Horace Camp: An invitation to grow government even further

When politicians want to avoid a fight today they write a framework for tomorrow.

The new Fiscal Policy Framework that Policy & Resources is bringing to the States is a classic of the genre. It is sold as a set of high-level principles to guide public finances for decades to come. It is full of calm diagrams about pillars and long-term sustainability. It reads well enough at first glance. Who could be against discipline and stability?

Look a little closer though and you find that this polite little document quietly rewrites some pretty big rules and does it without the honesty of a full political debate.

Start with the deficit. We have all heard the figure of £115m. repeated often enough. In the 2026 Budget the structural deficit was estimated at £77m. under the old framework. That calculation already tried to strip out one-off items and the ups and downs of the economic cycle. It still assumed a modest level of capital spending and no particular need to rebuild reserves.

The new framework takes a more realistic view on two important fronts. It accepts that Guernsey should be investing more in its infrastructure if it wants any kind of future growth and it recognises that running down reserves is not a sensible long-term strategy for a small, exposed island economy. Once you write those truths into your rule book the numbers move.

Appendix two of the policy letter shows how. It now assumes that general revenue must support infrastructure spending equivalent to about 2.3% of GDP every year with ports and utilities adding a further chunk on top. It includes the long-term funding requirements of the Guernsey insurance fund and the long-term care fund rather than just their in-year balance.

It adds a provision to maintain and enhance the value of the general reserve and the core investment reserve. None of this is unreasonable. It is what a prudent jurisdiction ought to do.

However prudence has a price. Once those factors are included, the structural deficit becomes £98m. Not £77m. Not a temporary gap that can be closed with a bit of efficiency here and there. A chronic shortfall of close to £100m. in an island that cannot rely on high population growth or inflation to dig it out.

In that light the £115m. narrative starts to look more like a political number than a technical one. Its own framework now acknowledges the underlying hole is around £98m. before you even begin to talk about new spending ambitions or political wish- list items.

Next look at what happens to capital spending. For more than a decade the States has failed to meet its own previous target of investing 2% of GDP in routine capital and major projects. Only in the years around 2012 and 2013 did we manage to get above that level and the rolling averages tell a familiar story of delay and under-delivery. The policy letter is very frank about this history. Yet the solution proposed is not to align ambition with proven capacity. Instead it is to declare that we ought to spend something nearer 3% of GDP on infrastructure once ports and utilities are included and to bake that assumption into the framework.

There is a similar leap when it comes to reserves. The document states that the States’ core entities currently hold around £1,5098m. in financial reserves which is equivalent to about 43% of GDP. That sounds comforting until you see how the number is constructed. The figure includes the core investment reserve and the general revenue reserve which are, at least in principle, available to government. It also includes the social security funds which are legally bound to pensions and long- term care. Those funds are not there to bail out general revenue. They are there to pay your pension and your care home fees.

The letter admits that the long-term care fund is on course to run out around 2062 without policy change. It also notes that existing projections show the unallocated part of the general reserve could be exhausted by 2032 unless significant new revenue is found. Despite that the framework proposes that total reserves should never fall below 43% of GDP and should over time move toward 50%. It is hard to see how you can hit those targets when two of the three main pots are already under pressure and the third is expected to be part-emptied within a decade.

Perhaps the most politically significant change is easy to miss. Appendix one reminds us that the old framework contained a clear statement that States revenue should not exceed 24% of GDP.

It also contained a hard limit that total debt should not exceed 15% of GDP. Those were not just accounting niceties. They were the closest thing we had to a constitutional ceiling on the tax burden and a clear red line on borrowing.

The new framework deliberately abandons both. There is no revenue cap at all. There is no fixed debt limit. Instead we are told that sustainable debt will be determined from time to time by external advisers. The most recent analysis from EY suggests that Guernsey could borrow up to about 30% of GDP without threatening its credit rating. We are currently at around 11% if you include group entities. On paper therefore we have plenty of headroom.

In practice what has happened is that the political brakes have been quietly removed.

What also strikes me is what the document refuses to deal with. There is not a hint of any plan to bring the budgeting process under control even though that is where most of our trouble begins. Committees overspend. Projects drift. Costs creep. Nothing in this framework would stop any of it happening again. Instead of restoring discipline it simply removes the old limits on taxation and borrowing which clears the way for future assemblies to take more from islanders and to load up more debt while the basic habits that created the mess remain untouched.

That is not fiscal discipline. It is an invitation to grow government even further under the banner of prudence.

There is one more ghost wandering through the document and that is GST- plus. When the authors discuss the future of reserves they say that without significantly more revenue the general reserve will continue to erode and the unallocated part could disappear within about seven years. They then note that the kind of revenues expected from the GST-plus package would be enough to stabilise reserves in real terms. In other words their long-term framework is being drawn on the assumption that something like GST-plus eventually happens even though the political attempt to introduce GST has morphed into a taxation review.

I am not arguing here for or against GST. I am simply pointing out that it is intellectually dishonest to write a rulebook that depends on a tax rise that does not exist. Either the framework should be based on today’s actual tax system or P&R should come back with an honest package of measures to close a £98m. structural gap. You cannot build castles in the air and call them pillars.

So what should the States do with this document?

On the one hand there is merit in facing up to the true size of the deficit once you account properly for capital and reserves.

It is better to know that we are nearly £100m. short than to pretend that a bit of belt tightening will fix everything. On the other hand adopting the framework as drafted would quietly remove important limits on the tax burden and borrowing while committing future assemblies to capital and reserve targets that may be unrealistic and in some parts depend on revenues that do not yet exist.

If deputies are content to take that step they should at least be honest with islanders about what it means. The choice is not just about four worthy-sounding pillars.

It is about whether Guernsey is prepared to accept that our finances are structurally broken and to give future governments permission to solve that problem through more tax and more debt. That is a serious political choice which deserves a serious open debate and not just a ticked box against a policy letter that many may not have read past the executive summary.