collect more than is required in order to remove many more of the lowest paid who currently fall within the social security and tax net by increasing personal allowances for tax

and introducing one for social security contributions. Among other measures, those on lowest incomes would receive a grant, as in Jersey, to offset the cost of GST. The overall impact on the lowest paid is thereby forecast to be less than the other two options which are being presented and would mean that many low-income households would pay less tax overall, leaving more money to spend on essential goods and services.

The evidence of implementation elsewhere is that GST is best applied widely to keep it low and reduce administrative requirements, and its implementation can be gradual without

significant long-term inflationary effects. It also widens the base of taxation and removes the strategic weakness of our heavy, almost unique, reliance on taxes based solely around income.

I have been contacted by many pensioners concerned that they feel they are being held to blame for this situation. That is not the case at all. It is in fact in the coming 15-20 years where we will see the biggest leap in the numbers of pensioners, and even then, it is not the ‘fault’ of that generation, which happens to be the one I fall into. It is a result of all of us living longer, which is a good thing, but it inevitably changes the make-up of our population.

The number of pensioners in the last 10 years has increased by 2,500 and it will continue to rise. So the forecast rises in costs are generally as a consequence of increasing demand for essential services and pensions which are already real now but will continue to grow in the future. Without an alternative, the buffer fund being used to smooth the impact of the increasing cost of providing the States pension, or old age pension, is forecast to run completely dry in just 17 years’ time.

There may be other things which government can do to generate more revenue and population management will be a key factor. I expect many States members will raise this in debate and will want to see more focus in this area because more economic activity and high-income households means more revenue for a relatively small change in overall population. Changing our population policy then of course entails having to try and solve the current shortage of housing. These are not issues which can be solved quickly but we must strive to ensure we do everything we can and as fast as possible. It does illustrate why this tax review debate is so significant, because our tax system touches on all aspects of government, and all the policies that affect our society.

Most are rightly concerned that we should be focused first on saving money. I agree entirely and as a general principle we should always strive to provide value for money within our public services and we must complete the work required on public service reform and investigate more innovative means of changing the way we fund services and our capital programmes as well. This is why the green paper stresses that growing the economy, and appraisal as to whether government is the right size or not, are cornerstones of developing a policy to deal with these fiscal pressures.

The other comment I regularly receive is to raise tax rates for high earners. Sadly there isn’t a group of mythical high earners ready to pay much higher taxes. To raise significant amounts the thresholds for these taxes need to be lower and the rates higher than you might expect. To raise £80m., for example, would necessitate everyone in the island earning £60k or more to pay a tax rate of 40% with social security on top of this (ie a total of 46.6% marginal rate for an employed person). To raise the same amount among those earning

higher amounts leads to disproportionately high and completely uncompetitive rates of taxation. Given that 25% of tax is already paid by the top 6% of earners, even a very small reduction of numbers in that bracket could lead to significant reductions in tax collections and consequent need for everyone else to pay even more.

I have said several times that I am not in favour of raising taxes but I am also committed to fiscal prudence. That should not be controversial. Indeed I have not seen any other members rushing to say the opposite. I have also been accused of being contradictory and of attacking my own policy letter. That is not my intention and I hope my words here are not construed that way. I am a tax sceptic and do not believe tax increases should be anything other than a last resort. But we are now in a position where we need that last resort.

I have reached a conclusion that the need to make more urgent preparation for the future, including additional tax, should speak for itself. I am determined to restructure as far as possible to lessen the effects, but we owe it to ourselves and our community to be brutally honest about the reality we face and recognise the likely solution to these pressing problems will require a combination of savings, economic growth and changes to our tax system.

None of these problems or solutions are easy, palatable, or, as regards to tax, popular. We must as an Assembly try to work together collaboratively now to solve them. I am not a fan of the ‘blame game’ and although I could invest much time dissecting how we reached this position, it will not help close the circle on a problem which has been lingering for many years. It is time for us to commit to savings, focus on our economy and to actively plan for fiscal changes to meet whatever gap remains.