Income Forecasting Group: report on the revised forecast of States Income for Summer 2023.

STATES OF JERSEY

INCOME FORECASTING GROUP: REPORT ON THE REVISED FORECAST OF STATES INCOME FOR SUMMER 2023

Presented to the States on 19th September 2023 by the Minister for Treasury and Resources

STATES GREFFE

2023  R.142

Income Forecasting Group

Report on the revised forecast of States Income for Summer 2023

Contents

1. Executive Summary ........................................................................................................................... 2
2. Uncertainties around the forecast ...................................................................................................... 3
3. Economic Assumptions...................................................................................................................... 4
4. Summary of forecasts ........................................................................................................................ 6
5. Range of estimates .......................................................................................................................... 10 Appendix A – Terms of Reference .......................................................................................................... 12

1. Executive Summary

1. Compared to Spring 2023, the Income Forecasting Group (IFG) has marginally decreased its income forecast in 2023 by £2 million, with projected increases in income taxes offset by a greater reduction in stamp duty with housing transactions forecasted to fall by 50%. The forecast improves from 2024 onwards driven by an increase in personal and corporate income taxes. This increase in the forecast is largely attributed to a reprofiling of financial services profits growth, with forecast interest rates expected to remain higher for longer.
2. The IFG's forecast has been informed by the updated economic assumptions[1] produced by the 1F

independent Fiscal Policy Panel (FPP) in July 2023, alongside the latest available outturn data.

3. The global macroeconomic outlook continues to remain weak. Since the Spring 2023 forecast, many advanced economies have continued to tighten their monetary policy to manage inflationary pressures, weighing down on economic growth. Nonetheless, Jersey's position continues to remain somewhat insulated from the global economic context, on a comparative basis.
4. UK interest rates have continued to rise with market expecting interest rates to peak at just below 6% in 2024. This will continue to have a positive impact on some parts of Jersey's financial sector, driving robust growth for the Jersey economy and thus, Government revenue. The income forecast should be considered against this backdrop of economic uncertainty.
5. The Summer 2023 forecast (based on the FPP assumptions of July 2023) has been developed as a central forecast' to represent the IFG's view of the most likely outcome. In view of the ongoing increased economic uncertainties around the forecast, a forecast range has been considered, which is detailed in section 5.
6. A review to assess the robustness of the forecast models and methodology is expected to be undertaken ahead of the next IFG, in 2024, as part of a continuous improvement drive in forecasting practices.

2. Uncertainties around the forecast

1. Significant uncertainty remains around the IFG forecast; emphasis should be on the range presented by the IFG.
2. Although the outlook has improved slightly, there are increasing and emerging uncertainties in the global economy with downside risks from persistent high inflation, the economic consequences of the ongoing conflict in Ukraine and other geo-political uncertainties including a slowdown in China's growth and financial sector turbulence. The global economy is expected to grow by 3% in both 2023 and 2024[2], however, this remains weak by historical standards. For advanced economies, growth is expected to fall in 2023 to 1.5% and stabilise through 2024. The UK economy is no longer expected to be in recession, projected growth remains sluggish at 0.4% in 2023.
3. Jersey's financial services sector contributes a large part of the Jersey tax revenue, both directly and indirectly. The sector has proven resilient against several challenges including the pandemic. After a long period of low interest rates, central banks across the world have increased their rates to combat inflationary pressures; since the Spring 2023 forecast, the Bank of England Bank Rate has increased by 1 percentage point to 5.25% in August 2023. It was previously anticipated that the period of elevated interest rates would be temporary, however, current expectations are for interest rates to peak at 6% in 2024 and to remain higher for longer. If inflation falls faster than anticipated, this will create a downward risk that interest rates fall, which may impact the increased profitability of the financial services sector and associated tax revenues in Jersey.
4. External regulatory factors continue to represent a key area of uncertainty in producing the forecast, with the Organisation for Economic Co-operation and Development (OECD) and G20 updating tax laws to reflect the digitalisation and globalisation of businesses.
5. The FPP have previously highlighted risks of housing and impact on the labour market to the ongoing growth of the economy. In the longer term, Jersey's economy faces similar risks to other advanced economies, including the impact of ageing demographics and challenges around low productivity growth. These continue to contribute uncertainty around the income forecast.
6. FPP have revised down their assumptions for housing transactions and house prices by -50% and -2% respectively in 2023, with a recovery in the later years. There remains significant uncertainty over the impact of interest rate rises for mortgage holders and how the housing market will evolve after an extended period of low interest rates.

3. Economic Assumptions

1. The FPP produced a new set of economic assumptions in July 2023. These reflect latest outturn data, international developments and use latest UK and international forecasts.
2. The main differences between the July economic assumptions and those used in the IFG forecast for Spring 2023 include:

• Higher interest rates over the forecasting period and a reprofiling of the growth in financial services profits introducing further growth in 2022 and 2024 with a downward revision in 2023 – however, overall profits over the forecast period are expected to be higher than Spring 2023.

• RPI inflation is projected to fall more gradually than previously forecast, from a peak of 12.7% in Q1 2023 to 2.8% in Q4 2024, as inflation is expected to remain high for longer.

• Average earnings are projected to rise almost alongside inflation, due to a tight labour market.

• Employment is assumed to rise consistently in the financial services sector, whilst the non- finance sector is expected to see a period of above trend growth reflecting strong post- pandemic recovery.

• House prices are forecast to slightly decrease in 2023 with a fall of 50% in housing transactions, due to higher interest rates making mortgages more expensive and thus reducing housing demand.

3. The IFG have considered the economic assumptions from the FPP and have agreed that these assumptions should be used as the basis of the income forecast modelling for Summer 2023. However, the IFG recognise the increased uncertainty around assumptions, and have factored this into the range of forecasts.

4. Summary of forecasts

1. The individual forecasts for each revenue stream are outlined below and provide further details of the assumptions and adjustments made to each component of the forecast. For information on the forecasting methodology, please refer to the Spring 2023 Forecast.[3]
2. Personal income tax has increased for the period 2024 to 2027, with some modest corrections to 2022 and 2023. This has been driven by changes to the latest FPP economic assumptions and outturn data, as well as updating the earned income growth to account for higher economic activity in 2022. In addition to these changes, the IFG have revised the forecast up from the central scenario. This revision is based on industry insight and expectation that remuneration across the economy will be higher than the FPP average earnings assumption. The IFG noted that higher profits in the financial sector are leading to remuneration increases that are higher than the FPP assumptions, and that pay increases in the non-financial sector may be closer to RPI inflation.

Table 2: Changes to Personal Income Tax Forecast

2022  2023  2024  2025  2026  2027 £'000s  Forecast  Forecast  Forecast  Forecast  Forecast  Forecast Spring 2023 Forecast  590  626  656  678  713  752 Earned income growth  +5  +6  +6  +6  +6  +1 Economic data/assumptions  -6  -8  +10  +10  +4  +4 IFG adjustments  -  -  +14  +18  +22  +31 Summer 2023 Forecast  589  624  686  712  746  788 Variance  -1  -2  +30  +34  +33  +36

3. Corporate income tax has increased for 2023 to 2027, driven by the upward revisions to the growth in financial services profits. The forecast corporate income tax revenue from other sectors remains stable.

Table 3: Changes to Corporate Income Tax Forecast

2022  2023  2024  2025  2026  2027 £'000s  Forecast  Forecast  Forecast  Forecast  Forecast  Forecast Spring 2023 Forecast  111  136  157  164  166  168 Impact of tax outturn  -1  -2  -2  -2  -2  -2 Growth assumptions – financial services  -  +14  +5  +12  +8  +5 Growth assumptions – non-financial services  -  -  -  +1  +1  +1 Summer 2023 Forecast  110  148  160  175  173  172 Variance  -1  +12  +3  +11  +7  +4

4. Goods and Services Tax has been updated to reflect the FPP's latest economic assumptions and outturn. The IFG has maintained its adjustment to the forecast with some upward revisions to the forecast from the reduction in the de minimis level and the registration of offshore retailers.

Table 4: Changes to GST Forecast

2022  2023  2024  2025  2026  2027 £'000s  Forecast  Forecast  Forecast  Forecast  Forecast  Forecast Spring 2023 Forecast  118  118  119  119  122  125 Economic Assumptions & IFG adjustments  -  +1  +2  +5  +5  +6 Summer 2023 Forecast  118  119  121  124  127  131 Variance  -  +1  +2  +5  +5  +6

5. Impôts duty forecasthas increased from 2025 due to the upwards revision of inflation based on FPP assumptions, however there is a slight decrease in 2023 and 2024 based on the latest outturn from Q1 and Q2 2023. Impôts duty is now returning to pre-pandemic trends with the settling of behaviour, consumption and travel No changes have been applied to the Vehicle Emissions Duty forecast pending a review into the forecast methodology for VED ahead of the next IFG report and given that policy options for future VED are not yet known.

Table 5: Changes to Impôts Duty Forecast

2023  2024  2025  2026  2027 £'000s  Forecast  Forecast  Forecast  Forecast  Forecast Spring 2023 Forecast  68,491  73,870  73,915  73,418  72,350 Spirits  (234)  (187)  95  96  187 Wine  (178)  (109)  230  232  334 Cider  (43)  (39)  -  -  11 Beer  (250)  (210)  34  35  110 Tobacco  -  139  640  606  707 Fuel  (445)  (239)  713  711  987 Customs Duty  (200)  -  -  -  - Vehicle Emissions Duty  -  -  -  -  - Summer 2023 Forecast  67,141  73,225  75,627  75,098  74,686 Variance  (1,350)  (645)  1,712  1,680  2,336

6. Stamp duty has decreased in each year of the forecast. This is principally due to the decrease in the FPP economic assumptions for housing transactions and house prices. The outturn in 2023 for Quarters 1 (Q1) and 2 (Q2) of the transactions of properties under £2m supports the updated FPP assumptions, and these have now been incorporated into the full forecast. The cause of this downturn is assumed due to high interest rates, in turn making mortgages more expensive. The number of transactions are forecast to return to pre-pandemic levels by 2026. The Q1 and Q2 outturn for transactions subject to Land Transaction Tax and the Buy-To-Let rate were higher than anticipated due to the completion of properties in the Horizon developments as construction was finished. These have been included within the 2023 forecast, with the on-going years adjusted to remove this peak in volume.

Table 6: Changes to Stamp Duty Forecast

2023  2024  2025  2026  2027 £'000s  Forecast  Forecast  Forecast  Forecast  Forecast Spring 2023 Forecast  44,883  55,395  56,053  57,980  60,542 Stamp Duty  (8,138)  (12,319)  (7,980)  (1,619)  (1,811) Probate  -  -  -  -  - LTT  2,161  (990)  (136)  1,475  1,578 EPTT  -  -  -  -  - Buy-to-let  -  (2,330)  (2,330)  (2,330)  (2,330) Summer 2023 Forecast  38,906  39,756  45,606  55,506  57,980 Variance  (5,977)  (15,639)  (10,446)  (2,474)  (2,563)

7. Other income for 2023 is now forecast at £84 million, which is a decrease of £6 million compared to the Spring 2023 forecast. The variance is predominantly driven by the reprofiling of the special dividend from Jersey Telecom, with the £20m dividend in 2023 now reduced to £10m, and profiled over the following years. Increases in the forecast in 2024 onwards are attributed to an increase in inflation and interest rate assumptions which in particular effect the Island Wide Rates and investment return on the Currency Notes fund. In addition, the forecast for tax penalties has increased based on the latest outturn data from 2022 penalties.

Table 7: Changes to Other Income Forecast

2023  2024  2025  2026  2027 £'000s  Forecast  Forecast  Forecast  Forecast  Forecast Spring 2023 Forecast  89,986  89,657  72,710  72,987  73,789 Island Wide Rates  408  990  999  1,175  1,203 Other Income – Dividends  (10,000)  (4,760)  12,241  3,314  322 Other Income – Non-Dividends  3,525  3,702  3,373  2,967  3,026 Other Income – Housing Trusts  -  -  446  454  462 Summer 2023 Forecast  83,919  89,589  89,769  80,897  78,802 Variance  (6,067)  (68)  17,059  7,910  5,013

8. Social security and long-term care contributions are forecast to increase for each year of the forecast. The increase in social security contributions is predominantly driven by the increase in average earnings projected in the economic assumptions as well as taking into account changes to the upper earnings limit, whilst the long-term care forecast is a direct function of changes in personal income tax.

Table 8: Social Security Contributions

2023  2024  2025  2026  2027 £'000s  Forecast  Forecast  Forecast  Forecast  Forecast Spring 2023 Forecast  280  288  292  300  308 Summer 2023 Forecast  283  299  311  320  329 Variance  3  11  19  20  21

Table 9: Long-Term Care Contributions

2023  2024  2025  2026  2027 £'000s  Forecast  Forecast  Forecast  Forecast  Forecast Spring 2023 Forecast  42  44  45  48  50 Summer 2023 Forecast  42  45  47  49  52 Variance  0  1  2  1  2

Table 10: IFG Income Forecast – Summer 2023

2023  2024  2025  2026  2027 £'000s  Forecast  Forecast  Forecast  Forecast  Forecast Income Taxes

- Personal Income Tax  624,000  686,000  712,000  746,000  788,000

- Corporate Income Tax  148,000  160,000  175,000  173,000  172,000

- Provision for Bad Debt  (3,000)  (3,000)  (3,000)  (3,000)  (3,000) 769,000  843,000  884,000  916,000  957,000 Spring 2023  759,000  810,000  839,000  876,000  917,000 Variance  10,000  33,000  45,000  40,000  40,000

Goods and Services Tax (GST)

- Goods and Services Tax  106,300  108,300  111,300  114,300  118,300

- International Service Entities Fees  12,700  12,700  12,700  12,700  12,700 119,000  121,000  124,000  127,000  131,000 Spring 2023  118,000  119,000  119,000  122,000  125,000 Variance  1,000  2,000  5,000  5,000  6,000

Impôt Duties

- Spirits  7,2 53  8,124  8,640  8,796  8,991

- Wine  8,764  9,719  10,234  10,316  10,439

- Cider  1,001  1,098  1,145  1,143  1,145

- Beer  6,398  7,097  7,471  7,531  7,622

- Tobacco  14,785  15,412  15,254  14,453  13,750

- Fuel  25,025  27,474  28,642  28,582  28,635

- Goods (Customs)  800  1,000  1,000  1,000  1,000

- Vehicle Emissions Duty (VED)  3,115  3,301  3,241  3,277  3,104 67,141  73,225  75,627  75,098  74,686 Spring 2023  68,491  73,870  73,915  73,418  72,350 Variance  (1,350)  (645)  1,712  1,680  2,336

Stamp Duty and Land Transfer Tax

- Stamp Duty  27,376  30,006  34,740  42,752  44,754

- Land Transfer Tax (LTT)  5,500  3,720  4,836  6,724  7,196

- Probate  2,700  2,700  2,700  2,700  2,700

- Enveloped Property Transaction Tax (EPTT)  1,000  1,000  1,000  1,000  1,000

- Buy-to -let  2,330  2,330  2,330  2,330  2,330 38,906  39,756  45,606  55,506  57,980 Spring 2023  44,883  55,395  56,053  57,980  60,542 Variance  (5,977)  (15,639)  (10,447)  (2,474)  (2,562)

Other Income

- Parish Rates  16,429  17,300  17,439  17,648  18,071

- Dividend Income  16,839  22,231  22,517  13,976  11,379

- Other Non-dividend Income  21,374  20,343  19,561  18,797  18,806

- Andium Return  29,277  29,715  30,252  30,476  30,546

Other Income  83,919  89,589  89,769  80,897  78,802 Spring 2023  89,986  89,657  72,710  72,987  73,789 Variance  (6,067)  (68)  17,059  7,910  5,013 Total Revenue  1,077,966  1,166,570  1,219,002  1,254,501  1,299,468 Spring 2023  1,080,360  1,147,922  1,160,678  1,202,385  1,248,681 Variance  (2,394)  18,648  58,324  52,116  50,787

5. Range of estimates

1. The central forecast has been prepared based upon the FPP economic assumptions with additional consideration by IFG, as outlined in the separate reports.
2. Sensitivity analysis has been run on the forecasts. This tests the sensitivity of the estimates to key variables included the FPP economic assumptions and provides useful confirmation that the model is working. Table 11 summarises the parameters used for the sensitivity analysis. Sensitivity analysis is an economic modelling tool that provides assurance that the model is working correctly and projections if certain variations occur. This does not imply what is expected and is not dependent on different scenarios.

3. The IFG advise that the central forecast should be considered within an illustrative range, as shown below.

£ Millions IFG Forecast Range

 1,500 1,400 1,300 1,200 1,100 1,000 900

 800 700 600 500

2022 2023 2024 2025 2026 2027 Central Upper Lower Spring 2023

Figure 1: IFG Forecast Range

Table 12: Range of estimates

2023  2024  2025  2026  2027 £'000s  Forecast  Forecast  Forecast  Forecast  Forecast Upper scenario  1,092,309  1,198,880  1,265,558  1,330,613  1,406,632 Central scenario  1,077,966  1,166,570  1,219,002  1,254,501  1,299,468 Lower scenario  1,055,667  1,113,502  1,125,529  1,134,104  1,148,475

Appendix A – Terms of Reference

Purpose

The group is established as an advisory function on the forecasts of all States income from taxation and social security contributions which will be informed by economic assumptions produced by the Fiscal Policy Panel with additional forecasts for other States income prepared by Treasury officers.

Objectives

To produce an absolute minimum of two forecasts each year

A full review of states tax, social security contributions and duty revenue forecasts will take place following the provisional outturn and no later than May of each year.

A further forecast to inform the Government Plan debate, including any revised economic assumptions and experience from the current year actual revenues.

To produce reports on the forecasts of states income from taxation and social security contributions, including:

Forecasts for income tax revenues

Forecasts for goods and services tax and ISE Fees Forecasts for impots duties

Forecasts for stamp duties

Forecasts for social security contributions Forecasts for long-term care contributions Forecasts for other States income

Economic assumptions used; and

Factors and risks that should be considered

The forecasts will cover a period of at least four years and include a range within which a central forecast can be applied.

Reporting

The reports will be presented to the Treasury and Resources Minister in advance of the Council of Ministers consideration.

Once a report is approved by the Treasury and Resources Minister it will be published alongside the Government Plan.

Other reports can be prepared on the request of the Treasury and Resources Minister.

Administration

All meetings will be minuted with agreed actions.

Quorum – at least six members be present for the meetings to be considered quorate. In exceptional circumstances a delegate may be appointed by an official, however external members cannot delegate. Quarterly internal review meetings will also be held.

Any variations to the group membership once established are to be agreed by the Treasury and Resources Minister or Chief Minister.

It will be the responsibility of the Chief Executive and Treasurer of the States to ensure that the group has sufficient resources to fulfil its responsibilities.

Group Membership

The members of the group are:

Director General, Treasury and Exchequer (Chair)

Director General, Customer and Local Services

Director General, Department of the Economy

Comptroller of Revenue

Deputy Comptroller of Revenue

Group Director, Strategic Finance

GoJ Chief Economic Adviser

GoJ Economist

At least two external members appointed by the Treasury and Resources Minister

The meetings of the group may be attended by the following officers in a supporting role: Head of Financial Planning (secretary)

Revenue Accountant Tax Policy Unit Officer

The group will invite other officers and external advisers to attend as appropriate which will be documented.

The group will operate independent of any political influence.