The Fiscal Policy Panel, publishing its advice for the 2020-23 Government Plan, said that the Island was facing a raft of potential external threats in a number of areas, including the fall-out of Brexit and the possibility that the City of London could become an offshore competitor.
Its latest report, published yesterday, highlighted the potential fragility of the Jersey economy because it was so heavily reliant on the finance industry, adding that precautions should be taken now because the economy was still strong. As a result, the panel has advised that the Island should tighten its purse strings to protect against any possible future ‘economic crisis’ in case it needed to rebuild in the future.
Treasury Minister Susie Pinel said that it would be ‘prudent’ to act on the advice, adding that she would rather not raise taxes to fund an injection of cash into the Strategic Reserve.
At present the value of the reserve, often dubbed the ‘rainy day fund’, is £800 million, which the panel has recommended increasing to at least £1.4 billion, which is 30% the size of the Island’s economy, in the coming years, rather than spending it on capital projects, like the future hospital.
The government has also been urged to either increase taxes or cut expenditure, while the economy is performing relatively well, and create budget surpluses to be ploughed into the Strategic Reserve and also the Stabilisation Fund, which is used to boost the economy during short-term downturns.
Panel member Francis Breedon said that how long Jersey should take to boost the rainy day fund by the recommended amount was a ‘decision for the government’.
He added: ‘What we are saying is the current population should put some money aside in case a really big crisis hits in the future.
‘We can’t tell when a crisis might be but what we can say is the current fund is not big enough in case a crisis arises. So the government needs to think in its long-term plans how to increase the reserve.’
He added that he was confident Jersey’s economy would continue to do well but its heavy reliance on finance was a risk in increasingly uncertain times.
‘Jersey is very dependent on the financial services industry and you can imagine scenarios where that industry moves [elsewhere] or shrinks very rapidly,’ he said.
‘A lot of tax revenue is dependent on that sector and you would have to think about how to manage it, if this happened. This is always the case in small countries – there is one industry, which the whole economy is betting on.’
During a briefing yesterday, Mr Breedon and panel chairwoman Dame Kate Barker warned that the City of London, a traditional ally of Jersey, could become a rival finance centre post-Brexit.
Mr Breedon added that Brexit was one of the reasons for Jersey to be cautious at this time.
‘We are basing our forecasts on an orderly Brexit but there are a bunch of other scenarios,’ he said.
‘Jersey is clearly going to be heavily influenced by it, even though it it not in the negotiations, and that could be the thing which triggers a horrible crisis.’
Mr Breedon said that recent efforts to diversify the economy, such as legalisation of medicinal cannabis, should be welcomed but small countries, like Jersey, always tend to lack true economic diversity.
Treasury Minister Susie Pinel said that she was ‘not surprised’ at the panel’s recommendations of economic caution and bolstering reserves.
‘I think at time of global uncertainty it is sensible to add to reserves so we can look after the population if we need to,’ she said.
‘We do not know what the outcome of Brexit is and what they have recommended is very prudent.’
The minister said that she would prefer not to raise taxes to generate budget surpluses, if possible, and indicated that cutting expenditure would probably be her preferred route.
‘Quite how we balance the books we don’t know at this stage, but the Chief Minister has put together a panel to review this,’ she said.
‘I would hope very much that this does not involve tax rises because that would be a dangerous move and could make businesses uncompetitive. They would also be unpopular.
‘But we have a predicted deficit of £30 to £40 million forecast for 2020 in public spending. We have to address that and that makes it difficult with the staff pay awards [dispute].’
She added that the long-term care contributions would need to increase at some stage.
The Fiscal Policy Panel is made up of Dame Kate Barker – a former adviser to the UK government, Professor Francis Breedon, professor of economics and finance at Queen Mary University of London, and Richard Davies, a fellow at the Centre for Economic Performance, which is part of the London School of Economics.