Additional spending and tax cuts could threaten government finances and fuel inflation

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ADDITIONAL spending and tax cuts could threaten the sustainability of government finances and fuel inflation, a panel of economic experts has said.

The Fiscal Policy Panel, which provides advice on public finances to the government and States Assembly, has also warned that while the Island’s economy remains strong, a range of factors create significant risks.

Insufficient money in the Climate Emergency Fund to cover the transition to net zero, overly-ambitious timetables for capital projects and the high cost of housing are all cited in the panel’s annual report, released today. [wed]

Panel chair Dame Kate Barker said: ‘Whilst the global macroeconomic outlook has worsened, Jersey’s economy is in a good position to weather global shocks.

‘Jersey is in an unusual situation – the economy is strong and interest rates rises will drive higher profits in the financial sector which will, with a lag, result in higher tax revenues.

‘At the same time, high inflation and rising interests are likely to create more immediate pressures for some households.’

The panel advocates using surpluses to rebuild the Stabilisation Fund and Strategic Reserve, pointing out that the latter fund is below the recommended level.

Dame Janet added: ‘Additional spending and tax cuts are not prudent given the stage of the economic cycle, posing a concern to the future sustainability of government finances and and potentially adding to inflationary pressures.

‘They will also limit the ability of the Government to provide targeted support or fiscal stimulus quickly should the economic outlook deteriorate.’

The panel’s recommendations include:

– Adopting a fiscal strategy that steers a careful course between avoiding a sharp downturn and not overheating the economy.

– Reacting quickly to provide additional targeted support should it be needed to counter the adverse effects of inflation, which the panel forecasts to peak at 12% by the end of 2022 before falling back.

– Taking care to ensure major capital projects do not overlap, and identifying smaller projects which could be paused, or implemented quickly to support the economy.

– Addressing the cost of housing as a priority, avoiding interventions which would boost short-term demand and support prices.

– Reconsidering the strategy for financing these challenges.

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