Capital spend key to economic prosperity

The island keeps its long- and short-term sovereign credit ratings at AA-/A-1+, reflecting ‘strong and flexible institutions, wealthy economy and considerable financial buffers’ but the accompanying message is a little more downbeat.

It is never great to be downgraded, even if it is just in the outlook, but nothing that S&P says in its analysis should come as a surprise. The report picks up on the forecast deficit in public finances, and covering that from reserves, and notes the reservations or lack of progress, so far, over raising taxes or cutting spending, and also highlights labour shortages, especially in hospitality.

S&P expects this is such an issue it will likely drag on the island’s medium-term growth and post-Covid recovery. Ironic then, that it’s job-based recovery, particularly since lockdown II, which S&P is encouraged by.

Its view is that the island emerges from the pandemic ‘relatively unscathed’, and it was virus suppression, and the adaptability of the economy to the pandemic, which secured that.

Financial services was ‘adept’ in shifting to virtual working while the sectors which could not adapt so easily, such as tourism, make only a nominal contribution to overall GDP.

S&P expects a ‘modest rebound’ of 2.4% in 2021 as activity restarts and external demand picks up.

Among its concerns – how the island continues to manage reputational risk in the face of rising global regulation of low-tax jurisdictions is critical to the island’s well-established business model.

And among its reasons for optimism – ‘an ambitious capex programme which will support activity over the medium term’.

Both the Scrutiny Management Committee, in a 2020 report, and the think tank Gpeg, in a report a year ago, have expressed concerns about the island’s track record on capital spending.

Although Policy & Resources has done a lot of talking about spending in the last couple of weeks, it’s clear that the importance of a properly costed and accounted for capital expenditure programme – which has failed to materialise over the past 16 months, despite being considered an initial priority by the new P&R – is important not just for the upkeep of basic infrastructure, but for the overall health of the economy too.