On the eve of the States Meeting that will see the Assembly discuss the Tax Review 'green paper', the Policy & Resources Committee is appealing to political members to recognise the seriousness of the financial problems the Island is facing, and that rejecting a Goods and Services Tax (GST) will not remove the need to increase taxation and that the alternatives could be more damaging for the economy.
Deputy Peter Ferbrache, President of the Policy & Resources Committee said:
"We know that many States Members are reluctant to adopt a GST as part of the solution to the funding shortfalls we'll face if we are to maintain reasonable public services that meet the growing demand for both current and long-term health and care needs in particular.
That very big underlying funding gap - up to £80million per year by 2025 - does not go away if members reject a GST. A solution will still need to be found. Making savings in public spending is absolutely critical. But given the scale of the numbers that won't be enough on its own unless there were truly sweeping cuts to frontline services, and some major services stopped altogether. We must remember that one of the core functions of our government is to provide critical services to those who otherwise could not afford them.
Some form of tax increase is going to be needed as part of the solution and the work we've done shows that a GST (supported by some additional revenue from the corporate tax system) as part of the package would be the best solution which can actually make some of the poorest better off and spread the tax burden across the population. However, if the States do not want a GST then it will need to be a tax on income. Whilst the amounts raised from a health tax will be ring-fenced for health services, it remains a tax on income, and so the effect on households is the same. It means islanders will take home less money on pay day and have less money to spend in local businesses. Taxing in this way places more of the burden on working people than a GST.
Members need to recognise that this is the alternative if they rule out a GST. There is no option where no one pays anything more and we can still support our growing older population with the services they need. My message to my political colleagues is we cannot pretend this will somehow go away. We must face reality."
The Committee has listened to the concerns raised about a GST, in particular from the retail sector. If the States agrees a GST should form part of the solution, the Committee will work with retailers to minimise any impact caused by the administration and collection of the new tax. Guernsey is highly unusual in being a jurisdiction that does not already have a GST or something similar, and retail industries successfully manage their application pretty much everywhere else. The Committee also confirms that a GST would also be charged on online purchases and note that Jersey has just laid proposals to reduce their threshold at which this applies to £60 - something the Committee will monitor closely.
Independent analysis commissioned by the Committee as part of the Tax Review shows that raising income tax instead of introducing GST also has the potential to impact on local retail as it will reduce the disposable income of the main customer base for the sector: local working people.
A GST also has the advantage of being spread more widely as it is paid by everyone whenever they make a purchase, including for example, holidaymakers or people who draw on their capital to support their spending. The expected amount raised from GST from visitors to the Island is £10m per year if charged at 8% (or £6m at 5%). It is also anticipated that a further £6m could be raised from the Finance Sector by implementing an International Services Entity Scheme similar to Jersey's. If the States decide to oppose a GST, this would be another £16m that would need to be largely borne by working Islanders through income tax.
As set out in the Policy Letter, a GST is regressive in isolation but not necessarily as part of the overall system. It is suggested that measures are put in place to accompany a GST, such as increased allowances for both income tax and social security contributions, which are specifically targeted at protecting lower income households from the regressive effects of a GST. As demonstrated in the Policy Letter, it is possible to design changes to the tax system which include a GST in such a way that the majority of lower income households may actually see their financial circumstances improve.
Deputy Mark Helyar, Treasury lead for the Policy & Resources Committee said:
"I have described myself as a tax sceptic. I am determined we will look at every option to minimise the tax increases, something we must do if we are to stay within the States' own limit on revenues, and I believe we can reduce the funding gap still further. However, I have come to the view that we cannot close the gap entirely through spending cuts or economic growth and so some increase in taxation is necessary. In that case, and following the extensive independent modelling work carried out, a GST is the best option given the economic risk of further raising taxes on income.
One way in which we may be able to reduce the level of tax increases is by countering the shrinking of our working age population. This means reviewing our population policy, and that's already started. But we need Guernsey to be somewhere attractive enough that people actually want to come and work. Raising our income tax levels won't help us do that. If we make ourselves less attractive to workers and business owners, we hinder our economy and we'll perversely need to raise even more tax overall, not less. It is a complicated problem that will need a smart solution using all the tools we have including our tax system. We're at a critical point now, and if we fail to act, or make the wrong move, it will have very serious consequences in the coming years."
While a possible GST has dominated the discussions, the Tax Review green paper asks States Members to agree a number of things:
- To reconfirm the limit placed on government revenues by the Fiscal Policy Framework
- To set up a cross-committee sub-group to look at ways in which expenditure can be reduced beyond the efficiency measures already in the Funding and Investment Plan
- To agree in principle that Social Security Contributions should be restructured to make it fairer and more progressive
- To confirm whether or not the next stage of development should include a GST
- To confirm that the next stage of the Tax Review needs to be co-ordinated with other measures which might reduce the need to increase taxation
- And to direct the Policy & Resources Committee to come back to the States in July next year with formal proposals