The future looks uncertain

IT WAS a tale of two halves.

And if anything the true battle lies ahead.

Guernsey's economy began the year showing signs of resilience and ended it stuttering.

The watchword at the moment is uncertainty.

Uncertainty over the future of the corporate tax regime, although all things point to the retention of zero-10 with a wider bracket of the finance industry taxed in the 10% bracket, which could help alleviate any loss of income from changes Europe demands.

Uncertainty over the future of the fulfilment industry.

Will the newly-launched legal challenge against the UK's decision to abolish a VAT-relief for the Channel Islands be successful? Even if it is, there will surely be no return to the status quo – perhaps just a battling chance given by creating a level playing field. But what other action could follow from a UK so keen to act?

Then there is the political uncertainty which comes with every general election. Will the next intake keep the foot on the brake of spending restraint, in fact press it down even further, and will the decisions being made by the outgoing States leave them on this path?

And international uncertainty.

Will Guernsey suffer at the hands of a more protective European Union as its main voice – the UK – stands adrift of the negotiating table? Or conversely, could the island's relative stability and sanctuary become like a beacon to investment.

But there is little doubt that with the economic crisis still gripping, the UK is also becoming the aggressor.

Treasury minister Charles Parkinson delivered his last Budget speech this month as he heads for retirement from politics.

It was largely well received and pertinent in analysing where we are and, more importantly, where we are heading.

'Local confidence at the beginning of the year was high, and growth had clearly returned but global economic conditions have steadily and relentlessly worsened since the beginning of the summer – in the main caused by the continuing unresolved eurozone sovereign debt crisis,' he said.

'Growth forecasts for the Guernsey economy have been revised down since the summer for the December Budget, and it is possible that they could be revised down further if conditions do not improve.'

The States predicts growth of 1.9% next year.

By comparison, the ratings agency Standard & Poor's is forecasting 1.1%.

The economy lost momentum during the second half of the year, he said.

But Deputy Parkinson likes to stress the comparative position – the global economy is about to enter a fifth consecutive year of recession or weak growth conditions.

Guernsey is on track to balance its budget and therefore stop eating into its reserves by 2014 – 'unless we are blown off course by external events'.

'There is no doubt that we have had to swallow some unpleasant medicine in recent years – indirect tax increases, real term freezes in States expenditure, the use of our reserves – but I believe that these measures were the right policies for the times,' he said.

'While expenditure restraint has been challenging in the face of increased demand for existing services and pressure for the introduction of new services, it has also given us the imperative to thoroughly examine and review all our expenditure to ensure that we are providing the right services, at the right level, in the right way and at the right cost.'

It has forced politicians to address wasteful expenditure and prioritise.

'There are three key factors that will influence the States financial position in the near future – they are the economy, corporate tax reform and expenditure restraint.'

Sadly there is little that can be done about importing the gloom that surrounds the global economy.

Corporate tax reform still needs the clarity that Europe's review in February should bring.

Expenditure restraint is already beginning to be challenging – and will only become more so.

At the heart of it lies the efficiency drive known as the Financial Transformation Programme, which is being driven from the centre by top civil servants.

That alone has ruffled some politicians' feathers, especially where to add impetus to the savings programme they were asked to find savings of £6.5m. next year.

There were already signs of feet dragging from the political boards. This will force that to stop. Not only do departments habitually underspend their budgets because of staff vacancies, all these savings have already been identified.

Problems come when some stop playing by the rules – take the example of Health wanting to put on hold new services the States had already agreed to pay for to plug its budget gap instead of looking at whether savings could be made on its current offering.

Next year will be the first that money has not been put aside from the FTP savings for new projects – the new States will have to decide whether this money will go to reducing the deficit or to spend, spend, spend.

Guernsey's tax strategy is based on them saving and that is going to be a large hurdle for the new Assembly to clear.

But at least there should be a tool, however rough it might be, to compare the worth of current and new services. Finally a debate can be had about whether money is being invested in the right areas instead of simply rolling it over year after year.