draft BUDGET 2012
(P.159/2011): amendment
(P159/2011 Amd) - COMMENTS
By the Minister for Treasury and Resources
Deputy Southern is proposing that the annual company return fee be increased from its current level of £150 to £265 from 1 January 2012, and personal income tax exemptions are increased by an additional 2.35% over the 4.5% proposed in the draft Budget.
The Minister for Treasury and Resources opposes this amendment for the following reasons:
- Consultation on increasing the annual company return fee was undertaken in the autumn of 2010.
- The overwhelming response was that increasing costs for local companies was not desirable in the current economic climate.
- In response, the basic ISE fee was increased instead of the annual company return fee.
- This allowed increased revenues to be raised from foreign-owned companies while protecting locally-owned companies.
- The Minister for Treasury and Resources continues to believe that the time is not right to increase costs for local companies.
- Following the doubling of the basic ISE fee from 2011, Jersey-registered customers of the finance industry now pay a minimum of £350 in Jersey. This is at a similar level or above the fees charged in our nearest competitors.
- Increasing fees as proposed would make Jersey more expensive than most of our key competitors including the British Virgin Islands and the Isle of Man.
- The potential damage that could be done to Jersey’s struggling businesses and to the Island’s international competitiveness would likely outweigh the additional benefit proposed in this amendment.
Comment
The annual company return fee is payable by every company that is incorporated and registered in Jersey. There are currently approximately 30,000 such companies. These companies are used for a variety of purposes, including:
- Holding property via share transfer and J-category property arrangements;
- Carrying on business in Jersey;
- As trading vehicles for charities;
- As vehicles for the clients of the financial services industry.
An extensive review into the level of fees charged to companies was undertaken in 2010. This was in response to calls from the States to consider whether there was any scope to increase revenues from these fees. The level of fees charged in Jersey was compared with the annual company fees chargeable in our main competitors. This exercise identified that there was some scope to increase fees without making the Island uncompetitive. A green paper was issued in June 2010 which proposed increasing the annual company return fee from £150 to £250.
The overwhelming response to the consultation exercise was that locally-owned businesses were strongly resistant to increases in their cost base in the prevailing economic climate.
It was therefore decided to increase the basic ISE fee, which is mostly payable by the clients of the financial services industry, instead of the annual company return fee.
As a result, the fee payable by Jersey companies remained at £150 while fees payable by clients of the financial services industry rose to £350. This increase made Jersey £100 more expensive than Guernsey and £10 less than the Isle of Man for this type of company. See below for a comparison of fees chargeable in Jersey against its key competitors:
| Annual return fee | Other fees | Total |
| £ | £ | £ |
Bermuda | 1,325 | | 1,325 |
Cayman | 485 | | 485 |
British Virgin Islands | 400 | | 400 |
Isle of Man | 360 | | 360 |
Jersey | 150 | 200 | 350 |
Panama | 65 | 195 | 260 |
Guernsey | 250 | | 250 |
Hong Kong | 195 | | 195 |
Luxembourg | 135 | | 135 |
Gibraltar | 45 | | 45 |
Ireland | 35 | | 35 |
Singapore | 10 | | 10 |
Switzerland | 0 | | 0 |
(Figures have been translated into sterling at May 2010 values except where fees have changed since that date. Fees for Luxembourg and Panama are at May 2010 levels.)
Increasing the annual return fee by the margin proposed by the Deputy would make total fees payable by local companies £265 and £465 for clients of the financial services industry. This represents a 43% increase for local companies and an 86% increase for international companies over a two year period. Jersey would become even more expensive than most of its key competitors, while also damaging its reputation for stability by increasing fees twice in two years.
The effect of this proposition would be to increase costs for local businesses at a time when trading conditions are already very difficult and damage the competitiveness of Jersey’s financial services industry. There is no evidence that the harm done would be justified by the marginal improvement for Jersey residents.
Financial implications
The Deputy suggest that increasing the annual company return fee by £115 to £265 would raise an additional £3.7 million in revenues. This ignores the reality that many of the companies registered in Jersey are clients of the financial services industry and as such have many choices about where to locate.
While it is less likely that a significant number of the companies currently registered here would leave as a result of the increase in fees, it could have a negative impact on the approximately 2,500 companies a year which choose to incorporate in the Island. With approximately 2,800 companies deregistering in 2010, Jersey is already facing a reduction in the net number of companies registered in the Island, and therefore a fall in revenues. This net reduction is not significant as yet, but could become so as increases in fees reduces competitiveness.
The Minister for Treasury and Resources urges Members to reject this amendment.
Statement under Standing Order 37A [Presentation of comment relating to a proposition]
These comments were late in distribution due to the Minister for Treasury and Resources having had limited opportunities to consider his response and to consult with the Council of Ministers, following the States' decision to sit in the week commencing 30 October 2011.
draft BUDGET 2012
(P.159/2011): SECOND amendment
(P159/2011 Amd.(2)) - COMMENTS
By the Minister for Treasury and Resources
The Minister for Treasury and Resources opposes this amendment.
Deputy Southern is proposing that the Minister for Treasury and Resources be requested to lodge a proposition in accordance with Article 4(3) of the Public Finances (Jersey) Law 2005 asking the States to agree to transfer £20 million from the interest on the Strategic Reserve Fund to the Consolidated Fund so that the Minister for Treasury and Resources will have sufficient resources to maintain appropriate Fiscal Stimulus measures to support the economy through 2012.
Comment
The Minister for Treasury and Resources recognises that the latest “On-Island” economic indicators and, particularly the latest global economic forecasts are disappointing. However, the Minister for Treasury and Resources remains confident that the three part plan to return to balanced budgets by 2013 remains the appropriate strategy. The 2012 Business Plan and draft Budget reinforce this strategy with no further increases in expenditure and no further changes in taxation.
This view is endorsed by the latest advice from the Fiscal Policy Panel in its October update report. The Panel recommends “the need to remain focused on phased fiscal consolidation and financial stability in the medium term”. The Panel also recommends that the States should avoid making decisions in the 2012 Budget that permanently reduce revenue or increase expenditure.
As well as broadly supporting the fiscal consolidation of the Council’s three part plan the Panel is also clear that “there should be no transfers into or out of the Strategic Reserve” at this stage. Despite the worsening of global economic forecasts, the Panel does not recommend that the Stabilisation Fund (or other new money) be used for further discretionary fiscal stimulus at this stage.
What the Panel does comment is that if the current economic conditions continue to worsen it may be appropriate to consider making the most of existing expenditure allocations and accelerating the profile of agreed capital projects where possible.
Ministers are currently working to identify schemes which could be accelerated in the existing capital programme, prioritised from the unspent capital balances and make best use of any further unspent balances from the current fiscal stimulus programme.
This funding will not move away from agreed States policies and does not propose or require a draw down of the Strategic Reserve. States policy is clear that that the Strategic Reserve is provided for significant structural change, not temporary, cyclical events.
The 2012 Business Plan also shows that a further £36 million will be employed, as planned in 2011, to enable the existing level of public services and capital programme to be maintained while tax revenues recover. This is the final phase of the automatic stabilisers provided from the Stabilisation Fund. Furthermore the improved balance on the Consolidated Fund at the end of 2010 will enable the small projected deficit in 2012 to be managed from current balances and public services can therefore be maintained.
It may appear enticing to some Members to support the use of the interest on the Strategic Reserve and leave the capital balance untouched. This would, however, ignore the fact that at a time of market uncertainty, low interest rates and rising inflation there is a danger of the Island’s key reserves being eroded in real terms. Increases in the value of the Strategic Reserve are now measured by how much the Reserve's proportion of the Common Investment Fund has increased. This amount includes both interest received and capital appreciation. Between December 2010 and June 2011 the value of the Strategic Reserve had increased by £14 million to £601m. Spending this appreciation in value would actually reduce the real terms value. It should certainly not be viewed as a “free” option without consequences.
If economic conditions continued to deteriorate and the States were advised that further funding was required for appropriate fiscal stimulus then the Minister for Treasury and Resources would have to consider how this could be funded. In the first instance, the £10 million balance remaining in the Stabilisation Fund could be used. However, the current advice is that any improvements in States finances should be used to increase the level of the Stabilisation Fund recognising the fact that most of the risks to the forecasts are on the downside.
Deputy Southern has, on at least four occasions previously, brought forward proposals to utilise the interest on the Strategic Reserve:
- P154/2006 - Stabilisation Fund – Rescindment
- P1/2008 - Millennium Town Park - Funding from Strategic Reserve (subsequently withdrawn)
- P113/2010 - Public Sector cuts and alternative taxation measures
- P157/2010 (Amd) - Expenditure Proposals for 2012 and 2013 and Draft Budget Statement 2011 (P.157/2010): amendment
and in 2 of the 3 Assembly votes has received 10 or less supporters. It is clear that the States consistently has no appetite to spend the Island’s Strategic Reserve. The Minister for Treasury and Resources trusts that this attitude will remain unchanged.
The Deputy’s views on use of the Strategic Reserve are not in line with States agreed policy and ignore the advice from the Fiscal Policy Panel. It is clear that no transfers from the Strategic Reserve or Stabilisation Fund are recommended at this stage and no new monies are recommended to be allocated to discretionary stimulus.
Financial implications
The amendment proposes that the financial implications are neutral and this is achieved by proposing to drawdown £20 million from the Strategic Reserve. The risks are that the £20 million is permanently removed from the Strategic Reserve and would be particularly inappropriate when £10 million remains in the Stabilisation Fund and could, if necessary, be used for appropriate Fiscal Stimulus in due course and if economic conditions deteriorate further.
The Minister for Treasury and Resources urges Members to hold to the principles they have long established through previous votes and reject this amendment and any use of the Strategic Reserve other than for the purpose for which successive generations have built it up. He is actively seeking alternative ways of maintaining fiscal stimulus for the economy during difficult times.
Statement under Standing Order 37A [Presentation of comment relating to a proposition]
These comments were late in distribution due to the Minister for Treasury and Resources having had limited opportunities to consider his response and to consult with the Council of Ministers, following the States' decision to sit in the week commencing 30 October 2011.
draft BUDGET 2012
(P.159/2011): amendment 3
(P159/2011 Amd(3)) - COMMENTS
By the Minister for Treasury and Resources
The amendment requests the Minister for Treasury and Resources:
- Part (b): To present a long-term tax policy to the States no later than September 2013 which supports the simplification of Jersey’s tax regime as set out in the draft 2012 Budget; and
- Part (c): Not to bring forward any further proposals to increase tax until a fully comprehensive and inclusive long-term tax policy has been agreed by the States.
Part (b): The Minister for Treasury and Resources has already committed in the draft 2012 Budget to prepare the principles of a long-term tax policy and to review those elements set out in the draft 2012 Budget statement. As such, he accepts the amendment, subject to a number of provisos set out below.
Part (c): The Minister for Treasury and Resources does not support this part of the amendment on the basis that:
- It is inappropriate for an outgoing States Assembly to seek to bind the ability of its successor to raise taxes for the first two years of its life;
- Given the current fragile economic position, it would be irresponsible to remove the ability of a Minister for Treasury and Resources to respond to sudden changes in the economic climate;
- If the States voted to reduce taxes in one area or to increase expenditure the Minister for Treasury and Resources could not increase taxes to compensate, forcing the States instead to turn to increased spending cuts over those already planned as part of the Comprehensive Spending Review, drawing on reserves, increasing Social Security or borrowing.
- Each of these would represent a change in current policy, which should be debated by the States after sufficient research into the impact.
- Under the medium-term financial plan, if the States vote to increase spending they must also approve a corresponding cut in expenditure or increased taxes. This amendment if approved would force the States to cut spending as the option of increasing taxes would not be available.
Comment
Part (b)
In many ways Jersey already has a long-term tax policy, on which the States has had the opportunity to vote on many occasions. Features of this policy include:
- A single low personal tax rate, with the effective rate rising as income increases.
- A simple company tax regime with an internationally competitive rate of tax while maintaining the ability to offer tax neutrality.
- A broad based system of GST with a single low rate as a result of a minimum of exemptions.
That said, it is recognised that aspects of the tax law have become complex, whether by intention or otherwise. There have also been many requests to the Treasury and Resources Minister to consider using the tax system to deal with social issues and there is no coherent policy on that.
The recently appointed Tax Policy Unit has been tasked with identifying the principles underlying Jersey’s long-term tax policy and from that to develop tax legislation to deliver those principles. Work on this has already begun, and preliminary indications are to be presented to the new Council of Ministers before the end of the year. As such, the Minister for Treasury and Resources considers it should be possible to present the States with a formal long-term tax policy by September 2013.
The Minister would however note the following:
- Accepting this part of the amendment does not imply a commitment to undertake another full-scale Fiscal Strategy Review (FSR).
- The Minister for Treasury and Resources does not consider that the reviews into tax policy which have been undertaken to date, namely the FSR and the business tax review, are in any way uninclusive or uncomprehensive.
- The 2012 Budget statement sets out the areas which are immediate priorities, and which the Minister fully expects to see through. However, changes in the international environment, global and local finances and other unforeseen events may lead to these priorities being reassessed. The Minister for Treasury and Resources of the day needs to have the flexibility to respond to changing circumstances.
- The 2012 Budget statement identifies those priorities that need to be reviewed. Having undertaken a full and thorough review, the Minister for Treasury and Resources must be able to act based on that advice in the best interests of the Island.
Finally, the Deputy suggests that a decision to increase GST is the “easy option”. She later notes that States Members are not experts in economics. However, States Members should be able to rely on the advice of those economic experts who have advised on the Jersey tax system during the FSR. Their advice was that that GST is the “best” tax from an economic perspective, in that it distorts economic activity the least and is least damaging to business.
Part (c)
The Minister for Treasury and Resources opposes this part of the amendment.
If adopted, this part would prevent the Minister for Treasury and Resources of the next States Assembly from raising taxes for at least the next two years.
It is not appropriate for an outgoing Assembly to tie the hands of its successor in this way. The future Minister for Treasury and Resources and the new States must have a free hand to act as they see fit.
Finances
If this part of the amendment were approved, the incoming Assembly would be unable to increase States revenues for at least two-thirds of its term of office, regardless of the economic climate then prevailing. The global recovery is fragile at best and a double dip recession cannot be ruled out, a point acknowledged by the Fiscal Policy Panel (FPP). Removing the Minister for Treasury and Resources flexibility to respond to sudden changes in our financial position would be dangerous for our short-term and long-term stability.
If the States voted to reduce taxes in one area the Minister for Treasury and Resources could not increase another to compensate. Effectively, any funding shortfalls would have to met through increased spending cuts, calling on our reserves, increasing Social Security or borrowing. There are difficulties with each option:
- Achieving significant spending cuts in the short term will be more difficult following the implementation of medium-term financial planning, since the States will commit to its expenditure for 3 years at a time.
- The FPP counsels against diminishing reserves at this time, and States policy is clear that the Strategic Reserve is provided for significant structural changes, not temporary events.
- The ability to fund shortfalls through increases in Social Security is limited, as funding is ring fenced for purposes set out in the Social Security Law. The only other option would be to reduce the cost of supplementation funded from central revenues.
- Jersey has resisted the temptation to borrow to fund current deficits to date. This is one of the reasons for the relative resilience of Jersey’s public finances during the ongoing global economic turmoil. Members will be aware of the difficulties faced by other territories, large and small, as a result of the public debt they carry. Borrowing to fund ongoing revenue deficits can quickly become uncontrolled debt.
Adopting any of these options would represent a significant change in States policy. A change of this magnitude should only be undertaken as a result of careful consideration and research. Adopting this part of the amendment would mean that if a Minister for Treasury and Resources needed to fund a deficit through one of the above, the change would be rushed, unconsidered, and with a minimum of reflection on the long-term impact for Jersey.
Under the medium term financial plan, if the States vote to increase expenditure they must also increase taxes or reduce expenditure in other areas to compensate. If this part of the amendment were adopted, the States would effectively be barred from turning to taxes and would be forced to reduce expenditure.
Financial implications
There are no immediate financial implications from adopting this amendment. However, if the States were to vote to reduce taxes or increase spending in one area, the Minister for Treasury and Resources would be prevented from increasing other taxes to compensate. This would lead to a fall in revenues.
The Minister for Treasury and Resources urges Members to reject this amendment.
Statement under Standing Order 37A [Presentation of comment relating to a proposition]
These comments were late in distribution due to the Minister for Treasury and Resources having had limited opportunities to consider his response and to consult with the Council of Ministers, following the States' decision to sit in the week commencing 30 October 2011.
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P.159/2011 Amendment. Comment
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