There are worse things out in the world than GST

This isn’t exclusively a Guernsey phenomenon, but extends to the entire western democratic world. Free healthcare, free education, ‘free’ (defined-benefit) pension provision are all not sustainable in the long term, nor are they even free. They come with long term economic and social costs that are simply transferred and transformed into a longer term obligation, namely debt.

Guernsey is fortunate in that it has been able to ride the wave of finance over the last 40-odd years and without overly indebting itself in the process, perhaps the Bailiwick has been lucky with timing and joining the finance game later in life. Broader western democracies on the other hand have not been so prudent with their debt accumulation, I reference in particular the USA, but also some major member states of the EU, whose debts now exceed, or are approaching, 100% of their gross domestic product.

These are unprecedented levels and in recent times Japan is the only country that has managed to negotiate these levels of debt without experiencing economic meltdown, albeit with a few decades of economic stagnation. Japan, however, was not ‘the leader of the free world’ or an entire bloc of nations, and Japan also possesses cultural attributes that allowed it to negotiate this path. We are in a different place.

The addiction to free ‘stuff’ provided by governments across multiple generations, while politically convenient in the short term, leaves us in a very sticky place in the long term because mathematically debt doesn’t disappear without significant economic pain. In one form or another, someone has to pick up the can kicked down the road.

The financial crisis of 2008 brought the world perilously close to such a great awakening but an escape route was found. The escape route – more debt! The issues of 2008 were never truly resolved, they were simply pushed up from corporate to government balance sheets, and that is where we find ourselves today – in a sovereign (government) debt crisis that extends across the western world. Debt has been the answer to all problems since WWII. Economic growth and wealth creation have been debt-driven but at the same time interest rates have virtually only gone down. The result – asset prices only go up, everyone is happy. Debt has become central to the system and the entire financial system works with US 10-year government debt as its central pillar and base assumption. Debt is also conveniently the means by which the West (led by the US) is able to exert its authority, lead the world and maintain the status quo. That is just the nature of the world we live in – to our great credit.

However what happens when the debt becomes excessive? At levels of excess its power becomes diluted, if not completely ineffective, and that can be manifested in any number of ways. These ways include inflationary episodes, increased geopolitical tension and conflict, distortions in assets prices, cultural and social upheaval. If that seems to ring any bells, it’s because we are in fact in the eye of that very storm and that is a central bank-induced financial crisis in sovereign debt ie. the effects of too much government debt. It’s nothing to worry about though, the governments to whom we have delegated our healthcare, education and pension provision have this completely under control. The problem with that however is that at the end of the day the government is just full of more people like you and I (mostly). These are not concerns you can ever truly delegate away, but that idea has fallen out of recent memory. We are in fact all in this boat together.

What happens now? It is difficult to say how this all plays out given these debt crises in major economies only happen once every few generations, but perhaps speak to someone you know who has grown up outside of the western bubble and ask them what happens when government debt exceeds 100% of GDP. We are lucky to have many lovely Zimbabweans who call Guernsey home and they could tell you a story or two.

Guernsey is extremely fortunate to not be burdened with the same levels of debt, but we are burdened with the same levels of expectations of government. Unfortunately you don’t overcome a multi-generational dependency issue overnight and Guernsey folk are blessed with a streak for self-sufficiency in a tight spot so GST it would seem is one way of making ends meet in the interim. However in the context of a wider financial storm brewing (or already boiling over) globally I think it is most prudent for the States to introduce an additional economic lever to assist in navigating the troubled waters ahead, and in that spirit introducing GST is something to be supported.

Tax laws are one mechanism through which jurisdictions compete with each other for capital (human and financial). Guernsey’s tax laws are particularly favourable for preservation of financial capital and financial capital is precisely what finds itself most under attack in a sovereign debt crisis through debasement of currency, price distortions and misallocation of capital.

If Guernsey really is to weather the financial storm it is precisely this status as safe harbour for financial capital encapsulated in Guernsey tax law that needs to be protected.

We therefore shouldn’t be too rash in seeking wholesale changes to the Guernsey tax regime. Zero-10 for example seems to bear the brunt here but not enough attention is given to the ways 0% companies contribute to GDP and tax viz. administration fees, company filing fees, director fees, tax substance filings, compliance fees, banking transaction fees, social security and payroll taxes, etc. They are not free vehicles, they come with costs, and they are not attractive simply because of 0% tax, but because they also provide a safe house for capital.

Guernsey stands to benefit greatly from capital flows, provided it can maintain its standing with the various ratings agencies. In addition the apparent inability of States members to agree on anything I would argue is another of Guernsey’s greatest assets. I would thank them for the outstanding levels of inertia and enhancing the case for political stability of Guernsey as a jurisdiction.

Long story short, Guernsey is in a reasonable state relative to the rest of the world and GST is a small price to pay if it allows us to negotiate murky waters.

There are worse things out in the world than GST and we should tread very carefully indeed.

DAVID REED