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Economists critical of tax policy

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THE government’s own economic advisers have criticised its strategy of ring-fencing taxes for specific areas of spending, such as tackling climate change, warning that it could cause budget shortfalls and unnecessary complications.

Fiscal Policy Panel: Richard Davies, Dame Kate Barker and Francis Breedon

Ministers are planning to set aside £5 million next year in a ‘Climate Emergency Fund’ under the Government Plan, following the States' decision earlier this year to declare a climate emergency and achieve carbon neutrality in the Island by 2030.

But one of the measures being proposed to raise money for environmental projects has been described as ‘not practical’ and ‘problematic’ by the Fiscal Policy Panel, an independent group of economists that advises the government.

In their latest annual report, the Fiscal Policy Panel said that the ‘hypothecation’ – ring-fencing – of taxes could make spending plans ‘more complex’ and ‘inefficient’, and that it was rare for income targets to match spending targets.

They urged caution on the part of the government and warned that budget shortfalls were more likely with this approach in financial policy.

An area of ring-fenced taxation already operating in Jersey is the long-term health charge, which is an income-tax-style levy.

And under the Government Plan an example of a new hypothecated tax would be the proposal to move 4p from a duty hike of 6p per litre of road fuel towards funding measures to tackle climate change.

During the panel’s presentation of the report this week, economist Professor Francis Breedon said that it was dangerous to base spending plans on specific revenue-raising measures.

‘This type of taxation can be problematic. The chances that the amount you raise from taxation will match the amount you want to spend is very low,’ he said.

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‘It is generally not practical to rely on particular types of hypothecated taxes to fund specific expenditure. The idea is that you raise taxes first and then you decide where they are spent.’

The concern was also outlined among the recommendations in the panel’s annual report.

‘Hypothecation should only be introduced where the revenue and spending are likely to be justifiably related,’ the report says.

‘However, the wider use of hypothecation, as suggested in the Government Plan, would tend to make fiscal policy more complex and risk inefficient resource allocation and should be avoided if possible.’

A form of hypothecated tax that was rejected by the States in recent years was the proposed income-tax-style health charge.

The Government Plan is due to be debated on 26 November.

Ian Heath

By Ian Heath
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