Unsustainable Guernsey

LET’S start with a couple of absolute certainties. Firstly, the very worst thing you can do is let States members loose with your money. They have no idea how to manage it and have pretty much driven Guernsey into the ground. Secondly, now that we have a double whammy of a punishing Budget and fresh attempts at introducing GST, the financial position of the island is worse than you can imagine.

This bleak position is compounded by Policy and Resources’ favoured ‘solution’, the so-called Scenario 3 in the Funding and Investment Plan (FIP) to be debated later this month. That’s because borrowing, as it recommends, is just about the worst thing Guernsey can do.

For all this we are indebted to the Guernsey Fiscal Policy Panel of three independent economists, who were engaged by P&R to provide a veneer of respectability for the FIP, but who can’t quite bring themselves to do so.

As they report: ‘…none of the three scenarios outlined in the Funding & Investment Plan are sufficient to place Guernsey’s finances on “a sustainable pathway back to long-term permanent balance” or deal with immediate capital pressures.’

The other thing we can say with certainty is that government has totally lost control of costs. The situation outlined by the fiscal panel highlights this while the Budget reinforces it, with P&R admitting that, just when the island has no money, expenditure next year will go up above RPI by £37m.

That’s an extra £3m. a week just to stand still, while the committees that are addicted to spending the dwindling amount of cash you have in your back pocket want an extra £11m. on top to do yet more stuff. This includes P&R employing a marketing officer to join (I quote) their fun, energetic team, so you can see how vital these service extensions are.

How can this have happened? The simple answer – something I have been labouring over the years – is that States members collectively do not know what they are doing. Or, if you wish to be charitable, have had little understanding of, or concern for, the consequences of their actions.

So what we learn from the fiscal panel is revealing. Over the years (12 at least) successive Assemblies have largely ignored the economic facts of life and spent as though Guernsey was a high-tax jurisdiction that could take effortless and increasing surpluses for granted.

Deputies have also massively underestimated the consequences of that old favourite, the demographic time bomb, both in terms of the decline of those in work – and, crucially, able to support those who aren’t employed – plus the cost of health care and benefits for older islanders.

This will get worse for a long time (probably beyond 2080), even with net migration of 300 people a year, and the effect of all these things is that Guernsey is fiscally unsustainable. To be sustainable, government net assets (basically cash and buildings) need to be constant as a share of GDP. Why? ‘This avoids a potentially explosive situation where assets are shrinking, or debt is growing faster than the economy over time,’ says the panel.

Instead, however, the States has shrunk its asset base from 19% of GDP in 2012 to an estimated 16% this year. Is that bad? Too true, the figure should be at least double that – between 30% to 60% of GDP – to be prudent. This refers to both investments and physical things like schools and roads, but both are in decline and our track record in putting money into the public realm is worse even than Mexico and the lowest out of nearly 40 countries monitored by the panel.

This infrastructure neglect is particularly bad because the island has also been burning through its financial investments – one of the worst things it could have done, according to the panel. Small economies like Guernsey’s are inherently vulnerable and generally dependent on one key export industry. In our case, finance.

Because it has done well over the years, the island is classed as a rich economy, with limited scope for growth – trending at about 0.4% a year since 2002. That’s much less than inflation or the increase in States’ spending. Which explains why a) we’re in a mess now and b) it would have made more sense to leave surplus money invested to get a better rate of return.

That low economic growth is especially dangerous, however, if you want to borrow (as P&R does). As the panel says, ‘Low economic growth has important implications for fiscal policy as it means that government debt is extremely difficult to manage.’

In other words, if you have a fast-paced economy, any debt tends to be eroded by growth. But for dawdling Guernsey, it’s the other way round. Government debt tends to become more of a burden over time, which is why the panel says Guernsey should be running a financial surplus. Definitely not borrowing.

Its analysis suggests Guernsey has been on an unsustainable path ‘due to the continuing deficits relative to the sustainable path, created by the insufficient revenues, and a declining real value of its fiscal reserves, together with a declining public asset stock due to low level of public capital investment’.

So as you can see, things are pretty bleak and the incompetence of successive States has plunged Guernsey financially deep into the soup. P&R’s nuclear rescue plan – GST and borrowing £350m. – just fails to mount a complete turnaround, so even with the stress and pain of that, the island’s public finances will remain unsustainable.

My own view is that the position is worse than the panel highlights. That’s because government has no credible cost containment plan and its track record on capital expenditure is lamentable, even when it had the money to spend.

So in summary, years of fiscal neglect need drastic action but P&R’s option three, for all its shock and awe, isn’t a magic bullet. At best, it could lessen further tax increases in future. As the panel says, ‘the less aggressive fiscal action is now, the more costly it will become in the future.’

What happens next? That depends on the outcome of the debate later this month, and what really worries me is this. The people and their successors who got you into this mess in the first place because they didn’t know what they were doing are now supposed to dig you out.

It won’t end well.