THE Island’s economy faces tough times amid high government spending and an expected decline in profits from the banking sector, an independent group of economic advisers has said.
The Fiscal Policy Panel, chaired by Sir Jon Cunliffe, criticised the government for taking insufficient action to use money from a recent spike in tax revenue to top up the Island’s reserves.
Sir Jon said the government had “difficult choices” ahead as it faced pressure to increase public spending on health services.
Treasury Minister Elaine Millar conceded that the government’s approach involved “a difficult balancing act” and said it was her intention to maintain the prudent approach which underpinned Jersey’s reputation for a well-regulated, stable economy.
Government tax revenues were boosted by a period of high economic growth which saw banking profits soar by 50% in 2022 and by a further 40% the following year. But the FPP warned that this period was now over, with rates likely to return to historic levels of around 5%.
This year’s report highlighted the failure to achieve any significant increase in the Strategic Reserve fund, as the group had recommended in its 2023 report. The panel repeated its view that the balance of the fund should be between 30% and 60% of the Island Gross Value Added, but that this figure was currently around 17% and was unlikely to increase significantly over the next four years.
Analysing the recommendations made in last year’s report, the panel highlighted warnings that the government was risking higher inflation through its fiscal stance, and concern about the sustainability of health-related funds. In both cases its verdict was the same: “No action has been taken and Jersey’s position has worsened.”
Sir Jon said the panel was not predicting that the government would be able to close the gap between the current situation and the 30% target for the Strategic Reserve that was the minimum recommended level.
The Island’s Stabilisation, or “Rainy Day”, Fund had been effectively exhausted as a result of pay-outs related to the economic impact of the Covid-19 pandemic, Sir Jon noted, and this left Jersey vulnerable in the event of a cyclical downturn or another pandemic.
Reserves are set to be boosted through the channelling of some of the revenue forecast to flow from the new Pillar Two global tax system brought in by the Organisation of Economic Co-operation and Development.
The government has forecast an annual increase in revenues of £54m over the next three years, with £41m of the three-year total being used to boost the Stabilisation Fund.
In assessing the Budget, due to be debated in November, the panel recognised that the government faced difficult choices between day-to-day spending, investment in productive capacity and addressing the depletion of the Island’s reserves. The report continued: “The strong increase in revenues since 2022 has funded a substantial increase in day-to-day expenditure, the majority of which is health-related.
“This trend is continued in Budget 2025: government income is rising less quickly than expenditure and as a result the near-term fiscal position has deteriorated with an increased operating deficit.”
Responding to the panel’s report, Deputy Millar said: “We recognise there’s a difficult balancing act; we are seeking to spend within our budgets and are looking at capital expenditure – we are looking at what can be delivered and trying to be realistic.
“There will always be a demand for spending from the public; we have a steady stream of requests but our focus is on delivering the projects laid out in the Common Strategic Policy.”
