Income Forecasting Group: Report on the revised forecast of States income for spring 2020

Income Forecasting Group

Report on the revised forecast of States income for spring 2020

R.52/2020

1. Executive Summary

1. The COVID-19 pandemic has had an immediate and significant impact on Jersey's economy and therefore its public finances. The Income Forecasting Group (IFG) has consequently reduced its spring forecast for total States income in 2020 by £106m (12.1%), when compared to the forecast made to inform the addendum to the Government Plan 2020-23 (P.71-2019 Addendum). Around half of this reduction (£51m) is due to downgrades to the forecast for income tax, with £20m from lower GST, £15m from stamp duty, £8m from reduced impôts, £6m from other income' and £6m from an increase to the forecast for bad debts.

Figure 1 – The variation in forecast States income in 2020

Year 2020 (£106m) Forecast variation to autumn 2019

£6m, Other income, 6%

£6m, Bad debts, 6%

£15m, Stamp duty, 14%

£51m, Personal, 48%

£8m, Impots, 7%

£20m, GST, 19%

£0m, Corporate, 0%

2. The COVID-19 pandemic has caused significant disruption to the economy, as necessary restrictions have been put in place to reduce its spread, which in turn affects the tax base. The duration and extent of the outbreak and of the restrictions are highly uncertain, as therefore is the consequent size and duration of the impact on the economy. The IFG's forecast has been informed by the independent economic forecast produced by the Fiscal Policy Panel (FPP).

3. The IFG forecast is considered consistent with a three-month period of restrictions on economic activity (put in place to reduce the spread of the disease), and with a three- month phased return to a full level of economic activity. This has a very significant impact on revenues in 2020, but is also forecast to result in a lower level of tax revenues in the future. The new IFG forecast for 2023 is around £58m (5.9%) lower than the previous forecast, primarily due to a reduction of £35m in the income tax forecast with stamp duty £8m lower, GST £6m lower, other income' £5m lower and impôts £4m lower. This is consistent with the FPP forecast for the economy to be around 5% smaller than previously forecast, in the medium term.

Figure 2 – The variation in forecast States income in 2023

Year 2023 (£58m) Forecast variation to autumn 2019

£5m, Other income, 8%

£0m, Bad debts, 0%

£15m, Personal, 26% £8m, Stamp duty, 14%

£4m, Impots, 7%

£6m, GST, 11%

£20m, Corporate, 34%

4. The forecast is highly uncertain, with a number of potential risks relating to the COVID-19 outbreak:

• The medical situation may require a longer period for significant parts of the economy to be shut down, or a second phase of restrictions.

• A larger impact on financial services, through a contagion effect either from the global or local economies. This is a particular risk to corporate tax, as banks pay a significant proportion of corporate tax and may see reduced profits in the event of suffering significant loan impairments.

• Long-term structural impacts, for example due to the failure of some key businesses.

• A reduction in travel to and from the Island in the medium term, which would delay the recovery in the visitor economy and could hinder the development of new business for exporting sectors.

• A prolonged reduction in domestic demand due to a strain on household finances and reduced consumer confidence.

• A prolonged reduction in business investment due to a strain on corporate finances and reduced business confidence.

• Changes to consumer behaviour, for example an acceleration in the shift to online retail.

• In addition to downside economic risks, there is a further layer of downside risks to income tax:

• The potential that bad debts will increase more than in the base case forecast.

• A potential trend for greater retention of profits in locally-owned firms, resulting in lower distributions.

• A potential reduction in relocations on the high-value residency tax regime.

5. In addition to risks from the COVID-19 outbreak, the longer-term risks remain:

• The uncertainty regarding the UK's future trading relationship with the European Union. While the Coronavirus pandemic may result in slow progress in negotiations, the British Government has so far ruled out any extension to the end of the transition period beyond the end of 2020. The IFG forecast assumes that the UK moves in an orderly fashion to a new trading relationship, at the end of the transition period – whether or not this is extended beyond the end of 2020.

• Risks to financial services, including the risk of external regulatory challenges. The pressure the current crisis has put on public finances around the world may result in an intensification of regulatory interventions, which may have unintended negative consequences for Jersey's financial services sector. In addition, the risk to the Jersey financial services sector posed by the possible behavioural responses of multinational companies to changing international tax rules and, in particular, the OECD work on the Taxation of the Digitalised Economy.

• Longer-term challenges including low productivity growth and the impacts of an ageing demographic.

6. The IFG has also developed a forecast for a downside scenario. This scenario assumes both a prolonged period of restriction on economic activity, and a more severe impact on the economy – including more significant structural impacts that reduce the forecast in the medium term.
7. Under the downside scenario, the forecast for total States income in 2020 is £163m (18.6%) lower than the previous IFG forecast. The majority of this reduction (£100m) is due to downgrades to the forecast for income tax, with £24m from lower GST, £16m from stamp duty, £10m from reduced impôts, £6m from other income' and £6m from a forecast increase in bad debts.
8. However, the base case scenario is considered by the IFG as the most likely outcome, with the downside scenario for information only. In future, several indicators will be closely watched to consider the extent to which the outcome may diverge from the IFG's base case forecast.
9. Key indicators include:

• The latest data and forecasts for the global economy

• Sentiment in Jersey's key sectors – informed by both discussions with key business leaders and the results of the Business Tendency Survey

• Local survey evidence on the impact of the COVID-19 outbreak

• Finance sector profit and employment projections

• Revenue Jersey intelligence on corporate tax projections

• Data on employment and on the number of Social Security contributors

• Number of people registered as Actively Seeking Work

• Inflation

• Average earnings

• Residential property prices and transactions

• Vacancies data from gov.je and other sources

• Data from GST returns

• Employer returns from the Income Tax Instalment System (ITIS)

• Aggregated data on credit card spending

• Data from the support schemes that the Government of Jersey has put in place:

• The Co-Funded Payroll Scheme

• The Business Loan Disruption Guarantee Scheme

10. In the first instance the Fiscal Policy Panel will be asked to update its forecast for the economy, using any new information that is available, plus the latest expectations for the extent and duration of any restrictions that remain in place. The income forecast will then be revised based on the updated FPP forecast and data from Revenue Jersey.

2. Purpose

2.1.  The purpose of the Income Forecasting Group's report is to provide the revised forecast of total States income as at spring 2020. The forecast reflects:

• the Fiscal Policy Panel's (FPP) economic assumptions of March 2020[1] and other related economic data for Jersey

• general revenues outturn for 2019

• initial information on general revenues for Quarter One 2020

• forecasts from Treasury for other income'

• latest available outturn data from Revenue Jersey, and

• intelligence from the IFG affecting future forecasts.

3. Background

1. The Terms of Reference (Appendix F) for the Income Forecasting Group requires that at least two forecasts are produced each year. This forecast will provide important background to the development of the Government Plan 2021-24.
2. The forecast period covers the years 2020-24 in order to cover the whole of the Government Plan period.
3. The next scheduled revision of income forecasts by the IFG will be an update carried out in autumn 2020. Additionally, internal consideration will be given to the forecast as the COVID-19 pandemic develops.
4. The IFG forecasts cover a large proportion of States income, including other States income from the Island Wide Rate, dividends and returns from States Investments, and other fees. The forecast for these income sources has been included in Appendix E.

5. A base case' forecast has been developed, to represent the IFG's view of the most likely outcome, alongside a downside scenario, which considers a more severe reduction in revenues due to COVID-19 (Figure 7).

4. Economic assumptions

1. The economic assumptions have been updated by the Fiscal Policy panel (FPP) based on the latest local and international developments to March 2020.
2. Additional consideration has been given to the impact of the COVID-19 pandemic and its probable economic effects.
3. The central assumptions on which the spring 2020 forecasts are based are shown in Figure 3.
4. The IFG has considered the economic assumptions from the FPP and have agreed that these assumptions should be used as the basis for the income forecast modelling, with any variations described in the relevant reports (appended).

Figure 3 – FPP Revised economic assumptions as at March 2020

Figure 4 – Variation in FPP economic assumptions between October 2019 and March 2020

5. Risks and uncertainties

1. There are a number of specific risks and uncertainties applicable to each of the forecast components, and these are described in more detail within the appended reports.
2. The  COVID-19  pandemic  has  had  a  significant  impact  on  the  forecast,  with  the Organisation for Economic Cooperation and Development (OECD) identifying the virus as the greatest threat to global growth since the financial crisis of 2007-08.
3. Prior to the COVID-19 outbreak, data on the local economy suggested there was a mild slowdown during 2019.
4. Uncertainty around the UK's future trading relationship with the EU continues. However, for the purposes of the forecast the IFG assumes that the UK will make an orderly transition to a new trading relationship
5. The increase in external regulation, particularly from the OECD, may have long-lasting consequences to Jersey's financial services sector.
6. A number of longer-term challenges, including low productivity growth and the impacts of an ageing demographic, will continue to cause uncertainty in the forecast.

6. COVID-19 pandemic

1. The base case forecast typically uses the FPP economic assumptions with few adjustments made to them.
2. Due to the significant economic disruption caused by the COVID-19 pandemic, a number of temporary adjustments have been made to consider the impact on revenues of a three- month period of restrictions on economic activity (put in place in order to reduce the spread of COVID-19) followed by a three-month phased return to a full level of economic activity.
3. With the forecast economic downturn and the fiscal measures being implemented due to COVID-19, the forecast for bad debts has been increased for the years 2020-22.

7. Summary of base case' forecast

1. Due to the complexity of the adjustments made to each of the individual forecasts for spring 2020, the individual reports are appended, with the overall change to the autumn 2019 forecast summarised below.
2. Personal income tax (Appendix A) – The personal income tax forecast comprises several components that have differing economic sensitivities. A number of individual adjustments suggested by the IFG result in a £45m decrease to the forecast in 2020 gradually falling away over three years. However, these adjustments together with the updated FPP economic assumptions, and additional data, reduce the autumn 2019 forecast by £51m in 2020, decreasing to a £15m reduction in 2023.
3. Corporate income tax (Appendix A) – The recent broadening of the corporate tax base, and the differential effects of the COVID-19 pandemic, has led to the IFG splitting the corporate tax forecast on a sectoral basis. Additional adjustments have been made to reflect the impact of restrictions on activity on sectors subject to a positive rate of tax. As the 2020 corporate forecast reflects the 2019 year of assessment there is no change to that year resulting from these adjustments. However, from 2021 the forecast is reduced by £27m with a £20m reduction in 2022 and 2023.
4. GST (Appendix B) – The restrictions to activity arising from the COVID-19 pandemic are likely to lead to a reduction in sales revenues, and hence GST receipts, in 2020. Work has been undertaken to identify the sectoral impact of the restrictions. However, the IFG feels that there will be a persistent impact on GST receipts continuing in 2021, with an implicit judgement that there would be a change in consumer behaviour. This leads to a reduction in the autumn 2019 forecast of £20m in 2020, decreasing to £6.3m in 2023.

5. Impôts duty (Appendix C) – Available in-year data suggests that the restrictions in place to mitigate the health impacts of COVID-19 are having a material impact on excise duties. For example, the closure of hospitality outlets has resulted in a dramatic fall in on-trade sales of alcohol, and the closure of schools and businesses has led to a significant reduction in fuel consumption. Additionally the FPP economic assumptions have also resulted in a reduction to the presumed duty rates in future years. The autumn 2019 forecast has reduced by £7.6m in 2020, £2.2m in 2021, £3.9m in 2022 and £4.5m in 2023.
6. Stamp duty (Appendix D) – Despite a strong start to property transactions in 2020, the impact of restrictions on activity will likely result in a decrease in the number of annual property transactions. The updated FPP economic assumptions support a decrease in the number of transactions and a subsequent reduction in property prices. The combination of these reductions result in a long-term reduction to the autumn 2019 forecast of £15.1m in 2020, decreasing to £8.0m in 2023.
7. Other Government income (Appendix E)  – The autumn 2019 forecast has been reduced by £6.3m in 2020, with smaller variances to the forecast for 2021 to 2023. The main driver of the reduction in the forecast is reduced dividends from some States-owned entities and, more significantly, reduced investment returns on the Consolidated Fund and the Jersey Currency Fund.
8. Figure 5 provides a detailed analysis of the base case forecast which is summarised below.

 Figure 5 – Base case IFG forecast for spring 2020

11

8. Downside scenario

1. The base case' forecast has been prepared assuming a three-month period of restrictions on economic activity with a three-month phased return to full economic activity.
2. In order to present a downside scenario, additional forecasts have been prepared to consider a scenario which assumes that economic activity remains severely restricted for up to five months, with a two-month phased return to full economic activity.
3. The downside forecast further assumes that the COVID-19 pandemic results in significant structural impacts and, therefore, this should not be considered a default' forecast if restrictions are extended.
4. The impact of the downside scenario results in a reduction of the overall base case forecast by £56.7m in 2020 increasing to £77.4m in 2024 as shown in Figure 6.
5. The specific impact of the downside assumptions on the forecast are detailed in the relevant appended reports. In summary these are:

1. Personal income tax - A c.£50m decrease from the base forecast for 2020 arising from the extended period of reduced economic activity. The downside forecast for 2024 is £54m lower than the base case, reflecting the assumption of more significant structural impacts arising from the COVID-19 pandemic.
2. Corporate income tax – No further effect in 2020 due to this being the 2019 year of assessment. However this is followed by a c.£16m-£19m reduction from the base forecast for each of the years 2021-24. This reduction is a result of a prolonged period of restrictions to economic activity, and an increased negative impact of the other risks to financial services firms as detailed in section A5 of Appendix A.
3. GST – The downside forecast includes a weaker recovery and a permanently-lower level of receipts, beginning with a decrease of £4.3m from the base forecast in 2020 reducing to less than £2m below the base forecast in 2024.
4. Impôts duty – The extended period of restrictions would only impact the 2020 year of the forecast, resulting in a decrease of £2.2m from the base case in that year.
   5. Stamp duty – A longer period of restrictions would likely result in fewer transactions of property, particularly those under £2m or subject to Land Transaction Tax (LTT). The lower volume of transactions, and forecast decrease in property prices, further reduces the base case stamp duty forecast in 2020 by £1.2m with an increased reduction of £2.6m by 2024.

7. Other Government income – The other income forecast is considered to be similar under both scenarios.

Figure 6 – Downside scenario of IFG forecast for spring 2020

Figure 7 – Comparison of spring 2020 base case and downside scenario forecasts

£'000 Range of forecasts for States income (spring 2020) 1,050,000

1,000,000 950,000 900,000 850,000 800,000 750,000 700,000 650,000 600,000

2018 2019 2020 2021 2022 2023 2024 Outturn Government plan 2020-2023 (autumn 2019) Base case forecast Downside scenario

Appendix A – Income tax forecast

Income tax forecast

The updated income tax forecast is summarised in Figure 1.

Figure 1: Changes to income tax forecast since Government Plan 2020-23

Some columns may not sum due to rounding

The remainder of the note is set out as follows:

• Section A1 describes how the forecast is carried out.

• Section A2 outlines the new economic assumptions and updates to tax outturn data.

• Section A3 explains the IFG's adjustments to the forecast to account for the COVID- 19 crisis.

• Section A4 sets out the forecast.

• Section A5 covers the uncertainties and risks to the forecast

• Section A6 – the IFG's downside scenario with a more severe contraction, due to the COVID-19 crisis.

• Section A7 - a comparison of the Fiscal Policy Panel's forecast with comparable forecasts for other jurisdictions.

• Section A8 – comparison of the IFG forecast with income tax forecasts for other jurisdictions.

A1.  How the forecast is carried out

Methodology for personal income tax forecast

An overview of the personal income tax forecasting model is shown in  

Figure 2. There are two main elements – forecasting taxable income and then forecasting the likely yield (i.e. tax collectable per £1 of taxable income) based on forecasts of the value of deductions (including exemption thresholds for marginal rate taxpayers, and the various reliefs, credits and allowances claimed by taxpayers). The forecast of tax collectable is therefore the product of the forecasts for taxable income and yield.

Taxable personal income is estimated over the forecast period by taking outturn data provided by Revenue Jersey and projecting it forward on the basis of statistical relationships between taxable income and various economic variables. The economic variables include compensation of employees (CoE), company profits, employment, average earnings, inflation and interest rates. Forecasts of these variables are overseen by the independent FPP.

The yield is then forecast by taking the baseline data for the value of deductions and forecasting changes in these in line with assumptions about future taxpayer numbers, inflation, interest rates and policy changes announced in previous Budgets and Government Plans. So, for example, the aggregate value of the basic exemption thresholds might be assumed to rise in line with the lower of RPI inflation and earnings (to represent the anticipated annual increase in the threshold), and employment growth (to represent the increase in taxpayer numbers claiming this threshold).

Figure 2: Model overview

BASELINE FORECASTS

• statistical relationship

Income Forecast income

• economic assumptions

minus minus

• taxpayer number assumptions

Exemptions, reliefs and allowances . Forecast reliefs

• known and future policy assumptions

• economic assumptions

multiplied by multiplied by

Tax rates Tax rates

= =

Net tax collectable Forecast net tax collectable

Methodology for corporate income tax forecast

Corporate tax is forecast to grow in line with the IFG judgement for specific sectors, informed by the FPP's economic assumptions.

A2.  New economic assumptions and updated tax data

The Fiscal Policy Panel's (FPP) updated economic assumptions (Figure 3) have been used in the model to update the income tax forecast. The economic assumptions were published in March 2020. The economic assumptions letter can be found on the FPP web-site www.gov.je/fiscalpolicypanel

Figure 3: FPP economic assumptions, March 2020 (nominal growth rates, unless otherwise stated)

The changes since the last set of assumptions are summarised in Figure 4.

Figure 4: Change in FPP economic assumptions between October 2019 and March 2020, percentage point change in growth

When compared to the previous (October 2019) assumptions, the main changes are:

• GVA in 2020 is forecast to fall and is more than 7% lower than the previous forecast. This is composed of gross operating surplus (GOS) i.e. profits, which are expected to be 11% lower than the previous forecast, and compensation of employees (aggregate wages), which are expected to be 6% lower.

• There is some recovery in GVA in 2021, but by the end of the forecast period GVA remains 5% lower than under the previous forecast.

• Employment is expected to fall, driven by a contraction in non-finance employment. The figure presented in the FPP forecast is an annual average, during the peak period of disruption the actual year-to-year fall is likely to be much larger.

• Average earnings are forecast to decline in 2020 in nominal terms. This would be the first decline in nominal earnings on record, with records going back to 1990.

• Inflation in 2020 is lower than in the last forecast. This reflects lower oil prices and lower mortgage interest rates for tracker mortgages. However, the FPP stated that other inflation pressures could work in either direction, as supply chain disruption or other shortages could cause pockets of high prices but there will be downward pressure on other prices due to reduced demand. Again, this is an annual average and quarterly data is likely to show significantly more volatility.

• Interest rates are lower in the early years of the forecast – reflecting both the recent cuts to Bank Rate of 0.1% and lower market expectations for the future path of rates.

The statistical outturns for some of these measures may be challenging for Statistics Jersey to compile and may show more volatility than usual. As new data are published, the Economics Unit will work with Statistics Jersey to seek to understand how these issues may affect tax forecasting.

Updated information from Revenue Jersey Personal tax assessments

There were delays to the assessing process for 2018 personal tax returns. In due course, assessments will also need to be raised for taxpayers who did not file a 2018 return. Further, there are some differences in the way that data are reported between the previous system (ITAX) and the new system (RMS) with the new system providing greater granularity between taxable income types. Revenue Jersey are working through both these issues to provide an estimate of the baseline position for 2018 but this has not been available to inform this forecast.

ITIS data

Data are however available from ITIS. Employment income reported through ITIS suggests growth of 5.7% in 2018 and 4.3% in 2019. This has been incorporated into the forecast.

Corporate outturn

A total of £114m was received in 2019, in respect of the 2018 year-of-assessment. This is around £1m higher than forecast.

A3. Adjustments to personal income tax forecast due to COVID-19 crisis

The personal income tax forecasting model is primarily based on estimates of the statistical relationships between economic variables and the tax base. This uses data over the last 20 years to forecast future tax receipts. While these statistical relationships are robust in the long run and in normal times, the IFG considers it likely that the collection of personal tax will diverge from the overall economic performance during the current period of economic distress and beyond, for the reasons set out in the remainder of this section.

Additional functionality has been added to the model to allow temporary adjustments to be made to each taxable income line in the forecast, and to the average effective tax rate. The starting point is based on the economic forecasts, and the statistical relationships, then a percentage reduction is made to this level of income in each year. It is important to emphasise that these adjustments are in addition to the downward impact of the revised FPP economic assumptions. So, the statistical relationships will already account for some lower growth in taxable income – for example growth in taxable employment income will already be smaller because of the lower forecast for growth in compensation of employees (CoE – the national accounts measure of aggregate earnings).

This is not intended to reopen the FPP forecast, but rather to seek to overlay additional impacts on the tax base. The IFG judgement on these adjustments is set out below. The adjustments are made on the available evidence and the IFG's judgements.

Employment income and other earned income (£2.3bn)

The extent of reductions to employment income is partly mitigated by the Government's Co- Funded Payroll Scheme (CFPS), which aims to ensure employment in supported firms, and allow workers continue to benefit from a reasonable level of income to avoid hardship. The IFG's adjustment here assumes that this scheme is successful in sustaining much of the employment income that would otherwise be lost, but there will inevitably still be some redundancies and reduced earnings in firms affected by the economic situation.

The downgraded FPP economic assumptions result in a considerable reduction to growth in taxable earnings due to the COVID-19 crisis, as this includes a forecast 2.9% fall in annual average employment in 2020; and a 0.6% fall in average weekly wages. This results in a reduction to the tax forecast of £14m in 2020.

However, since the FPP forecast the Bank of England has asked the largest UK banks not to pay cash bonuses to senior staff and to take appropriate further actions with regard to accrual, payment and vesting of variable remuneration[1]. The majority of these banks are also significant employers in Jersey. While the Bank of England guidance focused solely on senior staff at banks, the IFG considers it likely that a large proportion of local financial services firms will reduce bonus payments across a range of staff – particularly for bonuses due to be paid in 2021. It is estimated that around £90m of bonuses were paid in the financial services sector in 2018, representing around 3% of total taxable earned income. Therefore a 3% downward adjustment has been made to employment and other earned income in 2021, with smaller adjustments in 2020 and 2022.

In the non-finance sector, the FPP forecast already includes a fall in CoE of around 5%[2]. However, while the CFPS will help to reduce the number of redundancies that otherwise would have occurred, there will be temporary layoffs, reductions in hours and reductions in hourly wages. The majority of non-finance earnings are taxed at a marginal rate of 26%, rather than the c 22.8% marginal rate used in the model[3]. A 5% reduction in non-finance equates to around an overall reduction in wages of around £100m. If 26% of this were to be lost, rather than 22.8%, this would result in a further loss of £3m. This has the effect of reducing the overall average effective tax rate by around 0.1 percentage points in 2020, which is assumed to gradually fall away over the following two years.

The impact of both these effects is set out in Figure 5.

Figure 5: Impact of adjustments to employment income and yield

2020  2021  2022  2023+ Reduction to tax base (%)  -1.5  -3  -1.5  0 Tax impact (£m)  -8  -17  -9  0 Reduction to tax rate (percentage points)  0.1 0.05 0.03 0.0 Tax impact (£m)  -3  -2  -1  0

It is important to note that as the downward adjustment falls away, the amount of tax collected in the medium term is gradually forecast to come back into line with the growth in the economic variables. There is a risk that the current economic disruption might result in a permanent adjustment to the relationship between economic variables and the tax base. Under the FPP forecast, the economy is smaller throughout the period, with a gradual recovery to a lower level, and this is considered sufficient in the central forecast to capture the impact on taxes in the medium term, with a more permanent adjustment considered in the downside scenario set out in section A6.

Pension income (£290m)

The IFG forecast for pension income is driven by both demographic change (growth in the population aged 65 and over) and growth in recent earnings. Earnings can impact the annual uprating of pensions, particularly for the Social Security pension, and in the longer term will also influence the income for new pensioners retiring each year.

The recent fall in financial asset valuations will have resulted in a reduction in the size of many pension funds, which may in turn result in new pensions paying out a lower amount than might have otherwise been expected – and could in turn potentially lead to some deferral of retirement. Therefore, the IFG believes that it would be prudent to adjust pension income in 2020 so that it is not forecast to grow from its 2019 level. This requires a downward adjustment of 3.5%, with the adjustment assumed to fall away gradually over three years.

Figure 6: Impact of adjustments to pension income

2020  2021  2022  2023 onward Adjustment to tax base (%)  -3.5  -1.8  -0.9  0

Tax impact (£m)  -3  -1  -1  0

Business profits (£160m) and property income (£100m)

In the absence of clear statistical relationships between the economic variables and taxable income in these categories, the IFG has in the past assumed that this income grows in line with the respective recent average growth rates. Business profit (i.e. sole trader and partnership income) would therefore normally be forecast to grow at its 5-year average rate (3.5% per year) and property income at its 10-year average rate (6.9%). There are good reasons to assume that this rate of growth is likely to be disrupted in the short term, as set out below.

In relation to business income, a number of these businesses are likely to be in non-finance, particularly sole traders – though much of the partnership income will be in the financial services sector. The FPP forecast overall gross operating surplus (GOS – a national accounts measure of profits) to fall by over 8% in 2020. While non-finance profits are not explicitly included in the FPP letter, the implied fall is around 30%. IFG's judgement is therefore to make a downward adjustment of 30% to personal business profits in 2020.

Property rental income is likely to come under similar pressure, with revenues reduced but less reduction in costs. While it may be possible for some buy-to-let landlords to take mortgage holidays, this will not reduce the interest accrued on the loan but will in fact increase it due to compounding of interest. Therefore, the IFG judgement is for a significant fall in property income, with a negative adjustment of 15% in 2020.

Figure 7 shows the impact of this, with the downward adjustment gradually reduced over three years such that the growth in the tax base in the medium term gradually comes back into line with the growth in the economic variables.

Figure 7: Impact of adjustments to personal business profits and property income

2020  2021  2022  2023 onward Adjustment to profits (%)  -30  -15  -7.5  0

Tax impact (£m)  -12  -6  -3  0 Adjustment to property income (%)  -15  -7.5  -3.75  0

Tax impact (£m)  -4  -2  -1  0

Investment and other unearned income (£100m), shareholder income (£180m) and income taxed at source (£20m)

Investment and other unearned income includes a range of income sources such as bank interest, dividends and investment income plus a number of smaller sources of income. This income is generally grown in the IFG forecast using an established statistical relationship with interest rates (specifically Bank Rate). Shareholder income is a separate category, taxed on distributions of locally owned companies. The volatile nature of shareholder income, and the recent history of policy changes made to taxation of this area, means that in the past the IFG forecast assumed that this income remains flat in real terms. Income taxed at source, while not a substantial amount, has also generally been assumed to be flat in real terms.

While the lower forecast for Bank Rate will reduce the forecast for investment income, there are likely to be more powerful factors at play. There have been various reports of dividend cuts globally, and both the Bank of England and European Central Bank have urged banks to reduce dividend payments. Similar steps have been taken for insurance companies. Dividends or other payments from investment funds will similarly come under pressure, with reductions in the value of, and income from, underlying assets.

Forecasts for global dividend payments in 2020 vary, with calculations from UBS suggesting that European dividends could fall by 14% year-on-year, while Goldman Sachs have forecast a reduction in US dividends of 25%. IFG's judgement is therefore a downward adjustment of 20% in 2020, with this downward adjustment falling away gradually over the following two years.

Shareholder distributions and income taxed at source are also highly uncertain, but it is assumed that these follow the same path as investment income.

Figure 8: Impact of adjustments to investment income, shareholder distributions and other unearned income

2020  2021  2022  2023 onward Adjustment to tax base (%)  -20  -10  -5  0

Tax impact (£m)  -14  -7  -4  0

Comparison with post-2008 economic crash

After accounting for these adjustments, in addition to the impact of the FPP forecast, the fall in taxable income would be significantly greater than that experienced in 2009:

• Employment income grew by only ½% in 2009, the lowest rate of growth for the last seventeen years. The forecast includes a fall of 2% in 2020.

• Pension income grew by 8% in 2009 but slowed to 5% in 2010. Much slower growth in pension income was seen in both 2014 and 2016 but this was due to one-off exercises to reduce the number of tax assessments raised particularly for pensioners with income below their exemption threshold. The IFG forecast assumes no growth in 2020.

• Business profits fell by 10% in 2009, before recovering 24% in 2010. A 12% fall in 2011 is the largest fall in business income since at least 2002. The IFG forecast assumes a fall of 28% in 2020.

• Property income grew by 12% in 2009 but subsequently fell by 5% in 2011. The largest fall in property income was 8% in 2004. The IFG forecast suggests a fall of 9% in 2020.

• Bank, dividend and other income fell by 42% in 2009, the largest fall on record, with most of this coming from a fall in bank interest - driven by the 400bp fall in the average Bank Rate. The provisional IFG forecast includes a fall of 23% in 2020.

• A comparison of shareholder income is not possible as this was not taxed before the introduction of 0/10 in 2009.

Therefore, the combined impact of both the FPP forecast and the IFG adjustments would result in a forecast for a significant and unprecedented adjustment in each of the key areas of taxable income.

Figure 9: Sources of taxable income (£m)

3,000 Forecast 2,500

2,000

1,500

1,000

500

0

Profit Pension Property Earnings

A4.  Updated income tax forecast

Personal tax

The personal tax forecast has been reduced in each of the years 2020 to 2023. The forecast has been extended to include 2024.

Figure 10: Changes to personal income tax forecast since Government Plan 2020-23

Some columns may not sum due to rounding

Impact of audit

The IFG forecast for personal income tax was included in the audit of the Government of Jersey accounts for 2019. This focused on the forecasts for 2018 and 2019, which were used as estimates in the accounts. As a result of this audit, a number of minor changes were made to the approach, resulting in a small increase to the forecast.

New tax data

The latest ITIS data for employment income in 2018 result in an additional £1m of tax in each year. The latest data for 2019 result in a further additional £5m from 2019 onward.

Re-estimated relationships

Growth in earnings, pension income and investment income are forecast using statistical relationships that are proven to be effective in explaining past growth rates. Estimates of these relationships are normally updated (i.e. re-estimated) when a new set of tax data are available. However, a complete set of tax data for 2018 is not yet available, the relationships have been re-estimated using a set of revised economic data, which has been received from Statistics Jersey. There have been relatively small revisions to the historic data for the components of gross value added (GVA), i.e. compensation of employees (CoE) and gross operating surplus (GOS) – both of which are used to estimate the equation that is used to forecast earned income.

The IFG has also used the growth rate in ITIS earned income as a proxy for assessed earned income in 2018, therefore allowing an additional data point to be used to establish the statistical relationship.

The net impact of this is to increase the forecast by £2m-£3m each year.

New FPP economic assumptions

The new economic assumptions (outlined in Section A2) result in a reduction to the forecast of £14m in 2020, rising to £21m by 2023.

• Lower earnings and employment results in a reduction to the forecast of £14m in 2020, rising to £24m by 2023.

• Lower inflation results in an increase to the forecast of £2m in 2020, rising to £4m by 2023. This is as a result of slower growth in allowances.

• Lower profits in financial services results in a reduction to the forecast of around £1m in each year.

New HVR forecast

Tax from taxpayers on the high-value residency scheme (HVRs) is forecast separately. Outturn data from Revenue Jersey indicate that the tax received from these taxpayers for 2018 was £1m lower than forecast, this lower tax is taken as a new baseline position and the reduction therefore recurs in each year of the forecast.

Further, data have been received from Locate Jersey on HVR arrivals for 2019, and expectations for 2020 onward. The net impact of these is a further reduction to the forecast from 2020.

IFG adjustments

The impact of the individual IFG adjustments is set out in section A3. The aggregate impact is a reduction in the forecast of £45m in 2020, which gradually falls away over three years.

Policy changes

Two policy changes were already reflected in the previous forecast and remain in this forecast:

• Revenue Jersey has estimated a reduction in personal tax of around £1m from 2020 onward as a result of reduced distributions that may result from the extension of a positive rate of income tax to large corporate retailers[4];

• An increase of around £3½m due to the decision to remove the higher child allowance from 2019 as part of the new higher education funding scheme.

As these are unchanged from the previous forecast they do not appear in Figure 10.

Corporate tax

Corporate tax has in the past been forecast to increase in line with the FPP's forecast for financial services profits. This is because most of the tax is levied on financial services profits. Some tax is also collected from property development, property rental, utilities, and from 2019 tax has also been collected on the profits of large corporate retailers.

Given the recent broadening of this tax base, and the likely differential effects of the COVID- 19 outbreak, the IFG has split the corporate tax forecast on a sectoral basis.

Financial services and other

Revenue Jersey discussions with a number of banks and their agents suggest the recent reduction in interest rates could see a significant reduction in their tax liability for 2021. On the basis of these discussions, tax on banks has been assumed to fall 35% in 2021, with around half of this being recovered in 2022.

The remainder of the sector is assumed to grow in line with the FPP forecast for financial services profits. For 2021, therefore, tax is assumed to fall by 2% – based on reduced profits in 2020. There are likely to be pockets of the financial services sector seeing a more significant reduction in profits in 2020, but others may see some profit growth. A more significant fall in overall profits is considered in the downside scenario in section A6.

Given that banks make up around 70% of finance sector Gross Operating Surplus in Jersey (excluding legal and accountancy firms, which are predominantly taxed through personal income tax rather than corporate), the weighted average fall in tax on financial services profits in 2021 is forecast to be 25% (70% at 35% and 30% at 2%). 2022 is assumed to grow by 15%, recovering around half of the reduction in tax.

Other sectors subject to a positive rate of tax make up a relatively small proportion of the total (around 7% – mostly from utilities). No change has been made to the approach to forecasting tax from these sectors. Therefore, tax is assumed to grow in line with the FPP assumption for financial services profits.

Property development and rental

Tax from property development and rental is assumed to fall in 2020 as there was a large increase in tax received in 2019 from property development profits in 2018. In the absence of any reliable information on property development profits in 2019, this has assumed to be a one-off increase due to a heightened level of activity in 2018, particularly relating to some large developments. Rental income has been forecast to grow in line with IFG's forecast for personal taxable rental income.

Tax in 2021 is expected to fall further, as commercial rents are likely to come under pressure – particularly from sectors most affected by the economic crisis caused by the COVID-19 outbreak. IFG's judgement is that a fall of around 9% is reasonable, in line with the fall assumed for rental profits in the personal tax forecast.

While the likely structural impacts of the economic crisis are difficult to quantify at this stage, the IFG has assumed that there is a reduction in demand, in particular for retail space, and therefore tax from property in 2022 is not expected to increase from its 2021 level and growth thereafter is assumed to be remain subdued, growing in line with the general rate of underlying inflation (i.e. RPIY inflation).

Retail

Tax from large corporate retailers (LCR) has been assumed to decline by 50% in 2020, reflecting that sales in food and pharmacy retail will continue with most other sectors seeing a significant fall in sales and therefore likely to have limited profits in 2020. There are challenges in splitting the tax received on a retail sub-sector basis, as some companies will sell a wide range of items. But roughly a third of the tax is estimated to come from activities that have been completely or largely halted, temporarily, due to the restrictions put in place to reduce infection. A further third are likely to be severely restricted by the reduction in footfall, with the remaining third coming from activities that are less affected (e.g. food).

The IFG has assumed therefore that tax from LCRs falls by 50% in 2021, reflecting weighted averages of the estimated falls in subsector profits in 2020[5].

Considerable uncertainty remains in the forecast beyond 2021. There are likely to be losses in 2020 that not only mean that tax is reduced in 2021 but also losses are carried forward to be offset against tax in 2022. A gradual recovery is therefore forecast, for tax to return to 2020 levels by 2023, then grow in line with underlying inflation thereafter.

Figure 11: Assumptions used in corporate tax forecast

% growth rate  2020  2021  2022  2023  2024 onward

Financial services and other  2.0  -25  15.0  2.9  2.9 Property  -5.1  -9  0  2.2  2.4 Large corporate retailers  2.0  -50  50  35  2.4

Note: tax is collected one year in arrears, so tax in 2020 relates to profits in 2019.

Figure 12: Forecast of corporate tax in key sectors (£m)

90 80 70 60 50 40 30 20 10 0

2019 2020 2021 2022 2023 2024

Financial Institution Property Large corporate retailers

Figure 13 sets out the new forecast in comparison to the previous IFG forecast. The outturn was £1m higher than the previous forecast, and the impact of this continues in future years. The revised FPP economic assumptions result in a reduction to the forecast of £5m in 2021, and £3m in 2022 and 2023. The IFG's sectoral adjustments - for banking profits, property and large corporate retailers - reduces the forecast by a further £1m in 2020 and £24m in 2021.

Figure 13: Corporate tax forecast

Some columns may not sum due to rounding

A5. Uncertainties and sensitivities

IFG's view is that the base case' forecast set out in section A4 is consistent with a three- month period of restrictions on economic activity in order to reduce the spread of COVID-19, with a three-month phased return to a full level of economic activity. The main uncertainty to the forecast is that the medical situation requires a longer period of significant parts of the economy shut down, or a second phase of restrictions. Section A6 includes a downside scenario, which is considered consistent with a longer period of reduced activity – in addition to more permanent impacts on the tax base.

Beyond this, the main risks appear to be related to a deeper or more sustained economic downturn than the FPP's central forecast:

• A larger impact on financial services, through a contagion effect – either from the global or local economies. This is a particular risk to corporate tax, as banks pay a significant proportion of corporate tax and may see reduced profits in the event of suffering significant loan impairments.

• Long-term structural impacts, for example due to the failure of some key businesses.

• A reduction in travel to and from the island in the medium term, which would delay the recovery in the visitor economy and could hinder the development of new business for exporting sectors.

• A prolonged reduction in domestic demand due to strain on household finances and reduced consumer confidence.

• A prolonged reduction in business investment due to strain on corporate finances and reduced business confidence.

• Changes to consumer behaviour, for example an acceleration in the shift to online retail.

In addition to downside economic risks, there is a further layer of downside risks to income tax:

• The potential that bad debts will increase more than in the base case forecast.

• A potential trend for greater retention of profits in locally-owned firms, resulting in lower distributions.

• A potential reduction in relocations on the high-value residency tax regime.

While the balance of the risks from COVID-19 are to the downside, there is some potential for the impact on the economy or the tax base to be less severe than the base case forecast. Section A7 and Section A8 respectively demonstrate that the FPP and IFG forecasts are broadly in line with those for other advanced economies – but all forecasts are particularly uncertain currently.

In addition to risks from the COVID-19 outbreak, the longer-term risks remain:

• The uncertainty regarding the UK's future trading relationship with the European Union. While the global coronavirus pandemic may result in slow progress in negotiations, the British government has so far ruled out any extension to the end of the transition period beyond the end of 2020. The IFG forecast assumes that the UK moves in an orderly fashion to a new trading relationship, at the end of the transition period – whether or not this is extended beyond the end of 2020.

• Risks to financial services, including the risk of external regulatory challenges. The pressure the current crisis has put on public finances around the world may result in an intensification of regulatory interventions, which may have unintended negative consequences for Jersey's financial services sector. In addition, the risk to the Jersey financial services sector posed by the possible behavioural responses of multinational companies to changing international tax rules and, in particular, the OECD work on the Taxation of the Digitalised Economy.

• Longer-term challenges including low productivity growth and demographic change.

A6.  Downside income tax forecast

An alternative forecast has been carried out, assuming a larger and more sustained fall in the tax base as a result of the COVID-19 outbreak.

Figure 14: IFG downside forecast for income tax

Some columns may not sum due to rounding

Personal tax

The downside forecast for personal tax is based on the IFG judgement for appropriate increases to the adjustments set out in section A3. This downside forecast assumes that economic activity remains severely restricted for up to five months, rather than the three months in the base case, but also that the COVID-19 outbreak results in significant structural impacts. Therefore, this should not necessarily be considered a default' forecast if restrictions are extended, as an extended period of restriction increases the risk of structural impacts but does not guarantee them.

Figure 15 calculates the incremental' impact of each of the downside adjustments – i.e. the difference between the base case and downside forecasts.

Figure 15: Downside scenario assuming larger downward adjustments to the tax base

2020  2021  2022  2023 onward Adjustment to average tax  Base case  -0.1pp  -0.05pp  -0.025pp  0

rate  Downside  -0.2pp  -0.1pp  -0.1pp  -0.1pp Incremental tax impact  -£3m  -£2m  -£3m  -£4m

-£16m

Employment / other earned  Base case  -1.5%  -3%  -1.5%  0 income adjustment  Downside  -5%  -5%  -2.5%  -2.5%

Incremental tax impact  -£18m  -£11m  -£6m  -£15m Pension income  Base case  -3.5%  -1.8%  -0.9%  0

adjustment  Downside  -5%  -5%  -2.5%  -2.5%

Incremental tax impact  -£5m  -£7m  -£4m  -£5m

Base case  -30%  -15%  -7.5%  0 Profits adjustment

Downside  -50%  -25%  -25%  -25% Incremental tax impact  -£8m  -£4m  -£8m  -£11m

Base case  -15%  -7.5%  -3.8%  0 Rental income adjustment

Downside  -30%  -15%  -15%  -15% Incremental tax impact  -£4m  -£2m  -£4m  -£5m

Investment and  Base case  -20%  -10%  -5%  0 shareholder income

adjustment  Downside  -40%  -20%  -20%  -20%

Incremental tax impact  -£14m  -£7m  -£11m  -£15m

Overall incremental impact  -£49m  -£29m  -£32m  -£52m Downside scenario IFG adjustments (£m)  -£94m  -£65m  -£50m  -£52m

Some columns may not sum due to rounding

Figure 16 demonstrates that the combined impact of both the FPP forecast and the downside IFG adjustments would result in very large downward shifts in each of the key areas of taxable income. Further, under the downside scenario the recovery in income lines is slower and while income growth returns to rates forecast without the adjustment, they remain at a permanently lower level.

Figure 16: Growth in key taxable income types under the downside scenario (£m)

3,000 Forecast 2,500

2,000

1,500

1,000

500

0

Profit Pension Property Earnings The adjustments result in an overall downside scenario forecast as set out in Figure 17.

Figure 17: Downside personal income tax forecast, incorporating larger IFG adjustments

Some columns may not sum due to rounding

Corporate tax

The IFG's downside scenario for corporate tax also assumes a longer period of restrictions on economic activity and more significant structural impacts – with a resulting larger impairment to profits in property firms and large corporate retailers.

The IFG downside scenario also includes a more significant reduction in tax from financial services firms. The IFG does not consider that this is a likely impact of a longer period of restrictions, but relates to the further risks outlined in section A5.

Note that the downside scenario for corporate tax is constructed using adjustment to the growth rates for specific sectors, so caution is required when comparing this to the assumptions used for the downside scenario on personal tax (where adjustments are made to the levels of tax).

The downside assumptions are set out in Figure 18. The downside assumption is that financial services profits could fall 40% in 2020, resulting in a 40% reduction in corporate tax from the sector in 2021. Growth rates in future years are unchanged from the base case, but tax will start from a lower base – suggesting a significant structural reduction in corporate tax from this sector in this scenario. The downside for property income is similar, with the IFG assuming a much more significant impact on profits in 2020 (and tax in 2021) with future growth rates unchanged but from a lower base.

The downside for large corporate retailers has been dealt with in a different manner. Tax is still forecast to fall by 50% in 2021 – a larger reduction has not been assumed due to the likelihood of continued sales of essentials. However, a much slower recovery is forecast – accounting for the potential for a slower economic recovery and a greater level of losses carried forward from 2020.

Figure 18: Assumptions used in corporate tax downside forecast

% growth rate  2020  2021  2022  2023  2024 onward

Financial services and other  2.0  -40  5.0  2.9  2.9 Property  -2.0  -25  0  2.2  2.4 Large corporate retailers  2.0  -50  25  25  25

Figure 19: Downside forecast of corporate tax in key sectors (£m)

90 80 70 60 50 40 30 20 10 0

2019 2020 2021 2022 2023 2024

Finance and other Property Large corporate retailers

This results in a revised downside forecast as set out in Figure 20 Figure 20: Downside corporate tax forecast

Some columns may not sum due to rounding

Overall forecast

Figure 21 compares the IFG's base case and downside forecasts with the forecast that was published in the addendum to the Government Plan 2020-23[6]. In all cases the forecast is before the forecast of bad debts. The base case forecast is £51m lower than the previous forecast for 2020, but the difference increases to £71m in 2021, before falling back to a £35m differential by 2023. The downside is around £100m lower than the previous forecast in each year other than 2021 when the difference peaks at £116m.

Figure 21: Comparison of base case and downside with previous forecast

800 700 600 500 400 300 200 100 0

2018 2019 2020 2021 2022 2023

October forecast Base case forecast Downside forecast

A7.  Comparison of Fiscal Policy Panel forecast with other jurisdictions

Economic forecasting is always uncertain, but the circumstances of the current crisis mean that a much greater range should be considered around any forecast. Comparisons have therefore been made of the FPP forecast with forecasts for other jurisdictions, as a sense check for IFG.

GVA forecasts

The Economics Unit has compared the FPP's GVA forecast to GDP forecasts included in the International Monetary Fund's April 2020 World Economic Outlook[7].

Figure 22: Index of GVA – Jersey and other advanced economies (2019=100)

100

US Germany

Jersey UK

France

95 Italy

90

2015 2016 2017 2018 2019 2020 2021

Sources:  Jersey from FPP economic assumptions 23 March 2020

Other jurisdictions from IMF World Economic Outlook 14 April 2020

Other than Italy, all countries shown in the chart are forecast to experience a decline of around 6-7% in 2020. All countries with the exception of Italy are forecast to see GDP return to within 3% of its 2019 level, by 2021.

Of all the 39 advanced economies included within the IMF forecast, the worst hit are forecast to see declines of more than 5% over two years – San Marino (7.4%), Macao (7.1%) and Greece (5.5%). Only three advanced economies are forecast to grow over two years – Malta (4%), Korea (2.2%) and the Czech Republic (0.5%). The mean two-year decline is 2.1% and median 2.0% – compared to a forecast decline of 2.2% for Jersey.

The IMF forecasts have also been compared to various other easily-available forecasts and appear to be close to the lower end of the forecasts, though most of the other forecasts were made earlier than the IMF and therefore did not have the same degree of available information.

Figure 23: Other forecasts for UK

Figure 23 shows that forecasts for the UK vary, with the IMF forecast close to average. Further to this, the UK Treasury (HMT) produces a monthly compendium of forecasts for the UK economy, with the most recent published on 20 May . This includes 24 forecasts made between 1 May and 18 May. The average of these forecasts is an 8.6% decline in 2020, followed by 6.2% growth in 2021. The forecasts for 2020 GDP range from a 12.9% fall, forecast by Bank of America - Merrill Lynch, to a 4.7% fall forecast by Heteronomics. JP Morgan are forecasting the steepest quarterly decline – 56.7% in quarter 2, followed by growth of 63.9% in quarter 3.

The UK's Office for Budget Responsibility has produced a reference case' scenario , which shows a steeper decline than most of the forecasts covered in the HMT compendium. Under this scenario, UK GDP declines by 35% in quarter 2 of 2020. This drives a fall in annual GDP of 12.8%, which then bounces back strongly to 17.9% in 2021. However, the OBR's reference case assumes no lasting economic hit'.

Figure 24 demonstrates again that the IMF forecasts for the US and euro area are close to average. But there remains considerable uncertainty with the IMF indicating that risks are to the downside.

Figure 24: Other forecasts for the euro area and US

Overall then, the FPP forecast appears to be close to the IMF's forecast for most advanced economies. The IMF forecast in turn appears to be around average compared to other forecasts, though within a large range of forecasts.

GVA forecasts – quarterly considerations

It is worth noting that a number of the forecasts for other jurisdictions are based on significant quarterly declines, and it is these quarterly declines that are forming many of the headlines. For example, CEBR's forecast for the UK includes a 15% fall in GDP in Q2, while Goldman Sachs' forecast for the US includes a 5.5% fall in Q2[8] – but both forecasts include a recovery in the remainder of the year with annual GDP down 4%.

The FPP assumed a similar path for Jersey, stating that:

this forecast for annual growth comprises a very sharp contraction within the year with a short period of very steep decline, particularly in the second and third quarters of the year, but with the first and last quarter seeing less impact'

The FPP does not forecast quarterly GVA, nor is a series of quarterly GVA available for Jersey. However, Figure 25 illustrates one possible way in which an annual decline of 6.3% could be achieved with, in this example, a 15% fall in seasonally-adjusted GVA in the second quarter.

Figure 25: Illustrative quarterly growth rates to align with FPP annual forecast

Forecasts of the impact of the current crisis refer to the prospect of a V-shaped, U-shaped or L-shaped recovery, or alternatives such as a tick or a swoosh. The shape' of the forecast depends on whether it is the shape of the growth rates or the shape of the level of GVA – so while the FPP's annual growth rates look like a V-shape, the level of GVA is not.

Figure 26 extends the illustration in Figure 25 further, showing an index of quarterly GVA using illustrative quarterly growth figures that align to the FPP forecasts. It is worth noting that this is just one path for quarterly GVA that would align to the FPP forecasts, and the quarterly GVA figures illustrated here are not published or endorsed by the FPP.

Figure 26: Illustrative quarterly GVA index, based on FPP annual GVA forecasts

110

105

100

95

90

85

80

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2018 2019 2020 2021 2022 2023

Source: Economics Unit quarterly illustration, based on FPP annual forecasts, dashed line represents the FPP's October 2019 forecast

Figure 27 demonstrates that Jersey could see a broadly U-shaped' initial recovery phase, when looked at on a quarterly basis. But beyond this initial recovery GVA remains significantly below the FPP's previous forecast.

The shape of the illustrative quarterly GVA chart appears broadly similar in shape to the IMF's forecasts for advanced economies, as shown in Figure 27.

Figure 27: IMF quarterly forecast for advanced economy GDP and indicative Jersey quarterly GVA forecast (Index: 2019Q1 = 100)

105 100 95 90 85 80

75

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2019 2020 2021

Advanced economies - IMF forecast Jersey - illustrative forecast

Inflation forecasts – IMF

Forecasts for inflation are not available as widely as those for GDP. However, the IMF's forecast for consumer prices can be compared to those for Jersey's RPIY inflation. While there are differences in the measurement of price indices, the FPP forecast for Jersey appears to follow a similar trend to the IMF forecasts for a number of other advanced economies – with inflation in 2020 forecast to be around 1 percentage point lower than that experienced in 2019; with 2021 returning close to 2019 rates.

Figure 28: Forecast for Jersey RPIY inflation compared to forecasts for other advanced economies

Inflation (%)  2019  2020  2021 United States  1.8  0.6  2.2 Germany  1.3  0.3  1.2 France  1.3  0.3  0.7 Italy  0.6  0.2  0.7 United Kingdom  1.8  1.2  1.5 Jersey  2.6  1.4  2.2

Sources:  Jersey from FPP economic assumptions 23 March 2020

Other jurisdictions from IMF World Economic Outlook 14 April 2020 Labour market forecasts – OBR

The OBR coronavirus reference case' forecasts UK employment to fall from 32.8m in 2019 to 31.8m in 2020 (3%) before recovering to 32.3m in 2021 (1.7% growth) and 33m in 2022 (2% growth). The fall in 2020 is very close to the FPP's forecast of 2.9%, and the growth in 2021 is also similar to the 2.0% FPP forecast. However, the OBR's forecast for 2022 is significantly stronger than the FPP's 0.8%.

The OBR forecasts the unemployment rate to increase from 3.8% to 7.3% in 2020, then to 6.0% in 2021. However, these are annual averages and unemployment is forecast to peak at 10% in Q2.

Earnings are forecast to fall by 7.3% in 2020, before growing 18.3% in 2021. The OBR assumes that 30% of UK employees are covered by the Coronavirus Job Retention Scheme and it is likely that many of these will have their wages reduced to 80% while on furlough, and the OBR also assumes that many employees not on furlough will be working reduced hours.

Figure 29: OBR labour market forecasts - 'coronavirus reference case'

A8. Comparison of income tax forecast with forecasts for other

jurisdictions

As with economic forecasts, fiscal forecasting is also very uncertain. There are two ways in which errors can manifest in revenue forecasts: either because of economic outturns diverging from forecast; or a divergence in the relationship between revenues and economic variables. The draft IFG forecast for Jersey has been compared to forecasts for the UK and Ireland:

Office for Budget Responsibility forecast for the UK[9]

The OBR published a coronavirus reference case scenario on 14 April. This included a forecast fall in income tax and National Insurance contributions from £341bn in 2019/20 to £300bn in 2020/21 – a fall of 12%, compared to 7% for the IFG's base case forecast, and 17% in the IFG's downside forecast.

Corporate tax was forecast to fall from £55bn to £48bn – a fall of 13%, compared to 22% in the IFG's corporate income tax forecast for 2021. The IFG's downside forecast is for a 35% fall in corporate tax.

Economic and Social Research Institute (ESRI) forecast for Ireland[10]

ESRI have forecast a fall in Irish GDP of around 7% in 2020 – broadly similar to the FPP forecast for Jersey. ESRI forecast this to result in a 7% reduction in taxation, when compared to 2019:

• Income tax 5% lower

• VAT receipts 8% lower

The IFG's base case forecast of a 7% fall in personal income tax forecast for Jersey would therefore be slightly steeper than the ESRI forecast for Ireland. The IFG's downside forecast is steeper still, at 17%.

Appendix B – GST forecast

GST forecast note

This note sets out a provisional forecast of Goods & Services Tax (GST) for the Income Forecasting Group's (IFG) consideration. This updated forecast is based on new economic forecasts published by the Fiscal Policy Panel (FPP) in March 2020.

The remainder of the note is set out as follows:

• Section B1 describes how the forecast is carried out.

• Section B2 outlines the new economic assumptions.

• Section B3 sets out the new forecast.

• Section B4 covers the uncertainties and risks to the forecast.

• Section B5 sets out the results from the model estimation.

B1. How the forecast is carried out

Goods & Services Tax ("GST") was introduced in 2008 and is collected by Revenue Jersey. GST is collected from purchases of goods and services on the Island, and some imports from off-island. Initially introduced at 3%, the GST rate was increased to 5% in June 2011 with an effective rate of 4% for 2011 overall.

There are three components to GST receipts:

• "Normal" GST (i.e. spend on Island)