Treasury Minister's Budget Speech 2014

​Sir, today’s Budget debate is taking place at a time of cautious optimism.

Our Budget today has been designed to put Jersey in an even greater state of readiness to take full advantage of the gradually improving global economic conditions, for the benefit of every Islander. It is set within the context of the States’ Medium Term Financial Plan.

I’m delighted with the decision of this Assembly to move to three-year budgeting for spending and income.

The UK economy has been growing

Against this global backdrop, the OECD has said that the current expansionary stance of UK monetary policy remains appropriate given the degree of spare capacity in the economy.

If current trends continue the normalisation of interest rates could start at the end of 2015.

In its latest Inflation Report the Bank of England says that:

• “recovery has finally taken hold”
• and that the UK economy “is growing robustly as lifting uncertainty and thawing credit conditions start to unlock pent-up demand”

Although like the OECD they recognise that: “significant headwinds — both at home and abroad — remain.”

Jersey’s economy

I am pleased to report that the latest results from the Business Tendency Survey show that most of the indicators have improved over the last year. In particular, business optimism is the most positive since the survey began in 2009.

Last week the chief executive of Jersey Finance said to me that local business volumes are beginning to replicate the upturn in business confidence reported in the City. That is encouraging news.

It is also encouraging that average earnings growth this year across the economy was 2.2%.  This is the first time in four years that it has exceeded inflation, and it was also higher than in 2012.

Inflation has fallen sharply this year with RPI at 1.2% in September - close to historic lows and well below comparable measures in the UK.

The Fiscal Policy Panel recognised in their annual report a moderate improvement in the economy, and revised upwards its forecasts for 2013.

However, the Council of Ministers recognises that this improvement does not reverse the squeeze there has been on Islanders’ income in recent years.

That is why this Budget reduces the marginal rate of tax from 27% to 26%. Today’s Budget offers a tax cut to local people; in fact 84% of taxpayers will benefit.

I have already touched on the risks that the global and UK economies are still facing.  As a result we cannot take anything for granted in terms of our future economic performance.

The Fiscal Policy Panel are clear – significant spare capacity will remain in the economy over 2013 and 2014, suggesting that additional fiscal stimulus could be effective.

Sir, that is why this Budget delivers a further fiscal stimulus in 2014 that will help particularly our local construction industry in particular.

Jersey’s financial position

It is worth taking a moment to remind ourselves about the extent of the fiscal stimulus that we have provided to the economy in this year in particular with the additional investment in housing and the plans for next year.

Next year further capital allocations of £89 million are proposed. Not only will this capital spending deliver significant support to the economy but we will also deliver investment in key services such as health, housing and liquid infrastructure.

There are pressures on the financial services industry in Jersey

The challenges the finance industry has faced in the recent crisis years have come both from the economic pressures and from changes in the regulatory framework.

Nearly every global financial institution across major markets has been affected in some way, either by regulatory issues or by very large investor losses.

Although Jersey has also suffered, the issues we have faced have been relatively modest in comparison with other jurisdictions, and constrained in comparison to the global experience.

There are many reasons why we have a successful finance industry, well trained staff, good infrastructure, airline and also an effective reliable judicial system but I want to use this opportunity to recognise and thank our own financial services regulator and supervisor, the Jersey Financial Services Commission, for their work over recent years. Through their prudence and judgment we have avoided the worst of such losses and failures here.

They have steered the Island through these turbulent recent times with skill and fortitude in very difficult circumstances. At times their prudent approach has been questioned and certainly not always been understood, but ultimately the results have been positive.

I would also like to thank the outgoing Chairman of the JFSC for his contribution to the success of the organisation. Looking ahead we can have every confidence that the JFSC will continue to achieve positive outcomes for us as we enter more buoyant economic conditions.

Alongside forward planning for the States’ finances, we have been forward planning to create the right conditions for the future growth of financial services.

It has recommended plans for developing the trust and fund sectors, along with a much clearer focus on our target markets and future planning.

Taking action to support the finance industry: Jersey Finance promotes links with the Middle East

In addition to developing this evidence base, we have been taking practical steps at a government level to promote the finance industry.

We have now written to all of the leading chief executives of UK and European financial institutions.

We have met and briefed a significant number of the leading bankers and financial executives in the UK so as to convey the message that Jersey is an important source of business for the UK economy.

Jersey Finance has focused promotional efforts on the key strategic markets of the Middle East and Far East and Commonwealth.

As a result, the current value of banking deposits generated from the Middle East remains strong at 17.5%.

Our relationship with the UAE goes from strength to strength.

In Washington, I was pleased to have my first meeting with the newly appointed Minister of Finance of Qatar which was extremely productive and I am looking forward to furthering this relationship in meetings in Doha next Tuesday.

Next year we can also look forward to a number of London-based, Middle-Eastern ambassadors visiting Jersey.

I would like to take this opportunity to recognise the effective work of the Minister for External Relations and his team in supporting these developments.

Taking action to support the finance industry: Jersey Financial Services Commission works with the alternative funds industry

Our more traditional business markets of mature Europe and the UK are showing encouraging signs, with the UK returning to growth in 2013 after a flat performance in 2012.

Jersey now has a legal, tax and regulatory framework which will help the Jersey fund industry to grow.

The flexibility offered in our two-tier approach to Alternative Investment Fund Management Directive has encouraged enquiries from hedge fund managers interested in relocating to Jersey.

This is the kind of high value, low footprint business that we want to encourage.

Taking action to support the finance industry: government commissions Capital Economics Report

The commissioning of the Capital Economics Report documented for the first time the value of Jersey to the UK in supporting over 180,000 jobs and providing approximately £9 billion to the UK economy.

The Chief Minister’s attendance at the G8 Summit was also a key turning point for the Island’s reputation in the corridors of power at Westminster and throughout the City.

Our message that Jersey was not a tax haven, is not the problem and is part of the solution to growth, has been effective.

Now armed with the data from the Capital Economics Report, were are able to provide evidence of the value of Jersey businesses to the UK economy.

Having attended all of the party conferences this year, Ministers detected a clear change in the way in which Jersey is regarded by UK Ministers, peers and advisors.

British Ministers now have reasoned arguments to be supportive of Jersey, and that support is growing and widespread.

Our shared agenda with the UK, which includes zero tolerance of tax evasion and a commitment to transparency, has been recognised by the UK Prime Minister, who recently said: “I do not think it is fair any longer to refer to any of the Overseas Territories or Crown Dependencies as tax havens. They have taken action to make sure that they have fair and open tax systems.”  

During my trip to Washington too, it was evident that perceptions of Jersey are shifting.  

Another key minister I had the opportunity of meeting with was the South African Finance Minister.  We look forward to developing our relationship with South Africa particularly in their regional work on tax compliance 

The Chief Minister’s endeavours are working and it was encouraging that the Secretary General of the OECD wrote to Senator Gorst in July to congratulate the Island on the measures we have taken in support of international tax transparency.

Despite the challenges faced by the finance industry there is now every reason to be positive, not least the fact that Standard and Poor’s has taken such a positive view of Jersey’s financial strength. Standard and Poor has assigned to Jersey a long-term AA+ credit rating with a ‘stable outlook’ together with the highest possible short-term rating of A-1+.

Jersey’s credit rating

Obtaining this exceptionally high rating demonstrates to the world our high level of credit quality.  Furthermore the ‘Stable Outlook’ indicates both certainty and confidence in our future.

Standard and Poor commented that “The stable outlook reflects our view of Jersey’s high wealth and its strong public policy setting and government finances.”

The rating underpins our strong international reputation and provides the government of Jersey with the opportunity to issue a sterling rated bond at competitive interest rates as a method of financing our future housing needs.

Taking action to support Jersey’s economic growth and jobs

Whilst our financial position and reputation remains strong we must be mindful that unemployment remains at high levels.

The unemployment rate increased from 4.7% in March 2011 to 5.7% in June 2013.

Over the same timeframe, Registered Actively Seeking Work, increased from 1,300 to 1,900.

Back to Work is helping to minimise the costs to both the individual and society of the current levels of unemployment and ensure we do everything we can to get those out of work, particularly the young, back into employment as quickly as possible.

Having lost 700 jobs in the fulfilment industry, the unstoppable use of the internet for shopping, and the loss of jobs in financial services, it is quite possible that without the efforts of the Back to Work initiative, our local unemployment levels could now be in excess of 2,500.  That has not happened and not by accident.

However, when people lose their jobs they can be under so much financial pressure that they resort to borrowing at very high rates of interest.

That is why the Treasury is working with Community Savings to explore the opportunities for a Jersey based credit union.

This is a facility that could offer a more cost effective and sustainable way for people to save and borrow.

This Budget cements the support for the Economic Growth and Diversification Strategy in all key areas.

The Minister for Economic Development will be publishing a new strategy for economic growth and development that will deliver new high value and high growth business and raise the productivity of the whole economy.

Inward investment, diversification and job creation

The additional funding provided to the Economic Development Minister support growth is delivering results.

In the first nine months of 2013, Locate Jersey has delivered 28 new businesses that have created 245 new job opportunities.  235 of these jobs are for local people.

These new businesses are from a broad range of sectors. It is encouraging that 103 job opportunities are within information communication technology and e-commerce. This is an excellent example of the drive to diversify our economy through the development of the digital sector.

Retail sector

Whilst it is vital that we diversify our economy we must also support the sectors that form the bedrock of our community, such as retail.

In 2014, using funds allocated through the Medium Term Financial Plan, the Economic Development Minister will in conjunction with the Chamber of Commerce invest in a series of initiatives in Jersey's retail sector so as to capture more sales.

Taking action to support the local economy: delaying the implementation of the Long-Term Care charge

As well as looking after the local economy, this Council of Ministers continues to take action to support local people, especially the elderly.

Sir, the Minister for Social Security published a report in August on the new long term care scheme that will help Islanders pay for care, either in their own home or in a care home.

If the States agree, benefits from the new long term care scheme will be paid out from July 2014, offering greater protection for Jersey families. 

The Treasury has worked with Social Security to make it possible to reallocate existing Social Security budgets so as to avoid the need to introduce the planned 1% contribution in 2014. 

This will prevent a further squeeze on Islanders’ disposable incomes.

The Fiscal Policy Panel has agreed that such an initiative was advisable given the economic outlook.

Again, thanks here must go to both the Social Security Minister and the Health Minister for their help and support, working together with the Treasury to develop the funding strategies for this essential initiative.

What has the Fiscal Policy Panel said about the 2014 budget?

So, in addition to helping stimulate economic growth and deferring the implementation of a long term care charge, this Budget proposes significant allocations to capital in 2014 that will also provide a fiscal stimulus.

For this to work most efficiently, expenditure needs to be timely.

• training people that are currently seeking work
• encouraging young people to think about careers in construction
• looking at the way we license construction companies so as to ensure that there is healthy competition.

• the purpose of the Strategic Reserve has been agreed by the States as a permanent reserve to insulate the Island’s economy from severe structural decline or from a natural disaster and to meet the States’ contribution to the Bank Depositors Compensation Scheme
• the draft Budget 2014 proposes an additional purpose be added namely to fund the new hospital facilities from the investment returns on the Strategic Reserve.  The Council of Ministers considers that funding the hospital facilities in this way, with no increase in taxation and no debt, will be of benefit to Islanders now and in the future, and is consistent with the objectives of the existing fiscal framework.

• a strengthened definition of capital within the Strategic Reserve
• confirmation of the role of the Stabilisation Fund and how it should be replenished
• the arrangements for the repayment of the Housing Bond through the Housing Development Fund (HDF).

In summary, I consider that the safeguards on the Strategic Reserve are already extremely strong.  However the actions described above will strengthen these arrangements further and provide greater clarity for States Members before further funds are withdrawn to invest in our new Hospital.

I am grateful to and would like to thank the Panel for warmly welcoming improvements in the reporting, monitoring and implementation of their recommendations, which Treasury instigated this year.

I would also like to take this opportunity to recognise and thank Senator Ferguson and her Panel for the Scrutiny report on Budget 2014.  There are many positive and constructive comments made by the Panel. Treasury has issued a full response which we hope is helpful to today’s debate.

Specific budget measures

Sir, I now turn to the specific Budget measures for 2014.

Members may recall that our key tax policy principles set out in the MTFP are that:

• taxation must be necessary, justifiable and sustainable
• taxes should be low, broad and simple
• everyone should make an appropriate contribution to the cost of providing services, while those on the lowest incomes are protected
• taxes must be internationally competitive
• taxation should support economic development and, where possible, social policy.

The Medium-Term Financial Plan assumed that no significant tax policy changes would take place for a further two years.

The proposals in this Budget are consistent with that long term tax policy.

This Budget continues to provide the stability and certainty needed, in the tax system so as to enable growth in the economy and encourage investment.

Income tax

As Members are aware, two measures proposed in the 2014 Budget will provide a tax cut for approximately 84% of the Jersey tax-paying population, or around 40,000 households, if approved.

The 2014 Budget proposes two key income tax measures, they are:

• to reduce the marginal rate of tax from 27% to 26%
• to increase exemption thresholds by 1.5%

These tax cuts will not apply to higher earners who are in the ‘20 means 20’ tax bracket.

The overall cost of a 1.5% increase in exemption thresholds, combined with a 1% decrease in the marginal rate, is approximately £10.3million.

Additional support is also proposed for parents with children in higher education. At present, parents (both marginal and ‘20 means 20’) with children over the age of 17 years and in full-time higher education receive a tax allowance of £6,000 per child.

This Budget proposes to provide additional tax relief to parents by adding £3,000 per child in higher education to the tax exemption threshold for marginal rate tax payers.

This proposal will mean a tax cut of up to £780 per child for those parents paying at the marginal rate. The cost of this measure is approximately £900,000.

In addition, the restriction to child allowance by reference to the child’s earned income will be removed.

Additional income tax proposals

There are additionally a number of other amendments proposed to the Jersey Income Tax Law including:

• increasing the age of entitlement to the higher exemption threshold from 63 to 65
• amending ITIS provisions to restrict credit available to controlling directors
• removing three-year rule of residence for making lump sum donations
• permitting certain residents with housing licenses granted under regulation 1(1)(k) to apply to be taxed under the post July 2011 regime
• strengthening legislation on interest deductions to counter non-commercial debt financing
• revising the relief due to the self-employed in respect of social security contributions in response to changes to the social security law
• amending the distribution rules introduced in the 2013 Budget to ensure they operate as intended.

It is important to ensure that the tax system operates as intended, and many of these proposals are aimed at clarifying the law to provide certainty and to safeguard tax revenues.

Goods and Services Tax

There is no change in the rate of GST, which remains at 5%.

Some minor administrative changes are proposed to deal with anomalies in the current system that are set out in the Budget report.

Impôts

Sir, I now turn to the duty measures proposed for 2014.

In line with the amendment being brought forward by me the revised impôt increases proposed are:

• spirits – £1.27 increase on a litre bottle
• wine – 5p increase on a standard bottle of table wine
• 1p on a standard pint of beer or cider.

We are also introducing a new lower band of duty on low strength beer.  This new band of duty will be calculated at 50% of the standard duty rate.

• strong beer/cider – 6p per pint increase
• tobacco – 47p increase per packet of 20 cigarettes
• fuel – 1p per litre increase on unleaded petrol.

It is proposed that the increases in duty will take effect from midnight on 31 December 2013 in respect of new imports. This is an important fact that we can return to later when the Assembly debates the amendment.

So, why are duty increases on alcohol being proposed?  Firstly, because these directly align with the health strategy. Jersey deaths from chronic liver disease are up to 40% higher than would be expected in England and Wales.

In 2010 there were 2,373 hospital admissions attributable to alcohol.

There are also around 200 smoking related deaths in Jersey every year.

The cost to the health service, let alone the individuals and their families and friends, is considerable.

Furthermore, the recent report issued by Home Affairs, Building a Safer Society, shows that over half the crimes in the island involve alcohol and that there has been an increase in night-time assaults in St Helier. 

The proposed impôts increases on alcohol directly support the aim to reduce the harm caused by alcohol.  They are not the sole solution but they are part of the solution.

In terms of the commercial impact of the proposed increases, whilst those in the tobacco and alcohol industries have lobbied for lower duties, they have still not explained why it is that when duty and tax are stripped out, the underlying costs of these products are still so high. 

It has been shown time and time again that keeping duties the same does not result in cheaper prices for the consumer. 

Specifically in relation to alcohol, there has been some speculation that comparison of Jersey retail prices to UK prices does not accurately reflect the pre-tax prices being achieved by local suppliers.

Further analysis of UK and Jersey figures shows that, (for example on a pint of bitter), the duty proposed for Jersey is lower (at 35p, versus 49p) and our GST/VAT is lower (at 16p, versus 48p) yet the retail price in Jersey is higher, at an average of £3.28 per pint, as opposed to £2.87 for the average pint in UK. 

Even if we limit our analysis to London, the most expensive region for alcohol in the UK, on a pint of bitter, Jersey prices are higher despite duty and GST being lower.

Turning to the more sensitive issue of fuel, there has only been one minor fuel duty increase in last five years, and the increase proposed this year is equally very low, just 1p per litre.

I would like especially to thank Senator Le Marquand, the Deputy of Trinity and Senator Maclean for their support in assessing these serious issues and providing clear strategies for the future.

Stamp Duty

Growth allocations

In the Medium-Term Financial Plan debate, the States agreed a central growth allocation for 2014 and 2015.

The Council of Ministers is now proposing that the allocation of central growth for 2014 of £2.2 million, and £1.5 million for 2015, be allocated to departments in line with the original allocation set out in the MTFP.

Capital programme 

The MTFP also set out the indicative capital programme for each of the years 2013 to 2015. The total allocation approved for 2014 was £88.9 million.

The review of the indicative capital programme has identified very few changes.  However, a reduced cost for additional primary school accommodation was identified.

It is proposed that this variance is reallocated to Transport and Technical Services for works at Green Street Car Park, Education, Sport and Culture for work required to meet their Sports Strategy and to Parish projects.

The proposed allocations to departments for 2014 are set out in the report.

• Chief Minister’s Department – £1m
• Education, Sport and Culture - £15.8m
• Department of the Environment - £650,000
• Heath and Social Services - £14.8m
• Home Affairs - £1m
• Transport and Technical Services - £25.8m
• Treasury and Resources - £2.5m
• Other Capital - £5.2m
• Social Housing Programme - £22.2m

I would like to pause here and recognise and thank my Assistant Minister, Deputy Eddie Noel, for all of his efforts in this area.  His work with Property Holdings has accomplished some excellent results and the plans for next year are very exciting.

I am particularly grateful for the work of Deputies Eddie Noel, Rod Bryan and Roy Le Herrisier on rediscovering Fort Regent. Their creative ideas for the Forgotten Gardens and Town Park Two and their determination to make the Fort accessible to the public will be greatly appreciated in future years.

Funding for long-term infrastructure

The 2014 Budget also proposes funding for significant investment in three major projects that are essential to meet the Island’s long-term infrastructure needs.

Funding for the replacement and renewal of sewers and liquid waste facilities.

Housing

In order to provide the quantity and standard of housing that the island needs, it is proposed that Jersey’s new, excellent credit rating is utilised in order to borrow funds at historically low levels of interest for investment in housing.

Housing will draw upon the funds in stages and interest will be payable when the funds are drawn down.

Housing will then use rental incomes to repay the debt.

Repayments have been calculated to ensure full and final payment upon maturity.

This is a plan for long-term investment, not a rescue plan.

Future Hospital

Now turning to investment in the Hospital. The Health Minister’s strategy ‘Caring for each other, caring for ourselves’ was approved by the Assembly last October.

Since then, the Treasury has been working with the Health Department to identify where hospital facilities should be located, what the appropriate budget should be and how it should be funded.

Good work has been done and I am very confident that the new dual site proposal, based upon the General Hospital and Overdale sites, is the appropriate way forward for future hospital services.

The phased approach will mean that existing hospital services can be improved more quickly, without the potential delays and risks of capital overspend. This is a much more prudent approach.

It is proposed that investment returns on the Strategic Reserve be used to pay for the Hospital scheme at an estimated cost of £297 million.

This would mean that the Hospital scheme would be fully paid for by the time it is completed. There will be no new cost to the taxpayer and no debt for future generations.

In previous Budget debates, Members have asked me whether or not there would ever be a reward for the prudence and the difficult decisions taken in previous budgets.

I can now say, the answer to that is a resounding ‘yes’.

It is as a result of the difficult decisions of this Assembly in recent years on tax and spending, that we have preserved the value of the strategic reserve and achieved excellent investment performance.

Now, we are able to fund essential development of hospital services for Islanders, without the need to increase taxes and without incurring debt.

Sir, I said to the Minister for Health and Social Services when she was elected, that I felt she would make the biggest reform and improvement in health care in Jersey since the Second World War – and I don’t think I was wrong.  Our community can look forward with confidence to investment and improvement in their future health and social services.

This budget also allows us to set out a way to fund our liquid waste strategy.

Liquid waste may not be, as the Transport and Technical Services Minister says “the most exciting of projects”, but it is absolutely vital to every man, woman and child in Jersey.

Proper investment in our liquid waste system is extremely important and this Budget sets out how that investment is going to be funded.

This Assembly will consider the actual liquid waste strategy in the early part of next year.

In summary, it is proposed that the liquid waste project will be funded without any new cost to the taxpayer by using three sources:

• a targeting of the existing rolling capital vote (£12m)
• an allocation within the traditional main capital programme (£34m)
• an investment from the Currency Fund allocation to infrastructure (£29m) which will be repaid by TTS from savings.

This provides an affordable option for Transport and Technical Services (TTS), with no external debt and a new infrastructure that is more energy efficient and cheaper to run.

I want to recognise the work of the Minister for Transport and Technical Services and his staff for improving our infrastructure and keeping our Island running smoothly week in and week out.

These proposals reflect a huge amount of work and inter-departmental cooperation and I am extremely pleased that we have been able to develop three strategies that are financially prudent, at the same time as delivering vital infrastructure for the Island.

Finally I would like to remind the Assembly that we continue to work hard on delivering savings.  I would like to congratulate all Ministers and their Departments for the progress in delivering the challenging CSR savings targets over the last three years.

In 2013 some of the more significant savings have been in:

• Social Security £2.8 million
• Education, Sport and Culture £1.5 million through the negotiation of university tuition fees
• Economic Development £530,000 through managing prices and general efficiencies
• Law Officers’ Department saving £250,000 by reducing the use of external providers
• The Chief Minister’s Department saving £280,000 through consolidation of data centres and the central management of software licences
• Treasury and Resources Department £660,000 through the re-tendering of insurance arrangements and savings identified by the taxes review; and
• Transport and Technical Services saved £145,000 through a reorganization of Parks and Gardens.

These savings are just examples of almost £60 million in ongoing savings by 2013.

Conclusion

Sir, in previous budgets we set out the principles that were needed to ensure our economy is stable and protected:

• a low, broad and simple tax system
• a balanced budget; and
• acommitment towards long-term planning.

We have stayed true to those principles and they have worked.

They have allowed us to provide economic stimulus when it was most needed.

They have enabled departments to find efficiencies and make savings.

And they have seen us achieve one of the best, most stable credit ratings possible, as an endorsement for this prudence and good planning.

Now, these principles are allowing us to provide tax cuts and put money back in the pockets of Islanders.

They are allowing us to provide a legacy of essential infrastructure and care for future generations; a new hospital, new housing and investments in our community.

They are allowing us to help people to find work, to support the development of new sectors, and to protect and grow our finance industry.

This is a budget we can afford.

This is a budget that benefits everyone.

A budget that equips us for the future.

A budget that provides significant support to the economy when it is most needed.

A budget that will help us to lay the foundations for future growth and to compete on the international stage for new business opportunities. 

Sir, we can look to the future with confidence.

And, I commend this Budget to the Assembly.