Progressive GST added up to a fairer system

JILL MARTEL issued a fair challenge to me via your readers’ letters page of 9 August. How do I square my recent support for a tax package, containing a GST, with my other political beliefs?

I will have a go at answering, but firstly may I thank Jill for her very kind words about the work that I do. Those of us in public life get inured to receiving far more brickbats than bouquets, but it is still nice to be appreciated. Most of us – flawed or otherwise – go into the States with a genuine desire to make Guernsey better. Although I accept that ‘better’ is a subjective concept.

Turning to my counter-intuitive support for P&R’s previous tax package. I think there are two questions to address here. The first is whether the States really needs to raise far more in revenues than it traditionally has? The second is – if so – how best to do it?

The answer to the first question is an emphatic ‘yes’. The reasons for this are complex but 90% of it comes down to our changing demographics. In common with most of the world, the age profile of our community is getting older – and that brings significant extra costs.

For example, there is a real explosion going on in the number of islanders aged 80 and above. Statistics show that healthcare costs for this demographic are massively higher than for those in their 30s and 40s.

That is not in any way to blame our senior citizens for Guernsey’s financial challenges. In no way is it their fault as individuals, but those costs are real, and no responsible government could just stick their heads in the sand and ignore them. Something I am genuinely scared this States might do in order to avoid being the messenger getting shot for carrying bad news.

But it is not just healthcare. Our ageing population will drive up both social care and pension costs too. Spending on the States pension (what used to be called the old age pension) is rising rapidly.

As has been explained many times, this is not a ‘funded’ pension scheme like a typical occupational pension scheme, so no one has built up a personal pension pot during their working life. In common with similar schemes in many other countries, the States pension scheme is one where today’s contributors pay for today’s pensions, albeit that Guernsey has been prudent enough to build up a modest ‘buffer fund’.

So much for the effect of demographics on the spending side of the States’ balance sheet, but it impacts on the income side too.

I get fed up of ageist remarks about ‘working age’ islanders. If we are going to mitigate the impact of our changing demographics we really need to encourage all those who want to work to do so. This encompasses all sorts of initiatives, from more affordable child- care to changing our mindset over older people naturally dropping out of the workforce.

But however well we succeed in this, there is no doubt that an ageing population will inevitably lead to a smaller percentage of islanders being economically active. That is unavoidable.

So we have a perfect storm of suppressed income and elevated costs, meaning significant revenue-raising measures are undoubtedly needed. The big question is what form should they take?

For the avoidance of doubt, I would be dead against a stand-alone GST because it would be mildly regressive. This is because those on lower incomes need to spend all of that income on everyday goods and services, whereas those on higher incomes do not, and can put some of their income into savings.

So a GST of, say, 5% would be a 5% tax on the entire income of those lower down the income scale. While for a wealthier person able to save 20% of their income it would represent just a 4% tax. Completely the wrong way around.

However, the package I ended up supporting was very far from being regressive in this way. In fact it was hugely progressive, helping those on modest incomes, while putting much of the unavoidable burden on a combination of business and better-off individuals.

How so? Because while it did include a GST – regressive in its own right – it used some of the cash from that source to fund massively progressive measures elsewhere. By far the biggest of these would have been a root-and-branch reform of social security contributions to make them far fairer.

Those reforms would have been complex but at their heart was bringing in an ‘income tax style’ personal contribution allowance. In practice, that would have meant that those on low incomes paid far less. For example, at the moment someone earning £25K a year pays contributions on every penny they earn. Under the reformed system they would have only paid on half of those earnings, leaving them much better off, despite the % contribution level rising slightly.

In contrast, those on high incomes, while getting the same allowance, would pay more because of the new, higher contribution level impacting on a greater % of their earnings.

Taken with other measures, the package would have left (roughly) the half of the population with lower incomes better off than they are now. It would also have seen a big switch in the burden from individuals to businesses – mitigating one of the more unfortunate aspects of Guernsey’s unavoidable adoption of the zero-10 tax regime.

So, taken as a whole, the package I supported would have allowed decent public services to be funded while protecting those of modest means. Both completely aligned with my core political philosophy.

Hopefully that explains to Jill, and others, why I took the stance I did. Of course in the end the States took no decision at all over Guernsey’s tax system in February, but the issue hasn’t gone away. The books don’t balance and that will only get worse if it isn’t addressed.

Round two of this debate was set for September, but is now delayed until October. It will be fascinating to see what options P&R proposes. And indeed the options suggested by others who may lay amendments.

Whatever the options on offer, my moral compass remains unchanged. Raise enough cash to fund decent public services while protecting those on modest incomes.