Minister for Treasury and Resources: Request to Chief Minister to Lodge Proposition for Dismissal - Petition

STATES OF JERSEY

MINISTER FOR TREASURY AND RESOURCES: REQUEST TO CHIEF MINISTER TO LODGE PROPOSITION FOR DISMISSAL – PETITION

Lodged au Greffe on 1st February 2011 by Deputy G.P. Southern of St. Helier

STATES GREFFE

2011   Price code: B  P.16

PROPOSITION

THE STATES are asked to decide whether they are of opinion

to  request  the  Chief  Minister  to  bring  a  proposition  asking  the  States  to dismiss the Minister for Treasury and Resources.

DEPUTY G.P. SOUTHERN OF ST. HELIER

REPORT

This proposition is brought in response to a petition signed by many thousands of Island residents from a wide variety of backgrounds who are extremely concerned at the impact that the policies of the Minister for Treasury and Resources are having and will have on their standard of living and that of their families.

In response to the worldwide recession, the Council of Ministers has taken a number of actions and proposes more in 2012 which, in combination, in the opinion of the petitioners, unfairly penalise ordinary working people and their families, especially those on low to middle and fixed incomes. These actions include –

• Severe  cuts  to  front-line  public  services,  such  as  health,  education  and policing;
• Large-scale redundancies imposed on the public sector;
• The threat of a 2 year wage freeze and major reductions in employee terms and conditions;
• The proposed rise in GST to 5%;
• The refusal of the Minister for Treasury and Resources to use the Strategic Reserve to mitigate the impact of the recession.

By far the most important issue that was of concern to Islanders was the imposition of a 66% rise in GST from 3% to 5%, and what especially riled people was the Minister for  Treasury  and  Resources'  personal  opposition  to  the  introduction  of  any exemptions, despite the wishes of some other Ministers. A further point of contention was his decision to raise the rate at the earliest possible opportunity (following the ending of the moratorium on 31st May 2011), despite his categorical assurance that even in the event of a recession, he would oppose any rise. His opposition to any delay was  widely  commented  upon.  Many  in  the  community  regard  his  promises  with outright cynicism.

But those responses could be dismissed as mere emotion. What about the fiscal and economic facts we are facing?

The Minister says that he wants fewer jobs in the public sector and wishes to transfer many to the private sector. In other words, he expects private demand to replace public in the cause of growth. So why then does he tax private demand? And why tax it at precisely the point where it must cost jobs in King Street and amongst its suppliers? In short, why increase GST? We have already seen some 70 public sector redundancies, and that figure, whether in redundancy or from other forms of job losses, will rise to around 400 over the next 2 years. Why then does he put countless other jobs at risk in local shops, hotels, restaurants and other businesses in the private sector by increasing the cost of doing business? His policy makes no sense.

It does not matter that our GST is at the lower end of the consumption tax spectrum; and  there  are those  that would  say  that  taxes  on  spending,  in  normal  times,  are preferable  to  taxes  on  incomes.  But  these  are  not  normal  times.  The  Island  is struggling to come out of recession. So far, the Minister cannot point to any hard indicators that the recession is over and that even the first "green shoots" of recovery can be seen. At the time of writing, the unemployment figures have risen yet again. What price is there on a reduction after Christmas when the shops, the post and the fulfilment industry lay off temporary staff, and builders struggle with the weather?

What matters is the £80 million in GST being withdrawn from high street spending over the next 3 years, just when every Keynesian maxim says we should increase demand to lift employment. This is all the more important given the surge in food, fuel and commodity prices that is being seen worldwide. The £26 million a year in GST is a move in the wrong direction, at the wrong point in the growth cycle, and at the wrong place – at the tills.

The central truth of Jersey politics is unchanging. It is far easier to raise £26 million a year with what amounts to a stealth tax on poorer spenders than it is to abandon that fixed point in the Jersey firmament, bequeathed to us by the Germans, the sacrosanct 20% tax rate. The Minister for Treasury and Resources has tried hard, like his role model, David Cameron, to argue that GST is not regressive; that it does not have a disproportionate  impact  on  the  least  well-off,  whilst  the  highest  earners  pay proportionately less. Even his favourite fiscal experts, the Institute for Fiscal Studies (IFS), in their latest analysis of the UK VAT rise, states clearly that the increase has twice the impact on the bottom 10% than on the top. The Deloitte review, based on spending rather than income, has the poorest at 0.8% worse off and the top just over 1%, but they state that this is only because the poorest spend most on essentials, which in the UK are largely exempt or zero-rated. Jersey, thanks to the Minister for Treasury and Resources, does not even have exemptions on essentials such as food and heating.

The Minister has assured us that any public sector job losses will be taken up by the private sector and that recovery is on its way in 2011. And yet he cannot point to where these jobs will come from, nor to one solid indicator which points to the recovery. There are no real signs of recovery in the world economy either. Our closest trading country, the UK, on whom our economy is largely reliant, shows worsening business conditions in the service sector. There, the economy ended 2010 on a much weaker note and growth was expected to reduce from 0.7% to 0.4% in the last quarter. The Chief Economist of CIPS/Markit summed up the figures thus –

"Since  the  summer,  business  confidence  has  slumped.  No  imminent improvements in growth rates are signalled.".

The fact is that the Minister for Treasury and Resources has ploughed ahead with a plan to cut the economy by raising taxes and shedding jobs at the wrong time, while we are still in recession. Recovery is the best way to tackle the public deficit in the long term, and that means planning for a budget deficit in the short term until the recovery is firmly under way. Cuts in public spending will only have an effect on future competitiveness and will have an impact on the most vulnerable and needy in society. As argued by David Blanchflower, respected economist and former member of the Bank of England's Monetary Policy Committee –

Lesson one in a deep recession is you don't cut public spending until you are into the boom phase.'

In  acting  counter  to  this  basic  tenet  of  economic  management,  the  Minister  is gambling with the livelihoods of the Jersey population and the chances of economic recovery.

Jersey is still a wealthy jurisdiction. Average pay is among the highest in the world, while marginal personal tax rates for the highest earners are low for a country with fully developed public services. We have been for many years, and still are, a low-tax, low-spend jurisdiction. The time has surely come for the Minister for Treasury and Resources to abandon his rigid dogma that we can continue to apply the same low-tax business model to the Jersey economy. Tax increases for the better-off will not be popular but will sooner or later be necessary, and preferable to slashing those services on which the poorest and most vulnerable rely.

The time has surely come to start to address the gap between the rich and poor. The commitment  to  do  so  was  reluctantly  accepted  by  the  Council  of  Ministers  in amendments  to  the  Strategic  Plan.  This  must  involve  due  consideration  of  truly progressive tax and social security policies as part of the Fiscal Strategy Review. However,  the  Minister  for  Treasury  and  Resources  cynically  overlooks  his commitment to creating a fairer society in the Strategic Plan, in the same way as he chooses to be extremely selective when reviewing the evidence to support his policies.

The Minister has made mistake after mistake in his handling of the economy – Mistake 1:  The single largest contributor to the deficits we face is the decision to

adopt  the  "zero/ten"  company  tax  policy.  This  was  a  conscious decision taken by the current Chief Minister and supported by the current  Minister  for  Treasury  and  Resources  to  give  up  £80  to £100 million tax revenue from companies. A 0% rate for non-finance companies effectively allows foreign companies to trade in Jersey for free. The different treatment of local and non-local companies has resulted  in  the  current  problems  we  have  with  the  EU  Code  on Business Taxation (EUCBT). The Minister still has no solution for this.  He  ignores  the  fact  that  his  approach  has  led  to  a  loss  of £10 million to £15 million in tax revenue. In addition, the 10% rate for finance companies has reduced their contibution by half. The aim was to compete with the Isle of Man and satisfy the EU CBT. The policy has been an abject failure and he and his predecessors were told this back in 2005. We threw away £100 million in tax revenue only for the EU to reject the scheme. We have to think again.

Mistake 2:  The introduction of the regressive GST on all goods and services

(including essentials) effectively transferred half the tax burden from companies to ordinary residents, especially the least well-off. Further tax  revenues  (£10 million)  were  to  come  from  "20 means 20"  on middle-earners;  £5 million  or  so  from  ITIS  and  the  remainder (£20 million)  was  to  be  found  from  growth  in  the  economy.  The Ministers gambled on the continuance of the rampant growth in the finance sector GVA (up by 20% over the years 2005 to 2008) and in profits (up by a massive 35% in those years). This proved to be an expensive  gamble;  it  has  also  failed.  Negative  growth  is  now predicted  at  -4%  in  2009  and  -2%  in  2010  following  the  world banking crisis.

Mistake 3:  At the end of 2008 the States exhausted itself in a long and bitter debate over the replacement of the Energy from Waste (EFW) Plant. I

do  not  wish  to  revive  the  debate  over  the  pros  and  cons  of  this decision  here.  However,  the  Minister  for  Treasury  and  Resources

immediately brought a new proposal before the exhausted Assembly to  pay  for  the  EFW  Plant  all  in  one  go,  in  a  single  payment  of £110 million, instead of over a period of years. This had the effect of emptying  the  Consolidated  Fund  at  a  stroke.  In  addition  to  the £150 million  we  have  in  the  Stabilisation  Fund  to  contribute  to assisting with the effects of the recession, how much better it would be to also have the £110 million to help cushion the blow.

In the face of all the evidence the Minister still sticks by his policies for failure.

The Minister for Treasury and Resources repeatedly refers to the deficit as structural and  not  cyclical.  A  structural  deficit  is  more  serious  and  requires  drastic  action, according to him. The fact is that the "structural" change to our economy and tax generation was the choice to adopt zero/ten. The blame for this lies entirely in the court of Senators Ozouf and Le Sueur . The economic downturn losses below are absolutely and clearly cyclical.

The downturn in the economy over the years 2001 to 2004 showed similar reductions in GVA to those predicted for this recession. There was no panic then to slash the public sector workforce and thereby make the downturn worse. There should not be now, despite predicted negative growth of -4% and -2% over the current 2 year period. The Minister for Treasury and Resourcess obsession to slash the public sector is driven by ideological politics and not sound economics.

How big is the problem? – 1

There is no doubt we are in a mess over the economy. The questions which need to be answered are how big is the mess and how do we set about clearing it up? Indeed, first we have to ask which mess are we talking about? Well, there is the mess made by the recession and the mess we were already in (the £90 million revenue deficit caused by

the mistaken move to zero/ten) that the recession has simply brought to the surface. The first thing to do in attempting to deal with the issues is put the situation in context. We remain a wealthy juristiction as shown here (Jersey Economic Trends, 2009).

Not only that, but we are undoubtedly a low-tax low-spend economy (Minister for Treasury and Resources, 19th May 2009).

Table 7 – Government expenditure as a percentage of GNI for Jersey and the OECD

Not only do we have a much lower spend overall than the OECD average, we have a lower "social" spend as well. I include Luxembourg in the comparison for those who wish to argue that our lower spend is a merely a product of our high GNI. If further proof were needed, we need only consider the comparison made by Peter Body in Business Brief of March 2010, entitled "Who's better off?" summarised here –

The Business Editor of the Jersey Evening Post, an experienced observer of local economic issues, describes the initiatives of the Minister for Treasury and Resources and the Public Accounts Committee to slash 10% from public spending over 3 years or 2 years, respectively, in the following terms –

"I believe it is simply crazy to expect a large complex organisation like the States to be dramatically restructured over three years let alone two. The obvious danger is that services the public have said they want and value will be damaged irreparably. Now we have PAC, panicking even more (than the Treasury minister) . Certainly if you look at government spending elsewhere as a proportion of GDP, Jersey's figure is very much lower than just about anywhere else.".

The Minister for Treasury and Resources has opposed all measures which might mitigate the impact of his policies on the Jersey public. He has opposed –

• Any delay in implementing 5% GST
• Any exemptions on essentials
• Any use of the Strategic Fund
• Any borrowing
• Any progressive tax changes.

Public services are major employers and purchasers of goods and services. UK studies suggest that for every £1 spent on public services a further 64p is generated in the local  economy.  They  create  jobs,  provide  decent  pay  and  pensions  and  set  a benchmark in terms of equal opportunities. The imposition of a public sector pay freeze in 2009 may appear to have been a popular short-term expedient, but it has fostered a deep resentment amongst public sector employees which will have long- term negative implications.

The public sector pay target has been below inflation for the last 3 years. Further attacks on terms and conditions would not only reduce spending power in a key part of the economy, but also lead to recruitment and retention problems already evident in the nursing and social service sectors. And yet that is exactly what the Minister for Treasury and Resources proposes. He has set a target of £14 million savings from public sector pay and conditions as outlined in the "Tribal" report on the public sector.

Conveniently, this is the sum that would be saved by the imposition of a 2 year pay freeze. All other changes to conditions, such as pensions, overtime rates, etc., are subject to negotiation, but a pay freeze could be imposed. He has done it before and so may  try  it  again.  Whatever  approach  he  adopts,  we  are  likely  to  see  a  level  of confrontation with public sector workers which is unprecedented in Jersey.

Siren calls for a deflationary package of public spending cuts in order to balance the books' are just knee-jerk' reaction and show no real understanding of the impact on front-line public services or indeed the potential to plunge the Island into a double dip' recession. There is strong evidence, as the Business Editor of the J.E.P. points out, that suggests the public is against such a strategy in any event. Senator Ozouf has set his mind firmly against any tax rises, and uses misleading figures to frighten the public into accepting massive cuts in public services which will harm the least well-off and put recovery at risk.

The Minister for Treasury and Resources makes much play of the prospect of GST rates up to 12% by 2014, a figure produced by the Comptroller and Auditor General in response to a request from the Corporate Services Scrutiny Panel. This figure is, however, totally without any grounding in reality. Nonetheless Senator Ozouf was content to use this specious figure to bolster his one-sided arguments for his failed Thatcherite policies.

He is equally unashamed by his repeated selective use of the facts and figures. For example, he states accurately that States spending has risen by 30% over the past 5 years.  He  conveniently  fails  to  put  this  apparently  shocking  fact  in  its  proper perspective. He pointedly fails to mention the following significant changes in the economy over the same period –

Put into the context of an economy in growth mode with banking profits and overall GVA on the rise, a growth in public spending is to be expected. As John Clennett (a previous Treasurer of the States) stated in his recent contribution to the tax and spend debate: "States revenues and expenditure have been broadly in line and budgets have been balanced". Interestingly, the 21% growth in income tax revenues over the period 2003 – 2007  is  made  up  of  a  51%  increase  in  personal  tax  and  zero  growth  of company tax. In 2008, GST, most of which is paid by individuals,was added to further exacerbate this shift away from company tax on to the individual resident.

How big is the problem? – 2

We have all been immersed in tales of total doom and gloom in the UK media regarding the size of projected deficits in the UK and elsewhere. These are given for selected economies below. Note that the UK leads the way with nearly 12% of GDP in 2010. Whilst Philip Ozouf concentrates on the misleading 30% increase in spending

and the spectre of 12% GST, the reality is far different. Far from being 12% or even 6% in terms of GDP our deficit, taking the latest projection of £64 million and GNI around  £4,000 million,  is  running  at  1.6%  of  GNI.  This  is  hardly  the  stuff  of catastrophe that others are undergoing, requiring massive reductions in the public sector.  No  wonder  the  Minister  for  Treasury  and  Resources  alternates  between describing our position as "serious" and "fantastic".

If we are in a "fantastic" position as the Minister says, then why does he insist that draconian cuts to spending are the only way forward? He says to a sympathetic gathering of businessmen: "I am not afraid to make bold moves to cut spending and keep Jersey working.". The problem is that his cuts may well stop the recovery and worsen the recession.

Borrowing unashamedly from David Blanchflower, I have a question for Senators Philip Ozouf , Terry Le Sueur and Alan Maclean; but most particularly directed at the Minister for Treasury and Resources: "What plans do you have to get unemployment down any time soon?"

If  you want to transform a recession into a depression, go ahead and cut public spending. I would advise against it and so, I believe, would John Maynard Keynes. Voters want jobs, not cuts and unfair taxes. The policies of the Minister for Treasury and Resources are misdirected, ill-thought through and ill-timed. The Chief Minister and the States Assembly should have no confidence in them, and should say so now.

Financial and manpower implications

There are no direct financial or manpower consequences for the States arising from this proposition.

APPENDIX

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