Your £6,500

The post-Covid cash crisis has hit and it gives us a choice: learn to live within our means or give up our low tax status to pay for big government and an expanding public sector, says Richard Digard

Shutterstock picture (29083232)
Shutterstock picture (29083232)

MANY of you, I’m guessing, won’t have read the States of Guernsey Budget report for 2021. At more than 130 pages, why would you? Plus its authors assume a high level of detailed knowledge of the background to its compilation and of public finances generally.

In short, it’s not a particularly approachable document*. But if you work at it, a flavour of the challenges ahead certainly come through.

You’ll note, since it’s the new year and we’re all supposed to be optimistic and aglow with hope, that I am being restrained here.

For instance, the report notes that pay in the finance sector has fallen significantly, that the industry is under particular stress and these headwinds will offset the expected recovery in other areas of the island’s economy.

That setback is to be expected, given the large contribution finance makes to general revenues from both high-value employment and tax on company profits, and it’s one reason why government will post an anticipated £23m. ‘loss’ on its day-to-day expenditure budget this year.

To set the scene a bit, the Covid crisis clobbered States finances by £80m. in 2020. Add in losses by Aurigny and other areas like the ports, and that rises to £120m. This needs to be replaced. What hasn’t been headlined, however, is that is in addition to the £80m.-£130m. a year of new services that the previous Assembly agreed to without knowing how to pay for them.

As Guernsey – hopefully – emerges from the pandemic, that’s a debt and cost overhang of up to £250m., or not far shy of £6,500 per taxpayer. It’s a terrifying sum and explains why chief minister Peter Ferbrache is asking: ‘What level of public services should be provided and how much tax are we prepared to take from the economy and community in order to provide these?’

It’s also why Policy & Resources is prioritising work on reviewing the tax system to wring more out of you, as the existing mechanics can’t provide the 24% of GDP the current fiscal rules allow for.

This, to adopt Dr Brink’s approach, is important to us because it limits the size of the public sector. The cost of States’ services should not exceed more than 24% of the general economy. But – and it’s a big but – that cost is currently around 22%. In other words, we’re being invited to pony up an extra £65m. a year or so, or £1,600 each, to hit that GDP ceiling.

The point I really wanted to make, however, is how the economy itself is changing. Deputy Ferbrache touches on it in his Budget report by highlighting the stress that banking, in particular, is under.

Less visible, however, is how we’re drifting by default towards a Northern Ireland-type society, heavily dependent on public sector jobs for employment at huge cost to the taxpayer.

Not that long ago retail was the second-largest employment sector after finance, but now lies in third place behind working for the States.

Ten years ago, 22.2% of all employed islanders were in finance. That is now down to 19.1%. Over the same period, public administration has risen from 16.6% to 17.4% while retail has fallen from 13.7% to 12%. As finance contracts, so government expands and requires more from the private sector to pay its wages.

To give some context here, the Isle of Man has just seven per cent employed in public administration, according to a recent report by island specialists Critical Economics. This island has the highest percentage of the five islands it surveyed.

Deputy Ferbrache’s Budget report has already highlighted the big falls in financial services pay. Yet despite the popular myths, it’s not that lavish – median earnings last year were £47,954. Not a fortune when you remember that the ordinary household here spends £58,279 a year to live, excluding tax and social insurance payments.

Median earnings for public sector staff, however, were £37,327, more even than estate agents pay themselves, and considerably more than the £23,770 received by retail staff. And since many States staff are low-paid, like the manual workers, you can see civil service rates are particularly lush.

It’s one reason why non-established groups, like nurses, are demanding equal pay for work of equal value. In the circumstances, it’s difficult to criticise them for seeking to do so because they’d like to hit the jackpot too.

The less palatable truth is that past States have failed utterly to control the cost of the public sector and have burdened the taxpayer with employment terms that are unduly onerous and inflexible and a pension scheme that remains unaffordable and a burden on the taxpayer.

It is one reason why Deputy Ferbrache declared in his ‘first 100 days’ speech: ‘One of the issues of prime importance is that of civil service reform/transformation… we will suffer no procrastination… it is our avowed intent to achieve civil service reform and transformation.’

I’ve shortened the paragraph as you can see, but the words are pretty clear and you have to ask whether the surprise announcement last week of a non-negotiated pay-freeze on most States employees is the start of a different approach and the long-promised transformation process.

It’s also long overdue, as a quick glance at the 2010 Tribunal of Inquiry report into the industrial action at the airport highlighted through its 16 recommendations on labour relations and good governance.

Most, unsurprisingly, have not been actioned as successive deputies ignored reality, pursued vanity policies, piled on cost and refused to take the hard but necessary decisions.

Well, the cash crisis has caught up with us and the choice now is clear: slaughter a few sacred cows, or middle-income Guernsey sacrifices its low tax status to fund an increasingly bloated public sector.

Happy new year, eh?

* Here’s an example of the Budget report’s inpenetrability:

‘The Committee for Home Affairs has an outstanding savings target of £375,000 against which there are no significant savings anticipated to be delivered in either 2020 or 2021. Therefore, given the length of time this has been outstanding and the expectation that no further initiatives are planned which are likely to realise significant cashable savings in the near future, the Policy & Resources Committee considered it appropriate that the outstanding balance should be removed from the Committee for Home Affairs’ base Cash Limit for accounting purposes. As and when savings are delivered in the future, appropriate reductions will be made to the base Cash Limit.’

If you know what it means, do drop me a line…

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