22 October 2010
Ladies and Gentleman, we stand today at a crossroads. We are emerging from the deepest global recession since the second world war.
While we have more than £560m in our strategic reserve, no debt, and - compared to most nations - strong public finances, the downturn has left us with a projected fiscal deficit of at least £100m per year, which must be tackled.
We are facing this deficit for 2 reasons. Firstly - the global recession has reduced our tax revenues, particularly those from the financial services sector. Forecasts show that this is unlikely to be quickly reversed, mainly due to low interest rates which reduce banks’ profits and therefore our tax revenue.
Secondly - the effects of the recession have been exacerbated by the year on year increase in States spending. Comments continue that this deficit has been caused by the introduction of 0/10. I want to make it clear that the problems we currently face have not been caused by the introduction of Zero / Ten. These Zero / Ten provisions were introduced to restructure our corporate tax system in a way which meet international standards and preserved our financial services sector .
After the savings and tax measures which I am going to outline today, it is planned to run a deficit of £55 million next year and £18 million in 2012. This will give time for the economy to return to growth before the Island returns to balanced budgets in 2013 and beyond. By the end of next year we will have spent £158 million of our reserves on supporting the economy, maintaining key services and keeping people in work through a Fiscal Stimulus programme.
We will have used money set aside specifically to shelter the economy: this represents a substantial use of our savings to weather a period of economic downturn. I recognise that some would urge us to turn at this crossroads. It is my view, and that of the Council of Ministers, now would not be the time to spend more of our savings.
However, if economic growth does not materialise in the next few years, it might be time to consider a different response to what could, by then, rightly be described as a serious decline in the economy. As difficult as the economic downturn has been, that is not what we are facing now. In my view, it would neither be responsible nor effective to propose spending even more savings to fund consumption.
I have also listened to the arguments in favour of borrowing and concluded that there is little difference between the use of the Strategic Reserve and borrowing.
Borrowing would also reduce the States’ net assets and whilst I am not against borrowing for funding capital investment - it should not be used to hide an ongoing mismatch between the amount we spend each year and our income.
Borrowing for consumption is not sustainable - it would be like borrowing to fund annual household expenditure rather than to buy the house itself. This is the kind of fiscal ill-discipline which has caused many of the problems faced in the developed world including the UK.
As difficult as some of the measures contained in this budget are, future generations will thank us for prudent and stable public financial management.
Future generations will be grateful for the difficult, but necessary, decisions that we are now called to make.
Today, I am presenting what the Council of Ministers believes is the fairest and best balanced way forward for Jersey. And Ministers aren’t insisting on balancing the budget for its own sake, but because it is necessary for our future economic prosperity and job creation.
Families understand this, businesses understand it and I hope States Members will accept this when they vote on the Budget in December.
Ministers' strategy
We all want to see an education system that prepares our young people to reach their potential in a competitive global marketplace
We all want to develop a 21st century health system that is efficiently run and securely funded.
To maintain the services that matter to people, the Council of Ministers wants to take action now to ensure those services are properly funded and efficiently delivered for the long term.
In March we set out a clear strategy to deal with the gap between spending and income.
Firstly - a comprehensive spending review: a States-wide cost reduction programme designed to protect key services, while also driving a change in our culture of financial management.
Secondly - economic growth, to create good jobs for islanders, to increase business profitability and generate more tax revenue.
Thirdly – a review of our existing tax regime and, where appropriate, increased taxes to fund investment in a way that is both fair and supportive of economic growth.
A Budget for difficult times
The Budget I am proposing today has 2 parts:
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it fixes a limit on States spending for the next 3 years and a minimum savings target of £65m to be delivered by 2013
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tax raising measures for next year and intended increases for 2012 and 2013
A budget for these difficult times – dealing first with spending and savings, then taxes; reflecting the clear message from a majority of States Members during the recent Business Plan debate.
Also, many islanders made it clear they wanted a higher savings target than the initial £50 million. The Council of Ministers listened and agreed a new and challenging savings target - £65m to be delivered by 2013.
Comprehensive Spending Review
At the start of the spending review each department was asked to propose savings of 10%. With the help of 7 independent reviewers, who provided valuable input into four reviews of the major departments, all departments have played their part in meeting the target.
It is important to remember that the spending review is not just about savings. It as designed:
The review has highlighted many innovative ideas and it is encouraging that staff from across the States are now thinking differently. Of the many proposals included in the documents released today, is the proposal to merge the management of the Fire and Rescue and Ambulance Services to improve efficiency and resilience and build on an already close working relationship between two services. The proposal would also deliver a one-off saving from the 2 services working from one site.
There is also a proposal for much closer cooperation between Highlands and Hautlieu to reduce duplication and improve student choice.
Departments like Planning and Environment and Economic Development intend to reduce their accommodation requirements, move to cheaper smaller premises to save on support services and provide a better service for customers and tax payers.
A mereger of services like Jersey Enterprise and the independent Jersey Business Venture would provide a single, third sector agency to support businesses.
All these proposals are examples of a significant change programme which together will deliver a total of £42m savings from departments by 2013 - all of which are published today.
Staff costs
It would be unrealistic, in an organisation that spends more than 50% of its budget on staff, not to look at employment costs.
We are now finalising the Voluntary Redundancy Programme- it is likely that that over 70 will be accepted and reduce expenditure next year by over £3 million.
An independent review of staff terms and conditions, which is published today, has identified potential savings, including pensions, of between £35m and £42m.
The Council of Ministers has set an initial target of £14m to be delivered by 2013, including the reform of the public sector pension scheme.
As a good employer - staff and unions will have the opportunity over the coming months to shape which savings options are implemented within 3 years.
We will then continue to work together to deliver further savings after 2013.
Buying goods and services
We have already said that the way the States buys goods and services is an important area for spending reduction
A review of procurement has identified savings of £6.5m which can be made by 2013 - by introducing new processes which will allow the States to negotiate lower prices. The report, published today, fixes this target as part of the spending limits.
An in-depth review of Court and Case Costs – an area which has seen big increases in spending in recent years – has found that the States should, and will in future, negotiate to reduce the cost of court cases.
User pays
All departments were asked to consider restructuring charges for their services. New 'user pays' options could not be submitted as part of the 10% savings proposals, however, there are cases where it would be appropriate for the user of a service to pay for it rather than the taxpayer.
After careful consideration the Council of Ministers is bringing forward a contribution of more than £2 million of specific 'user pays' charges – to help meet the £65m target. These are also published today.
This spending review is about more than cost cutting – it is about refocusing the public sector
Growth
All departments were asked to submit their investment and growth needs for the next three years and these proposals are also published today.
They include, over and above the existing commitment of 2% real growth for Health and Social Services, additional funding for extra consultants, doctors, midwives and nurses.
Education Sport and Culture will receive additional funding to invest in vocational options for school leavers, in adult literacy and to expand locally provided higher education.
Taking together proposals for savings, 'user pays', investment and growth, the net reduction in departments’ budgets ranges from 3% to 13%.
Capital spending
We are also announcing capital spending proposals for 2012 to 2014.
- £49 million in 2012 and £46 million in 2013 - including extensive social housing funding - which after property disposals and other sources requires net funding of £14m and £19m respectively
- An additional £9m investment in Health
- £4 million for highways
- £2 million for sewers
- £1 million in sea defences
- Funding for the Philips’ Street Shaft Phase 1, to complete St Helier flooding prevention
If we are serious about savings, we have to ensure that we protect essential services - all savings will be phased in over three years.
Economy
We must ensure that enterprise can flourish and that the skills to underpin growth and provide job opportunities are developed effectively, whether in traditional sectors like construction, tourism and agriculture or in emerging sectors like e-commerce and intellectual property.
The week before the Budget debate, the States will be asked to approve the first phase of our new intellectual property legislation – designed to develop a new, high value, high productivity sector to complement financial services.
While Economic Development is diversifying our economy, we should not be in any doubt that the economic prosperity of the Island is inextricably linked with future of the financial services sector - banks, trusts, funds, and the cluster of businesses which, between them, employ more than 12,500 people.
It is a sector that pays for a large proportion of our public services and I am proud that we provide one of the best regulated financial services jurisdictions in the world.
This is not just my opinion, nor just that of the Council of Ministers. It is the opinion of the IMF, the OECD, the UK Treasury and many other global institutions – we have a world wide reputation for excellence and we should be proud of it.
It is essential that we continue to diversify into emerging markets like the Middle East, China and India. I am optimistic that we have a very strong future for financial services.
Skills training
Of course, growth and diversification will not happen without the most fundamental commodity – skills.
The work of the Skills Executive is encouraging increased investment in skills & training.
Jersey needs to up skill, innovate and legislate to capture new opportunities.
Fiscal Strategy Review
I now turn to the Fiscal Strategy Review and proposals for taxation for next year and in subsequent years.
In making budget proposals today, I have listened to the views of more than 1,000 people who responded to the consultation on Personal Tax.
I have paid close attention to the views of Islanders, businesses, organisations and States Members.
I recognise there is a clear disparity within the population between those who feel that a higher rate of tax will be fair, and those who think it would seriously damage our economy.
Those who favour a higher rate of tax believe we can tax the better-off significantly more, without any impact on the Island as a whole. This fails to recognise the mobility of international business.
If business moves elsewhere, this would result in a loss of jobs and a loss of tax revenue, leaving a higher tax burden for the rest of us.
The Council of Ministers has concluded that 20% has formed one of the island’s key elements of stability and economic success for more than 60 years.
I believe the States Assembly should remove any uncertainty over one of the cornerstones of our stable taxation system and send out a strong and powerful message that Jersey will maintain the 20% rate.
However, there are other ways to deliver a fair tax package where the better off pay more, without having significant unintended economic consequences.
For that reason, I am asking the Social Security Minister to bring forward proposals in 2011 to introduce a 2% flat Social Security charge on incomes above the Social Security cap, which next year will be just over of £44,000.
A fairer alternative than simply lifting of the cap, it is a supplement that would be paid by both employers and employees from 1 January 2012.
This measure will raise approximately £16m per annum and is being announced in advance to give employers and employees the maximum amount of time to prepare.
It represents a significant step towards making the Social Security fund self-sufficient.
It forms part of a series of fiscal measures which, taken as whole, meet the requirement to deliver a fair package
I will also be exploring, with the Social Security Minister, ways in which income for Social Security purposes could potentially be more widely defined. I will also investigate anti-avoidance measures for the existing regime.
Indirect taxes
The consultation on personal taxation set out two fund-raising measures that would have minimal impact on the economy - GST and property rates.
Property rates are low in Jersey - but following discussion with the Comite des Connetables I have concluded that a proposal to triple the level of property rates would not be appropriate. It would be too difficult to protect people on low incomes and I have therefore ruled out such an increase.
The advice I have received, including from the Fiscal Policy Panel, is that GST has a number of merits as a fiscal measure: not least that it does not undermine the competitiveness of the economy and we have measures which enable us to protect people on low incomes.
GST
For this reason, the Council of Ministers and I have concluded that GST should form part of the today’s budget.
It is proposed to increase in GST from 3% to 5% - but this increase will be deferred until June 1st 2011.
There have been representations that GST is regressive. The UK’s independent fiscal authority, the Institute for Fiscal Studies, concludes that VAT is progressive. If we added a similar assessment for GST calculation, it comes closer to being proportional, as opposed to regressive.
However, in the interests of fairness I propose that all people on Income Support will be compensated, just as they were when GST was introduced.
In addition, the GST bonus will be enhanced for those who do not receive Income Support but who earn less than the tax threshold.
In a full year, the amount raised by an extra 2% on GST will be approximately £30m, minus nearly £2 million for the cost of GST compensation.
Impôts
I am also proposing that alcohol duties should be raised across the board by 6.7%, the rate which was rejected in last year’s budget debate.
In addition, tobacco duties are proposed to rise at the higher rate of 11.1% - equivalent to 35 pence a packet.
These 2 measures not only raise revenue, they also support the polices of the Health and Homes Affairs departments' policies.
I am proposing that fuel duty should rise by 2 pence from 1 January 2011 - that’s half the rate proposed last year.
And I am proposing to increase higher rates of stamp duty (and Land Transactions Tax) on properties valued at over £1million and £2 million. I am proposing to defer this change until 1 June 2011.
Rather than raise a duty on marine fuel and following discussions with the Minister for Economic Development, I propose that the Harbours department provides an additional return of £200,000 per year.
I am also proposing that the profits from exploiting land and importing oil are subject to tax at 20% as are other utility companies.
Finally, I am proposing that income tax exemption thresholds increase in line with average earnings growth, helping taxpayers on lower incomes.
1(1)k Review
In my Budget last year I said I would commission an independent review of the 1(1)(k) regime and I have said I would review the Tax Function to maximise efficiency and ensure all taxes due are properly collected and paid.
I will outline recommendations on both of these areas in the Budget speech on 7 December.
Business tax
The review of our Business Tax regime is continuing, and we are awaiting the conclusion of the EU Code of Conduct assessment of 0/10.
As part of the review I remain committed to bringing forward ways of recovering the corporate tax revenue that was lost from UK business who trade in the Island. However, as the States agreed, it would be imprudent to make any changes to the corporate regime in advance of the of the EU Code of Conduct assessment.
I look forward to brining this to a conclusion within the next few months.
Following consultation on Company Fees, the Economic Development Minister and I have listened to the responses from local business, and given the challenges of the economic situation, we are not proposing to increase company fees.
Instead I propose to increase the basic ISE Fee charged to international companies, raising approximately £3 million.
Tax package
As I said at the beginning, we stand today at a crossroads, and it is important for us to take the right path.
It may not be the easiest or most populist path, but the path that I am outlining will safeguard Jersey’s future and secure the long term viability of our island.
This Budget is a key part of a long-term strategy to ensure that our public services are appropriate to the needs and size of our Island – and are delivered efficiently, effectively and for the right cost.
This package of budget measures, taken together, are fair and proportionate – affecting higher earners more than the less well-off.
This package of measures is designed:
- to minimise taxes paid by hard working islanders so they can keep as much as possible of what they earn, to spend on their priorities and choices
- to allow businesses the freedom to invest and innovate, to grow and create jobs
- to build Jersey’s reputation as a well-regulated, stable, international finance centre
It is a budget that will return our finances to balance budgets by 2013.
I commend it to the Island and to States Members.
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