‘The question is not whether we act, but how’

Politics is challenging, even in the best of times – which are rare and brief enough. So why would the Policy & Resources Committee take on the challenge of moving forward a tax reform package, developed by our predecessors, for which none of us voted?

The short answer is because some kind of tax reform is absolutely necessary: without it, we will have exhausted the island’s reserves – i.e. our savings, which are currently funding much needed major projects – in just six years’ time. Keeping this option on the table so that the States can consider it in the summer alongside the alternatives we’re currently exploring (corporate tax reform and expenditure reduction) is simply the responsible thing to do. But this needs some context.

If we take a step back in time, the States has been running a deficit – spending more than it receives – for most of the last 20 years. In 2006, the economy was booming and tax revenues rolled in without over‑burdening either business or local residents – and without much need to think how well the money was being spent. That was the year the States adopted a new corporate tax model, zero‑10 – a reform which had effectively been forced on us by the bigger bullies in the international tax playground.

As a result, from 2008, most companies paid zero tax on their corporate profits, and there was a 10% rate on banking profits. This meant a big drop in tax take for the States of around £150m. a year in today’s money so, to partially compensate, social security contributions and the tax on real property went up.

The rest of the shortfall was going to be funded temporarily from the island’s savings – the rainy‑day fund – while a savings exercise in the form of the Financial Transformation Programme reduced expenditure by £29m. and, it was predicted, by some at least, that economic growth would pick up the rest of the slack.

Then reality intervened. The global financial crisis hit in 2008. Brexit followed in 2016, creating years of political and business uncertainty. Next came the Covid pandemic, shutting down parts of the economy and costing taxpayers around £120m. Each shock pushed back the economic growth that the architects of zero-10 had been banking on.

Suffice to say, all of this has meant the public finance story has not played out quite as it was supposed to when the zero‑10 plan was designed in 2006, even though we’ve extended the scope of that corporate tax regime on several occasions since 2014. Consequently, we continue to draw down on our diminishing reserves, which will be exhausted in just six years’ time if we don’t act.

The picture is thoroughly confused by a slew of stats and information. We have an annual budget with one set of numbers – what money we think the States is going to raise and spend in the coming year. Then we have the annual accounts with another set of numbers – what money was actually raised and actually spent in that year. It can be confusing, which is why we’re keen to set out the position clearly. It’s easy to focus on one year’s figures, but they can vary widely – and the position must be viewed over several years to get a clear picture of the position.

We have been running down our savings for nearly 20 years because we haven’t been able to raise enough money each year to cover the cost of delivering public services and infrastructure, and in a few years’ time we won’t have any savings left unless we do something different.

Meanwhile, our ageing demographic continues to be the single biggest factor shaping our future fiscal landscape and driving the need for raising additional money.

Health and community support already consumes 33% of our entire budget, and demand for long-term care is growing rapidly. In 2023, we had 22 people of working age for every individual over the age of 85. By 2053, there will only be eight people of working age for every individual over the age of 85.

This is a double whammy. Most States revenue comes from people of working age, who typically need fewer public services. As people age, they naturally work and earn less (and therefore pay less tax) but understandably need to draw more from the public purse, especially in health, care and pensions. By way of example, the average person in their forties consumes £1,800 worth of States-funded health and care services each year, whilst for the average person in their 80s that figure is £17,500.

Pensions already account for 20% of public expenditure and that proportion will continue to grow. Pensioners have earned their entitlements through decades of contributions, but the system’s sustainability relies on enough workers paying in – and their proportion is falling just as the number of pensioners is rising.

None of this is to put the blame on older people in any way whatsoever, but we can’t ignore the fact that the demographic change we are experiencing – like most of the Western world – is the biggest single reason as to why the States spends more each year, and therefore needs to raise more.

If 70% of all revenue continues to come from personal income tax and social security and we make no changes, an ever-smaller group of working age people will shoulder an ever-larger tax burden to fund an expanding older population. We will be squeezing the already squeezed middle harder and harder. In that event, we should not be surprised if they decide to leave the island, leaving even fewer people to fund the public services that are in growing demand.

In short, we have an unsustainable tax model – reform in some shape or form is the responsible thing to do. The question is not whether we act, but how. In tomorrow’s Guernsey Press, I will outline the options we are exploring so that we can plan for a fairer, more sustainable system – and avoid being forced into crisis decisions later on.