AS WE APPROACH the debate on the Funding and Investment Plan, the issue of when, how and whether to borrow is coming to the forefront and is expected to dominate the forthcoming debate.
The Government Work Plan is a wide-ranging and highly complex collection of capital and other projects amounting to more than £650m. and rising, aimed at maintaining or improving public services, predominantly at the moment in health and education. It is a particularly large and demanding list now precisely because the States has been treading water on resolving its revenue issues and not completed any major capital projects for a decade. These projects have simply piled up until they have become urgent and created a larger bill to pay.
So, whilst it may have looked as if our accounts were stable over the decade before 2020, we were not generating sufficient surpluses and simply putting off inevitable costs and hiding financial chickens which are now coming home to roost.
One of the issues which very few (even qualified) observers appreciate about the way in which the States generates revenue and has paid for projects in the past is that it has, in a very conservative and some may call old fashioned approach, paid for projects in the past from ‘piggy bank’ reserves. Those reserves are made up of surplus money collected in tax, predominantly income tax (which in turn creates a significant concentration risk as our income is so heavily based around a shrinking working population). So, in order to maintain this approach, the States has had to generate surplus income in order to put money away for projects, something which it has failed to do for many, many years. There is speculation about how much this surplus needs to be to maintain essential infrastructure, but the States’ policy is an average of 2% of GDP (about £66m. per year, year on year in today’s money) and the Fiscal Policy Panel, after considerable thought, thinks it should be higher at 3% of GDP.
To give you an idea about how much the tank has been emptied, our fiscal rules requires us to maintain an emergency fund (formerly called the ‘rainy day fund’) of one year’s spending – over £600m. After more than a decade of low growth and rising costs that reserve stood at only £150m. at the end of last year. We have increasingly few logs on the woodpile to face an increasingly uncertain future.
The other little reported issue in our accounts is that while income has reduced following zero-10, there has been a growing reliance on investment returns from our reserves to bolster our income position, or rather to hide a growing mismatch between income and expenditure. The States accounts for the investment return properly and in line with accounting standards.
However, the problem we have is that the capital increase in investments is being considered as income – it is not. If you have a share which increases in value and you make a profit – it is only a profit on paper unless you sell that asset and realise the cash it represents. You cannot pay nurses and teachers or build new schools with a reported stock price. And if we sell those reserve assets and spend them, we reduce our reported revenue – actually making things worse because the underlying and hidden issue of insufficient income to fund public services remains. Guernsey collects significantly less as a percentage of GDP in tax than Jersey and the Isle of Man, and spends less on public services than any OECD country or our near neighbours.
The essential problem we now find ourselves facing is that we have collectively failed as an Assembly to address our income shortfall and so we are faced with increasingly unaffordable plans and a need to balance closing the gap in public finances and getting on with some overdue investment in infrastructure.
The ironically named ‘fairer alternative’ proposed at the last tax debate did not solve any of these issues – it simply put off making a decision and at the same time scuppered plans to revise our tax and social security systems which would have made the poorest in our society better off, even after payment of consumption tax.
The various moving parts make a complex interconnected puzzle, and P&R has put together a set of options which reflect what States members have told it that they want – ranging from do nothing and cut, to prioritising major projects and stabilising our medium term finances.
Option 3, which incorporates major tax reforms reducing the average overall impact of tax and social security on 60% of households incorporates most of the projects deemed essential by committees and includes £350m. of borrowing as well as the majority of elements suggested in the tax debate.
Option 2 includes £200m. of borrowing. The ‘core’ aspect of the propositions, which P&R recommends we must do, includes £25m. of income from increased corporate tax and motoring taxes, and £10m. of savings – reducing the structural deficit by £35m. and creating some headroom for repayment of borrowing.
Why borrow? Put simply, we cannot afford the essential list of infrastructure investment now necessary. Borrowing buys us time to do the things the States considers essential while protecting those vital reserves which we rely on as a buffer against unforeseen emergencies. With healthy reserves and borrowing which is not above internationally recognised limits, we can maintain Guernsey’s excellent credit rating, build better facilities for our children and those in need of care while ensuring that we protect ourselves from unforeseen emergencies.
The economists now talk of inflation as likely to be a ‘Table Mountain’ rather than ‘Matterhorn’ – higher interest rates are likely here to stay for some time. Waiting for an uncertain tomorrow to borrow until they come down may turn out to be a fool’s errand. Meanwhile, the longer we wait, the more we erode our reserves and the more expensive, pressing and contentious the projects will become.
It is time to bite the bullet and fix the problem, now, for the benefit of our children and those who will need care in 20 to 30 years’ time.
Guernsey should continue to be a place of which we are proud, with high quality services. If we cannot do so, then we have to reconsider whether this system of government remains fit for purpose.
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