A decision needs to be made

TAX Review II, Part II. It sounds like the title of the worst Shakespeare play that never got written, although it has the potential to contain as much back-stabbing as Macbeth or as much comedy as Much Ado About Nothing.

The GST/No to GST debate resumes on Wednesday. There are, of course, other items on the agenda for February’s States’ meeting but nobody is paying any attention to them. The tax debate has sucked all other political oxygen out of the room.

The most obvious and frequently asked question in the last three weeks is, of course, ‘What is the outcome going to be?’

The consensus view is that the numbers simply don’t exist in the Assembly for the Policy & Resources Committee to get its proposals for a goods and services tax approved and therefore that remains the least likely outcome. However, beyond that it is very hard to make any prediction as to the final outcome, as highly controversial debates such as these can take unexpected twists and turns.

So, if P&R’s preferred model – now called Option A – is dead on arrival, what are the alternatives?

At the time of writing, there are only two other packages formally in play – helpfully labelled Options B and C. Both are unattractive and the cynics would say have only been cobbled together so that P&R can claim to have responded to the debate by offering alternative solutions. The accompanying narrative is along the lines of, ‘Yes, we know Options B and C are horrible, which is why we ended up with Option A in the first place – that’s why you must now support it’.

Option B proposes that increased social security contributions do even more of the heavy lifting than in Option A. This approach does not reduce our over-dependence on raising revenues from personal incomes, which is the rationale behind the tax review in the first place. Neither is placing this burden on employers as a cost of doing business going to improve our long-term competitiveness.

Other elements of the package include a rag-tag of transport-related taxes, including distance charging, paid parking and an annual motor tax, alongside a 50% increase in TRP. The latter is a resumption of the path set in 2015 with the last tax review, the Personal Tax, Pensions & Benefits Review, which resolved to increase TRP by 100% over 10 years. This was applied from 2016-2020 but after the general election in 2020, the new P&R rather unwisely stopped that programme, both passing up the revenue it would have raised in the intervening years and making the hill to climb now somewhat steeper.

Option C is pie-in-the-sky and undeliverable. It envisages the same over-reliance on increases in social security contributions, accompanied by £30-35m. of as yet unidentified spending cuts, and a capping of Government Work Plan initiatives at a randomly selected 1% of annual spending. It’s really just an exercise to reverse engineer a package to fit the first number dreamt up, being the projected size of the structural deficit in 2040.

Putting all personalities aside, there is real recognition from many in the Assembly that no outcome would be a dreadful testament to this States’ ability to get anything – literally, anything – done. More importantly, it is recognised that putting a lit torch to the whole tax review edifice really is not in the best long-term interests of the community.

The real test will be whether there are enough members in the middle to coalesce around another option from the group behind the original Fairer Alternative (of which I am a part), which was debated in January.

This ‘Option D’ has not yet been finalised and lodged, but is a consensus solution which, as you’d expect, draws on the first part of the debate and requires compromise from most of its supporters. Unless P&R chooses to include Option D within its own amendment, the first hurdle (and test) will be for the rules of the Assembly to be suspended to allow the matter to be debated.

Option D, unlike A, B and C, would adopt a two-stage approach, recognising that there are some decisions that really do need to be made this week. Those proposed in Stage 1 would include a modest £4m. real terms’ reduction in spending in both 2024 and 2025. In addition, social security reform would proceed, accompanied by a £400 increase in the personal tax allowance. There is £20m. of new revenue to come from the corporate sector by means of a new community & infrastructure charge. There would be modest tax increases for those with the broadest shoulders, such as those subject to the tax cap and those in the minority of properties with a TRP value in excess of £300.

Stage 2 would require the review of the portfolio of capital projects and specific consideration of alternative funding models, along with detailed consideration of Deputy Parkinson’s ideas on territorial taxation. There would be a requirement to close the defined benefit public sector pension scheme to new entrants and review government services to identify efficiencies of up to £16m. a year. It would allow investigation to take place into a visitors’ levy to obtain a contribution from visitors (in lieu of GST in Option A) as well as the transport-related taxes anchored in Option B. The output from all the Stage 2 work would then feed into a further debate in June 2026, allowing the new States to make informed decisions early in its life, having given time for the changes up to that point to bed in.

In the absence of Option D as a credible alternative being accepted, there is the real prospect of the debate concluding with all the available propositions being voted out. For a small cadre of hard-line nihilists in the States – our equivalent of the European Research Group faction of the Conservative Party – they would rather a scorched earth outcome that avoids, at least for now, any decisions on higher taxes of any kind. There is another faction who cannot countenance anyone other than the coalition being seen to have had a hand in any solution. For this group, in some perverse way, that outcome would constitute a ‘victory’ for non-loyalists, which means a ‘defeat’ for loyalists. I know, it makes no sense.

As any States’ observer will know, there is still time for as yet non-existent Options E, F or G to appear – or for spoilers in various forms to emerge. And while the outcome is not certain, Shakespeare’s script for Bassanio in Act 1, Scene 1 of The Merchants Of Venice may yet prove to have relevance: ‘You speak an infinite deal of nothing.’