Andy Sloan: Tax reform must be a two-way bargain

When the States returns to the tax debate in September, deputies will once again be asked to make a profound decision. Not just whether to introduce a goods and services tax, but essentially to ask every working family and business on this island to commit to a system of higher taxation permanently. That is not a decision I take lightly.

I accept that Guernsey faces genuine long-term financial pressures. We have an ageing population, increasing demand for public services and difficult choices ahead. If, after careful consideration, the States concludes that additional taxation forms part of the solution to a balanced budget, then that debate should take place honestly. And a simple question I have pondered often over the last few weeks is that if taxpayers are being asked to make a permanent commitment through higher taxation, what should government be prepared to do in return?

My answer is equally simple. Government should demonstrate an equally serious commitment to controlling expenditure and managing public money more effectively. That is why I drafted the amendment requiring overall government expenditure to grow by no more than inflation for the next three years, unless the States decides exceptional circumstances justify doing otherwise.

Some, granted not many, have suggested that three years is either too short or somehow proves the proposal lacks ambition. I disagree but that’s not the point. The amendment is not intended to solve Guernsey’s long-term fiscal challenges. It is intended to demonstrate something more important – that government is prepared to begin changing its behaviour, not simply asking taxpayers to change theirs. That is what this debate is really about.

It is also worth remembering what the amendment does not do. It does not reduce public spending. It does not require cuts to public services. It simply asks government to limit the growth in overall expenditure to inflation for a defined period unless the States consciously decides there are exceptional reasons not to do so. To me, that is neither radical nor unreasonable.

And to those who say its an unnecessary constraint, given the States has ‘committed’ (sic) to finding 1% real-term efficiencies in its baseline expenditure, I say baseline expenditure is not total expenditure. Baselines can be increased, moved and re-defined. Don’t believe me, just go back to the last autumn’s Guernsey Press budget podcast with Deputy St Pier, then treasury lead at P&R, where he helpfully explains that that is the case. Baseline efficiency savings (even if achieved) as presently defined do not automatically feed through into spending constraint.

Since the debate was adjourned, much has been said about why this supposedly cannot be done. The argument I hear most often is that expenditure is increasingly driven by demographics, pensions and healthcare, making meaningful restraint impossible. I do not accept that.

Demographics may be real, but it is not a blank cheque. It is not a joker to be continual wheeled out to justify an absence of spending control. Every organisation faces areas where costs rise faster than inflation. Good financial management is not pretending those pressures do not exist. It is recognising them while asking where greater efficiency, better productivity and different priorities can offset at least some of the additional cost. The answer cannot always be total spending just goes up.

Similarly the response to every new ‘demand’ cannot automatically be to say yes. As I have become prone to saying, when I directed the review of long term spending projections in 2012 when States economist, was as much to point out that the future was unaffordable, not to suggest that we found ever more inventive ways to tax the current working generation to pay for it. We have to look at more ways to reduce liabilities, more than the glacial pace of change of the retirement age that is effectively the sole plank of our present strategy.

We have to be responsible adults. Budgets are not unlimited, resources are not infinite. If every area of expenditure is described as ‘demand-led’ and therefore exempt from restraint, then restraint simply ceases to exist. If every budget is an exception, there is no rule.

Some of the responses from colleagues have been Pavlovian. Take pensions. No one is proposing pension cuts. The question is whether demographic pressures automatically justify allowing total public expenditure to grow faster than inflation, or whether government should manage those pressures alongside every other demand on the public purse? Those are very different propositions. Budget-setting is budget-setting, it’s not rocket science. If it requires two major committees (P&R and ESS) to set their budgets jointly, so be it. Demographic pressures strengthen the case for better financial management – they do become a justfication for removing it.

There is another assumption that deserves to be challenged. We treat social security as though it somehow sits outside normal fiscal discipline. I do not accept that distinction. Whether government raises another pound through income tax, GST or compulsory social security contributions, it is still asking the same public to contribute another pound. The label changes – the burden does not. Particularly since following zero-10, we seem to have stripped away most of the characteristics of social insurance and our scheme comes more and more to look like a general taxation.

More importantly, however, I believe some critics have misunderstood what this amendment is actually trying to achieve. It is not really about a three-year spending cap. It is about changing the culture of government.

For too long, when government faces financial pressure, the default has too often been to ask taxpayers for more money. I believe the first instinct should be to ask a different question. Can government itself do better? Can services be delivered differently? Can productivity improve? Can existing resources be used more effectively before asking islanders to contribute more? And the $64m. question that never seems to be on the table – can lower priorities make way for higher ones?

Those are not ideological questions. They are the questions every family, every charity and every successful business asks when costs increase. Government should ask them too. None of this means government should stop investing in essential public services. Some areas will inevitably require more funding over time.

Asking taxpayers to contribute more should never remove government’s responsibility to demonstrate that it is managing public money as effectively as possible. Ultimately, this debate is not really about GST. Nor is it really about my amendment. It is about trust. If government is asking islanders to accept the biggest change to our tax system in decades, it should also demonstrate that it is prepared to change the way it approaches public spending.

Nor will my amendment solve Guernsey’s long-term fiscal challenges. It was never intended to. It simply asks the States to demonstrate, over a meaningful period, that changing its own behaviour matters just as much as asking taxpayers to change theirs. A permanent shift in taxation should be matched by a permanent change in the culture of public spending. Tax reform must be a two-way bargain.