In its annual report, the Fiscal Policy Panel says that under current government plans the value of the fund over the next 40 years would not reach 30% to 60% of the economy – the level they advise would be needed to deal with a serious setback, such as a collapse of the finance sector.
The fund, which is held in case of an economic crisis and is formally known as the Strategic Reserve, is currently worth around £1 billion and is expected to reach about 21% to 22% of Gross Value Added – the official measure of the value of Jersey’s economy – in the next four years.
Jersey’s GVA was most recently reported to be £4.6 billion, 30% of which would be £1.38 billion. Under current plans, the reserve is expected to peak at 28% of GVA within the next 40 years and never reach the 30% minimum benchmark.
The FPP’s report also says that taxes will need to rise in the ‘medium term’ to bolster government finances after the pandemic, and that this should be detailed in next year’s Government Plan.
The rationale for this is that while the economy has been ‘weakened’ by the Covid-19 pandemic, it has an ‘unclear outlook’ and therefore raising taxes should be avoided in the short term.
Among the panel’s other key findings were that the economy shrank by 8.7% last year, with the finance sector hit by the fall in interest rates, and hospitality in particular having a tough time.
The panel expects the economy to continue recovering ‘gradually’ following its rebound this year, with government revenues predicted to be £76m higher by 2023 than was forecast in last year’s Government Plan.
The government is planning to add around £750 million to the Strategic Reserve in the shape of the loan to pay for the new hospital. It intends to pay off the debt interest through investment gains in the reserve.
The FPP says that this policy would probably drain the rainy day fund of some money but not prevent it from it growing, adding that a new strategy would need to be found to bolster the reserve by 2026.
‘While these [interest] repayments have the impact of dampening the future growth forecast of the Strategic Reserve, it is still forecast to rise across the next 40 years due to expected future returns on investments offsetting repayment costs,’ the report says.
‘The panel previously recommended that the government should set out a plan to increase the reserve. Based on analysis of the fiscal impact of crises in other small economies, the panel suggested that a Strategic Reserve of over 30% of GDP would have been prudent in those cases.
‘This was considered a minimum and up to 60% could be required. The Government Plan forecasts would see the reserve remain broadly stable at 21% to 22% of GVA over 2022 to 2025.
‘In the long term, the reserve will increase over the next 20 years before reaching 28% of GVA and then fluctuating between 20% and 30% for the following 20 years.’
The panel recommends that the Strategic Reserve is bolstered at first through payments from the Consolidated Fund – the government’s current account – and later that ministers should consider ‘a plan of contributions to the Strategic Reserve towards the end of next year’s Government Plan period’, which is 2023 to 2026.
The report says that the FPP agrees with the government’s strategy of taking out borrowing to cover the costs of the new hospital (£756m), Covid-19 (£259m) and the refinancing of public sector pension funds (£480m), rather than raiding the Strategic Reserve.
The Fiscal Policy Panel is made up of Dame Kate Barker, Professor Francis Breedon and Professor Richard Davies.
