Fiscal Sustainability

July 6th, 2010 by Peter Roffey

Like the UK, Guernsey has a structural budget deficit.  Some of the unpopular austerity measures introduced by the new British government will have to mirrored here to some extent.

Put simply the States are spending more than they receive in income. The big difference is in how that situation came about.

Governments of all colours in Westminster, over many decades, have accepted borrowing as a fact of life. That national debt escalated alarmingly over the last couple of years as they borrowed heavily to stimulate the economy at the same time as tax revenues were falling because of the recession. It’s a real mess and the British people – like those of other heavily indebted nations – will feel the pain for many years to come.

Guernsey’s situation is very different. We have no national debt. Our deficit isn’t caused by interest payments but by a deliberate decision to slash the island’s tax on business profits, coupled with a failure to control spending. Difficult though that situation is it’s not half as bad as the UK’s.

“All” we need to cure our deficit is a mixture of £40M of extra revenue/economies to bring income into line with expenditure. The EU has even helped by insisting we should charge at least a minimal level of corporation tax.

It will still be painful and require some unpopular measures but once the correction has been made our budget will be back in equilibrium and if revenues grow so can public spending. By contrast in the UK it will take a generation to emerge from under a mountain of public debt. How right Deputy Matt Fallaize and his supporters were to oppose plans for Guernsey to embark on wholesale external borrowing.

With the pension age it’s harder to spot the differences between what’s happening in the UK and Guernsey but again our problems are less severe. The States have agreed to increase the “retirement age” from 65 to 67 over an extended period of time. That strategy is supported by actuarial evidence showing that such an approach is financially sound given the “partially funded” status of our local state pensions.

In Britain the state retirement pension is not funded at all, there’s no investment fund which has been built up to help with future expenditure, all of today’s pensions are simply paid out of current income. That makes their situation far worse and they are having to move quite quickly to increase the retirement age to 66 and it may eventually rise to over 70. Once again our forefathers’ financial caution makes Guernsey’s problems easier to tackle.

Many years ago – when quite a young deputy – I was accused of acting like a “cloth capped old Guernseyman” because I was reluctant to embrace a “buy today pay tomorrow” approach. Hopefully recent events will emphasise the virtues of a cloth cap mentality.

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