Income Forecasting Group report on the revised forecast of States income for Spring 2023.

Income Forecasting Group

Report on the revised forecast of States Income for Spring 2023

R.89/2023

Contents

1. Executive Summary ..................................................................................................................................................... 2
2. Uncertainties around the forecast ............................................................................................................................ 2
3. Economic Assumptions .............................................................................................................................................. 3
4. Summary of forecasts ................................................................................................................................................. 5
5. Range of estimates ...................................................................................................................................................... 8 Appendix A – Personal Income Tax Forecast ............................................................................................................... 10 Appendix B – Corporate Income Tax Forecast ............................................................................................................ 18 Appendix C – Goods and Services Tax (GST) Forecast .............................................................................................. 23

Appendix D – Impôts Forecast ........................................................................................................................................ 27 Appendix E – Stamp Duty Forecast ................................................................................................................................ 36 Appendix F – Other Income Forecast ............................................................................................................................ 42 Appendix G – Social Security and Long-Term Care Contributions Forecast ........................................................ 47 Appendix H – Terms of Reference .................................................................................................................................. 49

1. Executive Summary

1. Compared to Summer 2022, the Income Forecasting Group (IFG) has increased its income forecast in 2023 by £23 million, this is driven by better than expected outturn data in 2022. The forecast improves marginally in 2024 and is lower than the previous Summer 2022 forecast, from 2024 onwards. The decrease in the forecast in the latter years is attributed to a reprofiling of financial services profits growth.
2. The IFG's forecast has been informed by the updated economic assumptions[1] produced by the 1F

independent Fiscal Policy Panel (FPP) in March 2023 and the latest available outturn data.

3. The global macroeconomic outlook continues to remain weak. Since the Summer 2022 forecast, the global economy has been affected by high inflation and low growth. The forecast should be considered against this backdrop.
4. Rising interest rates have been used globally to counter inflationary pressures. This will continue to have a positive impact on some parts of Jersey's financial sector, driving robust growth for the Jersey economy and thus, Government revenue. UK interest rates may be at, or near, their peak and are expected to fall towards the end of the year and into 2024, although there remains uncertainty about the timing of this. Nonetheless, Jersey's position remains somewhat insulated from the global economic context, on a comparative basis.
5. The Spring 2023 forecast (based on the FPP assumptions of March 2023) has been developed as

a central forecast' to represent the IFG's view of the most likely outcome. In view of the ongoing increased economic uncertainties around the forecast, a forecast range has been considered,

which is detailed in section 5.

6. A review to assess the robustness of the forecast models and methodology is expected to be undertaken ahead of the next IFG.

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 a sole focus on the central forecast.
2. There are increasing and emerging uncertainties in the global economy with the challenges of high inflation, the economic consequences of the ongoing conflict in Ukraine and other geo-

political uncertainties. The global economy is expected to grow by 2.8%[2] in 2023, which by global standards is considered weak. For advanced economies, it is 1.3% which is a poor level of economic performance. The economic prospects for the UK economy are currently even worse, with the IMF predicting a contraction of 0.3% in 2023.

3. Jersey's financial services sector contributes a large part of the Jersey tax revenue, both directly

and indirectly. The sector has proven resilient against several challenges including the pandemic. After a long period of low interest rates, central banks across the world have increased their rates

to combat inflationary pressures; since the Summer 2022 forecast, Bank Rate has increased by 2.5 percentage points to 4.25% in March 2023. However, with UK inflation expected to fall in the UK

(as wholesale energy prices fall and covid-19 disruptions to the global supply chains ease), the

period of elevated interest rates is more likely to be temporary[3]. This creates a downward risk that interest rates could fall in the medium term at least, which may impact the increased profitability

of the financial services sector and associated tax revenues in Jersey.

4. External regulatory factors continue to represent a key area of uncertainty in producing the forecast, with the Organisation for Economic Co-operation and Development (OECD) and G20 updating tax laws to reflect the digitalisation and globalisation of businesses.
5. The FPP have previously highlighted risks of housing and impact on the labour market to the ongoing growth of the economy. In the longer term, Jersey's economy faces similar risks to other advanced economies, including the impact of ageing demographics and challenges around low productivity growth. These continue to contribute uncertainty around the income forecast.

3. Economic Assumptions

1. The FPP produced a new set of economic assumptions in March 2023. These reflect latest outturn data, international developments and use latest UK and international forecasts.
2. The main differences between the March economic assumptions and those used in the IFG forecast for Summer 2022 include:

• Higher interest rates and a reprofiling of the growth in financial services profits, bringing forward higher profits in 2022 and a downward revision in 2023. This reduces the forecast growth in real GVA expected in 2023 but introduces modest increases in 2024 and 2025.

• RPI inflation is projected to reach a peak of 12.8% in Q1 2023 and then to fall steadily. The RPI forecast for 2024 and 2025 has been revised down.

• Average earnings are projected to rise almost alongside inflation, due to a tight labour market keeping demand for skills high and thus wages reflecting this.

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

• House prices are forecast to increase at a slower rate in 2023 (compared with 2022), after higher-than-expected performance in 2022 and the effect of actual interest rates being higher than forecast. The forecast for growth in house prices in 2024 and 2025 is unchanged and the forecast for housing transactions remains unchanged.

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 2023. However, the IFG recognise the increased uncertainty around assumptions, and have factored this into the range of forecasts.

Figure 1 Economic Assumptions

FPP Economic Assumptions March 2023

% Change unless otherwise specified  2021  2022  2023  2024  2025  2026  2027+ Real GVA  9.2  4.3  3.9  1.6  0.4  0.4  0.5 RPI  2.7  9.3  9.9  1.8  0.8  0.2  2.4 RPIY  2.7  7.1  5.9  2.2  1.5  2.1  2.4 Nominal GVA  12.1  12.1  10.3  4.3  2.2  2.7  2.9 Gross Operating Surplus (including

rental)  19.2  19.0  13.8  5.3  2.5  2.4  2.9

Financial Services Profits  13.1  30.0  20.0  5.5  1.0  1.0  3.2 Compensation of employees (CoE)  6.8  6.5  7.0  3.2  2.0  3.0  2.9

Financial services CoE  3.9  5.4  6.9  2.6  1.9  3.7  3.4

Non-finance CoE  8.7  8.5  6.8  2.8  1.9  2.9  2.7 Employment  2.9  0.9  0.6  0.5  0.4  0.4  0.1 Average Earnings  3.3  6.2  6.4  2.6  1.6  2.6  2.8 Interest rates (%)  0.1  1.5  4.2  4.0  3.5  3.3   3.2 House prices  16.0  11.0  1.0  4.0  3.0  3.0  2.9 Housing transactions  15.1  -12.9  3.0  2.5  2.5  2.5  4.0 Change from previous forecast  2021  2022  2023  2024  2025  2026+  

Real GVA  +3.8  +0.2  -4.7  +0.3  +0.3  -0.1

RPI  -  +1.6  +3.2  -2.1  -1.9  -2.2

RPIY  -  +0.9  +0.7  -1.5  -1.2  -0.3

Nominal GVA  +3.9  +1.6  -3.8  -0.6  -0.6  -0.2

Gross Operating Surplus (including

rental)  +8.2  +2.5  -10.5  -0.3  -  -0.5

Financial Services Profits  -6.4  +3.8  -22.3  -0.7  -0.6  -2.2 Compensation of employees (CoE)  +0.7  +0.7  +1.6  -1.1  -1.2  +0.1 Financial services CoE  +0.3  -0.7  +1.8  -1.5  -1.2  +0.3 Non-finance CoE  +0.7  +1.8  +1.3  -1.5  -1.2  +0.2 Employment  -0.1  +0.2  -  -  +0.1  +0.3

Average Earnings  -  +0.9  +1.5  -1.2  -1.3  -0.2

Interest rates (%)  -  +0.3  +1.7  +1.3  +0.8  +0.7

House prices  -  +5.0  -4.0  -  -  +0.1

Housing transactions  -  -16.4  -  -  -  -1.5

4. Summary of forecasts

1. The individual forecasts for each revenue stream are included in the appendices and provide further details of the assumptions and adjustments made to each component of the forecast.
2. In the Summer 2022 IFG Report, The IFG outlined its review of forecast accuracy to assess both

the accuracy of the forecast model and the economic assumptions used to estimate personal income tax, corporate income tax and GST. This forecast accuracy review showed that the model had proven to be accurate in forecasting income lines using outturn data and that forecast errors are within an acceptable range for input assumptions. The accuracy work provides comfort to forecast users and the IFG that the model and FPP assumptions work well. This work will be used to drive continuous improvements in the forecasting process and to develop a continuous feedback loop in delivering forecast accuracy.

3. Personal income tax (appendix A) has increased for 2023 with some modest falls in the forecast for 2024 to 2026. These changes have been driven by changes to the marginal threshold exemptions made in the 2022 mini-budget and by the latest FPP economic assumptions. Movements in the 2021 tax outturn and 2022 ITIS data have positively contributed to the overall forecast. The IFG have reconsidered the remaining adjustments made for the impact of Covid and have maintained their inclusion in the forecast. The rationale behind this is set out in appendix A.
4. Corporate income tax (appendix B) has decreased driven by a reprofiling of the growth in financial services profits, bringing forward higher profits in 2022 and a downward revision in 2023. The forecast corporate income tax revenue from other sectors remains stable with one methodological change outlined in appendix B.
5. Goods and Services Tax (appendix C) has been updated to reflect the FPP's latest economic assumptions and outturn.
6. Impôts duty (appendix D) has decreased in each year of the forecast, due to worse than expected impots duty receipts in 2022. The coronavirus pandemic brought considerable uncertainty to the forecasting of Impôts duty for the years 2020-2022 due to the significant changes in behaviour, consumption and travel, however, the forecast is now predicting a return to pre-pandemic long- term trends.
7. Stamp duty (appendix E) has decreased in each year of the forecast. This is due to a decrease in

the number of transactions seen in Quarter 4 (Q4) of 2022, and the initial months of 2023, which

has been considered when producing the forecast. Consideration of the apparent downturn has resulted in the updated forecast for 2023 being reduced to £12m below the Summer 2022 forecast. The Group have considered this downturn to be temporary, the most significant impact being in 2023, with the subsequent years of the forecast seeing a reduction of between £2m and £5m from the Summer 2022 forecast.

8. Other income (appendix F) the updated forecast for Other Income for 2023 is now £90 million, which is an increase of £28 million compared to the Summer 2022 forecast. This variance is largely due to the inclusion of a £20 million dividend from Jersey Telecom in both 2023 and 2024, which was agreed in Government Plan 2023-2026.
9. 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.

Figure 2 IFG Income Forecast Spring 2023

- Personal Income Tax   626,000   656,000   678,000   713,000   752,000

- Corporate Income Tax   136,000   157,000   164,000   166,000   168,000

- Provision for Bad Debt   (3,000)   (3,000)   (3,000)   (3,000)   (3,000) 759,000   810,000   839,000   876,000   917,000 Summer 2022   751,000   826,000   866,000   900,000   - Variance   8,000   (16,000)   (27,000)   (24,000)

Goods and Services Tax (GST)

- Goods and Services Tax   105,300   106,300   106,300   109,300   112,300

- International Service Entities Fees   12,700   12,700   12,700   12,700   12,700 118,000   119,000   119,000   122,000   125,000 Summer 2022   108,200   110,630   112,530   114,300   - Variance   9,800   8,370   6,470   7,700

Impôt Duties

- Spirits   7,487   8,311   8,545   8,700   8,804

- Wine   8,942   9,828   10,004   10,084   10,105

- Cider   1,044   1,137   1,145   1,143   1,134

- Beer  6,648  7,307   7,437   7,496   7,512

- Tobacco   14,785   15,273   14,614   13,847   13,043

- Fuel   25,470   27,713   27,929   27,871   27,648

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

- Vehicle Emissions Duty (VED)   3,115   3,301   3,241   3,277   3,104 68,491   73,870   73,915   73,418   72,350 Summer 2022   79,088   81,257   82,837   83,570   - Variance   (10,597)   (7,387)   (8,922)   (10,152)

Stamp Duty and Land Transaction Tax

- Stamp Duty   35,514   42,325   42,721   44,371   46,564

- Land Transaction Tax (LTT)   3,339   4,710   4,972   5,249   5,618

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

- Enveloped Property Transaction Tax   1,000   1,000   1,000   1,000   1,000

- Buy-to -let   2,330   4,660   4,660   4,660   4,660 44,883   55,395   56,053   57,980   60,542 Summer 2022   56,927   57,571   59,879   62,945   - Variance   (12,044)   (2,176)   (3,826)   (4,965)

Other Income

- Parish Rates   16,021   16,310   16,440   16,473   16,868

- Dividend Income   26,839   26,991   10,276   10,662   11,057

- Other Non-dividend Income   17,849   16,641   16,188   15,830   15,780

- Andium Return   29,277   29,715   29,806   30,022   30,084

Other Income   89,986   89,657   72,710   72,987   73,789

Summer 2022   62,156   63,799   67,707   68,813   - Variance   27,830   25,858   5,003   4,174  

Total Revenue  1,080,360  1,147,922  1,160,678  1,202,385  1,248,681

Summer 2022  1,057,371  1,139,257  1,188,953  1,229,628

Variance   22,989   8,665   (28,275)   (27,243)

5. Range of estimates

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

Figure 3 Parameters used for the sensitivity analysis

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

Figure 4 IFG Forecast Range

£ Millions IFG Forecast Range

 1,500 1,400 1,300 1,200

 1,100 1,000 900

 800

2022 2023 2024 2025 2026 2027 Central Upper Lower Summer 2022

Figure 5 Range of Estimates

Range of estimates

2023  2024  2025  2026  2027 (GBP 000's)  Forecast  Forecast  Forecast  Forecast  Forecast Upper scenario  1,095,876  1,187,495  1,227,103  1,299,173  1,381,554 Central scenario  1,080,360  1,147,922  1,160,678  1,202,385  1,248,681 Lower scenario  1,059,741  1,104,703  1,097,150  1,116,289  1,138,691 Summer 2023  1,057,371  1,139,257  1,188,953  1,229,628

Appendix A – Personal Income Tax Forecast

The Personal Income Tax (PIT) forecast was updated in Spring 2023 to include new tax outturn data, the FPP's March 2023 economic assumptions, re-estimated statistical relationships and the removal of pandemic adjustments for business profits.

The updated personal income tax forecast is summarised below in Figure A1. Figure A1. Spring 2023 Personal Income Tax Forecast

Personal Income Tax Spring 2023

Forecast Methodology

An overview of the personal income tax forecasting model is shown in Figure A2. There are two main elements - forecasting taxable income and forecasting the average effective tax rate (i.e. tax liability per £1 of taxable income). The latter is based on forecasts of the value of deductions (including exemption thresholds for marginal rate taxpayers, and 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 by applying economic assumptions provided by the FPP to latest outturn data. The economic assumptions include the forecast year on year change in compensation of employees (CoE), company profits, employment, average earnings, inflation and interest rates. Outturn data is provided by Revenue Jersey. The average effective tax rate is forecast by taking baseline data for the value of deductions. Changes are forecast, 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 meeting this threshold).

Figure A2: Model overview

 utturn Forecast

 tatistical relationships

Income Forecast income

 conomic assumptions

minus minus

Ta payer number assumptions

Forecast e emptions, reliefs and emptions, reliefs and allowances allowances

 nown and future policy assumptions

multiplied by conomic assumptions multiplied by

Ta rates Ta rates

Ta  liability Forecast ta liability

Tax outturn, HVR and ITIS

Income and tax outturn data is taken from personal tax assessments by Revenue Jersey. Income outturn for 2021 year-of-assessment taxpayers was £208m (6.2%) higher than 2020 outturn and £15m (0.4%) greater than the Summer 2022 forecast. The breakdown of taxable income outturn is shown in Figure A3.

Figure A3: Taxable income forecast vs outturn for 2021

Taxable income

The tax outturn for 2021 year-of-assessment was £45m (9.3%) higher than 2020 and £9.0m (3.6%) greater than the Summer 2022 IFG forecast; these have been incorporated into the forecast as a new base. The breakdown by personal tax assessments, high-value residency (HVR) taxpayers and other entities is presented in Figure A4.

Figure A4: Personal income tax forecast vs outturn for 2021

Personal Income Tax

The impact of the outturn data on the forecast base increases the forecast by £11m annually.

Tax from other entities including clubs/associations, estates and pension schemes grew by 8.0% in 2021 to £2.6m, from £2.5m in 2020. The forecast assumes this amount to remain flat in nominal terms for the rest

of the forecast period. Assessments for taxpayers on the high-value residency (HVR) regime show that £25.9m was assessed for these taxpayers in 2021, increasing from £22.5m in 2020 and £0.9m higher than

in the Summer 2022 forecast.

Tax from HVR taxpayers 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 number of HVR arrivals in 2022 was lower than assumed in the last forecast, however, the forecast will continue to use a simplified average of 17 per year for the forecast period, 2023 to 2027. The number of HVR departures was 5, including one move to licensed status. The forecast uses a 5-year average of 7 for the forecast period. As outlined in the Government Plan 2023-2026, the minimum contribution for HVR taxpayers increased to £170,000 in 2023. These changes lead to modest changes to the forecast and

reduce the forecast by £1.2m over 2022-26.

Revenue Jersey has provided a revised figure for growth in employment income reported through the Income Tax Instalment System (ITIS) for 2022. Employment income grew by 8.0% in 2021. This is considerably higher than 6.9% implied by the equation used to forecast earnings. Faster than expected growth in earnings income as approximated by ITIS data increases the forecast by approximately £7m in each year of the forecast.

Policy changes and independent taxation

Personal exemption thresholds for marginal rate taxpayers for 2023 have been updated to reflect changes published in the Government Plan 2023-2026. The exemptions are as follows; £18,550 for single taxpayers, £29,750 for married taxpayers and £7,350 for second earners. The value of the exemption thresholds for marginal rate taxpayers is then forecast to grow in line with the smaller of earnings growth and RPI a year prior.

The impact of these policy changes reduces the forecast by approximately £16m annually.

From 2022, anyone arriving in Jersey or anyone who gets married or becomes a civil partner will be independently taxed. Whereas couples can optionally move to independent taxation for the years 2023 and 2024, it is intended that by 2025, although not currently legislated for, all married couples and civil partners will be independently taxed. The IFG agreed it was appropriate to incorporate the impacts of the compulsory change to independent taxation into the forecast, with an estimated reduction of £3m annually from 2025.

Economic data/assumptions

The FPP's March 2023 economic assumptions have been incorporated into the forecast and are expected to reduce the forecast by £10m over 2022 to 2026:

• The revised forecast for inflation results in a small decrease of less than £1m in 2023 and 2024.

This is the result of increased shareholder income/distributions that are forecast to rise in line with RPIY, partially cancelled out by the impact of faster growth in exemption thresholds. As inflation is now expected to fall faster from 2024, the personal income tax forecast sees an increase of £15m over 2025 and 2026.

• The projected rebound and growth in financial services profits has been reprofiled to an increase

of 30% in 2022 (up from 26%). Growth in 2023 has been revised downwards to 20% (from over 40%). This reduces the forecast by £35m over 2023 to 2026, after a small increase of £1.5m in 2022.

• The revised forecast for compensation of employees, average earnings and employment growth increases the forecast by a total of £4.5m in 2022 and 2023 but then decreases the forecast by a total of £27m over 2024 to 2026. These economic assumptions are updated together as they each interact with each other.

• The increased forecast for interest rates increases the IFG forecast by £6m in 2023 and £9m in 2024 with smaller increases expected in 2025 and 2026. This is due to the impact on bank interest, dividend, and other unearned income.

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

The IFG 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.

As more data and outturn became available the adjustments were appropriately revised or removed. Since the Summer 2022 forecast, two adjustments to business profits and property income were applied to the forecast growth rates for 2021 and 2022. The adjustments used are reported in Figure A5 below.

Figure A5. IFG adjustments applied in Summer 2022

2021  2022 Business profits  5.64%  5.64% Property income  2.88%  2.88%

Figure A6 below shows the growth rate of outturn data compared with the growth rates predicted in the Summer 2022 forecast:

Figure A6: Assessment of the IFG's adjustments using 2021 outturn

The outturn for 2021 indicates better than expected performance for business profits with growth exceeding the forecast growth rate by 8.6 percentage points. Growth in property income performed above the 10-year (2009-2019) average of 6.4%, however, it remained 2.1 percentage points lower than the IFG adjusted growth rate.

The impact of removing these adjustments for 2022 is set out below:

1. The removal of the adjustment to business profits reduces the forecast by £4m in 2022 and by a further £17m over the remainder of the forecast period, 2023 to 2027.
2. The removal of the adjustment to property income reduces the forecast by less than £1m in 2022 and by a further £4m over the remainder of the forecast period, 2023 to 2027.

The FPP's assumptions for real GVA have been revised upwards, suggesting greater economic activity across the island, however, this will be driven by the financial services sector. Although businesses, such as sole traders, faced greater input costs in 2022.It is unclear whether this higher inflation was absorbed by businesses, thus reducing the profitability. The IFG have agreed to maintain the adjustment of +5.64 percentage points to the 5-year average (2016-2021) of 5.7%, thus giving a forecast growth rate of 11.3% in 2022, before returning to the 5.7% for the remainder of the forecast period.

The IFG have also agreed to remove the adjustment of +2.88 percentage points to the 10-year average (2011-2021) of 7.0%. The IFG deemed this appropriate given the disparity between the year-on-year growth rental component of RPI inflation based on actual rents paid (1.5%) and the rental index based on advertised rents (10%) for 2022.

Figure A7 summarises the remaining adjustment used in the Spring 2023 forecast. Figure A7. Remaining IFG adjustment

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. 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 following section 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.

Pension Income Equation

Pension income is forecast to grow in line with average earnings and with 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 and a dummy variable for 2022 were also included to improve the fit of the model. In 2021, pension income grew 1.1% whilst other income lines saw higher growth, which may be explained by one-off high-value withdrawals or delays in individuals taking their pension income.

When incorporating the outturn for 2021 and re-estimating the relationship for pension income, the explanatory power of this equation drops. The re-estimated equation for 2021 is shown below in column (1) of Figure A8. The R-squared of this equation falls from 0.89 to 0.75 when 2021 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.

Figure A8. Pension equation

(1)  (2)

Explanatory variables  Pension income  Pension income

% change in earnings  0.6143* (0.3357)  0.8824*** (0.1978)

% change in earnings (-1)  0.7726*** (0.2383)  0.5718*** (0.1409)

% change in over 65 population  0.9750 (0.5806)  1.049*** (0.3317) D02to12  2.1674** (0.9217)  1.8088*** (0.5302)

D20  2.0039 (1.5966)  1.9421* (0.9114)

D21  -4.7204***(0.8623) Constant  0.5198 (1.3765)  -0.8186 (1.3118) Observations  20  20

R-squared  0.7505  0.9245

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 2021 and 0 otherwise has been added to the model. 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 A9. Incorporating the dummy increases the forecast by £14m over the period 2022-2026 compared to the re-estimating the previous specification.

Figure A9. Fitted and actual values of pension income (new model).

Range of forecasts

The IFG have produced an upper and lower estimate of the Personal Income Tax forecast using sensitivity analysis of the estimates to key variables included the FPP economic assumptions

Figure A10. Parameters used for the sensitivity analysis

Variation (pp)

RPI  +/- 3.0 RPIY  +/- 2.0 Financial Services GOS  +/- 10.0 Financial Services CoE  +/- 3.0 Non-Finance CoE  +/- 3.0 Employment  +/- 1.5 Average earnings  +/- 3.0 Interest rates  +/- 1.0 House prices  +/- 2.0

 ach 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. Figures A11 and A12 below show the upper and lower estimates of this forecast.

Figure A11. Range of forecast estimates

800 750 700 650 600

£ million 550

500 450 400

2020 2021 2022 2023 2024 2025 2026 2027

Upper scenario Central forecast Lower scenario

Figure A12. Range of estimates around the central PIT forecast

(GBP millions)  Outturn  Forecast  Forecast  Forecast  Forecast  Forecast  Forecast Lower scenario  534  590  613  635  651  677  706 Central forecast  534  590  626  656  678  713  752 Upper scenario  534  590  638  677  705  747  795

Appendix B – Corporate Income Tax Forecast

The Corporate Income Tax (CIT) forecast was updated in Spring 2023 to include new tax outturn data and the FPP's March 2023 economic assumptions. The forecast is summarised below in Figure B1.

Figure B1. Changes to the Corporate Income Tax forecast since Summer 2022 forecast

(GBP millions)  Outturn  Outturn  Forecast  Forecast  Forecast  Forecast  Forecast Summer 2022 forecast  98  110  131  171  181  184

Impact of tax outturn  +2  +1  +2  +2  +2  +3

Growth assumptions - FS  0  +3  -17  -19  -2 0

Growth assumptions – non-FS  0  +0  +1  +0  +1

Spring 2023 forecast  100  110  136  157  164  166  168 Variance  +2  +1  +5  -14  -17  -18

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

Outturn

The aggregate outturn for 2022 was in line with the Summer 2022 IFG forecast and increased by 11% between 2021 and 2022.

Tax from financial services is the largest contributor to CIT. It was hit strongly during the pandemic,

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 until December 2021. Tax outturn for financial services fell from £81m to £59m between 2020 and 2021 but has increased to £73m (+23%) in 2022.

Tax from property activities (property development and rental profits) fell by £3m in 2022 to £23m. This is while tax from large corporate retailers (LCRs) remained relatively stable with growth of around £0.9m from 2021. There were some downward revisions to the outturns for 2020 and 2021 when compared to the Summer 2022 forecast.

Tax from utilities fell by £0.8m, whereas tax from all other sectors fell marginally by around £0.1m; the other sector has been significantly revised downwards by £0.9m in 2020 and £0.3m in 2021.

Forecast methodology

CIT is paid in one year in arrears, so tax in 2022 relates to profits in 2021. For the purposes of the forecasts, financial services tax is assumed to grow by prior year financial services gross operating surplus (FS GOS – a measure of profits) forecast by the FPP and other contributors (property, LCR and other) by RPI(Y) inflation.

Below, Figure B2, are the growth rate assumptions used in the CIT forecast.

Figure B2 Assumptions used in corporate tax forecast

(% growth rate)  Outturn  Forecast  Forecast  Forecast  Forecast  Forecast Financial services  22.8  30.0  20.0  5.5  1.0  1.0 Property  -10.0  7.1  5.9  2.2  1.5  2.1 Large corporate retailers  13.1  8.6  5.9  2.2  1.5  2.1 Other  -10.7  7.1  5.9  2.2  1.5  2.1 RPIY inflation forecast  7.1  5.9  2.2  1.5  2.1  2.4

Financial services

The forecast has been updated with the new FPP economic assumptions. The new economic assumptions introduce a reprofiling of FS GOS, bringing forward an increase in the tax forecast in 2023 by £5m and reducing tax revenue over the period 2024 to 2027 by £80m.

The average interest rate for 2022 was 1.5% and is forecast to reach 4.2% in 2023 before falling from 2024 onwards. Given Jersey is primarily a deposit-taking centre, interest rate rises usually lead to an increase in net interest margins. The precise trajectory of inflation and therefore, interest rates, remains uncertain, which may lead to the current forecast being conservative.

Figure B3: Forecast corporate income tax from financial services (£m - budget year)

160

140 120 100 80 60 40 20 0

2020 2021 2022 2023 2024 2025 2026 2027

Spring 2023 Summer 2022

Note: tax is collected one year in arrears, so tax in 2022 relates to profits in 2021

Large corporate retailers

The current forecast remains broadly in line with the Summer 2022 forecast. The previous forecast assumed an uplift of 1.5 percentage points to RPI for the years of assessment 2021 and 2022 (whereby tax is paid in 2022 and 2023). Tax outturn indicates a growth rate of 13% in 2022. The Spring 2023 forecast continues to assume an uplift of 1.5 percentage points to the prior year RPI(Y) inflation in 2023 and steady growth by prior year RPI(Y) thereafter. The absorption of higher input costs by LCRs in not known but if the increased costs are not passed onto customers, it is probable that CIT receipts from LCRs could be lower in 2023 and 2024.

Figure B4: Forecast corporate tax from large corporate retailers (£m – budget year)

12 10 8 6 4 2 0

2020 2021 2022 2023 2024 2025 2026

Spring 2023 Summer 2022

Note: tax is collected one year in arrears, so tax in 2022 relates to profits in 2021

Property

Whilst the Summer 2022 forecast assumed flat growth in 2021 and 2022 for property rental and development profits, revisions to 2021 outturn led to a 6% increase when compared to 2020; this is followed by a year-on-year 10% decrease in 2022. The current forecast continues to assume growth by RPI(Y) inflation and is broadly in line with the Summer 2022 forecast.

Figure B5: Forecast corporate tax from property rental and development (£m – budget year)

30 25 20 15 10 5 0

2020 2021 2022 2023 2024 2025 2026

Spring 2023 Summer 2022

Note: tax is collected one year in arrears, so tax in 2022 relates to profits in 2021

Other corporate tax

The Other' corporate tax grouping is a set of predominately utilities, oil and mining businesses. Latest outturn data for tax paid in 2020 and 2021 were higher than forecast, and 2022 is close to the Summer 2022 forecast with a difference of £0.2m. The forecast grows with prior year RPI(Y) inflation, which is consistent with the growth rate for other sectors.

Figure B6: Forecast corporate tax from other sectors (£m - budget year)

9 8 7 6 5

4 3 2

1 0

2020 2021 2022 2023 2024 2025 2026

Spring 2023 Summer 2022

Note: tax is collected one year in arrears, so tax in 2022 relates to profits in 2021

Range in forecasts:

The sensitivity analysis applied to FPP assumptions outlined in Figure A7 have varying impacts on different parts of the corporate income tax forecast. The difference between these changes can be seen by the higher and lower estimates seen in Figures B7 and B8, below.

Figure B7: Range of forecast estimates

250

200 150 100 50

0

2020 2021 2022 2023 2024 2025 2026 Upper scenario Central forecast Lower scenario

Figure B8: Range of estimates

Corporate Income Tax Range of Estimates

2021  2022  2023  2024  2025  2026  2027 (GBP millions)  Outturn  Outturn  Forecast  Forecast  Forecast  Forecast  Forecast Lower scenario  100  111  136  147  142  133  125 Central forecast  100  111  136  157  164  166  168 Upper scenario  100  111  136  167  188  205  225

Appendix C – Goods and Services Tax (GST) Forecast

The IFG's pring 2023 forecast for Goods and Services Tax (GST) has been updated to incorporate the FPP's March 2023 economic assumptions and outturn data. The updated GST forecast is summarised in Figure C1.

Figure C1. Changes to the GST forecast since Summer 2022

(GBP millions)  Outturn  Forecast  Forecast  Forecast  Forecast  Forecast Summer 2022 Forecast  103  108  111  113  114  114

 +15  +10  +8  +6  +8  +11 Spring 2023 Forecast  118  118  119  119  122  125 GST  105  105  106  106  109  112 ISE fees  13  13  13  13  13  13

Note: Figures are rounded to the nearest £m

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 C1 and is estimated over the period 2010-2021

Equation C1

 ln( ) = 2.08 0.16ln( ) 1 + 0.85ln( ) + 1.22ln( ) + . (1)

The forward-looking forecast uses the FPP's assumptions for the growth of Co and is conditional on the tax rate being held at 5% for period of the forecast. Figure C2 shows the coefficients, standard errors, p- values, and diagnostic statistics for the regression model in Equation C1. Figure C3 plots the natural log of the GSTx outturn, and the fitted values predicted by the model.

Figure C2. ARDL with GSTx dependent  Figure C3. Fitted and actual values of  ( ) variable  

GSTx  

GSTx (-1)  -0.1602**  

(0.0685)  

CoE  0.8531***  

(0.0856)  

GST Rate  1.2204***  

(0.0861)  

Constant  2.0849***  

(0.5351)  

Observations  12  

R-squared  0.9929  

Adjusted R-squared  0.9902  

Log-Likelihood  33.08  

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

Updated FPP economic assumptions

The FPP March 2023 economic assumptions for CoE has been increased by 1.6 percentage points for 2023 and decreased by 1.1 and 1.2 percentage points for 2024 and 2025, respectively.

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.

Reductions in the de minimis level and registration of LCRs

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

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.

A deferral of the registration of offshore retailers to charge GST at source and the reduction in the de minimis level from £135 to £60, from the start of 2023 to 1 July 2023 was agreed as part of the measures included in the September 2022 mini-budget. The change has been made following requests from some offshore retailers for more time to introduce changes to their systems. The estimated impact of the

deferral is a decrease of £750K[2] from the expected additional £1.1m de minimis revenue in 2023. This has been incorporated in the Spring 2023 forecast.

Incorporating these changes from the outturn data, modelled coefficients and FPP economic assumptions, the current forecast, when compared to the previous forecast, is illustrated in Figure C4.

Figure C4: Initial Spring 2023 vs Summer 2022 forecast

135 130 125 120 115 110 105 100 95

2021 2022 2023 2024 2025 2026 2027

Summer 2022 Forecast Spring 2023 Forecast

As seen in Figure C4, the Spring 2023 forecast model predicted a fall in GST receipts in 2023, which could be attributed to unwinding of the 2022 the post-pandemic surge in demand for goods and services. After discussion, the IFG agreed that this was likely to be an under-estimation of GST and revised the forecast with flat growthfrom the 2022 outturn point and is shown below in Figure C5.

Figure C5: Initial Spring 2023 vs Revised Spring 2023 forecast

135

125

115

105

95

2021 2022 2023 2024 2025 2026

Summer 2022 Forecast

Initial Spring 2023 Forecast

Revised Spring 2023 Forecast

Range of estimates

The IFG have produced a range around the GST forecast using a variation around FPP economic assumptions. As a starting point, this is a range of +/- 3.0 percentage points for their estimate of the growth of CoE. This was then updated to accommodate the revision to the central forecast. The table below shows the upper and lower estimates of this forecast.

Figure C6. Range of estimates around the central GST forecast

GBP millions  2022  2023  2024  2025  2026  2027

Lower scenario  118  112  114  115  118  120

Central forecast  118  118  119  119  122  125

Upper scenario  118  119  121  122  127  132 Figure C7. Graph of upper and lower estimates of this forecast (£m)

135 130 125 120 115 110 105 100 95

2021 2022 2023 2024 2025 2026 2027 Lower scenario Central forecast Upper scenario

Appendix D – Impôts Forecast

Summary

The pring 2023 forecast for Impôts duty has been updated to incorporate the FPP's March 2023 economic assumptions together with 2022 and Q1 2023 outturn data. In previous years above inflation increases have been applied to certain products (e.g. tobacco and VED) to influence customer behaviour but no such increases have been applied to the forecast as Ministers are yet to agree proposed changes or increases

for 2024-2027.

The coronavirus pandemic brought considerable uncertainty to the forecasting of Impôts duty for the years 2020-2022 due to the significant changes in behaviour, consumption and travel, however, the forecast is now predicting a return to pre-pandemic long-term trends which are summarised in the charts and tables below.

The updated Impôts forecast is summarised in Figure D1. Note that the Summer 2022 forecast incorporated 7.9% RPI increases for alcohol and fuel whereas the Government Plan 2023-2026 exceptionally froze duty rises for these two commodities to support the hospitality industry and to help with ongoing costs of living impacts. In addition, the Summer 2022 forecast did not incorporate more latter increases to Vehicle Emissions Duty (VED) which saw charges for the two bands of highest polluting vehicles increased by 75% and 85% respectively.

Figure D1. Changes to the forecast since Summer 2022

Pre and Post Pandemic

Figure D2 illustrates the effect of the pandemic on the number of passengers travelling to / from the Island together with an anticipated return to the long-term trend in 2024. This trend is presented to against the clear link between passenger numbers and the two commodities most affected by duty-free purchases – tobacco and spirits.

Figure D2. Passenger numbers – tobacco and spirits comparison

Alcohol

Indications from the trade suggest that the hospitality industry is struggling due to a variety of factors including the end of Covid support, staffing difficulties, price rises and customer behavioural changes. It is believed, however, that, in terms of revenue from Impôts duty, the overall effect is neutral as high prices in the on-licence sector are likely to lead to a shift away from on-licence to off-licence consumption. [1]

The Government of Jersey 2021 Alcohol Profile reports on the consumption of alcohol in Jersey, its use,

and its harms. The report indicates that Islanders drink, on average, a sixth (16%) less than a decade ago in 2010 and that the relative cost of alcohol has increased.

Figures D3-D6 below illustrate longer-term trends in the dutiable quantity of each product together with 2023-2027 forecasts based upon annual RPI increases.

Figure D3. Spirits Duty and Quantity Long Term Trend

Figure D4. Wine Duty and Quantity Long Term Trend

Figure D5. Cider Duty and Quantity Long Term Trend

Figure D6. Beer Duty and Quantity Long Term Trend

Tobacco

The 2022 outturn for tobacco fell significantly from the Summer 2022 forecast (-33% or -4.55m) below forecast. A decrease had been anticipated and in-year adjustments had been made to the forecast but these ultimately proved to be over-optimistic. Information from the major importers and suppliers of tobacco products in the Island show that, as well as long-term reductions in consumption for health reasons and increased imports of duty free tobacco after the pandemic, a number of other related factors are likely to be influencing behaviours, including:

• Affordability (e.g. Impôts tax escalator)

• Plain packaging, restrictions on advertising, promotion and point of sale display

• Supply chain issues

• Banning of sale of flavoured cigarettes

• Move from tobacco to vaping

• General cultural trend away from smoking

Additional background information can be found in the Government of Jersey Smoking Profile 2021  Figure D7. Tobacco Duty and Quantity Long Term Trend

Fuel

Long-term volumes of duty paid road fuel have been in decline since the mid-1990s and there are no indications that this trend will not continue. 2022 outturn was 7% less than forecast whereas the average 10 year decline is between 1% and 2% per annum. On the basis of Q1 2023 volumes the 2023 forecast is currently predicting similar volumes to 2022.

Figure D8 Road Fuel Duty and Quantity Long Term Trend

Vehicle Emissions Duty(VED)

The 2023-2026 Government Plan, as part of efforts to continue to encourage the purchase of electric vehicles, introduced increases of 75% and 85% on the rates for the highest two polluting bands of vehicles, with 32% increases for lower bands.

Policy TR4 of the Carbon Neutral Roadmap, approved by the States Assembly on 29 April 2022, introduced a Vehicle Emissions Duty (VED) optimisation whereby no level of VED would be introduced on zero carbon vehicles but duty would be increased on all domestic petrol and diesel vehicles each year until at least 2030. The expectation in policy TR5 would be to bring into force legislation that prohibits the importation and exportation of petrol and diesel cars and small vans that are new to the Island by 2030 at the latest.

Ministers have yet to agree the proposed levels of increases for VED for 2024-2027 therefore for the purpose of this forecast RPI increases have been applied across all bands.

2022 saw a significant overall decrease in the number of vehicles registered in the Island and an increase in the number of electric vehicles. There is considerable uncertainty as to the effect of the 2023 increased VED rates on vehicle registrations and this forecast is therefore likely to require to be amended as more data becomes available through 2023 and beyond.

Figures D9, D10 and D11 illustrate long term trends in the decrease of the overall number of vehicles being registered, a breakdown of the number of vehicles registered each year per cubic capacity and an increase in the number of low emission, electric and hybrid vehicles. No separate breakdown is provided for the Agricultural tractors or commercial vehicles.

Figure D9 Number of Registered Vehicles per CC – Long Term Trend

Figure D10. Number of registrations of electric and hybrid vehicles

Figure D11 - Summary 2023 forecast for Impôts duty (RPI Increases for 2024-2027)

Summer 2022 (GBP 000's)  2,400  2,644  2,644  2,644  2,644

Variance  (176)  471  657  597  633

% -19%  15%  20%  18%  19%

Total Impots  66,481  68,491  73,870  73,915  73,418  72,350 Summer 2022  74,267  79,088  81,257  82,837  83,570

Variance  (8,538)  (10,597)  (7,387)  (8,922)  (10,152)

% -13%  -15%  -10%  -12%  -14%

Upper and Lower Scenario

Upside / downside assumptions for 2024-2027 have been provided below to take account of potential greater inflationary moves than anticipated of 3% above and 3% below the economic assumptions provided by the Fiscal Policy Panel in March 2023.

Figure D19. +/- RPI Assumptions

Impôts Forecast Range

2023  2024  2025  2026  2027 (GBP 000's)   Forecast Forecast Forecast Forecast Forecast Upper Scenario  68,491  74,669  76,844  78,520  79,626 Central Forecast  68,491  73,870  73,915  73,418  72,350 Lower Scenario  68,491  70,928  69,840  68,899  67,803

Appendix E – Stamp Duty Forecast

Summary

The stamp duty forecast has been updated to reflect the revised economic assumptions from the Fiscal Policy Panel, and to incorporate outturn data from 2022. The Summer 2022 forecast was c.£2.2m (4.0%) higher than the actual outturn for 2022, which was principally due to the lower than anticipated stamp duty raised from transactions under £2m and enveloped property transaction tax (EPTT).

A decrease in the number of transactions seen in Quarter 4 (Q4) of 2022, and the initial months of 2023, has been considered when producing the forecast, along with continued uncertainty in some of the components.

Consideration of the apparent downturn has resulted in the updated forecast for 2023 being reduced to £12m below the Summer 2022 forecast. The Group have considered this downturn to be temporary, the most significant impact being in 2023, with the subsequent years of the forecast seeing a reduction of between £2m and £5m from the Summer 2022 forecast.

Outturn 2022

Data available for Q4 of 2022 (Figure E3) and the first two months of 2023 (Figure E4) shows a reduction in the number of transactions compared to the same period in the previous year. The Statistics Jersey House Price Index report[1] for Q4 2022 presented the 2022 turnover of properties as being 12% lower compared against 2021, with Q4 2022 being 40% lower than Q4 2021.

The reduced number of transactions and lower than anticipated stamp duty from EPTT resulted in the outturn being c.£2.2m (4.0%) lower than the Summer 2022 forecast.

Revised FPP Economic Assumptions (March 2023)

The Fiscal Policy Panel (FPP) letter[2], published in March 2023 noted that the increase in house prices, and the number of transactions, were forecast to slow down due to the effect of higher interest rates on mortgage costs.

Compared to the economic assumptions published in July 2022, the assumption for house prices in 2023 has decreased by 4.0pp. Further changes are not seen until towards the end of the forecast period, with the assumptions for 2026 reducing house prices by 0.1pp and housing transactions by 1.5pp.

Figure E1: FPP Economic Assumptions March 2023

Figure E2: Variation to FPP Economic Assumptions from July 2022

Spring 2023 proposed forecast for Stamp Duty

Transactions under £2m

The number of transactions in Q4 2022 was reduced to pre-Covid levels (Figure E3), and this has continued to be seen in the first two months of 2023 (Figure E4). Anecdotal information has suggested that this trend may be expected to continue for the first half of 2023, and therefore, to provide additional consideration for this in the forecast, this component has been reduced by 50% for January to June 2023.

Figure E3: Comparison of stamp duty transactions under £2m in Q4

Figure E4: Comparison of stamp duty transactions under £2m in January and February

Transactions over £2m

The tapering of stamp duty means that property transactions over £2 million are increasingly difficult to forecast, with transfers of property potentially producing material amounts of duty from single transactions.

Changes to the High Value Resident scheme will be debated later this year, and this has led to a degree of uncertainty with recent applications. The forecast for this component has therefore been reduced by 50% to reflect this.

Land Transaction Tax (LTT)

Historically, Land Transaction Tax follows the trends seen in the transactions of property under £2m. However, principally due to a number of new developments, there was an increased level of turnover in these transactions seen in Q4. The group do not consider that this will continue throughout the whole of 2023, and therefore this component of the forecast has been reduced by 50% for January to June.

Wills and Probate

The forecasts for the stamp duty on Wills and Probate are both based upon a five-year average.

In-year data suggests that the current forecast methodology is not unreasonable, and therefore there is no change to these components.

Enveloped Property Transaction Tax (EPTT)

The introduction of Enveloped Property Transaction Tax (EPTT), following the debate by the States Assembly[3] in February 2022, provided an estimated £1m in each year of the forecast. Whilst this amount was not attained in 2022, there is no additional information to support a change to this component for

this update.

Figure E5: Spring 2023 stamp duty central forecast 2023 – 2027

Stamp Duty Forecast

2022  2023  2024  2025  2026  2027 (GBP 000's)  Outturn  Forecast  Forecast  Forecast  Forecast  Forecast

Stamp Duty

- Transactions <£2m  26,839 21,289 28,046 29,610 31,261 33,454 Summer 2022  32,145 34,764 37,059 39,125 41,870

- Transactions >£2m  17,691 13,054 13,109 11,940 11,940 11,940 Summer 2022  15,357 13,438 11,520 11,520 11,520

- Wills  1,649 1,170 1,170 1,170 1,170 1,170 Summer 2022  960 960 960 960 960

46,179 35,514 42,325 42,720 44,371 46,564 Summer 2022  48,461 49,162 49,538 51,604 54,349 - Variance  (2,282) (13,649) (7,213) (8,884) (9,978) 46,564

% -4.7% -27.8% -14.6% -17.2% -18.4%

Probate

- Probate  3,249 2,700 2,700 2,700 2,700 2,700 Summer 2022  2,700 2,700 2,700 2,700 2,700

Variance  549 - - - - 2,700

% 20.3% 0.0% 0.0% 0.0% 0.0%

Land Transaction Tax

- LTT  4,011 3,339 4,710 4,972 5,249 5,618 Summer 2022  3,759 4,065 4,333 4,575 4,896

Variance  252 (726) 376 397 354 5,618

% 6.7% -17.9% 8.7% 8.7% 7.2%

Enveloped Property Transaction Tax

- EPTT  236 1,000 1,000 1,000 1,000 1,000 Summer 2022  1,000 1,000 1,000 1,000 1,000

Variance  - - - - 1,000

% -76.4% 0.0% 0.0% 0.0% 0.0%

Buy-to-let

- BTL  -  2,330  4,660  4,660  4,660  4,660 Summer 2022  -  -  -  -  -

Variance  2,330  4,660  4,660  4,660  4,660

% 0.0%  0.0%  0.0%  0.0%  0.0%

Total Stamp Duty  53,674 44,883 55,395 56,053 57,980 60,542 Summer 2022  55,920 56,927 57,572 59,879 62,945 - Variance  (2,246) (12,045) (2,177) (3,827) (4,965) 60,542

% -4.0% -21.2% -3.8% -6.4% -7.9%

Upper and Lower scenario

To present the forecast within a range, the FPP assumptions for house prices have been varied by +/- 2.0pp and for housing transactions by +/- 4.0pp. This results in an upside variation of £1.3m (2.3%) in 2023, extending to £12.8m (21.2%) in the final year of the forecast. The downside variation ranges from - £1.3m (-3.0%) in 2022 to -£9.9m (-16.4%) in 2027.

Figure E6: Range of forecast 2023 – 2027

Stamp Duty Forecast Range

2023 2024 2025 2026 2027 (GBP 000's)  Forecast  Forecast  Forecast  Forecast  Forecast Upper Scenario  46,245  59,275  62,438  67,283  73,372 Central Forecast  44,883  55,395  56,053  57,980  60,542 Lower Scenario  43,556  51,823  50,505  50,355  50,615

Appendix F – Other Income Forecast

Summary

Other Income combines several income lines for the Government of Jersey which do not relate to taxation and charges. At a high level, these are:

• Island-wide rates (part of the rates system and collected by parishes)

• Income from dividends and returns (from States-owned entities)

• Non dividends (crown revenues, miscellaneous interest, fees and fines)

• Returns from Andium Homes

The Summer 2022 forecast other income was £62.6 million in 2022, compared with outturn of £71.3 million. The favourable variance to forecast is attributed to an improved position in the latter half of the year in the Currency Notes Fund and return to the Consolidated Fund, as well as an increase in tax penalties and JFSC returns. The other income forecast for 2023 of £90 million, has been updated to reflect the current FPP economic assumptions, outturn data and a one-off dividend from Jersey Telecom in 2023 and 2024, agreed after the Summer 2022 forecast and included in the Government Plan 2023 – 2026.

Figure F1: Other Income Forecast – Summer 2022

Other Income Summary

2022  2023  2024  2025  2026  2027 GBP 000's  Outturn  Forecast  Forecast  Forecast  Forecast  Forecast Island Wide Rate  14,578  16,021  16,310  16,440  16,473  16,868 Other Income - Dividends  6,990  26,839  26,991  10,276  10,662  11,057 Other Income - Non-Dividends  18,861  17,849  16,641  16,188  15,830  15,780 Other Income – Housing Returns  28,613  29,277  29,715  29,806  30,022  30,084 Total Other Income  69,042  89,986  89,657  72,710  72,987  73,789 Summer 2022 Forecast  62,561  62,156  63,799  67,707  68,813

Variation to Summer Forecast  6,481  27,830  25,858  5,003  4,174

The full forecast and variances are included as an Appendix.

Island-wide Rates

The projection for Island-wide rates takes the Retail Price Index percentage for the given year and applies it to the previous year to reflect the forecast.

Figure F2: Island-wide rates

Island-wide rates

2022  2023  2024  2025  2026  2027 (GBP 000's)  Outturn  Forecast  Forecast  Forecast  Forecast  Forecast Island-wide rates  14,578  16,021  16,310  16,440  16,473  16,868 Summer 2022  14,578  15,555  16,161  16,598  16,996  

Variance  -  466  149  (158)  (523)  

Dividends

The forecasts for dividends from both wholly or majority States owned entities are based on the following assumptions:

• Jersey Electricity Company – an inflationary increase in forecast dividends;

• Jersey Water – an inflationary increase in forecast dividends;

• JT Group – an additional planned special dividend payment has been agreed with Jersey Telecom. This will increase income in both 2023 and 2024 by £20 million, and is funded through the retained proceeds of the sale of the IoT element of the company

• Jersey Post – a small dividend in 2023 with modest increases year on year as their strategic business objectives and investment start to yield results;

• Ports of Jersey – continuing no forecast dividends for the period due to the projected investment in the Harbour and Airport;

• States of Jersey Development Company – continuing no forecast dividends for the period as all profits are being reinvested into future projects at South Hill and the Waterfront.

The dividends are paid according to the defined dividend policies and forecasts are prepared in line with the company's latest business model. In most cases the dividends are directly related to trading performance but can be affected by projects being undertaken.

Forecasts are based on detailed conversations with the board of the companies and the reviews of their Strategic Business Plans.

Figure F3: Other income - dividends

 Other Income - Dividends

2022  2023  2024  2025  2026  2027 (GBP 000's)  Outturn  Forecast  Forecast  Forecast  Forecast  Forecast Jersey Electricity  4,228  4,311  4,389  4,424  4,433  4,539 Jersey Water  2,464  2,528  2,573  2,594  2,599  2,661 SoJDC  -  -  -  -  -  - Jersey Post  298  -  29  258  630  857 JT Group  -  20,000  20,000  3,000  3,000  3,000 Ports of Jersey  -  -  -  -  -

Total Dividends  6,990  26,839  26,991  10,276  10,662  11,057 Summer 2022  9,223  9,669  10,157  10,716  11,113

Variance  (2,233)  17,170  16,834  (440)  (451)

Non-Dividends

Non dividends include other types of income, including investment returns on the Consolidated Fund and Jersey Currency Fund. It also includes tax penalties, miscellaneous fines, returns from the Jersey Financial Services Commission and Crown Revenue.

The forecasts for returns on the Consolidated Fund and Jersey Currency Fund are based on the following:

• The Currency Notes Fund average balance is projected to continue to remain stable at circa £90 million. There remains a risk that the value of currency in circulation will fall over time, though at present little evidence of this has been seen so does not feature in our core assumptions.

• The Currency Fund is invested, in line with its published Investment Strategy.

• The previous forecast for the Currency Notes Fund was calculated during a period of economic turmoil, with concern the portfolio would face a large drawdown. The portfolio diversification and relative market recovery put the fund in a comparatively stronger position. Higher than expected rises in interest rates have positively impacted this portfolio as well, which is cash heavy.

• The Consolidated Fund is expected to hold only frictional cash balances, based on timing differences between receipts and payments. Non-dividends income is therefore conservatively assumed to be nil.

• The forecast for tax penalties has improved due to higher outturn data and better than expected collections from incremental late filing penalties that were introduced last year.

Figure F4: Non-dividends

Other Income - Non-Dividends

2022  2023  2024  2025  2026  2027 (GBP 000's)  Outturn  Forecast  Forecast  Forecast  Forecast  Forecast Investment Income  -  -  -  -  -  - Jersey Currency Notes  2,500  3,400  3,200  2,900  2,700  2,700 Tax Penalties  9,136  7,600  6,600  6,600  6,600  6,600 Miscellaneous Loan  238  645  634  478  318  271 Miscellaneous Fines  404  224  219  214  209  204 JFSC  5,952  5,300  5,300  5,300  5,300  5,300 OfCom income  415  415  415  415  415  415 Crown Revenue  216  265  273  281  288  290 Total Non-Dividends  18,861  17,849  16,641  16,188  15,830  15,780 Summer 2022  10,147  7,776  7,779  10,183  10,086

Variance  8,714  10,073  8,862  6,005  5,744

Returns from Andium

The returns from Andium Homes arise from the incorporation of the housing function in July 2014. Andium is obliged to make a return based on the transfer agreement and an agreed rental and return policy.

The return is influenced by the prevailing RPI with a cap and collar in place. Rents in 2022 were again frozen, and in addition a policy to limit rents to 80% of the market rate was approved by the States Assembly. There is an increase to the Andium Return from the Spring 2022 forecast, which is due to a revised forecast of the impact of the 80% rent policy. The impact over the period has reduced due to less tenancies having their rent increase capped that previously expected.

Figure F5: Andium Return

Other Income – Andium Return

2022  2023  2024  2025  2026  2027 (GBP 000's)  Outturn  Forecast  Forecast  Forecast  Forecast  Forecast Andium Homes  28,613  29,277  29,715  29,806  30,022  30,084 Total Returns  28,613  29,277  29,715  29,806  30,022  30,084 Summer 2022  28,613  29,156  29,702  30,210  30,618

Variance  -  121  13  (404)  (596)

Income previously received form Housing Trusts is now forecast to be nil. The agreements with Housing Trusts provided for an annual contribution intended to off-set the cost of increase in Income Support for tenants on benefits and arising from the 90% of market rental policy. Now that the States have adopted an 80% of market rental policy, which is the general target for the Housing Trusts, there is no further agreement from the Housing Trusts to provide a contributory return.

Upper and Lower Scenario

The other income forecast has been prepared based upon the FPP economic assumptions with additional consideration by IFG.

Due to the uncertainties that may be expected around the forecast, a central forecast of other income has been considered within an illustrative range. For other income the main economic driver is RPI, this has been considered within a range of +/-3% on the FPP economic assumptions. The range is shown below;

Figure F6: Range of forecast Range of Forecast

2022  2023  2024  2025  2026  2027 Outturn  Forecast  Forecast  Forecast  Forecast  Forecast

Upper Scenario  69,042  91,140  91,551  75,821  77,370  79,556 Central Forecast  69,042  89,986  89,657  72,710  72,987  73,789 Lower Scenario  69,042  89,694  88,952  71,805  72,035  72,273 Summer 2022 Forecast  62,561  63,378  64,365  65,360  66,406  -