Comment in reply to the Proposition P.19/2008 Goods and Services Tax: Restriction on Amendment of 3% rate.

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A decision made (18/02/2008) regarding: Comment in reply to the Proposition P.19/2008 Goods and Services Tax: Restriction on Amendment of 3% rate.

Decision Reference: MD-TR-2008-0021
Decision Summary Title:	Goods and Services Tax: Restriction on Amendment of 3% rate		Date of Decision Summary:	13 February 2008
Decision Summary Author:	Ian Black - Treasurer of the States		Decision Summary: Public or Exempt?	Public
Type of Report: Oral or Written?	Written		Person Giving Oral Report:	N/A
Written Report Title:	N/A		Date of Written Report:	13 February 2008
Written Report Author:	Ian Black - Treasurer of the States		Written Report : Public or Exempt?	Public
Subject: Comment in reply to the Proposition P19/2008 Goods and Services Tax: Restriction on Amendment of 3% rate.
Decision(s): The Minister approved the comment on P19/2008 on Goods and Services Tax: Restriction on Amendment of 3% rate for presentation to the States on 19th February 2008.
Reason(s) for Decision: There was a need to draw the attention of States members to some of the unsound economic reasoning in the report and that to agree P19/2008 on the basis of the reasons put forward would simply leave a route open to poor economic management.
Resource Implications: There are no financial or manpower implications for the States.
Action required: Forward the comment to the States Greffe and request that it be presented on 19th February 2008.
Signature:		Position: Senator Terry Le Sueur, Treasury and Resources Minister
Date Signed: 18th February 2008		Date of Decision: 18th February 2008

Comment in reply to the Proposition P.19/2008 Goods and Services Tax: Restriction on Amendment of 3% rate.

The rationale for this proposition appears to be that if the exceptional economic performance of the past two years is sustained then it might be possible to reduce the rate of GST, to say 2%. The economic justification for this proposition is therefore flawed.

Economic growth in 2006 (the last year for which we have information) was nearly 7% and we know that in 2007 unemployment has fallen to a record low of 1.4% and that participation rates of people in employment have continued to increase above already high rates.

The economy has therefore been through a very strong phase and these are the times when there is likely to be very little spare capacity in the economy. If the economy maintains this momentum into 2008 and 2009 as the Deputy suggests it would be a serious case of economic mismanagement to reduce GST below 3%. This would just add to demand in the economy and inflationary pressure at a time when we have already seen inflation increase due to factors from outside the Island – oil and food prices. We would all be less well off as a result as higher inflation makes Islanders and our businesses worse off.

Furthermore, members should be reminded our 3% GST rate will be the lowest in the world and that a reduction to 2% or less would reduce the yield in proportion to the administrative cost.

The aim of the States should be to keep the rate of GST fixed at 3% indefinitely and avoid either increasing or decreasing the rate in response to short term fluctuations in the economy. We have a new Stabilisation Fund in place that allows us the flexibility to alter policy in the face of an economic downturn and to put money away in the good times. The Fiscal Policy Panel have been appointed and will report this year on what tax and spending policies are right in response to the economic conditions facing the Island. We should not be making knee-jerk policy decisions in the meantime.

Accordingly it is strongly recommended that the States rejects this proposal and confirms its commitment to maintain the rate of GST at 3% for the foreseeable future.