Sir, Budget 2016 takes a long term approach that is necessary to secure strong public finances for future generations.
It gives this assembly the opportunity to create a sustainable financial future and continue the process to a fairer taxation system.
This is not a budget that proposes sudden change but instead takes a carefully considered phased approach that lays the foundations for Jersey’s long term needs.
Budget 2016 proposes measures consistent with the aim of achieving fairness and sustainability in our public finances as well as supporting the Island’s economic, environmental, social and health policies.
Public finances
Sir, I begin today by setting the record straight about the state of our public finances.
Let me be absolutely clear. Our public finances are not in crisis and we are certainly not heading into the difficulties that some long-running critics of Jersey like to suggest.
We still have a very strong net balance sheet of £5.6 billion which is the envy of most jurisdictions – and that’s after the impacts of the global financial crisis that began in 2008.
The strength of Jersey’s public finances were once again independently confirmed as recently as late November of this year by Standard and Poor’s who reaffirmed our AA+ credit rating – the very highest that we could have been awarded.
There is of course the much discussed £145m potential shortfall in income over expenditure by 2019 (emotively described by some as a black hole).
It is not a black hole and the measures in this budget are not aimed specifically at resolving short term funding shortfalls. I’d like to put the £145m into context.
Firstly, it’s a forecast that will fluctuate. Secondly, it includes a choice to invest approximately £62m into new and improved services mainly in health and education
It includes, for the first time, depreciation of £55m so that future generations don’t have to deal with costs of what could otherwise be unfunded replacement capital works.
That leaves a core funding shortfall of £28m recurring by 2019 if we do nothing. But doing nothing is not an option.
Delivery of balanced budgets
If efficiencies and savings are not delivered to reinvest into our key priorities then not all the proposed investment will proceed as planned as we aim to deliver balanced budgets by 2019.
We are taking a responsible, prudent and transparent long-term view and that’s why we have included all potential costs and likely funding pressures into the MTFP. The full details of how we will fund them will be presented in the addition next June.
It’s a plan that will require change, reprioritising existing spending into key targeted areas of most need, cutting unnecessary costs or wastage and redesigning services. Not just redesigning services but considering the way that we deliver them and indeed whether some are better delivered by the private or third sectors.
Our focus is ensuring that every pound of taxpayers' money delivers the right services, in the right place and at the right price. Our detailed short, medium and long term planning sets us apart from many other places and was certainly a positive factor in Standard and Poor’s assessment of our fiscal strength.
Supporting the economy towards recovery
In recent years Jersey has had to react to the global financial crisis and part of that response has been the need to invest heavily to protect jobs and support the economy towards recovery.
This proactive strategy, supported by the FPP, has paid dividends as last year our economy returned to growth of 5% for the first time since the global financial crisis hit in 2008 and that’s even before interest rates rise.
Global factors which have an impact on our Island are not limited to economic issues. The impact of an ageing population challenges the sustainability of public finances in Jersey and most other countries.
Living longer may be good news, presenting society and individuals with new opportunities but there are costs associated.
These costs are ones to be borne largely by current and future working populations. It is important that we balance the needs of those of us who are lucky enough to live longer with the costs to be borne by current and future taxpayers.
This Council of Ministers and its predecessors have chosen to face the challenges of the ageing population head on.
We introduced the Long Term Care scheme to protect the vulnerable from the high cost of care in old age – and all of us from the potentially very high costs of that care.
Our senior citizens in Jersey have the certainty of knowing they will be looked after at home or elsewhere and that their life savings will not be wiped out in the process.
Equally, we have preserved the value of pensions compared to earnings growth and this has resulted in growth in pensioner incomes at well above the cost of living.
Quite apart from the significant investment in Eco-active that has insulated hundreds of pensioner households to reduce their energy costs helping them and the environment.
We are also targeting investment in our children – particularly those children who face the greatest challenges. This includes £11 million on early intervention services for children and investment to improve the educational outcomes for the more disadvantaged young people in our society.
In the long term, all these measures will improve equality and opportunity for individuals and benefit the wider community through improved standards of living, productivity and economic growth.
Investment in infrastructure
We must also not shirk away from the further important investment that will need to be made to the Island’s infrastructure.
While it may seem easier to put a sticking plaster on what we have and pass the bill down a generation, this is not the responsible thing to do.
The responsible action is to prepare now for the funding that will be necessary for future capital replacement of our assets by putting aside money today from the income we receive. That’s what we have done in the MTFP.
I’d like to turn now to another misconception: this time regarding our tax system and zero-ten.
There is a view of Jersey – a largely marginalised one – that lays our financial challenges at the door of the move to zero-ten and I would like to take a moment to clarify the position.
Firstly, the pressures that we face in our public finances are no different to many other jurisdictions, other than the scale.
Indeed, many countries are facing swingeing cuts to their public services and genuine austerity, in contrast we are in the fortunate position to be able to plan to make significant investment in improving key public services.
The dual impact of the global economic downturn since 2008 and the increasing costs of an ageing population can be seen the world over.
Jersey has weathered that storm well and is able to plan for the future in a way that other jurisdictions can neither contemplate nor afford.
But let me be absolutely clear, Jersey’s economy would have been seriously damaged had we not taken the difficult measures we have to ensure the continued success of our finance industry by moving to the internationally competitive position offered by zero-ten.
Economic growth has been – and will continue to be - driven by our flourishing financial sector and our increasingly diversified business services sector, much of it being driven by technology and innovation.
That growth has been enabled by the principles of our long term tax policy: that our taxes should be low, broad, simple and fair.
Economic outlook
I turn now to Jersey’s economic outlook. Globally, we have seen recovery over the course of this year. Continued improvement is anticipated but risks remain. Developments in the Euro-area and China still give cause for concern.
Jersey’s own economy returned to growth in 2014 for the first time since the global financial crisis that began in 2008. The financial services sector grew by 9% and growth was broadly seen across the rest of the economy as well. Tourism saw staying visitor numbers up, retail sales were up and employment hit a record level in June 2015.
Earnings have grown in real terms for the third year running. Jersey businesses continue to report increasing optimism through the Business Tendency Survey.
The Fiscal Policy Panel’s latest forecasts show that they expect economic growth to continue over the life of the MTFP. Inflation is currently very low – at 0.1% - but, ever conscious about the need to ease the cost of living pressures for Islanders; we will look to fully implement the recommendations of the OXERA competition review to ensure that markets work in consumers’ best interests.
The new Income Forecasting Group, largely based on actual data, has increased by 1.3% the latest forecast for general revenues to £673 million for 2015. How many other jurisdictions can say that?
However, using a prudent approach, the Group has taken a view that it would be premature to take all of this upside into its latest update of the forecast for the period to 2019.
Despite this approach and ignoring the upside in forecast for the current year, Scrutiny continues to express concerns that the forecasting is too optimistic.
Updated income forecasts
There can be no guarantees with forecasting, however, I am satisfied that the updated forecast does not represent an imprudent planning assumption from which to base our financial plans.
I am also pleased to note that the CSSP’s own professional advisor praises the work of the new Income Forecasting Group, pointing out that the quality of the analysis as being robust and, with the Taxes Office data, being likely to lead to significantly improved precision in the formulation of tax estimates.
This Budget reinforces the approach taken in the MTFP to lay the foundations for future economic growth and raise Jersey's productivity.
We have therefore maintained investment of £14 million in key areas which support economic growth, including employment schemes, financial services and the digital sector.
Further investment in education, growing our economy and continuing to invest in infrastructure reflects the advice of the Fiscal Policy Panel that we should continue to support the economy while global conditions remain fragile and until such time as our economy strengthens sufficiently.
This further reinforces the MTFP which earmarks a £20 million drawdown provision for economic growth and productivity projects that cannot be funded from existing resources and which can make a significant contribution to raising our economic performance.
Budget 2016 raises £1.8 million above the latest income forecasts of the Income Forecasting Group, and by 2019 will have the effect of raising £7.5 million.
This additional revenue offers important flexibility and will act as a safety net against income fluctuations.
It could also allow us to reduce the level of future charges, such as the planned health charge, as long as current income forecasts are achieved.
Efficiencies in the public sector
In addition, we have always been clear that we will drive the delivery of efficiencies in the public sector, ensuring that we can cut the costs of delivering public services before we introduce any additional new public charges.
The pace and scale of the public sector reform program will accelerate over the course of 2016.
All this year we have been looking at the organisation and asking ourselves "Do we need so many departments, can we simplify service delivery, and how can we be doing more or at least the same for less?"
Change is hard but it’s happening right now. We are reducing spending and improving efficiency. States departments saved 2% from their budgets in 2015, that’s £12m and we are still forecasting underspends in all departments. And Budget 2016 takes out a further £26m.
So far 102 staff have agreed to take VR which will deliver a recurring saving of £4.3m per annum.
On top of that, if we look at full-time equivalent posts, since February we have reduced 130 posts through more effective vacancy management.
As well as reducing staff numbers we are reviewing staff salaries to ensure they fairly reflect the jobs people are doing. We are simplifying staff policies and have reduced them from 70 to 31.
You can now pay your social security online, police officers are moving to mobile working and sports bookings will be online soon.
The Health Department has an impressive LEAN function that is reinventing services, improving the patient experience and cutting out unnecessary costs to reinvest in frontline services.
The public sector needs to be more productive so where and how we work needs to change as well. Our office modernisation program will bring most of our office staff together into one main government building which will improve efficiency and again reduce costs.
We have already started with Jersey Property Holdings, reducing its office space by more than 5,000 sq ft and customs have reduced by 3,000 sq ft. That’s better space utilisation and ultimately a cost saving.
Last weekend we co-located Economic Development, External Relations and Financial Services from three locations into one to improve output and reduce costs.
Online tax filing
In my own Department, plans are advancing to provide new technology for the Taxes Office which will give us the capability to integrate the collection of both taxes and social security contributions.
Our ambition is to provide Online Tax Filing for Islanders by the end of the MTFP period.
I would like to take this opportunity to thank Ministers and staff from across the States for their significant efforts so far in driving reform and delivering the savings we need – there is of course much more to come!
Budget measures
Sir, I will turn now to specific measures in this Budget, starting with some of the changes to exemptions and allowances.
These measures are based on the principles of fairness and affordability and that the measures are consistent with long term tax policy have been recognised in the report presented by the Corporate Services Scrutiny Panel advisors.
They are also aligned with our broader policies to support the most vulnerable members of our community.
To deliver against these principles we need to simplify our processes and address inequities that exist in the tax system. We all need to pay our fair share according to our means.
Currently, around 17,000 individuals and married couples and civil partnerships in Jersey pay no income tax at all.
Our relatively generous tax allowances mean that – in 2014 – the 40% of lowest-earning people contributed just 3% of the £354 million of personal income tax raised to fund Jersey's public services.
80% of Jersey taxpayers enjoy effective rates of tax ranging from 7% to 15% - well below the headline rate of 20%.
Our system of taxation is a comparatively generous one in relation to most other jurisdictions. However, given the known changes in demographics, improved health and life-expectancy, there are inconsistencies in our current tax system which can no longer be justified or afforded.
In addition they do not fit with the principles of a low, broad, simple and fair tax regime, as agreed by this Assembly.
Alignment of tax exemption thresholds
This Budget proposes the start of the gradual alignment of income tax exemption thresholds for people under 65 with those over that age. I will speak in detail about the rationale behind this measure during the amendment debate that will follow.
However, briefly I’d like to clarify that this measure will not take away the benefit from those 50% of pensioners who pay tax who currently enjoy it. Pensioners who don’t pay tax and who are on low incomes will also not be impacted at all by this measure.
This Budget sees further gradual removal of some remaining allowances still available to the Island’s 15% of highest earners who pay income tax at the 20% rate – this is without adjusting that headline rate of tax.
In 2016 we will start phasing out the standard child allowance and the additional person allowance. Both allowances will be removed from standard rate taxpayers gradually over the next three years. This measure will not affect 85% of taxpayers who are protected by the availability of marginal relief.
A married couple with one child under 16 would need a joint income of £106,000 before they would be impacted by this measure. A single parent household would need an income of £78,000.
The remaining allowance available to standard rate taxpayers who have children in higher education will remain in place for the time being while we fully explore the case and options for assisting Islanders with these costs.
A Ministerial oversight group is looking at this in line with the Chief Minister’s commitment to report back to this Assembly in the first quarter of 2016.
Access to employment is a clear priority for this Council of Ministers and we are exploring all areas to provide the support Islanders need to reach their potential in the work place.
Increase in relief on pre-school child care
We know that, for parents, the cost of child care can create barriers to working and while we look at the wider issues, we are raising the relief available on regulated child care for pre-school age children from £12,000 to £14,000. This measure will cost taxpayers £100,000.
In addition, we will maintain the maximum tax relief available on child care for older children at £6,150. About 1,600 marginal rate taxpayers claim relief to help with the cost of child care.
Finally, in the area of exemptions and allowances, we have proposed a reduction in the £1,000 tax exemption given on benefits in kind to £250.
This protects those who receive modest benefits but asking those in receipt of more generous benefit packages to contribute more. This further improves fairness between taxpayers.
The Taxes Office, in conjunction with the Social Security Department, will fully review the taxation of benefits in kind to ensure consistency.
We are also proposing that non-residents relief is removed from 2016. This will result in non-resident individuals paying tax at 20% on any income they generate from Jersey properties.
Mortgage interest tax relief
Sir, I turn now to the measures in relation to the way Jersey subsidises and taxes property ownership.
This Budget proposes the gradual phasing out of Mortgage Interest Tax Relief over the next decade.
We all – of course – want to help our loved ones onto the housing ladder if we can possibly afford to do so. But there is little justification today for the taxpayers of Jersey – many of whom rent property – to subsidise those who wish to purchase a property. It just isn’t fair.
Moreover, international benchmarking, research by the OECD and work by PWC for the Treasury conclude that MITR is inefficient and counterproductive.
It actually increases the cost of private-sector housing and potentially increases costs in the rented sector.
Some observers have criticised me for not undertaking specific research into Jersey’s housing market before embarking on this course of action despite the overwhelming evidence from elsewhere.
I repeat: Jersey’s housing market is not that different and the laws of economics apply here as well as they do in Guernsey, for example, where they are also phasing out the same relief but starting earlier than we are proposing.
However, more fundamentally, I believe it is no longer right to ask the taxpayers to subsidise house purchases, particularly if that subsidy increases house prices and thereby does not achieve its aim.
Notwithstanding all of that, I know that this Assembly remains sympathetic towards helping young Islanders onto the housing ladder.
Stamp duty
So with that objective in mind I propose to increase the Stamp Duty/Land Transactions Tax, the tax exemption available in respect of the registration of mortgage debts.
This means that anyone buying a home costing not more than £450,000 will be able to benefit from reduced rates of duty/tax on the registration of their mortgage.
By outlining clear plans for the future of MITR and by not starting the withdrawal until 2017 existing mortgage holders and potential first time buyers will be able to plan their finances accordingly.
The gradual withdrawal means that this measure will only affect a small number of taxpayers during this MTFP period.
Before leaving the subject of property related taxes, I did promise the Assembly that I would provide an update on last year’s Property Tax Review as part of the delivery of this Budget.
A summary of responses will soon be available online and, it is fair to say, the responses we received, while not numerous were heartfelt.
The message that we have received from those who responded was broadly, please do not radically reform the system, particularly in relation to Parish rates. It is a message we will heed.
We will continue the work that we are doing with rates assessors in highlighting areas for future improvement, including a better understanding of the Island wide rate.
However with the exception of the phasing out of MITR, we currently have no plans for the introduction of any new property tax.
Duty measures
Sir, turning to the duty measures proposed for 2016.
We are proposing a number of modest increases to duties for the coming year, all of which signal this government’s ongoing commitment to pursuing health, social and environmental policies.
Jersey has the highest per capita consumption of alcohol in Western Europe save only for Lithuania.
That, along with tobacco consumption, presents risks to Islanders health and wellbeing as well as rising costs to our healthcare services.
It is right therefore to maintain – and where necessary – increase the real value of alcohol and tobacco taxes.
- the duty, inclusive of GST, on a standard pint of cider or beer will increase by one penny
- strong beer and cider will see a 3 pence per pint increase, reflecting the potentially higher health risk they pose
- we are proposing a 2 pence increase on a bottle of table wine and the duty on average-strength spirits will increase by 90 pence per litre
- the increase in duty on a packet of 20 cigarettes will be 35 pence
- Jersey remains committed to meeting Kyoto targets and to protecting our natural environment and keeping Jersey’s air clean for future generations
Vehicle emissions duty
In this Budget we propose to modernise the way we tax vehicle emissions to incentivise the purchase of lower-polluting vehicles and to ensure that the polluter pays when they exercise their choice to buy higher-polluting vehicles.
I also propose to remove the discount given to hire car operators from 1 January 2017, giving them a full year to adjust the composition of their fleet of cars accordingly.
We welcome visitors with open arms – but we should not be encouraging them to pollute the Island they have come to see.
Taken together the changes to VED are expected to raise an additional £722,000 in 2016.
Business sector
Jersey knows the value of a healthy and growing business sector and we will continue to maintain an internationally competitive tax structure which encourages investment, growth and creates significant job opportunities, particularly for our young people.
However, I will take appropriate steps to address tax planning which reduces the amount of corporate income tax payable in the Island.
From the day of lodging the Budget – and subject to members’ approval today – we have taken steps to prevent the repayment of tax credits to companies taxable at the 0% rate, removing an opportunity previously available to foreign owned Groups to reduce the amount of corporate income tax paid in Jersey.
Changes are also proposed to the distribution rules in order to improve their operation.
The Taxes Office will continue to work with the tax adviser community to determine whether significant simplification of the rules can be brought forward in next year's Budget.
Long term approach to taxation
Sir, turning to the future I have indicated, this Budget is one part of an ongoing programme of work to develop a longer-term approach to our tax system.
An approach that needs to keep in step with our changing society.
Following the decision of this Assembly earlier this year to approve the preparation of legislation to allow same-sex marriage in Jersey, the Taxes Office has begun the work to prepare the income tax system for its introduction in 2017.
A number of initial measures are proposed in this Budget.
These include changing Wife's Earned Income Allowance and Child Care Tax Relief from the 2016 year of assessment so that they are given in respect of the second earner in a married couple regardless of their gender.
In addition, the department is working towards introducing the concept into the tax law of joint and several liabilities for the tax debts of married couples/civil partnerships.
Further amendments will be required in next year's Budget to ensure that the income tax system is both ready in time for the introduction of same-sex marriage and able to reflect the needs of the modern taxpayer.
To this end, I have asked the Taxes Office to bring forward options alongside next year's Budget for the implementation of independent taxation for the 2020 year of assessment.
This will outline the potential costs and benefits associated with a move towards independent taxation and must reflect any decisions made in preparing the income tax system for same-sex marriage.
The introduction of independent taxation must also dovetail with the modernisation of the Taxes Office's administrative procedures to ensure that they are efficient for both the Taxes Office and the taxpayer.
We will be making significant investment in modernising the Taxes Office computer systems, over the coming two years and proposing measures to simplify and strengthen the tax code to ensure that the Taxes Office is able to do the best job possible for Jersey by treating all taxpayers fairly.
As a result of our participation in numerous international tax treaties, an increasing amount of data will be available to the Comptroller of Taxes from overseas tax authorities and financial institutions.
I will propose similar measures to enable local financial institutions to provide equivalent data to the Comptroller. As a result the Taxes Office will more easily be able to detect error and evasion and to correct it more quickly.
In 2017 there will be a one-off Jersey Tax Disclosure Opportunity which will enable people who believe they may have been getting their taxes wrong to set their affairs in order before new data sources, new technology and new legislation make the detection of tax error and evasion easier - and before we increase the penalties and interest charges that may be levied on unpaid tax.
Capital programme
Turning next to the Capital Programme, which has not changed from that proposed in the MTFP.
Whilst the MTFP sets the total funding envelope for each year in respect of the capital programme, the actual schemes are proposed and agreed in the Budget process.
The 2016 programme includes funding for IT investment, which will be fundamental to improving efficiency within the States, providing the opportunity for changing our working practices.
Notable investment will be delivered in the Taxes Office, in improved HR systems and notably for the wider e government initiative.
All of these investments will support the aims of delivering a more innovative and lower cost government.
Consistent with the aims of delivering much needed investment in the island’s infrastructure, £10m is provided to enable the Transport and Technical Services Department to deliver the next stage of improvements to the current inefficient sewage treatment works, as well as to maintain the road and sea defence networks.
A further £2.5m is proposed to be provided for the replacement of vital equipment within the Health Service and £1.7m for the Refurbishment of Sandybrook Care Home.
To kick start the planning and feasibility phase for the proposed new Quennevais School, £1m is provided, with up to a further £39m estimated for 2017, to be confirmed in next year’s Budget.
The total of the capital projects provided for in Budget 2016 is £26.7m.
Conclusion
In conclusion Sir, and perhaps rather unusually, I’d like to quote from the comments made by the Corporate Services Scrutiny Panel’s professional advisors CIPFA, in the panel’s report on the budget. The advisor said:
“The relevant 2016 budget proposals achieve improved alignment with the principles of the long term tax policy principally through equitable simplification and set the foundation for some measured additional tax revenues over time. In respect of meeting those objectives we would commend the approach now taken.”
I thank them for their positive comment
This Budget fully supports the Medium Term Financial Plan agreed by this assembly.
It further recognises the absolute necessity of building sustainable public finances as one of the priorities in the Strategic Plan also approved by this Assembly.
It begins to provide some of the much needed flexibility that we will need over the period of the MTFP.
It clearly recognises the financial challenges the Island faces in a rapidly changing and highly competitive global environment.
It seeks to balance the need for short term fiscal support to maintain and build on the economic recovery with longer term policies to underpin economic growth, diversification and job creation.
It brings together our stated policies on health, on education, on housing and on reforming the public sector but also takes measures which will achieve our goal to develop our tax system so that it is simple and more equitable.
This Budget is about the future, it’s about some difficult decisions today that will ensure a safe, secure and affordable future for our grandchildren and future generations
I commend this Budget to the Assembly.
gov.je