Economic Growth Plan

STATES OF JERSEY

r

ECONOMIC GROWTH PLAN

Lodged au Greffe on 1st March 2005 by the Economic Development Committee

STATES GREFFE

PROPOSITION

THE STATES are asked to decide whether they are of opinion

to re f er to their Act dated 7th July 2004 in which they approved the Fiscal Strategy and agreed that a target

for economic growth of 2% per annum should be set for the period 2005 to 2009, and requested the Economic Development Committee, in conjunction with other Committees as necessary, to bring forward, for approval by the States, a strategy for delivery of this growth by February 2005, and –

(a ) to receive the Economic Growth Plan entitled Growing Jersey's Economy', as set out in the report

of the Economic Development Committee dated 1st March 2005 and, in order to give effect to recommendations made in the Plan –

(i ) t o a g ree that, in order to improve the skills base in Jersey and labour market performance –

  (A  ) t h e E  c o n o m ic Development and Education, Sport and Culture Committees should

bring forward a new skills strategy to address the issues raised in the Economic Growth Plan;

  ( B ) t h e E  d u c at i on, Sport and Culture Committee should ensure that preparatory work

begins on establishing an International Business School in the Island;

  ( C ) a l l re l e v an t Committees should give consideration to policies that can increase

labour force participation in Jersey;

( D ) t h e E c o n o m ic Development Committee should help to promote and disseminate

best practice in Jersey in the area of human resource management and other aspects of business performance;

( ii ) to a gree that, in order to create a more entrepreneurial society in Jersey, the Economic

Development Committee should take the necessary steps to –

(A  ) e s ta b l is h a p ilot Small Firms Loan Guarantee Scheme; (B  ) e s ta b l is h a J ersey Business Angel Network;

(C  ) e s ta b l is h a p ilot Venture Capital Fund;

  ( D ) r e q u es t th e Education, Sport and Culture Committee to ensure that enterprise

education is added to the curriculum for all young people in Jersey;

(E  ) p u t in p la c e an expanded support service for small business development;

  (F ) r e q u e s t th e Housing Committee, in consultation with other relevant Committees, to

ensure that the current system of 1(1)(k)  consents continues to facilitate the entry of entrepreneurs into Jersey;

(i i i) t o ag ree that, in order to encourage greater competition in Jersey and capture the benefits

this can bring, the Economic Development Committee should ensure that –

  ( A ) t h e le g a l p o wers of the Jersey Competition Regulatory Authority are kept under

review and that it develops a high profile in the Island;

  ( B ) f u r th e r c o n sideration is given to the best way to enhance the consumer voice in

Jersey;

(i v ) t o c h arge the Economic Development Committee to produce and publish before the end of

2005 a review of external transport policy in Jersey; and

( v ) to c harge the Finance and Economics Committee to develop a new framework for the

Strategic Reserve and Fiscal Policy that encapsulates the proposals in the Economic Growth Plan for a new counter-cyclical Stabilisation Fund, with the Strategic Reserve clearly reserved for use only if the Island faces a major shock to its economy;

(b ) to approve, in principle, the additional funding required to implement the Plan and to charge the

Finance and Economics Committee, in consultation with the Economic Development Committee, to assess the most appropriate source of funding.

ECONOMIC DEVELOPMENT COMMITTEE

REPORT

Contents Page Introduction 5 Executive summary 6 Chapter 1: The criteria for government intervention 16 Chapter 2: Boosting productivity, growth and competitiveness 19 Chapter 3: Skills and the labour market 26 Chapter 4: Enterprise 40 Chapter 5: Competition 52 Chapter 6: Transport infrastructure 57 Chapter 7: Macroeconomic stability 60 Appendix 1: The economic theory of growth 66 Appendix 2: The target and scope for growth 68

Introduction

In July 2004, the States of Jersey agreed a target of 2% annual economic growth for the next 5  years. Based upon past performance, this target is eminently achievable. But to achieve it safely, Jersey will need carefully analysed strategies to enable it to happen so that we bring long-term benefits to the Island.

There were 3  key  reasons for that States decision. First, carefully-managed and sustainable economic growth will benefit the community by creating more job opportunities for local people. The second benefit is that controlled economic growth will minimise the tax burden Islanders face. The third benefit for Jersey lies in providing the opportunity to strengthen our existing industries and in laying down a framework for diversification.

We live in a changing world. To ensure that Jersey maintains its position in that world it is vital that we consolidate and build on our strengths. The States has already made the first significant decision to enable us to do that, by moving to the 0/10 corporate tax regime. That decision gives our key industry – finance – the certainty it needs to consolidate and build on its global position as a leading international financial centre.

But Jersey has other significant strengths. The people of the Island are one of our key assets, Jersey's ability to adapt and change is another. The Economic Growth Plan (EGP) examines how best to use all of Jersey's assets and build the foundations for a secure and prosperous future, which will benefit us all.

Executive summary

The Economic Growth Plan (EGP) sets out how the Economic Development Committee intends to deliver the 2% per annum real economic growth between 2005 and 2009.

Why growth?

In most of the industrialised world the need for economic growth is clear cut and undisputed.

For Jersey, economic growth is about increasing the value of the output of the economy in real terms. Put simply, this means that our economic cake will grow: our incomes will be higher and our job opportunities will be greater. Also, the tax base of our economy will be larger, so that tax rates (personal and corporate) will generally be lower to fund the level of public services that we all currently enjoy.

To put this into perspective, if we fail to achieve the economic growth identified by the States and if we want to continue with our current provision of benefits, services and pensions, then personal tax rises equivalent to 4% on the standard rate of income tax (with a higher marginal rate) could be required.

Economic growth with sustainable inflation is the first aim of the States Strategic Plan – agreed last May. Sustainable is a critical word, as it would be possible to rapidly deliver 2% economic growth which could damage the economic base in the Island, harm the economy's long term potential and have negative impacts on the natural environment. By ensuring that economic growth is well-managed and sustainable the EGP means that these risks are kept to an absolute minimum.

Sustainable economic growth in Jersey will therefore provide a better quality of life and more employment opportunities for people in the Island and at the same time minimise the impact in the Island of population growth and the effect on the environment. This reflects public opinion expressed during consultation on the Strategic Plan.

The approach

The focus of the Economic Growth Plan reflects the feedback from our consultation. Jersey's business community has asked for a light touch' approach from government. This Plan recognises that government intervention can only be justified in a limited number of areas, such as skills and innovation.

The emphasis is on allowing market forces to drive efficiency improvements in the Jersey economy and to support the international competitiveness of the Island. The framework provided in the Strategic Plan means that productivity (the amount produced per person in the Island) improvement across the economy must be the policy goal. This means improved productivity across financial services, retail, tourism, fulfilment and agriculture and every other sector of the economy currently with a presence in the Island and any that locates here in the future. By focusing on productivity improvements we can maximise the potential of the resources currently used in the Island. It may well be possible that new industries are attracted to the Island and this should be encouraged, but only so long as they leave a small footprint and their requirements for land and/or labour do not impinge on current activity in the Island. Such diversification should be market-led rather than a case of the government trying to pick winners.

It is also conceivable that there may be scope for marginal improvements in the participation rate and this could help to grow the size of Jersey's labour force. This might not bring productivity improvements in the short term but can clearly help to generate economic growth and lead to productivity improvements in the long term.

The overall approach of the Economic Growth Plan is summarised in the Chart below and explained in more detail in the rest of this summary.

Chart 1: The overall approach of the EGP

A business environment more A new skills strategy that meets conducive to entrepreneurism

the demand from business

Greater participation in

A new macroeconomic the

framework workforce by local people

Sustainable economic

Maintain external growth through Sgrtroowntghe irnp eroacdhu csteivctiotyr

transport links improved

productivity

Limited inward migration to supply key skills

Reduced red tape and

remove barriers to Improved organisation of work foreign competition Greater competition and better dissemination of

with a stronger best practice consumer voice

The 7 key strands

The overall approach of this Plan is summarised in the following 7  headings –

1. G  o vernment intervention
2. B o o sting productivity and competitiveness
3. S k i lls and the labourmarket
4. E n t erprise
5. C o m  petition
6. T r a nsport infrastructure
7. M  a croeconomic stability

The report deals with each of these issues in turn with a chapter on each. The chapters are summarised in the following sections.

1. G  o vernmentintervention

When, in economic terms, should government intervene? This question is critical for analysing the possible responses to particular problems and picking the right one.

The  answer  focuses  upon  market  failure.  This  term  is  used  to  describe  circumstances  where  the  market mechanism fails to deliver economic efficiency. The fact that this failure exists does not automatically mean that government intervention is justified. It is a necessary but not sufficient condition for intervention – it is also necessary to show that adopting any new policy could be expected to bring net benefits to society and more so than other policy options or doing nothing.

All potential government intervention should be assessed on the basis of the same criteria. Even when these basic criteria are met, the next step is to show that the proposed policy will actually bring net benefits to society.

Part of government's role is to monitor what is happening in the world outside. It may well be that the Jersey economy could be knocked off course due to developments in the global economy. If this happens it must be recognised that the growth target may not be achieved in some years but that this does not mean the EGP should be abandoned. Rather that it will be more important that the Plan continues to be implemented so that the economy is better able to take advantage of the subsequent global recovery when it occurs. For every year where growth is below 2% there will be scope for stronger growth in subsequent years if the EGP continues to be implemented.

2. B o o sting productivity andcompetitiveness

The most straightforward method to increase the output of the Jersey economy is to increase the productivity of the resources already in use. If the same quantity of land, labour and capital can be used more efficiently and produce more per unit then growth can be generated and competitiveness enhanced.

The 5 drivers of productivity are –

• S k i ll s and human capital

• I n v e stment in physical capital

• I n n o vation

• C o m  petition

• E n t e rprise

The challenge for Jersey is to identify where these drivers are constrained due to market failure and whether government should respond with intervention. This should be done at the broad economy-wide level but can also be achieved by looking at different industry sectors. This requires an approach that looks at the performance of the key sectors of the economy in these areas and assesses whether there is market failure which can be addressed by government policy.

This means looking in detail at how each of these key sectors is working. A series of reports giving further analysis of the financial services, tourism, fulfilment and retail industries and the rural economy will be published shortly for further discussion, to build upon the Economic Growth Plan.

The performance and growth of the financial services sector is going to be vital to achieve the growth in the economy which the States require. Already, we know that it is by far the most profitable per person employed as the Chart below illustrates –

Chart 2: Profitability per employee

gross operating profit per full time equivalent, £,  2003

120,000 100,000 80,000 60,000 40,000 20,000 0

Agriculture water Construction bars Financial activities All sectors

Transport & intermediation

Manufacturing Electricity, gas, communications Other business

Wholesale & retail

Hotels, restaurants,

Source: States of Jersey Statistics Unit

The recommendations of the report on facilitating growth in the financial services industry will focus on a 6-point plan based on the key factors that will improve the industry's competitiveness and highlights –

1 .  I m p roved business education 2 .  O  ff shore product development 3 .  H  ig h value niche business

4 .  R a i sed industry profile

5 .  I n te rnational initiatives/partnerships 6 .  T a x office liaison

The cost to the States of such a package of measures is estimated to be in the region of £1.2  million and is included in the overall costing of the package of measures included in the Economic Growth Plan.

While growth in the financial services industry will be the main driving force behind the additional £20  million of tax revenue that is required from economic growth, it is also important to recognise that it is unlikely to provide many additional job opportunities. This makes it critical that growth in the non-finance sectors of the economy is also generated to provide employment opportunities for local people, particularly the young and some additional tax revenue.

3. S k i lls andthelabourmarket

Skills and human capital are at the heart of growing productivity and can be influenced by targeted education and training  policies.  That  said,  simply  ensuring  that  people  have  higher  skills  and  better  education  does  not automatically lead to economic growth. The real issue is to ensure that the skills base in the economy is able to meet the needs of business both now and in the future.

The government has a vital role in improving the skills base and education levels. There is clear evidence that Jersey lacks some of the skills it requires and that the Island's international competitiveness is being hindered as a result (see the Chart below which shows how skills gaps are affecting businesses). Two recent reviews of education and training in Jersey highlight the type of actions required to address these problems and support the drive for real economic growth.

Chart 3: Implications of skills gaps

% of employers with skills gaps citing they have negative implications for the following –

45 40 35 30 25 20 15 10 5 0

None of these Operating costs

Quality standards Customer service Loss of business

Introduction of NWP

Certain products/services Introduction of tech change

Development of new products

Source: IFF Jersey Employers Survey 2004

The first of these reviews was by the Learning and Skills Development Agency (LSDA) and identified 3  priorities for a Skills Strategy for Jersey –

• D  ev e loping the enterprise and vocational curriculum for young people

• D  ev e loping the skills of the people in the workforce

• D  ev e loping higher level skills at work.

In addition, a review of Higher Education in Jersey has recommended that an International Business/Management School should be a priority for Jersey to aid the achievement of improved skills among the workforce. Specifically, the Island should improve the provision of generic degree programmes, encourage the take-up of Open University places and stimulate demand for junior/middle management training.

The Economic Development Committee and the Education, Sport and Culture Committee will soon publish a Skills Strategy for Jersey which will draw on this work and identify the priorities for action in Jersey. The implementation of a Skills Strategy is a top priority for the States and vital to achieving sustainable economic growth.

Given the high rates of labour force participation in Jersey it would be too much to expect a significant improvement and to be able to drive economic growth in this way. However, even marginal improvements in participation can help to reduce the requirement for inward migration and address skills shortages issues. For these reasons it is important that full consideration is given to any policies that can –

• I n c re ase incentives/reduce disincentives to work

• A  d d ress barriers to work

• E n s u re the unemployed receive the right training to re-enter employment.

There is a role for government in terms of promoting and raising awareness of best practice in human resource management to ensure a better take-up of such practices and improved productivity in the Island. This role can be extended beyond human resource best practice and involve ensuring that information on best practice in all aspect of business operation is properly disseminated across the Island's business base.

While all efforts should focus on the above policy areas, there may still be a need for limited inward migration to address specific skills shortages.  The new Migration Policy will ensure that it is possible to meet business needs and make the decisions about employing labour from outside the Island more transparent and business friendly within the boundaries deemed acceptable by the States to limit the impact on the environment and society. It is important to remember though the factors that can prevent labour mobility between other countries and Jersey and ensure that economic and other policy can deliver low inflation, high quality public services, a red-tape free environment and high quality of life.

4. E n  terprise

Jersey's performance in enterprise is mediocre in the global context (see Chart  4), yet enterprise can play a vital role in driving productivity and economic growth as well as keeping inflation down.

Chart 4: Jersey's entrepreneurial performance on an international scale

entrepreneurial activity prevalence rate (% of population that has taken some action to create a new business in past year and those in business less than 42  months), 2002

20 18 16 14 12 10 8 6 4 2 0

US UK

Italy

India Chile

Korea Brazil China Israel Spain Japan Mexico Iceland Ireland Jersey Finland Poland Croatia France Russia

Thailand CanadaAustraliaNorway Hungary Denmark Germany Slovenia TaiwanSweden Belgium

Argentina Singapore

Hong Kong

Switzerland South Africa Netherlands

New Zealand

Source: Global Entrepreneurship Monitor 2002

To create an environment more conducive to the growth of enterprise in the Island, the Economic Growth Plan recommends –

• E  st a blishing a pilot Small Firms Loan Guarantee Scheme to allow small firms with good, low risk business propositions but no collateral to access finance.

• E s t a blishing a Jersey Business Angel Network to allow entrepreneurs access to business angels offering advice and potential investment.

• E s t a blishing a pilot Venture Capital Fund to encourage investment. The Fund would only be allowed to invest in Jersey business start-ups and young businesses.

• A  m e nding the educational curriculum for all young people to include the key skill of enterprise.

• E x p a nding the support service for small business development which builds upon and expands current support for business.

• C o n t inuing to encourage 1(1)(k) residents where they can contribute expertise and capital backing in the Island.

• A c h ieving  a  more  entrepreneurial  culture  and  greater  business  start-ups  to  generate  the  needed diversification in the Island backed by policies improving skills and education in the Island.

5. C  o mpetition

Ensuring  vigorous  competition  between  firms  is  critical  to  maximising  productivity  and  economic  growth. Competition encourages firms to innovate by improving efficiency and puts downward pressure on costs and improves the organisation of production. It should also result in a better deal for consumers.

The Jersey Competition Regulatory Authority (JCRA) has a key role to play. In particular –

• I t s h ould be pro-active and encouraged to develop a high profile in Jersey.

• I ts le gal powers should be kept under review and if necessary expanded to increase its potency.

• A  s a matter of priority it should investigate further some of the factors behind the price differences between Jersey and the U.K. on a number of goods and assess whether there are issues of lack of

competition or collusion.

A strong consumer voice in Jersey is also vital for effective competition. The Jersey Consumer Council (JCC) therefore has a key role to play. It should be given additional support and consideration should be given as to whether its role can best be enhanced by –

• r e ta i ning the JCC as it currently stands but with additional funding,

• r e v a mping and rebranding JCC under another name and with a more extensive remit, or

• r e ta i ning JCC in its current form, with another consumer body for the utility companies.

Jersey must be open to foreign competition and inward investment to help enhance competitive pressures and efficiency. Where there is no justification for barriers or impediments to open competition the States should ensure such barriers are removed.

Regulation should be reduced when it impedes market forces and imposes unnecessary costs on business. A Business Taskforce should be set up to keep a watching eye on new legislation to ensure that it has a minimum impact on business and to identify current regulations that impede market forces and which provide no real benefit to the community.

6. T r a nsport infrastructure

The external transport infrastructure supporting economic growth should be allowed to operate where there is no clear indication of market failure or threat to required service levels. The Economic Development Committee will publish later in 2005 a review of external transport policy in Jersey. This will be vital for ensuring that transport links are maintained and that economic growth can take place. The EGP gives a clear indication of the appropriate policy guidelines.

The policy for the air routes –

• C o n t inuation of open skies

• R e s i stance to subsidies to travellers or airlines

• F o c u s on maximising efficiency of airport.

In the case of the ferry services there may be greater risks in allowing market forces to prevail and a danger that this could lead to monopoly/price war cycles. The Economic Development Committee's review of transport policy and will give further consideration to a policy solution for the operation of the ferry services.

7. M  a croeconomic stability

This means creating a stable economic environment in terms of economic growth, inflation and employment. Only against such a backdrop can businesses and individuals be expected to operate efficiently and take long-term decisions on such issues as investment.

The Economic Growth Plan highlights the need for a new macroeconomic framework for Jersey that represents a clear break with the past. If sustainable economic growth is to be achieved with low inflation then the States of Jersey must ensure that fiscal policy – the one macroeconomic tool available to it – is focused on delivering the stability and low inflation required.

The Economic Development Committee offers its full support to the Finance and Economics Committee in working towards a new framework for the Strategic Reserve and Fiscal Policy. This should include a new counter-cyclical Stabilisation Fund, with the Strategic Reserve clearly put to one side to be used in the manner

that was originally intended, i.e. only if the Island faces a major shock to its economy. Measurement

It will be important to monitor the progress of the Jersey economy over the course of the next 5  years to assess how it is progressing relative to the target. GVA (the total value of output in the economy) data is only produced once a year and with a significant lag so it will also be important to measure the performance of the economy through other intermediate economic indicators. These will be able to give an indication of how the economy is performing and it will require a certain degree of economic judgement to assess whether the economy is on course. The types of indicators that can be monitored closely and are either more frequent or timelier than GVA data are: financial services profitability, employment/unemployment trends, inflation, tax receipts, sectoral data such as that for tourism and agriculture and business surveys.

The way forward

To achieve the twin objectives of additional tax revenue and employment opportunities and undertake the actions that the Plan entails the States will have to make an investment – in the region of £2.5  million a year. Table  1 illustrates rough estimates for the costs of the individual elements of the Plan.

But this is not the end of the matter. The focus in Jersey should now be on creating the right environment for enterprise and competition and the best approach to meet the skills needs of the Island. Focus groups will be organised to start the discussion on these issues and build upon the basic framework provided in this Plan.

In  addition,  a  series  of  documents  will  soon  be  published  assessing  the  potential  role  for  government  in maximising the productivity of the Island's key sectors: finance, retail, tourism, the rural economy and fulfilment.

The Economic Growth Plan is about getting the fundamentals in place. The focus of attention should now be on what else needs to be done to fully address the skills, enterprise and competition challenges which face the Island and to maximise productivity across all the sectors that make up the Jersey economy.

Manpower implications

Some of the actions required by the Economic Growth Plan will have manpower implications. It is estimated that the total requirements for additional staff would be approximately 9  persons on a fulltime equivalent basis (including the requirements of the Plan for Finance).

Table 1:  The Economic Growth Plan for Jersey

Macroeconomic framework 2006+ 0 Revenue costs for whole economy (sum 2005+ £1.5m

of above)

Sectoral actions

A Plan for Finance 2005+ £1.2m# (Current sector specific funding £0.6m

p.a.)

A Rural Economy Strategy 2005+ 0 (Current sector specific funding £4.5m

p.a.)

Tourism  Study 2005+ ? (Current sector specific funding £7.5m

p.a.)

Retail Study 2005+ ? (Current sector specific funding £0m p.a.)

Fulfilment Study 2005+ ? (Current sector specific funding £0m p.a)

Revenue costs p.a. for sectoral 2005+ £1.2m initiatives

Total revenue costs p.a. for EGP £2.7m Key: =will contribute to objective, =will make major contribution to objective

* To be financed through current budgets of TEP and Education, Sport and Culture.

**May be annual cost varies from £100k at start to £500k when close to start-up in 2010. Also revenue expenditure may be lower if some start-up costs covered through capital expenditure. A significant one-off capital investment is also likely to be needed outside of the Economic Growth Plan.

*** £50k in first year, £25k running costs thereafter.

# May be up to £400K lower if additional funding for JFL is agreed under EDC's resource submission for 2006-2008.

Chapter 1: The criteria for government intervention

There may be a number of different ways for a government to intervene to promote economic growth but with limited government funds (for any given level of taxation) the real issue is to ensure that public funds are spent on the activities that provide the greatest benefits to society and that they are spent in the most efficient way. This Chapter provides a framework for assessing potential government interventions on the same grounds and ensuring that the States of Jersey only implements policies, programmes and projects that will maximize improvements in efficiency.

Departments  requiring  public  funds  to  promote  a  particular  policy  must  be  able  to  answer  the  following 2  questions –

1 .  A  re there better ways to achieve the objective? 2 .  A  re there better uses for the resources?

This can be achieved by identifying other possible approaches which may achieve similar results, where possible attributing monetary values to all impacts of any proposed policy and assessing the costs and benefits for relevant options. Government intervention will be validated, objectives set and options reviewed by analysing their costs and benefits.

Justifying action

The first step is to make the case for action by identifying a clear need which is in the national interest for the government to address. The rationale for government intervention is essentially two-fold –

• I m p r oving economic efficiency by allowing markets to operate more effectively.

• A  ch i eving objectives of equity.

Even if either of these rationale is met, it is critical that the additionality, i.e. the net benefit of the intervention, is then calculated and compared against alternative polices and doing nothing.

Economic efficiency

Economic efficiency is generally said to be achieved when nobody can be made better off without someone else being made worse off. This enhances prosperity by ensuring that resources are allocated in the most productive manner. One cause of inefficiency is where the private returns which an individual receives from a particular action (e.g. pay or profits) differ from the returns to society as a whole (e.g. the actions incur costs such as pollution). Market failure is where the market mechanism cannot achieve economic efficiency and can occur for the following 4  reasons –

1. E  xt ernalities:  These occur when an activity produces benefits or costs for other activities that are not taken into account by market prices. The typical example is where a firm polluting a river does not take into account the costs it is imposing on those who have to clean the water for their use.
2. P u b lic goods: The market may have difficulty in supplying and allocating certain types of products and services that can be classed as public goods. Public goods exhibit 2  characteristics –

( a ) N o n-rival – consumption of the good by one person does not prevent someone else using or

consuming that good e.g. clean air.

(b ) N o n excludable – means that if the good is made available to one consumer it is effectively made

available  to  everyone  e.g.  national  defence.  This  can  give  rise  to  free  riding  where  some consumers fail to pay for the provision of the public good and let others do so.

3. I m p erfect information: Buyers need to know the quality of a good or service to judge the benefit it can bring them and sellers need to know the reliability of a buyer. Where such information is not available to both sides of the market there is asymmetry of information and market failure can exist. This can lead to moral hazard (e.g. people with insurance taking less care) and adverse selection (e.g. those with the highest risks take out insurance).
4. M  a rketpower: This arises as a result of insufficient actual or potential competition to ensure that the market operates efficiently. This can occur where high start-up costs deter entry by competitors or through organisations acting strategically to protect their position.

Equity

The other key rationale for government intervention is to achieve equity objectives. Government can use policy to achieve distributional impacts through the way the different costs and benefits are distributed across different groups.

Additionality

To calculate the success of a government intervention (in terms of employment or output) it is necessary to calculate its additionality. That is, its net rather than gross impact after taking into account what would have happened in the absence of the intervention. Additionality can also be referred to as a supply side' or structural' impact which alters the productive capacity of the economy which might occur as a result because of an increase in the size of the workforce or increase productivity.

The net benefit or additionality of a policy can be calculated as follows –

Net benefit = gross benefits minus the deadweight minus displacement minus substitution minus leakage plus multiplier effects

Leakage effects benefit those outside the Island. For example, spending on imports where the benefits leak to the country  of  origin.  Deadweight  refers  to  outcomes  which  would  have  occurred  without  the  intervention. Displacement and substitution measure the extent to which benefits of a project are offset by reductions of output or employment elsewhere.

Example

A publicly funded project in Jersey that costs £500k per annum might seem appealing because it is expected to generate 1,000 new visitors each year to the Island all spending £1,000 in the Island. At first glance, the benefit appears to be £500k extra spending in the Island above the cost of the project.

However, applying the formula above and taking into account all the relevant factors reveals a different answer. The benefit is the gross benefit with no account taken of factors such as deadweight and leakage. To calculate the real net benefit it is important to research these other factors.

It could be the case that 200 of the visits would have happened anyway for reasons nothing to do with the project, e.g. general growth in tourist numbers.

Another 100 of the visits simply substitute for those of other people, e.g. taking their seats on the plane.

The resources used (labour and land) mean that £100k of benefits cannot be generated elsewhere in the economy. 20% of the additional spending by tourists is directly on imports and of little benefit to the Island.

The multiplier effect of such spending is 1.1, meaning that an extra £100K of spending is created elsewhere in the economy.

Applying the formula above now means –

Net  benefit  =  Gross  benefit  (£500k) – deadweight  (£200k) – displacement  (£100k) – substitution  (£100k) – leakage (£200k) plus multiplier effects (£100k) = 0.

The end result is that what at first glance appears to be a project that would bring significant benefits to the Island is not the case when the net benefit is calculated.

Chapter summary

It is critical to examine all calls for government funds on the same basis and to apply a common approach to all. It is also important to bear in mind that just proving there is market failure and a net benefit to the economy is necessary but not sufficient in making the case for government intervention. Bearing in mind that government funds are limited, once the net benefit has been calculated it must then be compared with that of other projects to see which can generate the largest net benefit for the Island and which should receive greatest priority.

Chapter 2: Boosting productivity, growth and competitiveness

One way to bolster output in any economy and generate faster growth is to make more efficient use of the resources already in operation. Output is dependent on how many people are working and how much they produce. This latter point is basically referring to their productivity, which at the economy level is the main determinant of national living standards. Productivity is a measure of how well an economy uses the resources it has available by relating the quantity of inputs to outputs. Maximising productivity growth ensures that the potential of the resources in use is maximised something critical for every economy, but particularly for a small island economy.

All sectors

Maximising current potential involves maximising the productivity of every industry in the Island now and that may be present in the future. Enabling productivity growth in one sector of the economy would clearly help to spur productivity growth but without doing so in every sector, productivity growth will not be maximised. For example, the Chart below shows the importance of the finance industry to the Jersey economy as it contributes half of the total output. If productivity growth in finance could be achieved of 4% per year and if productivity growth  elsewhere  was  flat  the  overall  rate  of  productivity  growth  in  the  economy  would  be  2%.  If  4% productivity growth can be achieved in finance and in every other sector of the economy then productivity growth in the economy overall would be 4% and twice that in the previous scenario. The implication for policy is clear – to maximise economic growth in the economy the aim must be to maximise productivity growth in every sector from financial services to retail to tourism to agriculture to fulfilment.

Chart 5: The Jersey economy by GVA gross value added in 2003, current prices

Public Agriculture

administration 2% Manufacturing 7% 2%

Utilities 1%

Other business 18%

Transport & communications 4%

Financial services

Hotels, 50% restaurants &

bars

4%

Wholesale/

Retail Construction

7% 5%

Source: States of Jersey Statistics Unit

The target of 2% real economic growth in Jersey has been set for a number of reasons. The challenge is clearly to raise the living standards of everybody in Jersey but there are 2 additional underlying objectives. The first – laid down in the States' Strategic Plan – is to maximise employment opportunities for local people and the second – agreed by the States' as part of the Fiscal Strategy – is to generate £20  million additional tax revenue. The Chart below shows the breakdown of employment in Jersey. While financial services is still the dominant employer in the Island it is by no means as dominant as it is in terms of output and employs a quarter of the workforce. The need to maximise employment opportunities for local people therefore also clearly points to maximising productivity, competitiveness and growth in every sector of the economy including all the key sectors – financial services, retail, tourism, fulfilment and agriculture.

Chart 6: Employment in Jersey employment in 2004, full-time equivalent basis

Agriculture

Public 4% Manufacturing 4%

administration

12% Utilities

1%

Other business

13%

Financial services