A sustainable economy and competitive taxation

January 10th, 2011 by Peter Roffey

Just before Christmas a long serving deputy challenged me to be less critical of the States in 2011. I hate to disappoint her. I’m no polemicist but always focusing of the positives would make pretty insipid reading. Imagine a constant diet of – “this department is doing a reasonable job”.

So, in common with political commentators every where, I’ll continue to focus on problems, shortcomings and failings.

What I am happy to do is to make two things clear.

1. We have many excellent public services delivered by first class staff.

2. It’s much easier to be wise from the outside, pointing out the problems, than it is from the inside trying to find solutions.

With that in mind I will emphasise something positive today – and get it out of the way for the rest of 2011!

I want to be upbeat about the state of Guernsey’s economy. Honestly. Of course it’s a whole lot worse than it’s been over the last twenty years. There’s a current account deficit of tens of millions of pounds and we need a new corporate tax regime. But – being positive – we’re in better shape than most. We have no debt at all, despite Treasury and Resource’s ill-advised attempt to incur some, and the size of the black hole is quite mendable given application and discipline. Guernsey also looks to have played a cannier game than the other Crown Dependencies over zero-ten – although the jury is still out.

Does all this mean a possible return to the halcyon days of give away budgets, frozen taxes and ever expanding services? No, I’m afraid the opposite is true. Personal taxation and charges are likely to rise and service developments will be few and far between. There are two basic reasons why the era of Guernsey’s ultra low personal tax burden is at an end – although it’s still far lower than in most other places.

The first is that traditionally a tax of 20% on corporate profits was highly competitive internationally. So with a burgeoning economy, driven by the finance industry, company taxation financed much of government expenditure. A 20% corporation tax is no longer competitive. The world doesn’t owe us a living and other countries have adapted their own tax structures to encourage inward investment. Even if we end up 10% corporation tax, more of the burden of public expenditure will have to shift to individuals. It will take islanders a while to come to terms with that new reality and understand that perks like free parking on prime public land are no longer affordable.

The second reason for higher personal taxes is a rise in public expectations. Think back to the public services provided in the 1970s and we are living in a different world. There is a direct correlation between taxation and services. Traditionally islanders have demanded less of the former and more of the latter. For a few years that formula worked because of growing corporate tax returns but the days of having our penny and our bun have gone.

A classic example is the new “toilet tax”. It will be very unpopular. It’s regressive and will hit the poorest the hardest. And those using cesspits will pay more than those on main drains for an inferior service. Many islanders will shout “scrap this unfair tax” but those same people spent years loudly demanding proper sewage treatment which this new charge is [allegedly] going to finance.

If we all have to pay more is there a fairer way of doing so? There is. Our economy is driven by having competitive corporate taxes. If companies invest here, creating well paid jobs, then employees will fill them even if our income tax structure is slightly less benign to high earners than it used to be.

Once their corporate tax strategies are settled the three crown dependencies could work together to try to establish a fairer, more progressive way of shifting the tax burden from companies to individuals. A common top rate of income tax of 22 or 23% would hardly be punitive compared with other jurisdictions and with the tax cap – hateful though it is – it wouldn’t deter seriously wealthy settlers.

Will it happen? No chance. The three islands will continue to compete to keep headline taxes – such as income tax – as low as possible. Instead they’ll ramp up the regressive, indirect taxes, like Jersey’s rise in Goods and Services Tax (GST) or Guernsey charging poor pensioners to use their own toilets.

Blast! What happened to my resolution to be positive?

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