Spending reduction is no political holy grail

One of the key findings, for the umpteenth year in a row, is that Guernsey’s government has done really well in controlling its revenue spending. The report is undoubtedly correct in this respect. Both in absolute terms and compared with other jurisdictions, the States have succeeded extraordinarily well in keeping their spending down. All of the empirical evidence is there to prove it, but of course most islanders won’t believe a word of it.

The Guernsey folklore that ‘the bloney States just spend our taxes like drunken sailors’ has simply taken too firm a grip on the collective island psyche. Plus, of course, each individual islander can easily point to two or three instances of spending they personally disagree with to prove their mistaken point. The truth is that we now spend less, in real terms, than we used to and we raise less tax as a proportion of our GDP than most big countries, Jersey or the Isle of Man.

There was a time when the drunken sailor claim might have had some validity and oddly enough it was also a time when our fiscal policy was at its most prudent with massive annual revenue surpluses. In many ways the financial situation facing the States has come full circle since I first became a deputy in 1982.

Back then Guernsey’s government had to watch every penny as the growing industry declined and unemployment soared. Then came the finance boom of the 90s which, coupled with 20% corporation tax, led to huge government revenues and almost inevitably some indulgent spending decisions. In hindsight, we should have been putting more into reserves during that golden age, but that certainly wasn’t the cry from the public.

Why did that age of plenty come to an end? Outside pressures forced Guernsey into the zero-10 tax regime and with it the loss of circa £100m. in taxes on company profits. Then there was a global economic crisis. So over the last eight years the States has been in an age of austerity and has, by and large, responded really well by keeping spending down.

Why doesn’t it feel that way? Simple. While both the total tax take and government spending are lower than they used to be, much of that reduced tax burden has shifted from companies to individuals – and that hurts. The dichotomy is that moving it back the other way will probably make that pain much worse unless our competitors do so too.

Another thing the report points out is that the States could tax and spend far more and still keep within its own fiscal rules. That is true and, of course, the headroom has increased considerably since our GDP figures have been revised. I wouldn’t support such a policy, though. Keeping government income under 28% of our GDP is an upper limit, not a target.

That said, if spending restraint goes too far it can cause real structural damage to areas such as health and education, which we all depend on. I am beginning to spot signs of real stress in places and don’t think we should worship spending reductions blindly as if they are a political holy grail. They are not. They are simply a necessary evil in order to run a balanced budget and avoid running up debt.

The real dilemma is this. Our ultra-competitive tax regime is helping GDP to grow faster than government income, meaning our fiscal rules would now easily allow more to be raised to spend on crucial public services. That’s fine, but if we did increase taxation too much to do just that we could also choke off that growth. There is a fine balance to be struck.

One area where the spending squeeze has definitely been far too harsh is on the capital expenditure needed to maintain and develop Guernsey’s infrastructure. It has come nowhere near our 3% target. Even the amount put aside for infrastructure projects has fallen below that figure but the amount actually spent has been miserly. This has really hit our construction industry. With the restated GDP figures, the target of 3% has been missed by an even bigger margin.

So where do I think Dr McLaughlin and Professor Woods have got it wrong?

With their conclusion that Guernsey should try to significantly increase population growth as an economic enabler. While there is no doubt that youthful immigration would help with some tricky issues thrown up by our ageing demographics for a generation, in the long run it is a road to nowhere. Or rather a road to Guernsey becoming a city state surrounded by a few nice beaches. An older demographic is the new normal and the sooner Guernsey learns to adapt to it the better.

The alternative of an ever-increasing population is an unsustainable nightmare. For the economists to quote Jersey’s much bigger population growth as an aspirational target for Guernsey is misguided. Firstly it ignores the fact that Jersey has historically had a much lower population density than us. Secondly it is predicated on the Jersey ‘go for growth’ policy having produced a better outcome. Certainly they have grown their population and their economy, but where are the figures of GDP per head of population? Until I see them I remain unconvinced.

So, all in all, a good report which should [but won’t] put to bed the idea that the States just can’t stop spending islanders’ money. Some interesting ideas on population growth which focus so closely on pure economics that any other considerations, such as the ability of Guernsey’s infrastructure to cope, are ignored. Much more congested roads, anyone?

Oh, and of course, there is one more aspect to our restated GDP figures which falls outside the remit of the report – they make our overseas aid programme fall even further short of the UN target. But that is a debate for another day.