Looking into a black hole... But how do we get out of it?

Looking into a black hole... But how do we get out of it?
  • It was announced last month that the States face a £125m deficit by 2019

  • Several commentators have blamed zero-ten, Jersey's controversial tax regime

  • We asked two former politicians for their views on how the Island can get out of this mess

  • Should Jersey have brought in zero-ten? Take our poll below

Christine Herbert

Since the announcement last month that the States could be facing an estimated £125 million black hole by 2019 unless savings are made, numerous suggestions have been made as to why the Island's finances are as they are and what should be done about it.

Some have criticised zero-ten, Jersey's tax regime which was introduced in 2009, because it inadvertently allows local companies to pay less tax.

Christine Herbert asked two of the Island's former senior politicians, who now have the benefit of hindsight, to provide their perspective on past, present and future developments:

Question: Where did it go wrong and what do you think should be done now?

Pierre Horsfall, former Senator and president of the Finance and Policy and Resources committees; former chairman of Jersey Finance and the Waterfront Enterprise Board; currently chairman of Jersey Opera House

Former president of the Finance and Policy and Resources committees Pierre Horsfall

In the early 90s there was a recession and a budget deficit was forecast of some £50 million about five years ahead.

Following briefing meetings with all States Members a number of actions were taken, including using income from the Strategic Reserve, above inflation, to boost the tourism industry.

A number of projects, including a major one at Durrell and the Maritime Museum were funded in this way.

At the time, the finance industry was healthy and needed no special attention other than embarking on serious international promotion.

Now the situation is different, in that it is international business that could do with a boost. We need to attract new high-value business that can largely be handled by the existing workforce.

For example, we now have international mining companies settling in Jersey and Jersey Finance Ltd working worldwide to attract more business.

What we have to do in Jersey is provide modern state-of-the-art offices for new business to occupy, or existing business to expand. If we are confident in ourselves and in our future, it will happen and contribute to substantially reducing the deficit.

There is no doubt that if one is serious about attracting high-quality, high-value, international business, one must have quality infrastructure in place, as did Dublin and Gibraltar.

The present interminable squabbling about building new offices will only put international business off. We need to get on with it, wherever its location.

Terry Le Sueur, former Senator, Treasury and Resources Minister 2005–2008, Chief Minister 2008–2011

Former treasury Minister Terry Le Sueur

Even in the times preceding the financial crisis of 2008 it was becoming increasingly difficult for the States to balance its books in view of the increasing demands for more and better services.

Ministers did respond to those pressures, and books were balanced, but perhaps at the expense of the deferment of necessary expenditure which would not go away and which ultimately added to pressures at a time when resources were still tighter.

By 2010 it was clear that expenditure was rising far more quickly than income and that this was not going to change in the immediate future. The Island was fortunate to have a Stablilisation Fund of around £150 million, set up in the days of the late former Senator Reg Jeune when funds were indeed more plentiful. With an expectation that the economic downturn could last three or four years, these funds were utilised to boost the economy by directing States expenditure into projects assessed to be timely, temporary and targeted. In retrospect one might question whether we spent too much too soon but importantly it did provide the necessary breathing space whilst the States repositioned itself for the future.

One key policy proposal agreed during my time as Chief Minister was to reduce States expenditure within a three-year period by £65 million per annum. Looking back over the review carried out by the Fiscal Policy Panel I note that in 2011 (my final year in office as Chief Minister) they commented (among other things) that '… expenditure has risen slightly more than income, and although the proposal to save £65 million still looks achievable a lot of work and difficult decisions will still be needed to ensure that they are'.

Improving States revenue was, and is, important, but it has always been clear to me that containing, and ideally reducing, expenditure was essential if the Island was to have a secure financial future. I was also aware that change of that magnitude takes time; it does not happen overnight, and it needs resources, commitment and goodwill from all involved. That is why in 2010 the £65 million target was given a three-year timescale (and perhaps a realistic expectation that it could take five years to deliver). I was also well aware that the only way to achieve such a target was a fundamental change in the way that the States operates.

Sadly, those fundamental changes still seem to be a long way off. The management of change is not easy. It needs specialist skills and needs the support of the electorate as well as that of States Members and civil servants. It cannot be done as a sideline. Bringing in advisers such as Kevin Keen may help, but only if he is supported by the whole organisation, and indeed the whole community, even when some of the necessary changes appear unpalatable.

My final comment is to remind States Members that borrowing only works if, in borrowing, one can generate enough additional income, over time, to repay such borrowing. The principle of balancing budgets year on year is a tough one, but it is wiser than following the approach of the UK and elsewhere of expecting (hoping?) to balance budgets over a five-year cycle (which subsequently becomes a ten-year cycle and ultimately never balances). Jersey is still relatively rich in assets. We must ensure that these are not squandered due to an inability or an unwillingness to act. We have already taken too long implementing change; the time to act is now.

Under the zero-ten regime, foreign non-finance firms pay no tax, while finance firms pay a reduced rate.

One of the big decisions that is still having an impact today was the introduction of the zero-ten corporate tax rate. From 2009 to 2010 – the first year that it took effect – Jersey's corporate tax take fell from £218 million to £83 million, whereas personal tax take increased from £289 million to £311 million.

Under the regime, foreign non-finance firms pay no tax, while finance firms pay a reduced rate.

By 2013, the gap between personal and corporate tax had widened still further, with corporates bringing in £99 million and personal taxpayers £353 million.

But both former politicians – who could be described as the architects of the system – have said that the Island had no other choice.

The alternative was to say, we won't discriminate and we'll charge everybody zero. But we were allowed to make exceptions for different industries, so the compromise was that finance companies paid ten per cent. That was the only solution.'

It then fell to Mr Le Sueur, who was Chief Minister when the new tax regime took effect, to try to iron out any teething problems – not least, the loss of income from non-Jersey-owned companies trading in the Island.

'We toyed with the idea of a property tax, and indeed various other ideas such as a charge based on the number of employees,' he recalled. 'This all stemmed from the desire to replace the tax no longer paid in Jersey by trading companies such as Bhs.

'The important part to remember is that the tax we lose by not taxing these companies is far less than the tax we stood to lose with the exodus of several key financial institutions. It is important also to remember that for those UK-owned businesses, they still pay the same amount of tax, but they pay it all to the UK Chancellor rather than the Jersey tax man (previously, they paid 20% to Jersey and offset that against their UK liability).

Nonetheless, we recognised that there was a degree of unfairness and a perception of advantage to UK businesses, and we promised to look at other ways of ensuring that those businesses made some financial contribution to the cost of running the Island.

NOW that ministers have come clean about the size of Jersey's black hole, decisions about how we tax and spend are more pressing than ever.

Ministers have repeatedly said that yet more taxation is a last resort and that has to be the right answer.

Whether through direct taxation or by stealth charges, middle Jersey is already shouldering an excessive burden.

Deputy Geoff Southern has called for the rich to pay more to help balance the books. He set his sights on those earning more than £100,000 and the high-net-worth super-rich immigrants known historically as 1(1)k residents.

Meanwhile, tax justice campaigner Richard Murphy says that he has been right all along after warning in 2005 that the zero/ten corporate tax regime would leave Jersey facing a £100m-plus black hole.

We do not know what the economic consequence would have been had zero/ten not been introduced. The question is whether senior ministers buried their heads in the sand and refused to listen to what now appears to have been a prescient voice.

As Jersey moves forward, it must learn the lessons of the past. Shouting down those who disagreed with zero/ten and forecasted that it would lead to an ever-increasing burden on middle and lower tax earners was a mistake because it meant Jersey failed to prepare properly for the current deficit.

Jersey's tax regime should be reviewed as part of the debate about ensuring future prosperity, but heaping an even greater burden on middle Jersey is not the answer.

Efficiencies and savings must come first.

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