David Piesing: Fiscal policy and the need for compromises

As we all know, fiscal policy is right at the heart of the forthcoming election, with multiple candidates seeking to overturn or alternatively defer the implementation of the GST-plus package already agreed by the outgoing Assembly.

Whatever the respective merits of their arguments may be, there is one factor which has to override everything. Our current reserves are going to run out by 2032, and the new Assembly will be powerless to get anything done if GST-plus is overturned or deferred. It is already scheduled to be in place from mid-2027.

The oath to be sworn by the newly-elected cohort of deputies de facto has an obligation to demonstrate fiscal responsibility by acting in the best interests of the island and its people.

Overturning or deferring GST-plus would immediately put them in breach of that obligation, regardless of their election manifestos.

Any alternative packages would inevitably take time for the new Assembly to debate and approve, and we simply do not have the luxury of wasting any more time.

We cannot afford to kick any cans further down the road because we have run out of both road and cans.

The last Tax Review was held in January 2020 (in the last phase of the extended 2016-2020 term) and it took most of the 2020-2025 term for the next Assembly to eventually reach a majority vote to approve one fiscal package, namely GST-plus, after several stalemate debates.

In my view there is a clear compromise strategy which needs to be considered right now by candidates ahead of the election.

As mentioned, our dilemma is that we simply cannot afford to delay the introduction of new taxes any longer. However, there is big resistance to anything that includes GST, despite all the widely misunderstood (or mistrusted) mitigations of the GST-plus package. There are several candidates who want to properly investigate corporate taxes (a complex debate with lots of external moving parts), while others want to bank on offshore wind farm revenues to justify deferring the implementation of GST-plus. In addition, there are others who want to defer any decision until there is evidence of cuts in public sector spending. Well-intentioned perhaps, but very clearly two or three years too late even if such savings are actually possible.

We simply have to fix our fiscal deficit before we literally run out of money, and we can’t/shouldn’t borrow because no lender will be keen if our fiscal deficit position doesn’t first get addressed. We are between a rock and hard place and compromises have to be made.

So, my proposed package of compromises is:

1. Immediately reaffirm approval of the GST-plus package, but for a fixed five-year term starting from mid-2027 as currently scheduled, with no increases in the fixed rate or either 5% (with no exemption on food) or 6% (with food exempted). On 31 December 2032 (which will around the mid-point of the subsequent Assembly), the GST-plus package will automatically end. It could then be permanently scrapped, renewed or revised, but without agreement by the next Assembly, it will no longer exist. That new Assembly, to be elected in mid-2029, will commence with an existing tax policy in place, and they would need to decide by no later than 31 December 2030 (18 months into their new term), whether the GST-package will be scrapped, amended or replaced at the end of 2032.

I would suggest that in the absence of agreement being reached by 31 December 2030, the GST-plus package would simply be extended at the same rate for 12 months at a time because we must never get ourselves into this same negligent position again.

2. Push hard with Jersey and the Isle of Man to shift from zero-10 to zero-15. This really should be a no-brainer for all three Crown Dependencies. Do we go ahead anyway if they don’t agree? I’m not convinced either way on that, but I do think that we ought to be able to reach collective agreement with our Crown Dependency friends once we have actually taken the step of joining them in having a consumption tax.

3. Use this new political term to (a) see how Pillar 2 corporate tax revenues develop, (b) assess how the offshore wind farm project progresses, and (c) carry out a full tax review including the corporate tax options. These are the new major factors which will massively influence our fiscal future going forward. Right now, we don’t have the answers, but equally right now we have to show fiscal responsibility to secure extra tax revenues. We simply don’t have the luxury of waiting for clarity on any of these factors.

4. Use the first half of the new political term to really step up the attempts to cut the cost of government and to explore other ways of raising revenues, with a strong focus on achieving economic growth. We must also use this period to properly assess how we fund our healthcare system, including long-term care, going forward, as the healthcare budget is the massive millstone around our neck. The current model is clearly unsustainable in light of our demographics, but if we are going to materially change anything, then it needs thorough investigation and debate, and any changes would probably take five years to have any positive financial effect on general revenue.

The harsh reality is that the very last thing we can now afford is delay and procrastination in securing our fiscal position.

For those candidates who really don’t like GST or GST-plus, the compromise on their part would be that it’s only guaranteed to be in for a fixed five-year term. Similarly, for those (like me) who are convinced that GST-plus is the answer, the compromise on our part would be that it’s only guaranteed to be in place for that fixed five-year term.

For those who are hanging their hats on Pillar 2 and any wider new corporate tax revenues, the compromise on their part is that these would still remain on the table and we could see how these develop globally (which we cannot influence or control) before we can reasonably rely on them. Likewise, for those supporting the prospects of generating large revenues from leasing our seabed for an offshore wind farm, their compromise is that it remains on the table and by the end of the new term the picture should be a lot clearer.

All of the above would enable the imminent new Assembly to hit the ground running with confidence, knowing that projects can be responsibly funded, including trying to fix the increasingly desperate housing crisis.

If such compromises cannot be accepted by those wedded to their own entrenched positions regarding fiscal policy, then the inevitable alternative will be four more years of not being able to do anything at all while we have go through several more fiscal debate bun fights with no agreed outcome, while crucially eating further into our dwindling reserves which will move us a lot closer to the Armageddon of having to go cap in hand to the UK government to bail us out.

The only other way to avoid that Armageddon would be to impose an eye-watering level of new taxes which would simply send us into terminal decline.

Politics is the art of the possible. Compromise is the key.