Plan B's worth a punt

WHO do you believe most? Heidi Soulsby or Peter Ferbrache? Or, strictly, Mark Helyar, whose swift and total conversion from GST-denier to goods and services evangeliser-in-chief because he’s Treasury lead on the tax review for Deputy Ferbrache?

Tough call, eh? And I ask because, for many islanders, how or whether we stabilise government finances by increasing the cost of food, fuel and kiddies’ clothing boils down to one thing. Trust.

Most won’t have had the time or inclination to wade through the tax review policy letter, the just-released – and rather tempting – alternative package from Deputy Soulsby and others, or the narrower amendment from Charles Parkinson and Liam McKenna, which targets corporation tax.

And even if they have, how many would stick out their neck and say, ‘You know, this is clearly the best solution?’

So, back to trust it is. That, of course, is inextricably linked to truth – or at least what we understand to be the truth. When Deputy Helyar said in May 2021 that Guernsey’s system of government was a Jurassic Park monster that was self-perpetuating, almost uncontrollable and opaque from a cost perspective but one where the dinosaurs feel at home, we knew what he said was true.

When he now says there’s no alternative but to feed that Jurassic monster even more of our money and there’s no need to fret over (I quote) a system allowing every committee and its staff to do largely as they wish without visibility or accountability to the Assembly, P&R, or the public, we think, hmm… really?

But then up pops Heidi and Co. with an alternative proposal without GST but with a hint of spending restraint. Hurrah. But what’s this? Gavin St Pier? Hasn’t he an axe to grind with Ferbrache and the controlling Blob in the Assembly? What if he’s massaging the figures – just like the official tax review – to prove a point?

Well, relax. Help is at hand: a neutral, expert body that has analysed what’s really happening to the island’s economy and its government and provides a pretty good steer on what the Assembly should do to get its finances back on track. So here we go.

Standard and Poor’s is a company that assesses the financial strength of businesses and governments, especially their ability to meet capital and interest payments on their debts, and basically whether you can (that word again) trust them.

In Guernsey’s case, less so than the previous year, which was a decline on the year before that. Hence Policy and Resources saying in a pretty selective release based on S&P’s latest downgrading that there was no alternative to its GST-based tax review (I paraphrase a bit).

Go through S&P’s concisely-worded report, however, and a different picture emerges. The economy – the bits government can’t foul up – is in pretty good shape, grew by 7.4% in real terms in the two years to 2022 and was above pre-pandemic levels. The downside is government expenditure has increased by more than that growth in the economy. So it is spending more than it earns.

Why? As has been noted previously, it’s profligate, inefficient and fails to outsource. For S&P, the particular issues are that the increasing pressure on health and care services is intensifying the squeeze on public finances (i.e., they’re taking an increasing slice of the available revenue ‘cake’), while the shrinking working age population also threatens tax collections because fewer people are earning.

This, however, is not a surprise. We’ve been talking about the demographic time bomb for 20+ years. So the health argument for raising tax, while plausible, is actually an admission that successive States have failed to manage the problem they themselves forecast. Ditto the declining workforce.

Reinforcing this ‘government is rubbish’ theme, S&P notes a key driver of the projected £90m. deficit is capital expenditure. More than £560m. is needed because past States failed to invest in the things the island needed like housing, education, digitalisation, and transport, so this is a half-billion catch-up exercise.

But, and it’s a big but, the ratings agency has little expectation the States will do what it says it will do, so that £568m. won’t be needed anyway. This is important because it affects how much is allegedly needed from GST.

S&P gets edgy when a government has assets of less than 100% of GDP, and ours dipped from 102% to an estimated 85% last year. That 17% dip, however, is largely due to the market value of the assets falling, because of global circumstances, rather than the States dipping into its savings to pay civil servants or fund public services – a rather different narrative to that peddled by P&R.

The other standout from the report is another government failure: ‘Substantial improvements in the quality and timeliness of national income accounts data, or in the availability of external statistics such as full balance of payments and the international investment position, could also lead us to take a positive rating action.’

In other words, just like the States’ accounts, the available data is poor so transparency is lacking and S&P isn’t getting the full picture on how Guernsey’s really performing. And neither is government of course.

What does this mean for the tax review debate? If I were a deputy voting on all this, it’s pretty clear cut. Government is chasing the wrong targets. Instead of looking for growth, increased efficiency and greater productivity, it’s simply looking to inflate the government machine (AKA Deputy Helyar’s Jurassic States). That’s unsustainable.

Its reserves mean that there’s time, especially as the markets recover, to put right some of the unreformed spending habits within committees, negotiate better contracts of employment with staff and review the services government should be providing and at what level. Doing so should provide some sustainability.

As Deputy Helyar noted in his 2021 ‘Jurassic’ letter: ‘…the reason we are where we are now is primarily not demographics or Covid but wanton “gold plated” decision-making by former Assemblies and uncontrolled growth of government spending with open disregard for how annual repeating costs can be met, other than by a lazy resort to raising tax at some indeterminate point.’

I don’t know about you, but that still sounds about right to me.

What if Deputy Soulsby’s Fairer Alternative anti-GST package is wrong and misguided or – more likely – committees block its proposed meaningful reform and savings initiatives? Well, some financial reserves will be spent in the interim but the island won’t be bankrupt and an unpopular set of proposals from P&R will be properly tested. And there’s still the backstop of a tax on goods and services if and when it’s needed.

I’m not a gambling man, especially with taxpayers’ money, but the S&P report, properly analysed, clearly suggests the alternative set of proposals is worth a punt with little to lose if not 100% successful.

In short, if I were a States member, on this one I’d trust Heidi.