Review of the Fiscal Strategy Review - Ministerial Response - 15 April 2011

Findings

Comments

1

The  precise  implication  of increasing  Social  Security contributions  will  not  be apparent  until  detailed proposals become available.

Noted. Analysis is already underway in the Social Security Department to develop detailed proposals.

However,  the  overall  economic  and  distributional impacts of increasing Social Security contributions were  researched  and  published  in  the  supporting report  to  the  consultation  paper  in  July  2010.  A summary  of  these  impacts  was  included  in  the consultation paper.

2

The  FSR  of  2010  was  not sufficiently  wide-reaching, given that non-domestic rates were not included within the options considered.

Not  accepted.  All  options  were  considered.  Non- domestic  rates  were  discounted  before  the consultation  because  they  could  raise  the  cost  of doing  business  in  the  Island  and  could  have  a negative impact on competitiveness. This conclusion was reached after consulting with parish constables.

Findings

Comments

3

If reforms to the tax system are to be fair (and to be seen to be fair), it must be clear that  people  are  not  a subsidiary  issue  and  the social  impact  of  any measures  on  them  must  be understood  and  clearly communicated.

Agreed. Over the last year the Minister has engaged with and involved politicians and the public in a wide-ranging consultation process, which led to the subsequent development of policy to deal with the permanent shortfall in States finances as a result of the global economic downturn.

The  consequences  of  doing  nothing  were  clearly described. The effects on households' incomes of the Fiscal Strategy Review proposals were published so people could better understand what they might mean  for  them.  The  Scrutiny  Panel's  Advisor indicated  that  the  research  represents  the  most detailed  economic  analysis  ever  published  in  the Island.

The  questions  asked  of  people  during  the consultation  centred  on  how  the  different  options might affect them and the Island as a place to live, work and do business. Their responses were fully considered in reaching final decisions.

4

The FSR proposals contained within the 2011 Budget were effectively  short-term measures taken to address a short-term problem.

Not agreed and unjustified. There appears to be a disconnect between the finding and the report.

Short-term is around one year, medium-term around three and longer-term is beyond that.

The Fiscal Strategy Review was intended to deal with  the  consequences  of  the  global  economic downturn and to put spending on a sound medium- term footing. The downturn left a permanent impact on  States finances,  with an  estimated  shortfall of c.£110 million each year.

Experience in other countries shows the importance of managing public finances in a sustainable way, balancing the short-, medium- and long-term needs.

Short-term  measures  might  have  included  using money from the Strategic Reserve. But such short- term measures were rejected.

The  2011  Budget  proposals  included  long-term measures to make savings and increase taxes that will have a permanent impact on States finances, resulting in the shortfall being closed by 2013.

The  proposals  were  also  developed  in  line  with sensible medium-term objectives that are consistent with medium-term policy of closing the gap in a way  that  is  both  fair  and  avoids  damaging  the economy.

Findings

Comments

The  Minister  for  Treasury  and  Resources acknowledges  that  work  on  the  Island's  fiscal strategy, in general, needs to continue and that the States  is  moving  towards  longer-term  financial planning.

5

Jersey  does  not  yet  have  a true long-term, wide-ranging fiscal strategy.

There is scope for improvement in developing and reviewing the Island's fiscal strategy in the future.

The  States  has  debated  and  approved  2  fiscal strategies since 2004.

The  first  strategy  responded  to  international developments on tax policy and was necessary to maintain  the  competitiveness  of  the  Island.  The result was changes to corporate tax, income tax and GST;  as  well  as  making  savings  through  greater efficiency.

Last year's fiscal strategy was necessary because the Island  had  to  react  to  events  and  economic conditions outside its control.

It is true these strategies have been shaped by the need  to  keep  public  finances  on  a  sustainable footing,  which  has  typically  meant  aiming  for balanced budgets in the medium term.

In future, the Minister for Treasury and Resources plans  an  approach  to  fiscal  strategy  that  will complement the Strategic Plan and its objectives.

6

Long-term and wide-ranging tax  reform  ought  to  be possible in the Island.

Noted.

7

A true fiscal strategy cannot be  developed  until  the Business  Tax  Review element has been completed.

Not agreed.

Business tax is a wider issue than those aspects of it which were covered in the Business Tax Review. It was considered as part of policy development during the Fiscal Strategy Review as it was important that we  remained  competitive.  Changes  to  Social Security and to International Services Entities (ISE) fees affect businesses.

The Business Tax Review was launched against a backdrop  of  uncertainty  about  the  0/10'  regime which is now in the process of being resolved. It was designed specifically to look at the tax regime as it applies directly to companies' profits.

Findings

Comments

The objectives of the Business Tax Review were clear, i.e. –

• To  understand  the  nature  and  focus  of  the international  pressure  then  being  applied  to amend Jersey's corporate tax system;

• To protect existing corporate tax revenues;

• To determine whether an alternative regime could result  in  an  increase  in  tax  revenues,  while addressing international concerns and protecting the finance industry.

8

Notwithstanding  that  the FSR  was  intended  to  focus on  personal  taxation,  it included elements that were essentially business taxation.

The  FSR  included  options  for  changes  to  Social Security,  including  employer  contributions.  All options that could meet the objectives of being fair and minimising the impact on the economy were considered.

It was important to the Minister for Treasury and Resources  that  the  Fiscal  Strategy  Review consultation  was  comprehensive  and  included  all Islanders, including those with a business interest.

9

The Island's fiscal strategy' should be a comprehensive, long-term  plan  covering  all aspects  of  taxation in  order to  avoid  creating  a  skewed and  therefore  potentially unsustainable distribution of the financial burden.

Agreed and in progress.

The Minister would like to clarify that fiscal strategy must also incorporate policy for spending and the balance between tax and spending.

10

At the time of the FSR, the Island did not have a current Economic Growth Plan.

Noted. However, the publication of a new Economic Growth Plan was delayed because of the unexpected economic downturn and the focus on dealing with it, including  the  delivery  of  the  fiscal  stimulus measures.

While the Island did not have an explicit Economic Growth Plan for last year, the key policies remained in place from the previous plan in terms of skills, enterprise,  competition  and  the  fiscal  framework (which sets out the use of the Stabilisation Fund, etc.).

The Minister for Economic Development will bring forward a Green Paper on a new Economic Growth Strategy in the first half of this year.

Findings

Comments

11

Contrary  to  the  clear message  that  spending should  be  controlled  before taxes are increased, this has not occurred.

The Minister responded to the impact on the States of  the  global economic  downturn  by  proposing a strategy in the 2011 Budget that covered changes to both taxes and spending. The States approved the timescale  of  the  changes  to  spending –  a  faster reduction  would  have  had  unacceptable consequences  to  public  services  and  economic recovery.

The fiscal strategy to deal with the downturn in the 2011 Budget was accepted by the States. Figure 4.2 of the 2011 Budget (page 23) sets out the planned changes to tax and savings (control of spending) for 2011, 2012 and 2013. The plan is to deliver savings of  £65 million  in  3 years  and  increase  taxes  by £46 million  in  2 years.  The  States  will  need  to continue  to  deliver  best  value  for  money  and manage spending more effectively in the future.

Recommendations

To

Accept/ Reject

Comments

Target date of action/ completion

1.

The  Minister  for Treasury  and Resources  should reconstitute  the Fiscal  Strategy Review  to  address medium- and long- term issues.

T&R

Accept

The  Minister  for  Treasury  and Resources wants to make it clear that States  departments  are  already working together to address medium and long term issues.

Reviewing  taxation  and  spending policy is done on an ongoing basis. The review of medium- and long-term taxation issues will be improved with the recently formed Tax Policy team.

For the remaining term of the current Council of Ministers, the Minister for Treasury  and  Resources  will  work with  the  political  steering  groups  to complete  the  Business  Tax  Review, changes to Social Security and work on medium-term planning.

The  Minister  for  Treasury  and Resources  will  recommend  that  the new Council of Ministers reconstitute a group to look at longer-term fiscal strategy.

2.

The  Minister  for Treasury  and Resources  should consult  the  Fiscal Policy  Panel  for guidance  on  the creation  of  a medium-term  fiscal strategy and on how long-term  fiscal objectives  may  be accomplished.

T&R

Accept

The  Fiscal  Policy  Panel  already advises the Minister for Treasury and Resources  on  fiscal  policy  matters when appropriate. All advice has been published in their interim and annual reports.

The  strategy  set  out  in  the  2011 Budget across spending and taxes to fix  the  structural  deficit  by  2013 constitutes  the  medium-term  fiscal strategy  that the  Fiscal  Policy  Panel advised the States to put in place.

The Minister will continue to seek the advice of the FPP on all future fiscal policy development.

Recommendations

To

Accept/ Reject

Comments

Target date of action/ completion

3.

Before  the  end  of the  current  States, the  Minister  for Treasury  and Resources  should provide  the  States Assembly  with  a report  on  his  work on  long-term  and wide-ranging  fiscal reform and strategy.

T&R

–

Progress  updates  on  a  medium-  and long-term  fiscal  strategy  will  be presented as part of the 2012 Business Plan and Budget. Such work should be in place to inform the next Strategic Plan and it may be more appropriate for the next Council of Ministers to incorporate this recommendation into the next Strategic Plan.

The  Minister  will  do  as  much  as possible to provide the new Council of Ministers with information to enable them to work on long-term financial planning  and  fiscal  strategy  beyond 2012. He will also focus on achieving the  savings  needed  this  year  and beyond.

4.

The  Minister  for Treasury  and Resources  should present  an  Annual Fiscal  Strategy Report.

Accept

An annual report on fiscal strategy is part  of  the  Budget  each  year.  In addition, the FPP publish their annual report giving an independent view on such matters.

5.

The  Minister  for Treasury  and Resources  should not  propose  any further increases in the rates of Income Tax, GST or Social Security  unless  the savings  identified in CSR Part 2 have been delivered.

Accept

Given the uncertain economic outlook it  would  be  unwise  to  commit  to anything beyond the direction set out in  the  2011  Budget,  spanning  the period from 2011 to 2013.

The  Minister  for  Treasury  and Resources is determined to deliver the CSR savings already approved by the Assembly  and  hopes  that  the Assembly  will  continue  to  be supportive in him doing so.