STATES OF JERSEY

 REPORT ON THE REVISED FORECAST OF STATES INCOME FOR SPRING AND SUMMER 2022

Presented to the States on 4th October 2022 by the Minister for Treasury and Resources

STATES GREFFE

2022  R.134

2

REPORT

The purpose of this report is to present the Spring 2022 and Summer 2022 reports of the Income Forecasting Group to the Assembly.

R.134/2022

Income Forecasting Group

Report on the revised forecast of States Income for Spring 2022

Contents

1. Executive Summary ..................................................................................................................................... 2
2. Uncertainties around the forecast ................................................................................................................ 2
3. Economic Assumptions ............................................................................................................................... 3
4. Summary of forecasts .................................................................................................................................. 4
5. Range of forecasts....................................................................................................................................... 6 Appendix A – Personal Income Tax Forecast ..................................................................................................... 7 Appendix B – Corporate Income Tax Forecast ................................................................................................. 18 Appendix C – Goods and Services Tax (GST) Forecast................................................................................... 22 Appendix D – Impôts Forecast .......................................................................................................................... 26 Appendix E – Stamp Duty Forecast .................................................................................................................. 33 Appendix F – Other Income Forecast................................................................................................................ 39 Appendix G – Social Security and Long-Term Care Contributions Forecast .................................................... 45 Appendix H – Terms of Reference .................................................................................................................... 47

1. Executive Summary

1. The Income Forecasting Group (IFG) has increased each year of the forecast when compared to the Spring 2021 forecast addendum [1]. In total, the forecast for income in 2022 has increased by £54.5 million (5.9%). This is driven predominantly by improvements to the forecast for income taxes.
2. The IFG's forecast has been informed by the updated economic forecast[2] produced by the independent Fiscal Policy Panel (FPP) in March 2022. The updated economic forecast suggests that the economy is recovering well from the pandemic, with unemployment at record lows, however the cost of living is forecast to increase, along with anticipated interest rate rises.
3. The IFG have considered 2021 outturn data compared to the Covid-19 adjustments made to the Spring 2021 forecast addendum. These are detailed in each of the respective component reports appended.
4. The Spring 2022 forecast (based on the FPP assumptions of March 2022) 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.

2. Uncertainties around the forecast

1. Significant uncertainty remains around the IFG forecast, emphasis should be on the illustrative range presented by the IFG, rather than sole focus on the central forecast.
2. Risks to the previous forecast was around the uncertainty over how quickly the economy would recover from the Covid-19 pandemic and public health measures put in place as a response. There remains the economic consequences of the Covid-19 pandemic post Government restrictions, with supply chain pressures pushing up prices.
3. Similarly, more is now known about the UK and Jersey's trading relationship with the EU as the Brexit transition period came to an end in December 2020. There is remaining uncertainty over how much impact this might have on Jersey's economic prospects in the medium term.
4. There are increasing and emerging uncertainties in the global economy with the challenges of rising inflation and the economic consequences of the ongoing conflict in Ukraine.
5. The financial services sector contributes a large part of the Jersey tax collection, both directly and indirectly. The sector has proven resilient against several challenges including the pandemic. Interest rates are expected to increase over the forecast period, and this drives a large part of the increased income tax forecast.
6. 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.
7. 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

3. Economic Assumptions

1. The FPP economic assumptions have been updated based on the latest local and international developments to March 2022.
2. The main variations to the economic assumptions used in the addendum to the IFG Forecast for Spring 2021 reflect these developments and include:

• Inflation to reach a peak of 5.8% in 2022, then to fall at a slower rate than the UK. The forecast is lower than the UK predominantly due to lower reliance on gas and electricity prices in long- term contracts.

• In response to rising inflation, markets are expecting interest rate rises and these have been reflected in FPP assumptions, with rates reaching 2.3% in 2023 before slowly coming back down.

• Interest rate increases are expected to drive financial services profits growth.

• The overall economy is forecast to grow, but not by as much as financial services. Non-financial service sectors are projected to recover their pandemic losses before returning to trend.

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 Spring 2022. However, IFG recognise the increased uncertainty around assumptions, and have factored this into the range of forecasts.

% Change unless otherwise specified   2020 2021 2022 2023 2024 2025 2026 Real GVA  -8.7  6.0  5.1  7.7  -0.2  -0.8  0.6 RPI  1.3  2.7  5.8  4.6  2.9  2.1  2.6 RPIY  1.2  2.7  5.3  3.6  2.5  2.4  2.5 Nominal GVA  -7.2  8.8  10.6  11.6  2.3  1.6  3.1 Gross Operating Surplus (including rental)  -15.5  13.2  17.1  20.6  1.4  0.2  3.2 Financial Services Profits  -18.1  19.5  25.7  36.1  -0.9  -3.1  3.4 Compensation of employees (CoE)  0.2  5.4  5.4  3.6  3.2  3.0  2.9 Financial services CoE  1.5  3.5  5.7  4.0  3.4  3.3  0.4 Non-finance CoE  0.0  6.5  5.3  3.4  3.1  2.8  2.9 Employment  -2.4  3.0  0.9  0.7  0.6  0.4  0.4 Average Earnings  1.1  3.3  4.5  2.8  2.6  2.5  2.7 Interest rates (%)  0.2  0.1  1.2  2.2  2.0  1.7  1.5 House prices  6.1  16.0  6.0  5.0  4.0  3.0  2.7 Housing transactions  -3.8  15.1  3.5  3.0  2.5  2.5  1.5

Real GVA  +0.6  +3.8  +2.3  +4.4  -1.8  -1.4 RPI  0.0  -0.3  +2.2  +2.0  +0.4  -0.5 RPIY  0.0  -0.3  +1.8  +1.1  +0.1  -0.1 Nominal GVA  +0.8  +4.0  +4.4  +5.9  -1.7  -1.5 Gross Operating Surplus (including rental)  +2.2  +7.1  +6.9  +11.4  -3.8  -3.0 Financial Services Profits  +9.4  +15.5  +11.3  +19.2  -8.4  -6.5 Compensation of employees (CoE)  -0.3  +1.6  +2.2  +0.5  +0.6  -0.1 Financial services CoE  0.0  0.0  +2.2  +0.5  +0.6  -0.1 Non-finance CoE  0.0  +2.6  +2.3  +0.7  +0.1  -0.1 Employment  0.0  +1.9  -0.1  -0.1  -0.3  0.0 Average Earnings  0.0  +0.7  +2.3  +0.7  +0.5  -0.2 Interest rates (%)  0.0  0.0  +1.0  +1.7  +1.5  +1.1 House prices  0.0  +11.0  +2.0  +2.4  +2.0  +0.3 Housing prices   0.0 +10.1 0.0 0.0 0.0 +1.0

4. Summary of forecasts

1. The individual forecasts for each revenue stream are included in the appendices, these provide further details of the assumptions and adjustments made to each component of the forecast.
2. Personal income tax (Appendix A) has increased for all years of the forecast, this is primarily driven by the higher-than-expected tax outturn for 2020, and 2021 data available from the Income Tax Instalment System (ITIS), as well as the latest FPP economic assumptions. The IFG have reconsidered the adjustments made for the impact of Covid-19 and have removed these from the forecast. The rationale behind this, explaining why the adjustments have been removed, is set out in appendix A.
3. Corporate income tax (Appendix B) reflects a significant increase since the previous forecast, driven by financial services profits growth with higher market expectations for interest rates. The forecast corporate tax from other sectors remains stable as upward revisions to inflation forecasts, are offset by methodological changes described in appendix B.
4. Goods and Services Tax (Appendix C) has been updated to reflect the latest outturn data and the FPP's latest economic assumptions.
5. Impôts duty (Appendix D) reflects an increase in each year of the forecast, driven predominantly by forecast increase in RPI. The adjustments for Covid-19 which take into account behavioural changes along with the latest available market intelligence data have been reviewed. The Covid-19 adjustments reflect behaviours and consumption re-adjusting slowly in 2022 and returning to pre- pandemic levels from 2024 onwards.
6. Stamp duty (Appendix E) has been revised to incorporate the outturn of transactions from 2021 and the updated FPP economic assumptions. The stamp duty forecast has grown significantly from the previous forecast, with the property market in 2021 seeing the highest annual average values as well as the highest turnover of properties for all property types to date.
7. Other income (Appendix F) outturn for 2021 (including the Jersey Telecom one-off £40 million dividend) was £104 million compared to forecast of £109 million. The other income forecast over the period has reduced in each year, primarily due to a reduction in housing returns because of the rent freeze in 2022 and policy to limit rents to 80% of the market rate.
8. Social security and long-term care contributions (Appendix G) 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, whilst the long-term care forecast is a direct function of changes in personal income tax.

5. Range of forecasts

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. There are heightened risks and uncertainties around the forecast, including those described in section 2 above. Therefore, the IFG advise that the central forecast should be considered within an illustrative range, as shown below.

£ Millions IFG Forecast Range  1,450

 1,350

 1,250

 1,150

 1,050

 950

 850

 750

2021 2022 2023 2024 2025

Year

Central Higher Lower Outturn Spring 2021 Addendum

Appendix A – Personal Income Tax Forecast

The IFG's autumn 2021 forecast has been updated to incorporate the latest outturn tax data and the FPP's March 2022 economic assumptions. This should be considered provisional, as some taxpayers have not had their 2020 assessment finalised yet with the data from Revenue Jersey currently using estimates for these taxpayers.

Revenue Jersey's provisional estimate for the tax outturn for 2020 is £489m, £16m higher than the last IFG forecast in August 2021. Given the uncertainty with forecasting the effect of the pandemic on both economic and tax outcomes, the difference between outturn and forecast is not unexpected.

The updated personal income tax forecast is summarised in Figure 1. A large driver of the increase over 2021-2025 is the new economic assumptions published by the FPP in March 2022. The other main drivers are a stronger than expected tax outturn for 2020 and ITIS outturn for 2021. Downwards contributions to the forecast include the re-estimation of statistical relationships and the removal of the IFG adjustments which will be explored in detail in section 3.

Figure 1: Changes to personal income tax forecast since August 2021

Note: Grey background is previous forecast and outturn. Some columns may not sum due to rounding.

The remainder of the note is set out as follows:

• Section 1 describes how the forecast is carried out.

• Section 2 sets out the new economic assumptions and updates to tax outturn data.

• Section 3 explains the IFG's adjustments to the forecast to account for the economic effects of the COVID-19 pandemic.

• Section 4 sets out the forecast.

• Section 5 sets out the range of estimates

• Annex 1 sets out in detail some improvements made to the statistical equations used in the forecast for pension income.

How the forecast is carried out

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 average effective tax rate (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 the average effective tax rate.

Taxable personal income is estimated over the forecast period by taking outturn data provided by Revenue Jersey and projecting it forward, largely using 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 Fiscal Policy Panel (FPP).

The average effective tax rate 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

New economic assumptions and updated tax data Updated economic assumptions

The Fiscal Policy Panel's (FPP) updated economic assumptions have been used in the model to update the income tax forecast. The economic assumptions were published in March 2022.The economic assumptions letter can be found on the FPP website www.gov.je/fiscalpolicypanel.

Updated information from Revenue Jersey Personal tax assessments

Outturn tax data now include the 2020 year of assessment; however, the 2020 tax outturn data contains £19.3m of estimated returns and as such should be considered provisional. 2019 outturn data also contains approximately £2.7m of estimated returns. These have been estimated by Revenue Jersey who have applied the value of any prior year tax returns to a taxpayer who appears to need an assessment.

The estimates apply to 5,700 taxpayers who do not yet have an assessment for 2020. Tax returns for 2020 were due in August 2021, so late returns may still be received. During 2020, there may have been taxpayers who left the Island, but did not notify Revenue Jersey. Similarly, the move to current year tax basis from prior year tax basis may have not captured taxpayers who have left the Island in 2019 but did not notify Revenue Jersey of their departure.

Revenue Jersey's provisional estimate for the tax outturn for 2020 is £489m, £16m higher than the last IFG forecast in August 2021. Figure 3 shows the long run trends of each of the income types. This highlights the absence of a large shock to most taxable income lines in 2020. Figure 4 below sets out the difference between the forecasted value of each income type and the 2020 outturn.

Figure 3. Taxable income by income type (£m)

600 2,500 500

2,000 400

1,500 300

1,000 200

500 100

0 0

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

 Business Investment Pension Rental Shareholder Earning

Note:

Earned income uses the right-hand axis, all other income types use the left-hand axis

Figure 4. Forecast vs outturn comparison of taxable income for 2020 (£m unless otherwise specified)

Given the uncertainty with forecasting the effect of the pandemic on both economic and tax outcomes, the large difference between the 2020 outturn and forecast is not unexpected. The two income types with the biggest variation from the forecast were both impacted by large downwards IFG adjustments. Earnings income, which accounts for approximately 71% of the total taxable income only saw a 2% increase from the August 2021 forecast.

Taxpayers on the high-value residency regime

Assessments for taxpayers on the high-value residency (HVR) regime show that £22.9m was assessed for these taxpayers in 2020, falling from £23.4m in 2019. Tax from these taxpayers is forecast separately, and the outturn of £22.9m has been incorporated into the forecast as a new base. This is around £1m lower than forecast in August 2021. Revenue Jersey have confirmed that the fall in tax in 2020 was due to a couple of material one-off events for a few HVR taxpayers in 2019 which generated above average amounts of income taxed at 1%. This one-off income then fell away in 2020 and is considered unlikely to occur again for those specific individuals, however this could occur in the future for other HVRs. In this forecast, the base is provided by a relatively normal year for HVR taxpayers and so no adjustments will be made for the impact of one-off events for HVR taxpayers.

Other entities

This includes tax from clubs/associations, estates, and pension schemes. Tax from these entities grew by 32% in 2019 to £3.5m. However, this fell by £1.3m in 2020, to £2.2m. The forecast predicts this amount to remain flat in nominal terms, under the assumption that the increase in 2019 was a one-off occurrence driven by an increase in estate and club/association income in 2019 which does not recur in 2020.

ITIS data

Revenue Jersey has provided a revised figure for growth in employment income reported through the Income Tax Instalment System (ITIS) for 2021. This indicates that employment income grew by 5.4% in 2021.

The 5.4% for the full year is the combination of relatively weak year on year growth in quarter one when stringent public health restrictions were still in place and stronger growth in the following three quarters. Quarter two showed strong growth of 9.3%, reflecting that quarter 2 of the previous year was the height of restrictions, whilst quarter's three and four were more modest at around 5%.

While the annual growth rate is much larger than 2020 (1%), this is expected as the FPP have predicted strong growth in output and compensation of employees during the post-pandemic economic recovery. For information the average growth over 2016-2019 was over 4.1%.

Adjustments to personal income tax forecast due to the COVID-19 pandemic

The Income Forecasting Group made additional adjustments to account for the impact of the global pandemic and the resultant restrictions on economic activity. These adjustments were to the smaller income lines, i.e., income other than employment and pension income. This is because the impact on employment income was already included in the FPP forecast. The approach in normal times' is to forecast many of these smaller income lines to be flat in real terms, or to grow in line with recent averages, and IFG took the view that adjustments were needed to these assumptions to reflect the impact of the pandemic not only on the labour market but on other income streams.

These adjustments were based on the judgement of the IFG, using available local and international evidence and their knowledge of the Jersey tax base. In total, these four types of taxable income represent less than 20% of total taxable income.

The way in which the adjustments have been incorporated in the model means that any remaining adjustments will have a positive impact on the forecast – i.e. they will reflect the Covid impacts gradually easing and growth rates incorporating some bounce-back from their temporarily suppressed 2020 levels. Therefore, it is only appropriate to include adjustments where it can be observed that there was a supressed level of taxable income in 2020 from which to bounce back.

Figure 5 below shows the growth rate of the outturn data compared with the growth rates predicted in the August 2021 forecast. When considering the adjustments together, previous forecasts have been weighted to the downside, an appropriate action considering the economic outlook and the large degree of uncertainty associated with it at the time of forecasting.

Shareholder income / distributions outperformed expectations, growing 1.3% in 2020, in line with RPIY (its predictor in the model). This income line is particularly volatile in normal circumstances, ranging from -11% in 2017 to +14.7% in 2016 (over a period when tax policy for this income has been consistent), although in more recent past years this has been less volatile. The IFG adjustment of -21pp was overly negative on this income line. In contrast the IFG adjustment on property income, which was formed on the assumption that property income remained flat in nominal terms in 2020 was only 1.2pp away from the outturn growth.

Figure 5. Assessment of the IFG judgement's accuracy in 2020.

The IFG has removed the adjustments to bank, dividend and other unearned income and shareholder income/distributions. The adjustments were designed to converge back to the pre-pandemic growth path of each income line over 2021 and 2022, or in simpler terms they introduced a period of stronger growth (or a bounce back) following the fall in 2020. When the 2020 outturn was incorporated, it contained the covid impact

which was smaller than previously anticipated, so placing additional adjustments on top of this caused these adjustments to artificially inflate the forecast for these income types. Consequently, the removal of these adjustment has a large downwards impact on the forecast.

The adjustments to business profits and property income have been reduced to reflect a convergence with the pre-pandemic growth path in 2022. The adjustments required are shown in the table below, given to two decimal places. These adjustments have a small upwards impact on the forecast compared to the scenario where all adjustments are removed, but do not inflate the forecast as much as the previous adjustments. It is important to note that these adjustments are applied differently to adjustments in previous versions of the personal income tax forecast. The adjustments are applied as a percentage point addition to the growth rate in the unadjusted model, rather than a percentage variation from the value in the unadjusted model. The adjustments used are reported in Figure 6 below.

Figure 6. IFG adjustments

Figure 7: Forecasts for taxable income types

Updated personal income tax forecast

The forecast has increased in all years, with the main drivers being the 2020 tax outturn and its impact on future allowances, new FPP economic assumptions and changes to the IFG's adjustments.

Figure 8: Changes to personal income tax forecast since August 2021

Note: Grey background is previous forecast and outturn. Some columns may not sum due to rounding.

 Figure 9 breaks down the drivers of the aggregate change over the six years 2020-25. Total revenue from personal tax over these six years is now forecast to be £116m (3.9%) greater than the August 2021 forecast. The majority of this increase is attributed to the new economic assumptions published by the FPP, approximately £100m, whilst the re-estimation of statistical relationships has reduced the forecast by £25m. The tax outturn has increased the forecast by £151m over 2020-25. This is partially due to the way that the IFG adjustments were originally incorporated into the forecast. The unwinding of these adjustments reduces the forecast by £132m and is explained in detail in the previous section.

Figure 9: Changes in total revenue 2020-25

A more detailed disaggregation to the changes to the forecast is set out in the remainder of this section.

Tax outturn

As stated in section 2, the outturn for the 2020 year-of-assessment was £16.2m higher than forecast, whilst the outturn for the HVR taxpayers was £1.3m lower than forecast. This has been incorporated into the base and therefore recurs and compounds in future years leading to an increase in the forecast of £10m in 2021 and £13m in 2022.

ITIS outturn

Data from ITIS for 2021 suggest annual growth in earnings of 5.4%. This is considerably higher than implied by the equation used to forecast earnings, which would suggest growth of 4.5%. Quicker than expected growth in earnings income as approximated by ITIS data increases the forecast by approximately £5m in each year of the forecast.

Policy changes

At the time of the last IFG report, the value of personal exemption thresholds for marginal rate taxpayers were assumed to grow in line with RPI a year prior, due to very low growth of average earnings in 2020. Since the publication of that report, policy has reverted back to grow the value of these exemption thresholds in line with the smaller of earnings growth and RPI a year prior. This increases the forecast for 2023 by £4m and is carried into future years of the forecast.

Personal exemption thresholds for marginal rate taxpayers for 2022 have been updated as published in the Government Plan 2022-2025. The exemptions are as follows; £16,550 for single taxpayers, £26,550 for married taxpayers and £6,550 for second earners. From 2022 onwards the married/single standard and married/single age-enhanced exemption values have converged. This change reduces the forecast by £800k annually from 2022 onwards.

Economic data/assumptions

The FPP's March 2022 economic assumptions have been incorporated into the forecast:

• The higher forecast for inflation results in a small increase in the forecast of less than £1m annually. The increase in shareholder income/distributions which are forecast to rise in line with RPIY is partially cancelled out by the impact of faster growth in exemption thresholds. The period of high inflation expected to begin in 2022, will feed into allowances growth for 2023 onwards

• The projected rebound and growth in financial services profits impact the equation used to forecast taxable employment earnings. The strong growth in 2022-2024 increases the forecast by £11m in 2022, £20m in 2023 and £17m in 2024.

• The higher forecast for compensation of employees, average earnings and employment growth increases the forecast by approximately £3m annually from 2022 onwards, after decreasing the forecast for 2021 by £3m. These economic assumptions are updated together as they each interact with each other in the model, and it would be misleading to try to separate out their individual effects.

• The higher forecast for interest rates increases the forecast by £7m in 2023 and £9m in 2024. This is due to the impact on bank interest, dividend and other unearned income.

• The increased house price forecast results in a small reduction to the forecast which impacts in the first three years, due to a small increase in the projections for mortgage interest tax relief. It is worth noting that mortgage interest tax relief will be phased out by 2026.

New relationships

The statistical relationships used to forecast individual types of taxable income have been updated. The equations used to forecast pensions and investment income (bank, dividend and other unearned income) have been re-estimated with the latest tax outturn. Annex 1 sets out a small improvement to the pension equation, to make it more robust. The new equation results in a compounding decrease to the forecast of around £300k each year from 2022 onwards.

• The pension equation relies on the Statistics Jersey population projections for the growth of the over 65 population in the Island. Census population data for 2021 was below that predicted by the population projections from 2016. New population projections have not yet been published but will be incorporated into the IFG's next forecast as they become available.

• Due to the availability of data from Statistics Jersey, SIC2003 classification has been used for finance GOS, non-finance CoE and finance CoE instead of SIC2007 as in previous years. For finance GOS and CoE we were able to use a consistent series in SIC2003. However, the series for non-finance CoE contains two structural breaks when different SIC classifications were used in 2014 and 2018 due to the availability of data. The non-finance CoE series uses SIC2003 pre-2014, SIC2007 between 2014 and 2018 and SIC2003 post-2018. We have ensured that growth rates do not cross over the structural breaks. The re-estimation of the earned income equation now incorporates revised growth rates for both 2019 and 2020 and so the coefficients, particularly for non-finance CoE are subject to some uncertainty. The re-estimation of this equation reduces the forecast for 2021 by £1.3m in 2021 and this reduction is compounding over the years of the forecast.

• Property income and business profits are forecast to grow in line with their ten- and five-year average growth rate respectively. These averages do not include 2020 outturn due to its distortionary effect on the growth rates. Including 2020 would further reduce the growth rates of these income types, so they do not return to their pre-pandemic trend growth over the forecast period.

Updated HVR forecast

Tax from HVRs is forecast separately to the main taxpayer population because the tax rates faced by these taxpayers differ from those for other taxpayers. The forecast for HVR tax is based on expectations for the number of HVR taxpayers arriving, departing, or moving to licensed status.

The outturn for 2020 was around £1.3m lower than forecast, and this has been incorporated into the base. There have been a few revisions in the data for the number of departures in previous years. The number of arrivals in 2021 was greater than assumed in the last forecast, while the full year expectation for 2022 will follow the recommended target of 15-20 arrivals annually. This is simplified to an average of 17 per year. The number of departures has been elevated in 2020 and 2021 to approximately 10 per year, with a number of these departures not leaving the island but changing to licensed status. For the years of the forecast, we assume that the number of departures is equal to the five-year average of 6.

The net effect of these adjustments is relatively insignificant as it reduces the forecast by an additional compounding £300k from 2022 onwards. A review of the HVR scheme, including the number of new arrivals permitted and the tax contribution of each resident can be undertaken in 2023 as laid out in the Budget 2018. The forecast is based on the current policy and will be updated when any changes are agreed.

Removed IFG adjustments

The reasoning for removing the IFG adjustments is set out in section 3. The impact of each individual change is set out below:

1. The removal of the adjustment to business profits reduces the forecast by £8m in 2021, £12m in 2022, and £56m over the remaining three years.
2. The removal of the adjustment to bank, dividend and other unearned income reduces the forecast by £2m in 2021, £4m in 2022 and £19m over the remaining three years.
3. The removal of the adjustment to property income reduces the forecast by £1m in 2021, £2m in 2022 and £7m over the remaining three years.
4. The removal of the adjustment to shareholder income/distributions reduces the forecast by £6m in 2021, £9m in 2022 and £40m over the remaining three years.

The introduction of adjustments to the growth rates of business profits and property income to incorporate a period of higher growth following the pandemic. The impact of these two changes is compared to the forecast in which no adjustments are made and are as follows:

1. The adjustment to business profits increases the forecast by £2m in 2021, £5m in 2022 and £25m over the remaining years.
2. The adjustment to property income increases the forecast by £1m in 2021, £2m in 2022 and £8m over the remaining years.

Annex 1: Improvements to statistical relationships

The statistical relationships used to forecast taxable income have evolved and adapted over time. Review and improvement is done regularly to ensure that it can be demonstrated that the relationships used accurately explain the past data and therefore maximise the potential for a robust forecast. Currently equations are used to forecast earned income, pensions and investment income. Together these three represent around 85% of aggregate taxable income.

The three equations currently used are:

1. Growth in earnings is forecast in line with aggregate earnings in the finance and non-finance sectors, and profits in the finance sector.
2. Growth in pensions is forecast in line with average earnings and growth in the over-65 population.
3. Growth in investment income is forecast in line with changes to the Bank of England Bank Rate.

The equations currently used for earnings and pensions were developed by Oxera in 2017. Changes were made to each of the three equations in Spring 2021 to make the estimated relationships more robust. A full description of these changes and the current methodology is available in the IFG Spring Report 2021, R.151/2021 The changes are summarised below:

1. The earned income equation has been improved by using data on growth in earnings reported through ITIS from 2016-19, rather than growth in assessed earnings - as there is some uncertainty around the consistency of recent data from assessments.
2. The pension equation has been improved by adjusting for a potential change in the relationship between pension income and the economic variables.
3. The investment income equation has been improved by including a variable to account for the change in interest rates in the previous year – to account for delay in passing on policy interest rate changes.

Note that the comparisons set out here relate to the monetary impact of using the improved equation, as compared to the alternative of re-estimating the existing equations using the previous structure but with the latest data. This differs from the comparisons set out in the main forecast document, which are the impact of the new equations when compared to the last IFG forecast.

High-level summary

While the three existing equations remain broadly robust and explain a large degree of the past variation in taxable income, the new data series mean that without making any changes the equations would be less robust than before. Improvements have therefore been implemented as follows:

1.  The pension equation has been improved by including a dummy variable to account for the effects of the pandemic on this income line.

The small change to the pension equation results in a new estimated relationship that is more robust, and therefore has been incorporated into the forecast. As stated above, reviewing the relationships and making incremental changes is not unusual and would be expected of any econometric model.

Range of estimates

The IFG has produced an upper and lower estimate of the Personal Income Tax forecast using a judgement on the margin of error around the FPP's assumptions. The error margins used are shown in the table below.

Figure 10. Margin of error around the FPP's assumptions.

Each of the FPP's assumptions has a different impact on the forecast, and often these variables interact. For example, the personal exemption threshold for marginal taxpayers is assumed to grow in line with the lower of RPI and earnings, so the impact on the forecast of a change in either of these variables will be subject to changes in the other. Some variables also affect both income lines and allowances. For example, an increase in inflation will increase the forecast through its impact on shareholder income/distributions and decrease the forecast through increased exemption thresholds for marginal taxpayers. The table below shows the upper and lower estimates of this forecast.

Figure 11. Range of estimates around the Personal Income Tax forecast.

Pension Income Equation

Pension income is forecasted to grow in line with average earnings and the change in the number of pensioners, which is approximated by the change in the population aged 65 or over (modelled by Statistics Jersey).

In the previous version of the forecast a lag on average earnings was also included to improve the fit of the model. In 2020, pension income grew 6.4% whilst other income lines saw falls or very slow growth suggesting that pension income was more resilient to the economic shock of the pandemic. Average earnings grew only 1.1% in 2020, with ITIS growth very similar at 1%. An explanation for this may be an increase in the number of pensioners exceeding that of the number of people reaching pensionable age in what has been called the Great Retirement as more over 50s leave the workforce. Across the UK, there were 192,000 fewer over 50s in employment in March 2022 than before the pandemic[1].

When incorporating the outturn for 2020 and re-estimating the relationship for pension income, the explanatory power of this equation drops. The re-estimated equation for 2020 is shown below in column (1) of Figure 12. The R-squared of this equation falls from 0.89 to 0.83 when 2020 outturn data is incorporated. A lower weight is placed on the change in average earnings and the change in the over 65 population than in previous estimations of the relationship, whilst the constant becomes positive (although still not statistically significant).

Figure 12. Pension equation

Standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1

For this reason, a dummy variable which takes the value of 1 in the year 2020 and 0 otherwise has been added to the model for 2020. The dummy is significant at the 5% level and improves the overall fit of the model. The equation including the dummy is shown in column (2) of Figure 12. Incorporating the dummy reduces the forecast by £3.8m over the period 2021-2025 compared to the re-estimating the previous specification.

Figure 13. Fitted and actual values of pension income (new model).

2000 2005 2010 2015 2020 Year

Linear prediction PEN_INC

Appendix B – Corporate Income Tax Forecast

Figure 1 summarises the corporate tax forecast. The Income Forecasting Group corporate income tax forecast for 2021 was very close to outturn. The forecast was £96m compared to an outturn of £98m.

The forecast receipts for the rest of the horizon have increased significantly since the previous forecast, primarily due to higher expected financial services profits as per the Fiscal Policy Panel's (FPP) latest economic assumptions. This increase in financial services profits is driven by higher market expectations for interest rates. The forecast for tax from other sectors has remained stable as upward revisions to inflation forecasts, which are a key determinant, are offset by methodological changes.

Figure 3: Changes to Corporate Income Tax forecast since August 2021 forecast

Grey background is previous forecast and outturn. Some columns may not sum due to rounding. 2021 outturn from Revenue Jersey

The aggregate outturn for 2021 was in line with the IFG forecast. Tax from financial services was hit strongly, primarily due to the impact of the reduction in the bank rate which fell in March 2020 from 0.75 to 0.1 and remained at that level for the remainder of the year. Tax outturn for financial services fell from £81m to £59m between 2020 and 2021. This includes a £1m downwards revision to 2020 outturn. Note that corporate income tax is paid one year in arrears, so tax in 2020 relates to profits in 2019.

Tax from property activities (property development and rental profits) fell by £0.8m in 2020, while tax from large corporate retailers (LCRs) remained relatively stable with small growth of around £0.2m despite lockdown restrictions impacting trade.

Tax from utilities grew by just over £½m, whereas tax from all other sectors fell by around £1m.

Overall corporate income tax fell by 19% between 2020 and 2021, nearly all of which was due to falls in tax from financial services, assumed to be largely due to the impact of lower interest rates on financial services profits. This was reflected in the IFG forecasts.

Updated forecast Financial services

The forecast has been updated with the new FPP economic assumptions, which were published on 30 March 2022. The new economic assumptions forecast a large increase in financial service gross operating surplus (FSGOS – a measure of profits) in 2021-23 which drive increases in the tax forecast between 2022-24. Interest rates are currently expected to reach 2% by the end of 2022 and 2.3% by the end of 2023. Given Jersey is primarily a deposit-taking centre, interest rate rises usually lead to an increase in net interest margins. The subsequent increase in FSGOS is consistent with previous changes to the interest rates such as the large fall in FSGOS in 2020 with a corresponding smaller base rate change.

Jersey Financial Services Commission data also suggests some reductions in banks operating expenses in 2021, particularly by Jersey Incorporated Banks. This is incorporated in the FPP's assumptions, which leads to a forecast increase in Corporate Income Tax from financial services companies in 2022.

The FPP forecast that FSGOS will fall towards the end of the horizon as market expectations are for interest rates to come down from a peak, which translates to minor falls in the forecast for corporate income tax in 2025 and 2026.

The impact of these revisions is that there is a doubling of corporate income tax between 2021 (latest outturn) and 2024.

Figure 4: Forecast corporate tax from financial services (£m - budget year)

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

The previous forecast assumed flat growth in large corporate retailers' profits across 2020 and 2021 and growth in line with RPI-Y for 2022 onwards. Latest outturn shows there was growth of 2.7% in 2020, which was higher than inflation. Further growth now appears more likely in 2021 and 2022, particularly as latest GST outturn data from 2021 suggests a large increase in consumer spending. Therefore, large corporate retailers' profits are now forecast to increase by RPI+1.5ppt in 2021 and 2022. The growth assumption for the rest of the forecast, growth by RPI, is unchanged.

There also have been an upward revision in the outturn for LCRs in 2020 (around 20%), however, this may be due to movements in categorisation of companies which underwent a refresh from Revenue Jersey, rather than significantly higher corporate tax receipts.

Figure 5: Forecast corporate tax from large corporate retailers (£m - budget year)

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

Property

The previous IFG forecast suggested flat growth between 2020 and 2021 for corporate income from

property. Outturn shows that there was a modest fall of 3% and a downwards revisions to 2020 outturn although some of this may be due to the improvements in categorisation by Revenue Jersey.

IFG forecasts that there will be flat growth for property rental and development profits in 2021 and then they will grow in line with RPI-Y from 2022 onwards.

Latest retail vacancy data from St Helier and Jersey Business[1] suggests vacancy rates remain low and fell between Q1 and Q2 in 2021 from 8% to 7.7%. Whilst 8% was a recent high, this fall bucked the UK trend where vacancy rates grew by 0.4% to almost double St Helier's rate at 14.5%. This suggests retail vacancy rates in St Helier are influenced by a small number of shop closures but remain at low rates with no current signs of a upward trend.

Outside of retail, offices make up the majority of the rest of corporate property income. A report by D2RE5 suggested that vacancy rates increased between 2020 and 2021 from 7.8% to 8.5% but the rate for prime office space remains very low. The majority of businesses expected rental requirements to stay the same over the coming year and there was a slightly larger number of businesses who expected requirements to grow than there was for their requirements to fall. This is similar to last year's results.

Figure 4: Forecast corporate tax from property rental and development (£m - budget year)

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

Other corporate tax is a group of businesses predominately utilities, oil and mining. Previously, the IFG August forecast assumed a large drop in profits in 2020 and then considerable subsequent increases recovering profits. The growth rate was based on the growth in profits across the whole economy.

Outturn data suggests the fall in profits in 2020 was much smaller than previously forecast and the subsequent large increases in profits thus seems less likely. Therefore, the forecast for profits for 2021 onwards has been updated to match RPI-Y inflation, which is consistent with the growth rate for other sectors.

There also have been an upward revision in the outturn for the other' catch all sector in 2020 which may be due to changes in categorisation of companies by Revenue Jersey.

Figure 5: Forecast corporate tax from other sectors (£m - budget year)

Note: tax is collected one year in arrears, so tax in 2020 relates to profits in 2019 Figure 6: Assumptions used in corporate tax forecast

% growth rate  2021  2022  2023  2024  2025  2026 Financial services  19.5  25.7  36.1  -0.9  -3.1  3.4 Property  0.0  5.3  3.6  2.5  2.4  2.5 Large corporate  4.2  6.8  3.6  2.5  2.4  2.5

retailers

Other  2.7  5.3  3.6  2.5  2.4  2.5 RPIY inflation forecast  2.7  5.3  3.6  2.5  2.4  2.5

Range of estimates

The IFG has produced a range around the Corporate Income Tax using judgements on the variation around FPP judgements. The main determinants of the size of the range are the variation around the financial services profit changes and inflation changes. The range increases later in the forecast as the estimates become more uncertain. The table below shows the lower and upper estimates of Corporate Income Tax for the forecast horizon.

Figure 7: Range of estimates around the Corporate Income Tax forecast

Grey background is outturn

Appendix C – Goods and Services Tax (GST) Forecast

The IFG's Autumn 2021 forecast for Goods and Services Tax (GST) has been updated to incorporate the latest outturn data and the FPP's March 2022 economic assumptions.

The updated GST forecast is summarised in Figure 1. The increases to the forecast are attributed to the changes to the de minimis level and outturn data. The re-estimation of statistical relationships makes a downwards contribution to the forecast.

Figure 1. Changes to the GST forecast since August 2021

Note: Figures are rounded to the nearest £m

This note is set out as follows.

• Section 1 describes the forecast methodology

• Section 2 sets out the new economic assumptions and updates to the tax outturn data

• Section 3 explains the removal of the pre pandemic adjustments

• Section 4 explains the impact of de minimis changes and the registration requirements for large corporate retailers

• Section 5 gives a brief overview of the forecast

• Section 6 sets out the range of estimates

Section 1 – Forecast methodology

The GST forecast models the relationship between GST excluding International Service Entity Fees (ISE Fees), denoted as GSTx, compensation of employees (CoE) and the tax rate. The forecast for GSTx is then added to the forecast for ISE fees. No changes to the model have been made for this version of the forecast. The model is set out below in Equation 1 and is estimated over the period 2009-2020

ln ( ) = 2.87 0.12 ln( )1 + 0.72 ln ( ) + 1.20 ln ( ) +  . (1)

The forward-looking forecast uses the FPP's assumptions for the growth of CoE and is conditional on the tax rate being held at 5% for period of the forecast. Figure 2 shows the coefficients, standard errors, p-values, and diagnostic statistics for the regression model in Equation 1. Figure 3 plots the natural log of the GSTx outturn, and the fitted values predicted by the model.

Figure 2. ARDL with GSTx dependent  Figure 3. Fitted and actual values of  ( )

variable

GSTx

GSTx (-1)  -0.116**

(0.077)

CoE  0.717***

(0.095)

GST Rate  1.194***

(0.096)

Constant  2.868***

(0.592)

Observations  11

R-squared 0.997

Adjusted R-squared 0.995  2010 2015 2020 Log-Likelihood 33.08  year

ardl: fitted values Ln(GSTx)

Standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1

Section 2 – Outturn data and new economic assumptions

Outturn data for 2021 points to a very buoyant year for consumer spending on GST liable goods and services. In nominal terms there was a 15.6% increase in GST receipts published in the accounts for 2021. The FPP March 2022 economic assumptions for compensation of employees has been upgraded by 2.2 percentage points, with subsequent years seeing smaller increases. This has increased the forecast by £700k in 2022 and approximately £1m in future years.

Changes to the annual ISE fees from 2021 were expected to increase the GST forecast by £3.5m each year to approximately £12.6m. Outturn data for 2021 suggests that this assumption was accurate as value of ISE fees in 2021 was £12.63m. The growth of ISE fees is expected to be flat in nominal terms throughout the years of the forecast.

Section 3 – Removal of the pandemic adjustments

Outturn data for personal income tax and GST for 2020 and 2021 has been particularly buoyant. On a sectoral basis, the wholesale and retail sector did not experience a significant change in nominal GST receipts over the course of the pandemic, whilst the transport and storage sector saw a fall in 2021 for the second consecutive year. Most sectors have experienced a bounce back from the sharp decrease in 2020, this is particularly pronounced in the accommodation and food services sector. Whilst sectors have emerged from the pandemic with different lasting effects, the overall balance has improved.

Adjustments that were made to account for the pandemic may have been overly negative. Whilst this view was justified at the time of publication, there have been a number of recent economic indicators which point to the economy having weathered the pandemic better than expected. In the previous IFG Spring report, a downwards adjustment of £2.8m was made to the forecast for 2021. Outturn data for 2021 came in £7m higher than forecast in Autumn 2021. For this reason, we will not be making any pandemic related post estimation adjustments to the forecast for 2022 onwards.

Section 4 – Reductions in the de minimis level and registration of LCR's

In October 2020, the "de minimis" level for paying GST on unaccompanied imported goods was reduced from £240 to £135. Amendments to this have been approved from January 2023 which further reduce the de minimis level from £135 to £60.

The impact of the change from £240 to £135 was estimated to increase GST receipts by £0.8m annually. This was included in the previous August 2021 forecast. The additional reduction in the de minimis level from £135 to £60, approved in the Government Plan 2022-25, is estimated to increase GST receipts by £1.1m from 2023 onwards[1]. The additional investment required to administer this change is estimated to be around £350k per annum.

In this version of the forecast, we have not accounted for the impact of the requirement for large retailers such as Amazon to register for GST. However, the impact of this on the GST forecast is anticipated to be minimal as this would simply transfer some import GST to on-Island GST.

Section 5 – Forecast overview

A summary of the Spring forecast is as follows.

• Changes to the de minimis level adopted in the Government Plan 2022-2025 are expected to increase the forecast by £1.1m per annum from 2023 onwards.

• Updated FPP assumptions and outturn data for 2021 increase the 2022 forecast by £700k, and approximately £1m from 2023 onwards.

• Re-estimating the relationship between GSTx and compensation of employees decreases the forecast by £1.7m in 2022, with this increasing to a reduction of £2.1m by 2025.

Low retail price inflation in 2020 and strong demand growth in 2021 gave positive real growth in GST receipts for the two years. The only other year to see significant real growth since the change in the GST rate was 2015, the year in which Jersey hosted the Island Games and saw an additional expenditure of visitors of £3.8m[2] during the week of the Games.

Figure 4. Annual real growth in GST receipts.

50% 40% 30% 20% 10% 0% -10% -20%

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026

Outturn Forecast

The ratio of GSTx spending to compensation of employees, which acts as a proxy for household income, will continue to fall over the duration of the forecast. This is a trend seen in the data over the previous decade. 2021 seems to be an outlier in this regard and when considering the global context of fast paced economic recovery, this does not appear to be a reversal of the previous trend.

Explaining this phenomenon of falling taxable expenditure relative to income requires considering the context of the local economy. In recent years, property and rental prices have risen considerably faster than both inflation and average earnings, this indicates that households may have less disposable income when accounting for housing costs. Similarly, this can also be explained by a shift towards a greater density of higher paid roles in the economy. Those with lower incomes tend to spend more of their income on GST liable goods and services and tend to have a lower savings rate. An increase in the average income could therefore explain the lower proportion of taxable expenditure relative to compensation of employees.

This trend may also be explained by a behavioural shift from high street spending to online shopping. Since smaller online purchases are not subject to GST, they may be cheaper than products bought in high street stores. Reductions in the de minimis level may mitigate this as more online purchases are subject to GST.

Figure 5. GSTx spending relative to CoE income.

72% 70% 68% 66% 64% 62% 60% 58% 56%

2009 2011 2013 2015 2017 2019 2021 2023 2025

Data Forecast May 2022 Forecast August 2021

Section 6 – Range of estimates

The IFG have produced a range around the GST forecast using judgements on the variation around FPP assumptions. This is a range of +/- 3.0 pp for their estimate of the growth of compensation of employees. The table below shows the upper and lower estimates of this forecast.

Figure 6. Range of estimates around the central GST forecast

Appendix D – Impôts Forecast

Summary

This paper summarises the Impôts yield for Customs and Excise duty for 2022 and the estimates of yield for the years 2022 to 2026.

Assumptions and uncertainties

The impact of the coronavirus pandemic continues to bring uncertainty to the forecasting of Impôts duty due to the significant changes in behaviour seen over the past two years as shown in Table 1.

The number of passenger arrivals into Jersey during the pandemic is shown in Table 2. Arrivals in 2019 (2.36m) fell 79% in 2020 (0.5m) and Ports of Jersey anticipate a sharp recovery in 2022 (1.4m) and 2023 (2.275m) with a return to pre-pandemic levels by 2024.

Figure 1 – Passenger Arrival Figures – Air and Sea

3,000,000 2,500,000 2,000,000 1,500,000 1,000,000 500,000 0

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 (est) (est) (est)

Visit Jersey was unable to conduct exit surveys to provide details of visitor numbers and expenditure between April 2020 and the end of 2021. In the absence of a profile of those visitors (e.g. holiday, business, visiting relatives & friends) it is difficult to draw clear conclusions on the effect of each of those category of visitor on excise duties therefore for the purpose of this report and forecast overall passenger numbers will be used for comparison.

Impots estimates are provided to take account of the following scenarios for 2022-2026:

• A base forecast taking account of pre-Covid volumes and trends and applying these to 2022-2026

• A forecast adjusted for Covid taking into account the possibility that behaviours and consumption will re-adjust slowly in 2022 and only return to normal levels from 2024 onwards.  

• Upside / downside positions to FPP assumptions taking into account potential volatility in the economy including RPI of -3% and +3%.

Alcohol

The 2022 forecast is contingent on the nature and extent of the Island's pandemic recovery (inbound visitors, Jersey residents travelling abroad, business travel).

In 2020 and 2021 duty-paid spirits increased 28% compared to 2019, wine increased 7% and cider 6%. By comparison, beer decreased 12%, the divergence likely relating to the fact that beer is often bought in on- trade settings and was more affected by on-trade closures (disruption to the night-time economy).

Whilst direct comparisons cannot be drawn between Jersey and the UK, a Public Health England report Monitoring alcohol consumption and harm during the Covid-19 pandemic' from July 2021 highlighted that off- trade sales of alcohol increased by 25%, with the largest relative increase being beer (31%) followed by spirits (26%), wine (20%) and cider (17%) as people avoided pubs and drank wine and spirits at home

These figures largely mirror intelligence from both on-trade and off-trade suppliers in Jersey.

In addition, it is believed that changing factors like the drop in visitor numbers, a change in the profile of arriving passengers (e.g. less leisure and business travellers) have had a significant effect on in-Island consumption and of a reduction in duty free imports.

Table 2 – Alcohol Forecast 2022

Fuel

The quantity of fuel subject to excise duty in 2021 increased 6% on 2020 but remained 12% below pre- pandemic levels. The Covid adjusted forecast incorporates an estimated 6% increase towards pre-pandemic levels.

The trade anticipate 2022 duty paid volumes to return to within a few percentage points of pre-pandemic levels and are basing their planning assumptions on longer-term trends up to 2019 and are essentially disregarding pandemic disruption.

Oil prices jumped on 24 February 2024 when Russia invaded Ukraine and have continued to lead to increases in road fuel prices to new record levels. Whilst at this time fuel importers and distributors have not seen the price increases translating to decreased demand, if high prices are sustained the sense is that consumer behaviour may be affected but not to any significant extent at this stage. The August revision of this forecast will provide any necessary updates.

Table 3 – Fuel Forecast 2022

Tobacco

Tobacco receipts in 2021 again saw a sharp rise as a result of reduced travel during the pandemic, in excess of the forecast. The adjusted forecast for 2022 incorporates provision for passenger arrivals to remain at 40% below pre-pandemic levels, with a resultant decrease in the quantities of duty free tobacco being imported.

Table 4 – Tobacco Forecast 2022

Figure 2 – Passenger Arrivals and Tobacco (kg. duty paid) Comparison

60 2,500,000 50 2,000,000 40

1,500,000 30

1,000,000 20

10 500,000

0 0

2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 Tobacco Total passengers (est) (est) (est) (est) (est)

Whilst not directly affecting the forecast it is nonetheless worth noting that new legislation is coming into force in Jersey on 31st July 2022 introducing plain packaging for domestic sales, and banning flavoured cigarettes (e.g. menthol) from being produced or supplied in the Island. The Restriction on Smoking (Standardised Packaging and Labelling) (Jersey) Regulations 2021 are intended to encourage smokers to stop smoking and may in turn contribute to the steady decline in consumption and quantities of duty paid tobacco in Jersey which for the period 2015-2019 averaged about -6% each year.

Figure 3 –Tobacco (kg. duty paid) and Duty (£) Comparison

30 70

60 25

50 20

40 15

30 10

20 5

10 0 0

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026

quantity duty

Other

VED forecasts are based upon anticipated changes resulting from 2022 Government Plan initiatives to discourage the purchase of high CO2 emitting vehicles and to incentivise the purchase of lower emissions or electric / hybrid alternatives.

The forecast for Customs duty (CCT) has been increased from £800,000 to £1m as a result of increases numbers of goods being subject to Customs tariffs post-Brexit.

Impôts Forecast 2022 to 2026

In addition to the measures detailed above the below figures include the GP measures of:

• Alcohol  RPI increase for 2023-2026

• Cigarettes  RPI + 5% increase for 2023,RPI increase for 2024 - 2026

• HRT  RPI + 8% increase for 2023, RPI increase for 2024 - 2026

• Fuel  RPI increase for 2023-2026

Table 5 – Impots forecast 2022-2026

On the advice of Chief Economic Adviser +/- assumptions for 2023-2026 have been provided below to take account of potential greater inflationary moves than anticipated of 3% above and below the economic assumptions provided by the Fiscal Policy Panel in March 2022.

Table 6 - +/- RPI Assumptions for 2023-2026 Forecasts

Figure 4 - +/- RPI Assumptions for 2023-2026 Forecasts

£95,000 £90,000 £85,000 £80,000 £75,000 £70,000

2021.5 2022 2022.5 2023 2023.5 2024 2024.5 2025 2025.5 2026 2026.5

RPI RPI + 3% RPI - 3% or 0

Appendix E – Stamp Duty Forecast

1. Summary

1. The property market in 2021 saw all property types recording their highest annual average values seen to date.
2. Furthermore, the annual turnover of properties was also the highest turnover recorded to date.
3. This strong outturn for 2021 improves the base for future years of the forecast and is the key driver of the increase in stamp duty against previous forecasts.
4. The revised FPP economic assumptions for March 2022 (Figure 1) provide an additional increase to all years of the forecast.

2. Outturn for 2021  

1. The outturn of total stamp duty in 2021 was £17.2m (39%) higher than that shown in the IFG spring 2021 forecast addendum[1].
2. This increase was experienced across all components of the forecast, with the most material being in property transactions over £2m, exceeding the forecast by £8.9m (66%), and property transactions under £2m which exceeded the forecast by £6.1m (25%).
   3. Transactions Q1 2022

1. Full data for Q1 2022 are only available for LTT transactions and property transactions by High-Value Resident's (HVR's). Supported by additional intelligence provided by Locate Jersey, these appear to be in-line with the forecast proposed below.
2. When further data are available, these will be incorporated into the forecast.

4. Revised FPP Economic Assumptions (March 2022)[2]

1. The housing market in 2021 continued to show strong growth in both house prices and the number of transactions. This resulted in a £105k increase in the median price of a 3-bed house.
2. The FPP forecast continued strong growth in house prices for the initial years of the forecast, albeit less rapid than in the last two years.

Figure 1: FPP Economic Assumptions March 2022

Figure 2: Variation to FPP Economic Assumptions from August 2021

3. The recently released Statistics Jersey House price report for Q4 2021[3] shows that the overall turnover of properties was 19% higher compared with 2020, and the overall house price index was 16% higher.

5. Spring 2022 proposed forecast for Stamp Duty

1. The stamp duty forecast has been revised to incorporate the outturn of transactions from 2021 and the updated FPP economic assumptions.
2. Compared to the forecast shown in the addendum to the IFG forecast for Spring 2021, there is a material increase of c.36% in all years of the forecast.

Transactions under £2m

3. Strong growth in house prices and the number of transactions in 2021 resulted in the outturn being £6.1m (25%) above forecast.
4. This has resulted in an increase to the base, which provides a £5m increase to this component for 2022.
5. The seasonal variation has been reviewed, however due to the restrictions in housing market activity in 2020, it would not be appropriate to include that year within the three-year average. The seasonal variation is therefore based upon the average monthly transactions for 2018, 2019 and 2021.

Transactions over £2m

6. The tapering of stamp duty means that property transactions over £2 million are increasingly difficult to forecast, with recent transfers of property producing significant amounts of duty from single transactions.
7. In 2021 there were almost double the number of property transactions over £2 million than in previous years, resulting in c.£9m of stamp duty above forecast.
8. Approximately £3m of this increase was due to a single transaction. As there are a limited number of properties of a value likely to generate a similar level of stamp duty, the base amount used to forecast future years has been adjusted to remove this transaction.
9. Intelligence from Locate Jersey suggests that the transactions in 2022 are anticipated to remain strong.

Land Transaction Tax (LTT)

10. The Statistics Jersey House Price Index for 2021 shows a return to pre-2020 levels in transactions of flats, which form the majority of transactions subject to LTT.
11. The index for Q4 transactions of 1 and 2 bedroom flats saw the highest mean prices seen to date for these types of property.
12. As with the transactions of properties under £2m, there was a noticeable decrease from trend during Q2 of 2020. The seasonal variation is therefore based upon the three-year average for 2018, 2019 and 2021.

Wills and Probate

13. The forecasts for the Stamp Duty on Wills and Probate are both based upon a five-year average.
14. The outturn for Probate was c.£0.5m higher than forecast, which has resulted in an increase for this component of £0.2m each year.
15. The outturn for the Wills component saw an unanticipated spike in 2021 due to a small number of high- value registrations, and this has therefore been adjusted when being incorporated into the five-year average.

Enveloped Property Transaction Tax (EPTT)

16. The introduction of Enveloped Property Transaction Tax (EPTT) following the debate by the States

Assembly[4] in February 2022 has added an estimated £1m to each year of the forecast.

Figure 3: Spring 2022 stamp duty central forecast 2022 – 2026