OPINION: What little difference a decade makes

WITH all the excitement of being in Jersey last week for the publication of the first paper of the International Sustainability Institute Channel Islands (more later), I’d quite forgotten my filing deadline for this month’s GP column.

Bit of a schoolboy error, as I’d known what I was writing about this month since the start of the year. I’d checked when the States of Guernsey published the ‘Potential long term implications of demographic and population change on the demand for and costs of public services’. Pithily named, this March is the 10th anniversary of the publication of that document. It’s still on the website – google it to find it. I had the idea for a stock take, compare, contrast with what was published 10 years ago. Spoiler alert, this month I am breaking my golden rule of keeping out of States business.

I wasn’t aware the IOD would be hosting its mid-term debate (sic) on Guernsey’s demographic dilemma this month. I do like to think of myself as ahead of the pack in my thinking, but 10 years ahead is a bit of a record even for me.

Joking aside, the reason I took it upon myself to get the analysis done and publish this paper as States economist was to highlight the long-term issues that I felt needed discussion. I did not see politicians doing it and I hoped it would help to catalyse it. Ten years later the issue is being discussed but it’s painful how little has been done to address the issues and put the finances on a sustainable long-term footing. As I said when commenting on Guernsey’s S&P rating this January, when I did all this I never imagined that subsequently the default policy response would be just to raise taxes.

On my return to these pages last September, I tried to explain how much general spending had increased in the last decade. I also tried to explain how the numbers had been fudged (deliberately or otherwise) to help justify a step change increase in spending. Making more than one point is always a bit tricky and I think I might have lost a few people. As one reader’s letter to the editor said, ‘I was pleased to see that you have persuaded Dr Andy Sloan to resume column-writing for you again, not least because I enjoy the mental exercise of reading it several times to see whether I really do understand what he’s saying’. Thing is I’ve only got 1,200 words each month and I squeeze in stuff.

I’ll try and make this point simply. Suggesting that spending has risen too much in recent years is not mutually exclusive with acknowledging that demographic pressures are forcing spending upwards. If social spending is being gradually pushed upwards by demographics, it’s irresponsible not to keep control of general spending. Public spending has inertia. That is spending programmes are difficult to remove once they’re there, so new spending commitments are not just for Christmas. It’s no coincidence that I hear Policy & Resources haven’t had too much success with their round robin request for ideas for spending cuts.

In a previous life I used to teach a master’s course on public policy economics. One of the lectures covered the growth of government spending over the centuries. I went through 17 different theories and models to explain expenditure growth. Frankly there’s more than 17 and inertia is just one. I explained all this (not each theory obviously) once to a Chamber audience at the OGH. Since then, the tax burden has gone up for most of us in Guernsey. Part of the rise was advertised. Pensions, health and in 2008 we introduced zero-10 (revenue had to come from somewhere). But part of it wasn’t, the bit that came with new spending commitments and a lack of control of costs.

The point I was trying to make last September is yes, spending on pensions, health care etc. is being forced up with the changing demographics, but total spending today is up by more than just that. General revenue expenditure (that is spending on everything other than social security and pensions) grew by 42% in the 10 years following the introduction of zero-10. Stripping out the effect of inflation it was still 15%. That’s real spending growth of 15%, which is only possible to fund by a higher tax burden. Ten years on, the only thing that’s been done to put our finances on a long-term sustainable footing was to make our cost base more expensive.

I must admit, though, I feel for the politicians involved. None of this is forecastable with certainty. This week the States is embarrassed by a surplus when it forecast a deficit just a few months ago. Though frankly someone should have been able to see that one coming. It’s little wonder that few trust the numbers. That’s why I established the fiscal policy panel back in the day. It was supposed to be Guernsey’s independent fiscal watchdog providing transparency. What worried me more than it being quietly killed in the last States was that so few noticed.

Yes, members of P&R, I am available to take on the role!

Here’s another one of those ‘they’re not mutually exclusive’ comments.

Introducing GST and reforming the corporate tax regime are going to both be necessary to make our finances sustainable in the long run. But explaining all this will probably require more than a page in the GP or a tax review website giving the impression that we only spend taxes on good causes.

But a couple of points on corporate tax might be in order. One, zero-10 was intended to have a short shelf life, even Jersey’s late Colin Powell admitted that. Two, we missed our best chance to change, when we got cold feet about moving to a territorial regime (that we had developed) in 2012. HMT at the time had our back. Problem is, that regime won’t work now – the rules have changed too much and Blighty no longer has our corner in the EU.

I’ll admit I was irked by the comments of ‘leading figures from the finance sector’ about the success of zero-10 a few weeks ago. Just for the record, despite what some say, our finance sector hardly grew in the post zero-10 decade, but that’s not to deny things have certainly picked up in the last few years. What irked was these were the same figures who dragged their feet on supporting a move at the time.

Strategically Guernsey’s now in a bit of a fix, having to cede (and deny doing so) sovereignty on tax little by little to defend the zero-10 regime. Not moving to territorial is up there with not introducing a bifurcated Solvency II regime as a poster boy for short-sighted strategic decisions. For those that don’t follow that last point, I apologise. Stop me in the Pollet one day and I’ll explain.

But happily we don’t have the prerogative on strategic fixes. That’s one thing I learnt speaking to everyone in Jersey last week at the ISICI paper launch. So many issues we face are common. Which was one of the reasons why I established the Institute across both islands.

Gosh, finished already. I wonder, what was my point? Perhaps on fiscal sustainability I wouldn’t start from here!