States Meeting Transcript - 3rd December 2013

STATES OF JERSEY OFFICIAL REPORT

TUESDAY, 3rd DECEMBER 2013

PUBLIC BUSINESS - resumption................................................................3

1. Draft Budget Statement 2014 (P.122/2013)..............................................3

1. Senator P.F.C. Ozouf (The Minister for Treasury and Resources):.......................4

2. Draft Budget Statement 2014 (P.122/2013): amendment (P.122/2013 Amd.)..........13

1. Deputy G.P. Southern of St. Helier:....................................................14
2. Deputy E.J. Noel of St. Lawrence:......................................................15
3. Senator S.C. Ferguson:.................................................................17
4. Deputy T.M. Pitman of St. Helier:......................................................19
5. Deputy M. Tadier of St. Brelade:.......................................................20
6. Deputy S.G. Luce of St. Martin : ........................................................21
7. Deputy J.A.N. Le Fondré of St. Lawrence : .............................................22
8. Senator P.F.C. Ozouf :..................................................................25
9. Connétable L. Norman of St. Clement:.................................................26
10. Deputy J.H. Young of St. Brelade : ..................................................27
11. Deputy A.E. Pryke of Trinity : .......................................................29
12. Deputy M.R.Higgins:...............................................................29
13. Deputy P.J.D. Ryan of St. John : .....................................................31
14. Senator F. du H. Le Gresley:........................................................31
15. Deputy S. Power of St. Brelade:.....................................................32
16. Deputy C.F. Labey of Grouville :....................................................32
17. Deputy J.A. Martin of St. Helier:....................................................33
18. Senator I.J. Gorst : ...................................................................33
19. Deputy G.P. Southern : ..............................................................34

LUNCHEON ADJOURNMENT PROPOSED..................................................37 LUNCHEON ADJOURNMENT................................................................37

3. Draft Budget Statement 2014 (P.122/2013): third amendment (P.122/2013 Amd.(3)) 37

1. Deputy G.P. Southern :..................................................................37
2. Senator P.F.C. Ozouf :..................................................................38
3. Deputy J.G. Reed of St. Ouen:..........................................................39

4. Deputy E.J. Noel: ......................................................................40
5. Deputy G.P. Southern :..................................................................40

4. Draft Budget Statement 2014 (P.122/2013): fourth amendment (P.122/2013 Amd.(4)) - paragraph (a) ............................................................................41

1. Deputy J.H. Young:....................................................................42
2. Senator P.F.C. Ozouf :..................................................................44

3. Deputy J.H. Young:....................................................................45

5. Draft Budget Statement 2014 (P.122/2013): fourth amendment (P.122/2013 Amd. (4))

- paragraph (b)..........................................................................46

1. Deputy J.H. Young:....................................................................47
2. Senator P.F.C. Ozouf :..................................................................47
3. Deputy J.A.N. Le Fondrè:..............................................................47
4. The Connétable of St. John:............................................................48
5. Deputy J.H. Young:....................................................................48

6. Draft Budget Statement 2014 (P.122/2013) - fourth amendment (P.122/2013 Amd. (4))

- paragraphs (c) and (d).................................................................49

1. Deputy J.H. Young:....................................................................49
2. Senator P.F.C. Ozouf :..................................................................52
3. Senator A. Breckon: ....................................................................55
4. Deputy R.C. Duhamel of St. Saviour:..................................................56
5. Deputy G.P. Southern :..................................................................58
6. Deputy M. Tadier :......................................................................59
7. Deputy J.A.N. Le Fondré:..............................................................60
8. The Deputy of Trinity :..................................................................62
9. The Deputy of St. Ouen:................................................................62
10. Deputy J.H. Young: .................................................................64

7. Draft Budget Statement 2014 (P.122/2013): fifth amendment (P.122/2013 Amd.(5))..67

1. Deputy G.P. Southern :..................................................................67
2. Senator F. du H. Le Gresley:............................................................68
3. The Connétable of St. John:............................................................69
4. Senator A. Breckon: ....................................................................70
5. Deputy M. Tadier :......................................................................71
6. Connétable J.L.S. of Gallichan of Trinity :..............................................71
7. Senator P.F.C. Ozouf :..................................................................71

8. Deputy G.P. Southern :..................................................................72

8. Draft Budget Statement (P.122/2013): fourth amendment (P.122/2013 Amd.(4)) - paragraphs (e) and (f)...................................................................73

1. Deputy J.H. Young:....................................................................73
2. Senator S.C. Ferguson:.................................................................75
3. Deputy E.J. Noel: ......................................................................75

ADJOURNMENT................................................................................76

[9:30]

The Roll was called and the Dean led the Assembly in Prayer. PUBLIC BUSINESS - resumption 1. Draft Budget Statement 2014 (P.122/2013) The Deputy Bailiff :

Very well, we now resume Public Business. The first item is the Draft Budget Statement 2014, P.122/2013, and I ask the Greffier to read the proposition.

The Deputy Greffier of the States:

The States are asked to decide whether they are of opinion - (a) to approve, in accordance with the provisions of Article 10(3)(a) of the Public Finances (Jersey) Law 2005, the estimate of income from taxation during 2014 of £639,513,000 as set out in Summary Table A of the Budget Statement, with the sum to be raised through existing taxation measures and the proposed changes to income tax, Goods and Services Tax, Impôts duty, stamp duty and Land Transaction Tax for 2014 as set out in the Budget Statement; (b) to approve, in accordance with the provisions of Article 10(3)(c) and 11(3) of the Public Finances (Jersey) Law 2005, the appropriation of £2,210,000 in 2014 and £1,460,000 in 2015 from the amount appropriated to growth expenditure in the Medium Term Financial Plan 2013 to 2015 to a revenue head of expenditure for each States funded body as set out in the recommended allocation of growth expenditure in Summary Table B; (c) to approve, in accordance with the provisions of 10(3)(d) of the Public Finances (Jersey) Law 2005, a capital head of expenditure for each of the capital projects for States funded bodies to be started or continued in 2014 (other than States trading operations) as set out in the recommended programme of capital projects in Summary table D totalling £88,892,000; (d) to approve, in accordance with the provisions of Article 10(3)(e) of the Public Finances (Jersey) Law 2005, each of the capital projects that are scheduled to start during 2014 in the recommended programme of capital for each States trading operation, as set out in Summary Table E that require funds to be drawn from the trading funds in 2014; (e) to agree - (i) that, following the approval by the States on 16th May 2013 of the proposition "The Reform of Social Housing" (P.33/2013) and in accordance with the provisions of Articles 10(3)(b) and 21 of the Public Finances (Jersey) Law 2005, the States be authorised to borrow up to a maximum £250 million in 2014 for housing purposes and that, in accordance with the provisions of Article 10(3)(f) of the Public Finances (Jersey) Law 2005, the amount borrowed by the States be transferred from the consolidated fund to the Housing Development Fund; (ii) in accordance with Article 3(3)(b) of the Public Finances (Jersey) Law 2005 that the purposes of the Housing Development Fund ("the Fund") be varied to enable the further provision and development of housing in Jersey and that - (A) the Fund be permitted to lend money up to a maximum of £250 million to Housing Trusts/Associations/Companies or bodies with the same purpose registered in Jersey in order that they can provide housing for Islanders, on terms and conditions to be agreed, after consultation with the Minister for Housing, between the Minister for Treasury and Resources, and the aforementioned Housing Trusts/Associations/ Companies; (B) all administrative costs associated with the operation and maintenance of the activities of the Fund to be paid out of the Fund; (C) the Fund to be invested through the Common Investment Fund in accordance with its own published investment strategy, and that subject to the sanction by Her Most Excellent Majesty in Council and the subsequent coming into force of new Articles 3(3)(aa) and 3(3)(ab) of the Public Finances (Amendment No. 4) (Jersey) Law 201-; (D) all money due to the Fund, including any loan repayments and interest due from Housing Trusts/Associations/Companies, be credited to the Fund; (E) money credited to the Fund does not form part of the annual income of the States; (f) to refer to their Act dated 5th December 2006 in which they approved a revised policy for the use of the Strategic Reserve Fund established under Article 4(1) of the Public Finances (Jersey) Law 2005 and agreed that the Fund should be a permanent reserve, where the capital value was only to be used in exceptional circumstances to insulate the Island's economy from severe structural decline such as the sudden collapse of a major Island industry or from major natural disaster and their Act dated 6th November 2009 in which they varied that policy and agreed that the Fund could be used, if necessary, for the purposes of providing funding, up to a maximum of £100 million to meet the States contribution to the Bank Depositors Compensation Scheme and/or to meet any temporary cash flow funding requirements of the Scheme established under the Banking Business (Depositors Compensation) (Jersey) Regulations 2009 and, in order to enable the creation of new hospital services as part of the proposals agreed by the States on 23rd October 2012 in adopting the proposition "Health and Social Services: a new way forward" (P.82/2012) - to agree, as an exception to the approved policy for the use of the Fund, that the Fund may be used for the planning and creation of new hospital services in the Island, and to approve the transfer of an initial sum of £10.2 million from the Strategic Reserve Fund to the consolidated fund in 2014 so as to provide for these purposes, in accordance with the provisions of Article 4(3) and 10(3)(f) of the Public Finances (Jersey) Law 2005.

1. Senator P.F.C. Ozouf (The Minister for Treasury and Resources):

May I start by thanking the Deputy Greffier for reading the whole of the important Budget proposition? [Approbation]

The Deputy Bailiff :

Minister, if I may say so, it is to enable us to concentrate on the debate. Senator P.F.C. Ozouf :

Excellent, Sir. Today's Budget is taking place at a time of cautious optimism. Our Budget today has been designed to put Jersey in an even greater state of readiness to take advantage of the gradually improving global economic conditions for the benefit of every Islander. It is, of course, set within the context of the States Medium-Term Financial Plan. I am delighted with the decision of this Assembly to move to 3-year budgeting for spending and income. This approach is working, and it is working well. The time and effort that the Treasury and indeed all States departments would have spent on short-term decision-making, to say nothing of Members' time that would have been used recently in negotiating, debating and agreeing spending for only one year ahead, is now being so much more efficiently and profitably deployed. Our collective efforts can now focus on service delivery, monitoring and planning for a better Jersey in the medium and longer term. This is why we can have a budget debate today and tomorrow and perhaps the day after that is not short- term but concentrates on long-term challenges that face the Island. I am grateful for the leap of faith by Members in making these important changes and I hope Members will agree that this Budget - the result of teamwork - is forward thinking. It anticipates opportunities so that Islanders can begin to feel the benefits of the improving global economic condition. This Budget supports our aspirations for economic growth, job creation, better education and better healthcare. Where is the evidence that the global economic conditions are improving? Since we lodged the Budget and I made the initial statement, there have indeed been a number of positive developments. The global economy, according to the O.E. C.D . (Organisation for Economic Co-operation and Development) continues to expand at the moderate rate of 2.7 per cent this year. While growth is uneven, it is expected to accelerate to 3.9 per cent in 2015. While the risks in Europe have receded, there is still a possibility that tension in the Eurozone could resurface and further brinkmanship over U.S. (United States) fiscal policy and the debt ceiling early next year remain a key uncertainty. It is against this global backdrop that the O.E. C.D . have said that the current expansion restart in the U.K. (United Kingdom) monetary policy remains appropriate, given the degree of spare capacity in the economy there. If the current trends continue, the normalisation of interest rates could start at

the end of 2015 and the latest estimates from the National Institute of Economic and Social Research are that the U.K. economy is now growing at an annual rate of about 2.5 per cent in the 3 months to October.

[9:45]

This is following 2 years of difficult stagnation. In its latest inflation report, the Bank of England said that the recovery has, in their opinion, finally taken hold and that the U.K. economy is growing robustly and lifting uncertainty and thawing credit conditions start to unlock pent-up demand although the O.E. C.D . at the same time recognise that significant headwinds, both at home and abroad, remain. The economic conditions locally are slowly improving and I am pleased to see that the latest results from the Business Tendency Survey show that most of the indicators have improved over the last year. In particular, business optimism is at the most optimistic period and point since the survey began in 2009. Last week, the Chief Executive of Jersey Finance said to me that local business volumes are beginning to replicate the upturn in business confidence reported in the city and this is encouraging news. It is also encouraging that average earnings growth this year across the economy was 2.2 per cent. This is the first time in 4 years that earnings have exceeded inflation and it is also higher than the earnings reported in 2012. At the same time, inflation has fallen sharply this year with R.P.I. (Retail Price Index) at 1.2 per cent in September. This is close to historic lows and well below comparable measures in the U.K. While, of course, inflation may not stay this low for ever, it is expected that this will not exceed our inflation target for the foreseeable future. This is good news for Islanders and businesses alike, especially those that export and need to continue to improve their competitive position in export markets. The Fiscal Policy Panel recognised in their annual report a moderate improvement in the economy too and they revised upwards their forecasts for 2013. However, the Council of Ministers recognise that this improvement, of course, does not reverse the squeeze that has been seen on Island income in recent years. That is why this Budget reduces the marginal rate of tax from 27 to 26 per cent. Today's Budget offers a tax cut to local people. In fact, 84 per cent of taxpayers are designed to benefit from this measure. I have already touched on the risks that the global and U.K. economies are facing and as a result, we cannot, of course, take anything for granted in terms of our future economic performance. The Fiscal Policy Panel are clear in their advice to us. Significant spare capacity will remain in our economy throughout 2013 and in 2014 too and they have suggested that

the additional fiscal stimulus could be for that reason effective. That is the reason why this Budget also delivers a fiscal stimulus in 2014 that will particularly help our local construction industry. It is perhaps worth taking a moment to remind ourselves about the extent of the fiscal stimulus that we have provided to the economy in this year, in particular with the additional investment in housing and also to reflect on our plans for housing investment next year. Next year proposes further capital allocations of £89 million. Not only will this capital spending deliver significant support to the economy but it will deliver investment in key services, in housing, as I mentioned, but in housing and the start of improving our liquid waste infrastructure. The challenges facing the finance industry have, of course, been known to all Members. The recent crisis years have come from both economic pressures, from governments dealing with debt and changes in the regulatory framework. Nearly every global financial institution across major markets in every country of the world has been affected in some way, either by regulatory issues or by very large investor losses. Although Jersey has also, of course, suffered, the issues we have faced have been relatively modest in comparison with the other jurisdictions and constrained in comparison, of course, to many in the global community. There are many reasons why we have a successful finance industry: well- trained staff, good infrastructure, air links, a reliable - and if I may say - an effective judicial system, but I want today to recognise the role of the Jersey Financial Services Commission, our own regulator and supervisor, for their work in recent years. Through their prudence and judgment, we have avoided the worst of such losses that other countries have seen. They have steered the Island through turbulent times with skill and fortitude in extremely difficult circumstances. It must be said that at times their approach has been questioned and certainly perhaps not widely understood but ultimately, as we stand here today, we can see that the results have been positive and I would like to take this opportunity also of recognising the outgoing Chairman of the J.F.S.C. (Jersey Financial Services Commission) for his contribution to the success of that organisation in recent years.  [Approbation] Looking ahead, we can have every confidence that the J.F.S.C. will continue to achieve positive outcomes for us as we enter, we hope, more buoyant economic conditions. Alongside forward planning for States finances, we have been forward planning to create the right condition for the future growth of sustainable quality financial services. Eighteen months ago, we made a decision to undertake a detailed assessment of our financial services industry and the global consultants McKinsey were commissioned to report and assist us on this. This significant report, carried out in partnership with both the J.F.S.C. and J.F.L. (Jersey Finance Limited), has resulted in a clear action plan and a roadmap for the future. It has recommended plans for developing the trust and fund sectors along with a much clearer focus on our target markets in banking and across future planning for all financial services. In addition, when developing this evidence base, we have also been taking practical steps at a government level to promote the finance industry further. We have written to all of the leading chief executives of U.K. and European financial institutions and the Chief Minister and I have met and briefed a significant number of leading bankers and financial executives in the U.K. so that we can convey our message that Jersey is an important source of business for the U.K. economy. Jersey Finance has reprioritised and focused promotional efforts on the key strategic markets of the Middle East and Far East and increasingly across the Commonwealth. The current value of banking deposits from the Middle East is strong at 17.5 per cent and we expect this to grow. Jersey's robust connections with the Middle East are enhanced by the presence in Jersey of a number of Jersey Gulf-based banks here. Our relations with the U.A.E. (United Arab Emirates), who celebrated their national day yesterday, go, of course, from strength to strength and I am pleased also to have had my first meeting with the newly appointed Minister of the State of Qatar which was extremely productive and I am looking forward to furthering this relationship in meetings in Doha next Tuesday and Wednesday. Next year we can look forward to a number of London-based Middle East Ambassadors visiting Jersey. I would like to take this opportunity of recognising the effective work of the Chief Minister's Department and particularly the Minister for External Relations and his team in supporting all of these developments. Our traditional business markets of mature Europe and the U.K. are showing encouraging signs too with the U.K. returning to growth in 2013 after its difficult economic performance in recent years. We have now the legal tax and regulatory framework to help lift the funds industry and grow it further. The flexibility offered in our 2-tier approach to A.I.F.M.D. (Alternative Investment Fund Managers Directive) has encouraged inquiries from hedge fund managers interested in locations to Jersey and we have all been seeing successful examples of people coming to Jersey. This is the kind of high value low footprint

business that we want to encourage. The commissioning of the Capital Economics report, documenting for the first time the value of Jersey to the U.K. in supporting over 180,000 jobs in the U.K. and providing approximately £9 million to the U.K economy, has been extremely effective. The Chief Minister's attendance at the G8 summit was also a key turning point for the Island's reputation in the corridors of influence at Westminster and, indeed, throughout the city of London. Our message that Jersey was not a tax haven, was not the problem and is, in fact, part of the solution to U.K. growth, has been effective and now armed with the data from Capital Economics, we are able to provide real evidence, independent evidence, of the value of Jersey businesses to the U.K. economy. Having attended all the Party conferences this year, I detected a clear change in the way that Jersey is regarded by U.K. Ministers, Peers and advisers from across all Parties. British Ministers, British M.P.s (Members of Parliament) now have reasoned arguments to be supportive of Jersey and that support I detect is growing and widespread. Our shared agenda with the U.K., which includes zero tolerance of tax evasion and a commitment to transparency, was recognised, of course, by the U.K. Prime Minister himself who said: "I do not think it is fair any longer to refer to any of the overseas Territories and Crown Dependencies as tax havens. They have taken action to make sure that they have fair and open tax systems." During my recent trip to the I.M.F. (International Monetary Fund) global bank meetings, I detected an upturn in confidence too. Perceptions of Jersey are shifting. Another key Minister I had the opportunity of meeting on a one to one basis was the South African Finance Minister and we look forward to developing our relationship with South Africa, particularly in their important regional work on tax compliance. The Chief Minister's endeavours are working and it is encouraging to see that the Secretary General of the O.E. C.D . wrote to him in July to congratulate the Island on the measures we have taken to support the international tax transparency agenda. Despite the challenges faced by the finance industry, there is now every reason to be positive and that is now not least because we have got the Standard & Poor independent assessment which is so positive of Jersey's financial strength. Standard & Poor, the leading credit agency, assigned Jersey a long-term double A plus credit rating with, what is more, a stable outlook, together with the highest possible short-term rating. This exceptionally high credit rating demonstrates to the world of our high quality level of credit and public finances. Furthermore, the stable outlook in a world of considerable uncertainty indicates both certainty and confidence that they have in our future and we should too. S. & P. (Standard and Poor) commented that the stable outlook reflects our view that Jersey's high wealth and its strong public finance policy and setting of government finances and I think that every Member should take warm congratulations for that assessment for their part in delivering that credit rating. That rating underpins increasingly our strong international reputation and provides the government of Jersey with the opportunity next year, I hope, subject to Members' approval, to issue the first sterling rated bond at competitive interest rates as a method of financing our future housing needs. While our finance position and reputation remain strong, we must, of course, be mindful that unemployment remains at very high levels. The unemployment rate increased from 4.7 per cent in March 2011 to 5.7 per cent in June 2013. Over the same timeframe, registered actively seeking work' increased from 1,300 to 900 people. Back to Work is, however, helping to minimise the costs to both the individual and society of the current levels of unemployment and we are ensuring that we can do everything we can to get those people who find themselves out of work, particularly the young, back into employment as quickly as possible. Having lost 700 jobs in the fulfilment industry, the unstoppable use of the internet for retail and the inevitable loss in financial services, it, I believe, was quite possible that without the efforts of the Minister for Social Security and the Back to Work initiatives, our local unemployment levels could now be in excess of 2,500. That has not happened and I do not believe that it is by accident. However, when people lose their jobs, they can become under so much financial pressure that we also realise that they can resort to borrowing at very high rates of interest and that is a concern that the Council of Ministers has. I can say today also that the Treasury is now working with the Community Savings organisation to explore the opportunities of a Jersey-based credit union which is a facility that could offer most cost effective and sustainable ways for people to save and borrow. This Budget cements support for economic growth and diversification in all key areas of our economy. The Minister for Economic Development will be shortly publishing new strategies for economic growth and development that are designed to deliver high value and high growth business and raise the productivity of the whole economy. I also would like to take today the opportunity of recognising and thanking the work of the Minister for Economic Development through what has been, I think we all realise, a very difficult time for him. He has continued to work and his department is delivering results. [Approbation]

[10:00]

That additional funding that we provided to the Minister is supporting growth and, as I say, is delivering results. In the first 9 months of this year, Locate Jersey has delivered 28 new businesses which have created 245 new job opportunities; 235 of those jobs are for local people. These new businesses are, of course, also encouragingly in a range of sectors. It is encouraging that 103 of those job opportunities are within the I.C.T. (Information and Communication Technology) and e- commerce sector. This is an excellent example of the drive to diversify economy through the development of the digital sector. While it is vital that we diversify our economy, we must, of course, support other sectors that form the bedrock of our community, particularly in the area of retail. In 2014, using plans allocated through the M.T.F.P. (Medium-Term Financial Plan), the Minister for Economic Development in conjunction with, I am pleased to say, the Chamber of Commerce, will make an investment in a series of initiatives in Jersey's retail sector so as to attempt to capture more sales from the ever-rising growth of the internet. As well as looking after the local economy, this Council of Ministers continues to take action to support local people and, of course, especially our valued elderly community. The Minister for Social Security will be debating next week his new long-term care scheme that is designed to help Islanders pay for care either in their own home or in a care home. If the States Assembly agrees, benefits from this new long-term care scheme will be paid out from July 2014 and offer greater protection to Jersey families. However - and this is important - contributions to the scheme have been deferred and will now be phased-in from January 2015 at 0.5 per cent of taxable income, rising to 1 per cent in 2016. The Treasury has worked extremely well with the Minister for Social Security and his team to make it possible to reallocate some of their existing spending so to avoid the need to introduce the planned 1 per cent contribution next year as originally intended. This will mean that a further squeeze on Islanders' disposable income at a time of continued economic uncertainty, will not happen. I am pleased to say that the Fiscal Policy Panel has agreed that such an initiative was advisable, given the economic output and I must thank the Minister for Social Security and the Minister for Health and Social Services for their help and support together with Treasury in developing the funding and collection mechanisms in order to ensure that this scheme can be brought into effect in a fair way and a proportionate way. In addition to helping stimulate economic growth and deferring the implementation of a long-term care charge, this Budget proposes significant allocations to capital in 2014 which, as I have said, is designed to provide a fiscal stimulus. For this to work most efficiently, expenditure, of course, must be timely and it must be spent. The Fiscal Policy Panel's report emphasised the previous delays in getting capital that this Assembly had allocated spent and that we needed to change. We have now allocated funds to support schemes that will deliver service improvements to the Island but I have to say that all departments and Ministers will

continue to work extremely hard to ensure that all of the projects that are set out in the Budget debate start and moreover are delivered on time. Looking ahead, the F.P.P. (Fiscal Policy Panel) also highlighted the risk that future capital expenditure, which will be the subject of this Budget debate, has the risk of overheating the economy. What I am pleased to say here is that our now more vigilant approach to longer term planning means that we have got sufficient warning to ensure that the supply side - particularly within the construction industries - can be encouraged to grow at the right time in the next few years. That industry can place itself to meet that demand so that we can ensure that both the public demands on the construction industry and what we hope is going to be increased private sector demands can be met. The action to prepare for this economic recovery will mean putting a number of initiatives in place to build capacity, training people that are currently seeking work, encouraging young people to think about careers in construction and looking at the way we license construction companies to ensure that there is healthy competition which, at the end of the day, is going to ensure that prices do not rise. It is positive that the F.P.P. supports our plans for that significant investment in 2013 and 2014. Now, with regard to the F.P.P.'s recommendation that we should define the purpose and optimal size of the Strategic Reserve, I want to make 2 important points. Firstly, the purpose of the Strategic Reserve has been agreed by this Assembly as a permanent reserve to insulate the Island's economy from severe structural decline or from a natural disaster and, indeed - if ever it were needed - to meet the initial contribution to the banker depositor compensation scheme. Secondly, this draft Budget proposes an additional purpose to that Strategic Reserve proposition, namely to fund hospital facilities but it is from investment returns from the Strategic Reserve that that is being made. The Council of Ministers and I wholeheartedly agree that the funding of new hospital facilities done in this way, with no increase in taxation and no debt, will be the right benefit to Islanders now and into the future. Moreover, it is consistent with the objectives and our existing fiscal framework. I have, of course, the sole ability to make withdrawals from the Strategic Reserve. When withdrawals are made, it will only be done in accordance with the approved policy. I agree that also as a result of the Public Finances Law - which puts the F.P.P. on a statutory basis - to consult the F.P.P. on those withdrawals. The controls on the Strategic Reserve I would argue have been extremely restrictive and they have been extremely effective in protecting that reserve from inappropriate short-term use and we now have the opportunity for those reasons to make the significant investment in hospital services without the need to raise taxes. However, I do agree that controls can always be strengthened and improved. I am proposing a strengthened definition of that capital within the Strategic Reserve Policy 2006. I am going to confirm also that the role of the Stabilisation Fund should be clarified and we should set out how it is going to be replenished. I also agree that the arrangements for the repayment of the Housing Bond through the Housing Development Fund should be clarified. In summary, I consider that the safeguards for the Strategic Reserve are extremely strong. However, the actions that I have just described - I believe - will strengthen the arrangements even further and I hope that this further clarity is enough for States Members to approve the initial withdrawals from the Strategic Reserve for the health investment in a new hospital. I am grateful to the F.P.P. for their work and I warmly welcome their complimentary remarks that they have made in the improvements in reporting, monitoring and the implementation of their previous recommendations. I should also like to take this opportunity of recognising Senator Ferguson and her panel for the Scrutiny Panel Report on the Budget 2014. There are many positive and constructive comments made by the panel and the Treasury has issued a full response to their report which I hope is helpful to this debate. Turning to the specific measures for this Budget, Members will recall that our key tax policy principles were set out and agreed in the

M.T.F.P. Taxation should be necessary, justifiable and sustainable. Taxes should be low, broad and simple. Everybody should make a contribution to the costs of providing government services while those on the lowest incomes should be protected. Taxes should be internationally competitive. Taxation should support economic development and, where possible, social policy. The Medium-Term Financial Plan that Members approved assumed that there would be no significant tax policy changes over the period of this Assembly and therefore it is for this reason that this Budget is consistent with all of those principles. But this Budget continues to do more than that. It provides more stability and certainty in the tax system to enable growth in the economy and encourage investments. Members are, of course, aware that there are 2 measures in this Budget that will provide a tax cut for approximately 84 per cent of Jersey taxpaying individuals. That means around 40,000 households will benefit if Members approve the proposals today. The 2 key measures to reduce the marginal rate from 27 to 26 per cent and to increase exemption thresholds by 1.5 per cent are bold. These are tax cuts but, of course, they do not apply to higher earners who are in the 20 means 20' tax bracket. The overall costs of these initiatives are approximately £10.3 million. I was also pleased with the good work and good relationship with the Minister for Education, Sport and Culture to propose help for parents with children in higher education. At present - and the Minister has been concerned about this - parents with children over the age of 17 currently receive a tax allowance of £6,000 per child and that is available to all taxpayers. What this Budget does is it provides additional tax relief to parents in the marginal relief of £3,000 per child for each child in higher education. This proposal effectively is a tax cut for each child at university or higher education worth £780 and this measure in itself is costing nearly £1 million. Also, we have ended the restriction on Child Allowance by reference to a child's earned income that they can make. There are a number of other amendments to the Income Tax Law of which I am sure Members are aware. The important ones are the lifting of the entitlement to higher exemption thresholds for 63 to 65 which will be the subject of an amendment debate. We are changing some arrangements for I.T.I.S. (Income Tax Instalment Scheme) to restrict credit available to controlling directors dealing with our policy on reducing avoidance and we are removing the 3-year residence rule for making lump sum donations. We are also permitting, with certain strict criteria, that existing 1(1)(k) residents can apply to be taxed under the new post-July 2011 regime but only when they develop and extend businesses here. We are strengthening legislation on interest deductions to counter non-commercial debt financing, again an issue on tax avoidance; and we are revising the relief due to the self-employed in respect of Social Security contributions and responses to changes that the Minister for Social Security has made. We are also amending further to clarify the distribution rules that we introduced last year so that they can operate as intended. It is important that the tax system continues to operate as intended and many of these proposals are aimed at clarifying the law and provide more certainty and, of course, safeguard our tax revenues. There is no change to the rate of G.S.T. (Goods and Services Tax) which will not be a surprise to Members which is kept at 5 per cent. We are, however, making some further additional minor changes to G.S.T. to deal with anomalies and Members will know these as they are set out in the Budget report. Perhaps with some degree of hesitation, I turn to the issue of duties. In line with the amendment that I have brought forward, the revised impôts increases are to increase a bottle of spirits by £1.26, a bottle of wine by £5 and the standard - I am told it is a working man or woman's pint - by a 1p amount. We are, however, also now proposing to issue a lower band of duty on low strength beer and this new band of duty will be calculated at 50 per cent of the standard duty rate. We are, however, continuing with the 6p increase on strong beer and cider and we are also continuing and will be arguing strongly for the 47p increase on a packet of cigarettes. We are proposing a penny on the increase on unleaded fuel duty. It is proposed that all of these measures take effect from midnight on 31st December 2013 but perhaps we will come to this in the major debate. It is important that perhaps Members and members of the general public understand that this duty increase only affects the amount of product going into warehouses and we will come to the important issue of why products seem to rise at the same time that the Budget duty increases go into warehouses. I do not see any justification for that but we will come back to that later in the Budget debate. Why are we proposing increases on alcohol and tobacco? Well, firstly, they are aligned with the health strategy. We have to have a frank discussion about alcohol consumption in Jersey. We have chronic liver disease up to 40 per cent higher than can be expected in England and Wales. In 2010, the Health Department counted 2,373 admissions attributable to alcohol abuse. As regards tobacco, we have 200 smoking-related deaths in Jersey every year and the cost to the health service, let alone the individuals and their families and friends, is, of course, considerable. Furthermore, the recent report issued by the Minister for Home Affairs - Building a Safer Society - shows that over half the crimes in the Island involve alcohol and there has been an increase in night-time assaults in St. Helier. The proposed duty

increases on alcohol directly support these aims, to reduce the cause of harm in society by alcohol. [10:15]

They are not, of course, the sole solution but they are, we will argue in this debate, part of the solution. In terms of the commercial impact of the proposed duties, while those in tobacco and alcohol industries have lobbied for lower duties - and we are going to hear much about this no doubt in this debate - they have still not explained why it is that when you strip out duty and tax, underlying costs in all of these products are so high. It has been shown time and time again that keeping duties the same - the benevolence of States Members - does not result in lower prices to consumers. Specifically in relation to alcohol, there has been some speculation that the retail price in the U.K. that we set out in the Budget report does not accurately reflect the pre-tax prices being

achieved by local suppliers. I have analysed this further. The U.K. and Jersey figures show that, for example, on a pint of a standard bitter, the duty proposed in Jersey is lower. It is 35p in Jersey versus 49p in the U.K. G.S.T. at 5 per cent compared to 20 per cent means that there is 16p on a pint of beer in Jersey and 48p in the U.K. Yet the price of beer at a standard pub in Jersey is £3.28 as opposed to £2.87 that I found in the United Kingdom. I have looked at pub prices. I have been in pubs in the U.K. to check out these issues for myself and I have seen that there is clearly an issue that we have to take seriously in relation to competition and the alcohol industry. The issue of fuel duty is, of course, sensitive and the issue is that we have only increased fuel duty once in the last 5 years - and I am going to argue that a 1p increase in fuel duty is an appropriate thing to do. Generally speaking, on the issue for duties, I would like to sincerely thank Senator Le Marquand, the Minister for Home Affairs, for his help and also the Minister for Health and Social Services and the Minister for Economic Development for their support in assessing all of these serious issues and providing what I hope is a compromise to the concern raised by a number of Members. The housing market is an important area and this Budget proposes to continue to extend the maximum threshold for first-time buyer relief from £400 to £450 for one final year. At a time when the housing market is beginning to show slow signs of recovery, we should do everything we can not to disturb that progress. In the Medium-Term Financial Plan, the States agreed a central growth allocation for 2014 and 2015 which would be allocated in this year and next year's Budget. The Council of Ministers are proposing to allocate the growth of £2.2 million in 2014 and £1.5 million in 2015 and it will be allocated to the departments that were set out pretty well in the M.T.F.P. The allocation for capital, as I have said, is an important part of fiscal stimulus. The review of the indicative capital programme that we have identified over the last few years has resulted in a few changes since the debate last year, particularly in the area of the Minister for Education, Sport and Culture's primary school accommodation and we are proposing here to make a change to the allocation that we envisaged last year to allocate money to the Minister for Transport and Technical Services for works at Green Street car park and also Education, Sport and Culture for work required to meet their sports strategy which I hope is going to give a real boost to the Island Games in 2015 and also I am pleased to say it is important for Parish projects too. The allocations are set out in the Budget report and I will not go through them now. I would like, and I know I am thanking quite a few people, but there is one special person that I would like to thank at this stage of the debate. I would like to recognise my Assistant Minister, Deputy Eddie Noel, for all of his work [Approbation] generally in the Budget but particularly in the work that he is doing in Property Holdings to make sure that projects are spent and spent wisely and quickly. We have got an exciting capital project and I also am grateful for the work of him and Deputies Bryans and Le Hérissier for their work on Rediscovering Fort Regent. I think their report is positive, I think it is optimistic, and I think their catchphrases of Rediscovering Fort Regent, rediscovering forgotten gardens, and a Town Park too, show their determination and this Assembly's determination to make real progress on Fort Regent over the next 12 months and I hope that their work is appreciated by Members.  [Approbation] This Budget is different to previous Budgets because we are dealing for the first time with serious long-term investment in our infrastructure; 3 areas will command this Assembly's attention: first, housing; secondly, hospital; thirdly, liquid waste. In order to improve the quality and standard of housing that the Island meets, we are proposing that Jersey's new excellent credit rating is utilised in order to borrow funds at historically low levels for investment in housing. Last night, the editorial of the J.E.P. (Jersey Evening Post) said: " Ozouf , a

legacy for debt?" I was disappointed with this editorial which I will address later on in the debate. This is not a negative legacy of debt, this is a positive legacy of investment in our social housing, [Approbation] improving the standards of social housing, creating more social housing, doing the right thing and investing in a way that is a far more appropriate way of allocating money for social housing than the Annual Capital Programme that we have seen in the past. Moreover, the Minister for Housing, if I may say, is different to other Ministers. He repays his debt because he has got the

income to pay for it rather than a circular route of allocating more annual revenue. I think the editorial needs to be rewritten. I think we need to have an editorial which says: "Positive legacy of positive investment in our housing" and I will deal next, if I may, that is hardly a rescue plan in my opinion. But dealing with the rescue plan, I think we need to rescue the J.E.P. from their figures because they also said that we are going to spend in this debate £500 million on the hospital. Now, I know the Minister for Health and Social Services perhaps thought that all her Christmases had come at once [Laughter] but her strategy of caring for each other and caring for ourselves was approved unanimously by this Assembly and the Treasury since then has been working on an effective and appropriate Budget for the hospital and also where those hospital investments should be made, moreover, and I repeat again, what that appropriate Budget should be. There has been excellent work done by Property Holdings again, and the Health and Social Services Department, and I am very confident that the new dual site proposal based on the General Hospital and Overdale is the appropriate way forward for our future hospital services. More than that, rather than simply dealing with a greenfield site which had all sorts of risks for the Island, the phased approach in investing in our hospital services means that we can deliver improvements more quickly without delays and we will not also have the enormous risk of capital overspends because of the phased approach. I believe this is a prudent approach and I also confirm that the amount that is allocated to the hospital and the amount that we are setting out is £297 million and that is £297 million in cash which is the cash amount for the next 10 years so if anything, the J.E.P. needs to point out that it is not £500 million, it is not £297 million, but is less than that in real terms in financial value today. I am sure that this hospital scheme will be fully paid for in the appropriate way when it is completed but more importantly, we are going to make a decision to deliver this new hospital with no cost to the taxpayer and no debt for any future generations. In previous debates, and I have cited the Connétable of St. Mary on a number of occasions, I have been asked whether or not there would ever be a dividend for the difficult decisions for the prudence taken in previous Budget years. I think we can now say in this Budget debate that the resounding answer to that question is yes, there is a dividend, and it is our new hospital services.  [Approbation] It is the result of the decisions of this Assembly that in recent years, we have preserved the value of the Strategic Reserve and moreover the Treasury has been able to achieve excellent and, indeed, pretty well-beating investment performances. We are now uniquely, in this Budget debate, able to fund essential development of hospital services for Islanders. I said to the Minister for Health and Social Services

when she was elected I felt that she was going to be the Minister that was going to see the biggest reform and improvement in healthcare services since the Second World War and I do not think I was wrong. Our community can look forward with confidence to the investment improvements in healthcare services and I think we should thank the Deputy of Trinity for all of her work in doing all of these endeavours. [Approbation]  Liquid waste, as the Minister for Transport and Technical Services says, is not perhaps the most exciting project, particularly after breakfast or indeed before some warming soup but it is, however, vital to every single man and woman in Jersey. Proper investment in our liquid waste system is extremely important and that is why this Budget sets out how that investment is going to be funded. We will, of course, consider the actual liquid waste strategy in the early part of next year and we are proposing, however, to set out how that proposal would be funded, targeting existing rolling capital vote which will deliver £12 million and proposing to allocate £34 million from the overall capital programme but also to invest from the Currency Fund £29 million which importantly, on this occasion, can be repaid by the expected savings in the new technology in the same way that the Minister for Housing is going to repay his borrowings. This one, of course, is done for internal purposes. This is an affordable option for Transport and Technical Services who for many years have been trying to find solutions to this funding. Again, with no external debt, new infrastructure will be delivered which is more energy efficient, cheaper to run, and better for the Island and I want to recognise the Minister for Transport and Technical Services and his staff for improving infrastructure and I hope .. I am sorry the

Constable of St. John is not here but I hope we are going to have a debate which recognises the significant and positive investment that we are making in infrastructure across the Island. All of these proposals represent a huge amount of hard work and inter-Ministerial and departmental co- operation and I am pleased to have been able to develop all of these 3 strategies that are a financial improvement at the same time as delivering better services to Islanders. I should not make a Budget speech without some remarks on savings. All Ministers are delivering on their savings and I would like to congratulate all the staff that are across the States working hard to deliver savings: £2.38 million in Social Security, £1.5 million in Education, Sport and Culture through the renegotiation of university tuition fees; E.D. (Economic Development), £530,000 through managing prices and general efficiencies; Law Officers' Department, £250,000 by the use of better external providers; Chief Minister's Department saving this year £280,000 through consolidation of data centres and central management of software licences; my own department, £660,000 through retendering insurance arrangements and savings identified through the Tax Review; and T.T.S. (Transport and Technical Services) even with their difficult infrastructure requirements delivering £145,000 as a result of the reorganisation of Parks and Gardens. I was pleased to see the Social Survey recognising how Islanders value the work of Parks and Gardens. These are savings that are important. This Budget is not just about spending, it is about saving and sticking to our savings plans and these savings will also not end here. Departments are working now hard to prepare further savings and efficiencies that we expect to make in the next M.T.F.P. period and again there is good co-operation under the leadership of the Minister for Economic Development with the Chief Minister, Ministers are working on further savings and I want to make that very clear to all Islanders. In previous Budgets, we set out the principles that were needed to ensure our economy is stable and protected: a low, broad and simple tax system, a balanced Budget, a commitment towards long-term planning. We have stayed true to these principles and they have worked and are working. They have allowed us to provide economic stimulus when it is most needed without debt. They have enabled departments to find efficiencies and make savings and they have seen us achieve one of the most stable credit ratings possible for a small jurisdiction, an endorsement of

previous prudent and good planning. These principles are allowing this Assembly in this Budget debate to provide tax cuts and put money back into the pockets of Islanders. They are allowing us to provide a legacy of essential infrastructure, care for future generations, a new hospital, new housing and investments throughout our community. This Budget allows us to help people to find work, to support new sectors and to protect and grow our finance industry. This is a Budget that we can afford. This is a Budget that benefits everybody. This is a Budget that further equips us for the future, a Budget that provides significant support to the economy when it is most needed. It is the Budget that will lay the foundations for future growth and enable us to compete on the international stage for all of those business opportunities. It is a Budget that we can look forward to with confidence in the future and I commend it to the Assembly. [Approbation]

[10:30]

The Deputy Bailiff :

Is the proposition seconded? [Seconded]

2. Draft Budget Statement 2014 (P.122/2013): amendment (P.122/2013 Amd.) The Deputy Bailiff :

Very well, we come to the first amendment which is that of Deputy Southern in relation to paragraph (a) and I would ask the Greffier to read the amendment.

The Deputy Greffier of the States:

Page 2, paragraph (a) after the words "as set out in the Budget Statement" insert the words – "except that – (i) income tax exemptions for the year of assessment 2014 shall not be increased by 1.5 per cent as proposed in the draft Budget Statement; (ii) the marginal rate for the year of assessment 2014 shall not be decreased from 27 per cent to 26 per cent as proposed in the draft Budget Statement; (iii) the estimate of income from taxation during 2014 shall be decreased by £5 million by zero-rating or exempting from Goods and Services Tax foodstuffs in line with United Kingdom Value Added Tax arrangements and domestic fuel and energy with effect from 1st July 2014."

1. Deputy G.P. Southern of St. Helier :

I congratulate the Minister for Treasury and Resource on his endurance. Magnificent speech. I was just waiting for the bit of praise for me. I was a bit lonely there. [Laughter] I did not hear praise for keeping him on his toes during the year, perhaps, and maybe for bringing what he described as a politically astute amendment to his Budget. I will be far briefer because this is a very simple proposition. I have absolutely nothing against the principles of this particular Budget. It is doing the right thing, I believe, in delivering a tax cut to many residents on the Island, which the Minister expects to go into people's pockets and then be spent in the local economy, thus giving a boost and helping us out of the recession. I have been arguing for that principle for some years now and the Minister attempted to deliver fiscal stimulus again last year and the F.P.P. says that he failed to do so. Perhaps last year in the Medium-Term Financial Plan, he might have listened to me when I said to put an extra £20 million into a green initiative fund so we can spend even more in the economy in 2012 and perhaps get ourselves out of the recession just a bit quicker. So nothing wrong with the principles, totally correct. However, the question is how to deliver that tax cut. The Minister has kept saying that this will affect 84 per cent of taxpayers and the fact is, it will not affect 84 per cent of taxpayers: it will affect 84 per cent of income tax payers. Whatever is written down, it is income tax payers. Why is that important? Because who does not pay income tax? Why? The very poorest in our society, they will be completely unaffected by these measures, except a little nudge of a very borderline, maybe an extra 50 people not paying tax. What is the best way to make sure that money going back into people's pockets goes into the local economy? It is to give it to the poor because the poor spend every single penny they get and often more. They are the ones who need credit to survive. The most effective way of doing it and the most comprehensive way of doing it is not to play with income tax because the bottom 20 per cent do not pay income tax; we do not affect them at all. It is to do something with the tax we all pay, day in and day out, routinely, without even thinking about it except when we have to pay for a book, because it has the price on the back of it and that is really annoying, but never mind. That is a different issue. The tax we all pay, G.S.T. If we want to deliver more money to the economy, then let us do something about G.S.T. We can do so quite simply. Take food and domestic heating, 2 of

the essentials, again which have the greatest impact at the bottom end, and remove G.S.T. on them. It is a simple move that can be done. It would require legislative change and would take some time to draft the law to do it, but it could be done. It can be done in exactly the same time scale as the moves proposed by the Minister for Treasury and Resources and it can be done with almost exactly the same benefit. It does not come in fully until 2015, but if we were to draft the laws by July 2014, it could be in place. We would get a half year, around £5 million. In 2015, we get the full £10 million, which is what the Minister for Treasury and Resource is attempting to give back into the economy. So it matches in terms of the sum, it matches in terms of the timing. Above all, it fulfils that statement that I have just heard the Minister for Treasury and Resources make, this is a Budget that benefits everyone. That is simply not true. If you want to benefit everyone, then you have to start amending the tax that we all pay, not the tax that some of us pay. The reality is that G.S.T. needs to be amended. If we are going to do that and meet that target, that budget, that benefits all. The cynical among us, of course, will say that this is a giveaway Budget in an election and well done for producing it in an election year coming up. The last Budget for the election, well done. Or saying that this is simply a way of covering up a tax rise which is on its way, which is Long-Term Care. So in 2015, we will see the first half a per cent of Long-Term Care charges, 2016, one per cent and thereon upwards. We are increasing taxes there so, in this Budget, we are having a reduction in taxes. The other thing to say is that if we were to amend our G.S.T. provision, to take out food and heating, the likelihood is that we would not see that reimposed in the future. That would be a very big step. Whereas, if you simply go along with accommodating fiscal drag - which is what we are doing - and lower the tax levels, then it is relatively straightforward, it has been done for years in the past by various Ministers for Treasury and Resources. To reinstate that, you simply do not uprate next year or the year after that or the year after that. It is very easy for fiscal drag to then get that money back without doing anything, just by simply the absence of doing something and uprating your exemptions and your rates. So if we were to do that, it would have, I believe, a long-term impact. Now, we are told, and this is the single argument that needs to be addressed, I think, that of course, if we reduce tax, we will not see any change in prices. And yet we are told that we are the most tax compliant country in the world. We have something like 97.97 per cent compliance. We are a very honest society. We pay our tax where it is due. G.S.T. compliance: tremendous. Income tax compliance: tremendous. And yet, it is suggested that if we reduce tax, we will not see the benefit. Nobody will bring their prices down. Are you telling me that the shopkeeper out there who does not bring his price down by 5 per cent will remain competitive and in business while people do? What is a competitive world about? Of course we will. We will see that benefit. To introduce that benefit particularly on food and domestic heating, I will show you the figures in my report about how much, in particular, food prices have gone up over the last 5 years and how much over the last 3 years energy prices have gone up. These are the pinch points that really hurt ordinary working people. If we can do something there, then we make a significant change in the quality of their lives. The cost of implementing what I am suggesting is put at between £200,000 and £300,000, about 3 per cent of the total change in 2011. It is doable, it is feasible and it is the right way to make sure that this

Budget encompasses everyone and that everyone benefits. I maintain the proposition. The Deputy Bailiff :

Is the amendment seconded? [Seconded] I call on Deputy Noel.

2. Deputy E.J. Noel of St. Lawrence :

Some Members will be very familiar with this subject, as similar propositions have been debated in this Chamber on at least 9 previous occasions. The arguments for and against, zero-rating on food and domestic energy are as relevant now as they were previously. While I am also aware that G.S.T. has not been debated by this current Assembly and in particular the class of 2011, I will therefore briefly outline the background to the introduction of G.S.T. in Jersey and explain why we should maintain the principles of a broad-based, low rate system or B.B.L.R. (Broad Base - Low Rate), as we refer to it in Treasury. G.S.T. was implemented in 2008 on the basis of a modern consumption tax as adopted throughout the world in the mid-late 1990s. These systems attempt to have a broad-based tax with few zero-rating or exemptions and in doing so can adopt a relatively low rate of tax. Hence them being referred to as broad-based, low rate, B.B.L.R. At the same time, many countries introduced or enhanced targeted income support and other benefits to protect the lower income groups just as we have done in Jersey. This B.B.L.R. model was adopted after considering other options involving the full consultation exercise and a lengthy States debate. Jersey followed what is considered to be an international best practice and deliberately avoided the very complicated U.K./E.U. (European Union) type of V.A.T. (Value Added Tax) system. By doing so, we have the lowest standard rate of V.A.T. or G.S.T. in the world at 5 per cent. In fact, our standard rate is lower than most countries lower rates of V.A.T. The main reason for adopting B.B.L.R. is to keep the compliance costs to businesses at a minimum and the cost to the state administration as low as possible. We have achieved this to date and the B.B.L.R. system is still

the long-term policy goal. The exclusions proposed by Deputy Southern are based on the U.K. V.A.T. model, a model which is regarded internationally as one of the most complex systems in the world and even non-compliant in terms of E.U. directives on V.A.T. harmonisation. The difficulties of applying the U.K. rules are striking, even after 40 years of live tax experiences. The U.K. exclusions for zero-rating for food includes 4 general items and sub-categories, they being food for human consumption, animal feedstuffs, seeds of plants and live animals. However, there is no specific legal definition for food but includes drink. However, catering is excluded and a list of 7 other exceptional items including ice cream and confectionary. Exclusions of any kind under a G.S.T. or V.A.T. system will result in loss of revenue and added complexity. The range, type and number of exclusions directly impact on the complexity and results in a reduction of the tax base and consequently a reduction in the revenue in-flows. In previous debates, States Members have themselves provided interesting illustrations of food items, such as Jaffa Cakes to Pringles crisps, just to illustrate how difficult it can be under the U.K. V.A.T. to determine whether something is subject to tax or zero rated. I am sure we will hear many more examples during the course of this debate.

[10:45]

However, to assist Members further, I have circulated a list of examples, which over the years have created administrative, legal and financial difficulties for the U.K. Government and for H.M.R.C. (Her Majesty's Revenue & Customs). Two of my favourite examples are prawn crackers and the change in status of ferrets in 2009. I would particularly like to draw Members' attention to the treatment of rabbits. One wonders whether U.K. retailers have had to deal with V.A.T. refunds if Bugsy, the pet rabbit, decided to eat its own bedding, as hay and straw, put up for sale as bedding is taxable but as an animal feedstuff, it is zero-rated. Further, should Bugsy end up in a casserole, would a refund be claimable as a pet variety of rabbit is V.A.T. able but those for eating are not. [Laughter] I would also like to remind Members of recent events in the U.K., which again just illustrate how difficult it can be to even to attempt to remove some V.A.T. complexities. As part of the 2012 U.K. Budget, the Government decided to simplify the V.A.T. treatment for catering. The borderline between a hot takeaway food, which is subject to V.A.T. and cold takeaway food, which is eligible for zero-rating, has been the subject of constant review, appeal and litigation. The U.K. Budget intention was, and I quote: "To tax all hot takeaway, which is at a temperature above the ambient air temperature with the exception of bread." That is clear, is it not? After a political controversy, fuelled by the tabloid press, involving not only the Prime Minister, claiming to be a regular pasty eater and the Chancellor, who did not know what they were, the idea was rapidly shelved. However, on a more serious note, if the States approve Deputy Southern 's amendment, then the complexity and the revenue impact assessment for (1) food, is very high and (2) domestic energy is medium. However, if you take them together, the impact assessment would still be high. Most Islanders would welcome the prospect of low taxes, lower prices and increased disposable income. However, with this amendment, there is no guarantee that prices will be reduced in line with the G.S.T. content. Some retailers, such as Deputy Rondel, would obviously do their best to pass on the full benefit, particularly those selling pre-packaged goods sourced from the U.K. But evidence from elsewhere in the world under similar circumstances suggests that this just will not happen. I have included in the example sheet, distributed to Members, a short paragraph which outlines the experiences of similar experiences of similar exercises in other V.A.T. regimes, such as France and Turkey. BBC's  Watchdog Report ran a report on the V.A.T. rate when it was temporarily reduced in the U.K. from 17.5 per cent to 15 per cent in 2008. It found that Asda had only reduced the V.A.T. rate on certain products. Next and Matalan had reduced the prices at first only to shortly afterwards increase them back up to the previous levels prior to the reduction in V.A.T. In reality, stores simply kept the amount that they had previously paid to the Government in V.A.T. to improve their margins. McDonalds reduced some of their prices but not all of them

and in doing so, pocketed the difference as extra profit. What all this proves, beyond doubt, is at the end the consumer did not benefit. In previous States debates, serious concerns have also been raised concerning propositions in an attempt to mirror the U.K. V.A.T. legislation. If this amendment was adopted and part of Jersey's G.S.T. law would have its origins in the U.K., which is intended to be compliant with the E.U. V.A.T. Directives but in fact is not. The U.K. law is still vulnerable to change by the E.U. and therefore parts of it replicated in Jersey would also be subject to appeal and change here. This would inevitably lead to further complications, confusion and increased costs, although the upside would be that our legal firms would be kept busy. If adopted, would Deputy Southern 's amendment really work and help the least well-off? It is accepted that tax changes in the Budget will not help those who do not pay taxes, but they do help the vast majority of taxpayers, i.e. the 84 per cent who do pay taxes. Those on lower incomes have already been compensated for the effects of G.S.T. on food. Now is the time to help those who pay tax and the measures proposed in the Budget target the 84 per cent of all taxpayers. Deputy Southern 's amendment is silent on these compensating measures, being the issue of increased income support and the G.S.T. bonus currently being paid to the less well-off in society. Both were introduced to insulate the impact on G.S.T. on lower income groups. If this amendment is successful, then presumably these would no longer be needed to be maintained and current levels of income support and G.S.T. bonus could be withdrawn. If this does happen and the retail prices do not reduce by the tax content, then these groups will be worse off. This will be the exact opposite to the higher income groups, who will benefit most if this amendment is successful. Over 30 per cent of the potential cash benefit from the moving G.S.T. will go to the top quintile. That is the top quintile better off by some £3 million or just over 10 per cent; only roughly £1 million, would go to the lowest income quintile. Even Deputy Southern cannot claim that this is fair. The direct income tax changes contained in this Budget are serious and balanced and they attempt to provide an incentive to work, reducing the tax burden on the vast majority, the 84 per cent and thereby boosting the economy. They are targeted, they are permanent and they are guaranteed. In conclusion, I suggest

that States Members support the Budget as proposed by the Minister for Treasury and Resources and reject Deputy Southern 's well-meaning but misguided amendment.

Deputy G.P. Southern :

Sir, a point of clarification, if I may? Is the Assistant Minister saying that when he sticks to his 84 per cent of taxpayers, is he misleading the House when he means 84 per cent of income tax payers? Because he again repeated this misleading figure of 84 per cent applies to income tax payers, not taxpayers.

The Deputy Bailiff :

Assistant Minister, do you wish to clarify? I understood that is what you said, but ..

Deputy E.J. Noel:

I may have just missed out the word "income", but it is income tax payers and we all know that.

3. Senator S.C. Ferguson:

Yes, I am glad Deputy Southern has mentioned that, it saves me going through it as well. The Assistant Minister, sadly, has forgotten to mention the chocolate body paint in the U.K., which is also zero-rated. [Laughter] It comes up every time with the debate, so I thought I would get it in first. [Laughter] Retreating from that, we are talking about an effective tax. An effective tax should be simple, efficient, equitable and progressive. Progressive, so that resources can be redistributed to the needy and can be targeted. If you buy more, you pay more tax. There is a G.S.T. refund for people who pay no tax and there is an allowance for G.S.T. in income support. This all combines to make a tax which fits with the basic principle and in effect is progressive in the context of all taxes. Much has changed since we last debated this. In fact, Australia is now not

only looking for ways to simplify the system and reduce administration and compliance costs but is also suggesting that they should broaden the G.S.T. to cover everything; a flat rate, like the New Zealanders. They will not like to admit it, I think, that they are copying their smaller neighbours but these things happen. Singapore has no exemptions either and it has been able to ensure that those needing assistance, low income and pensioners can be targeted for benefits. As the Assistant Minister has said, it is by no means clear that reducing the G.S.T. on food would mean that savings would appear in the shops. We have inflicted too much red tape on them. Most of our businesses are small businesses - 75 per cent of them, I understand - and they have already had to spend considerable amounts of money updating their tills for G.S.T. and increases in G.S.T. and are we going to inflict another substantial expenditure on them? When G.S.T. came in, there were extra income tax allowances to compensate the less well-off and this has made changes to the distribution of the tax take. In 2008, 18 per cent of the population paid 59 per cent of income tax collected at 20 per cent. 53 per cent of the population paid 41 per cent of the tax collected at the marginal rate. In 2009, we had 15 per cent paying at the 20 per cent rate, paying 54 per cent of the tax and 55 per cent paid at marginal rate and they paid 46 per cent of the tax. So the amount of tax being collected at the marginal rate is increasing and the number in the population paying at the 20 per cent rate is falling. In other words, people at the margin are falling into a lower tax band and the number of people paying no tax has increased due to higher allowances. In other words, the measures to reduce the burden on middle Jersey and the less well-off to compensate for G.S.T. have worked. There are probably other factors but the main reasoning remains. We have a targeted benefit, the G.S.T. bonus, payable to all people who are not on income support and who do not pay any income tax. It is not very well advertised but it was brought in with Deputy Le Fondré's amendment in order to cater for those people who do not pay any tax and therefore do not benefit from the low rate of G.S.T. If we have a simple, easy to run system, there is no evasion or avoidance and instead of spending money on administration, we have the spare cash for the targeted benefits. The Assistant Minister has spoken of the complexities of the U.K. system and he has mentioned the case on whether hot food eaten off the premises is zero-rated or standard-rated. I mean, can you imagine the problems we are going to have with the small takeaways in Jersey. If you take the bacon rolls that you can obtain on the Albert Quay, if you eat them standing up, they would be zero-rated. If you sit at the tables, they will be standard-rated and if you go off and eat them in your car, are they zero-rated or standard-rated, because you are sitting down. But the original case went to the European court and it was brought by a Mr. Manfred Bog and this enabled the red top media to declaim that H.M.R.C. have effectively said: "Bog off." [Laughter] I am quoting the newspapers, Sir. I regret that I have not got a copy of it with me. [Laughter] In contrast, Singapore has also copied us with their version of the G.S.T. bonus and they have kept their G.S.T. at a low level; and Australians are looking at a flat rate on everything. But does the proposal make economic sense? What we are looking for is economic growth. Does reducing consumption taxes make that sense? According to the O.E. C.D ., their research emphasises that there is a hierarchy of taxes. The top ones which encourage economic growth and the bottom ones impede economic growth. From their research, income taxes and corporate taxes impede economic growth and consumption taxes and property taxes encourage economic growth. The best summary of the rationale for the simple system has come from New Zealand and there they found that the constraints on introducing the broad-based single rate consumption tax were not as great as they had previously imagined. The studies showed that in absolute terms, higher income people would

gain most from exemptions for food, clothing and other necessities. [11:00]

This came through in surveys of household spending. If food had been exempted from G.S.T., the bottom 20 per cent of households would have received only 15 per cent of the aggregate benefit of the exemption. The other 80 per cent of households, which were not considered to be poor, would