Today, on Children in Need day, Guernsey’s new Treasury & Resources Minister has released the Budget for 2013, which will be debated in a special sitting of the States on 12 December. One or two of you may recall the ‘Island in Need’ headline from an earlier Budget, but given that the basic message is the same as the last 10, I make no apology for that.
We knew as early as 2002 that the likely, indeed necessary, strategy to protect what many see as our key industry would result in reduced corporate tax receipts. The plan to deal with the deficit by cutting spending and growing the economy was at least understandable if also over optimistic for years up to 2007. But from 2008 it has been clear that we would not see the sort of growth anticipated previously, and that there would need to be another way. We have yet to see that through the Budgetary process. And the experience of other countries is clear; you cannot cut your way to growth.
Public spending has not been reduced as much as had been hoped for. We continue to spend more than we earn, this last year to the tune of £31m, after capital allocations and transfers. The plan is to reduce this for 2013 by £14m, but we continue to have a deficit, a position that cannot be allowed to go on forever. But what measures are included in the Budget?
The usual suspects have been targeted, but for alcohol, fuel and property the increase of 3 per cent is in line with inflation. Smokers will have to pay more, with a proposed increase in duty on tobacco of 6 per cent. Personal allowances are to be increased in line with inflation, which will help pay for the increases.
Homeowners will be hit by the proposed phasing out of mortgage interest relief by 2020. As the first step in this process there will be a reduction in qualifying mortgages from £400K to £350K from 1 January 2014. The Minister considers this a subsidy of a few by the many that cannot be justified. But the day after a further increase in house prices was announced, those struggling to get on to the bottom rung of the housing ladder may feel differently. Whilst creating artificial ‘hurdles’ produces its own difficulties, perhaps a change of focus to the value of the property rather than the size of the mortgage would have been better?
On the corporate front the 10 per cent band under the zero 10 regime is to be expanded, ostensibly to offset the removal of the deemed distribution provisions, which in turn was required in order to keep zero 10. The Island does need to keep its zero product. We do need to raise revenues, and some expansion of the 10 per cent band was inevitable.
The 10 per cent tax rate will be extended to licensed fiduciaries, insurers (in respect of domestic business), licenced insurance intermediaries and insurance managers. There needs to be more clarity as to what this actually means for those potentially affected by it which should be in the draft legislation and for insurers we assume this will follow the GFSC categorisation. However, by excluding the extension of the 10 per cent rate to funds and related service providers, making Guernsey ‘the home of the fund’ is to be welcomed. We do need to look to grow and this, combined with maintaining the general rate of zero, should enable the Island to maintain its position at the forefront of the financial services industry, whilst making a contribution to addressing the deficit.
The Budget includes a proposal to establish a Strategic Development Fund with an initial sum of £3m. Apparently this will fund significant strategic policy objectives approved by the States. If this is used in growing the economy it should be positive.
However, overall little has been done to address the deficit in the Budget and this is the third Minister at which this charge can be levied. We need to do more than look to cuts in spending we seem unable to deliver and it is interesting that we do not blink at paying 20 per cent UK VAT in some of our local shops. Yet without any local tax on consumption, unlike any other place I can think of, we all feel we pay too much for the goods and services we buy already.
The Budget Report notes the shift of the tax burden to individuals following the introduction of zero 10. Therefore next year will see a widespread review of taxes and duties charged on Islanders, with a view to providing greater equity in the system. That is perhaps one reason why the steps in the Budget are limited. However, with the general acceptance of the need for a main corporate rate of zero, and a difficult economic environment, that will be a challenge.
The Minister considers this Budget to be fair to all, with no undue tax rises placed on any of us. It might also prove to be unfair on all of us, some more than others, if yet again we have put off making difficult decisions in the hope that the problems facing the Island’s finances sort themselves out. We do not want Guernsey to be an Island in need.
Graham Parrott, Partner – Tax, Ernst & Young LLP
Category: Finance & Business