Draft Budget 2016 - Ministerial Response - 2 March 2016

Findings

Comments

1

No background studies have been carried out as to the consequence on the housing market should these changes be implemented.

PwC provided independent, expert advice to the States of Jersey to inform the property tax review Green Paper. Part of their advice looked specifically at the issue of mortgage interest tax relief ("MITR"); PwC identified the following arguments against providing MITR –

• It  supports  artificially  high  prices  for  housing  that benefits  current  owners  and  create  unnecessarily  high barriers to entry for new buyers.

• It encourages the use of debt, with potentially negative consequences  for  financial  stability  and  household finances.

• It drives a wedge between the cost of owner-occupation and the rental market that primarily disadvantages those on lower incomes and with less capital available to them.

• It provides the largest benefit to those with the highest debt and the highest incomes.

Findings

Comments

 It appears to be positively correlated to greater volatility in the housing market.

There is no reason to suggest that these arguments are not valid in the context of the Jersey housing market.

2

The Panel is also concerned that those already struggling to pay a mortgage may face great financial difficulty when this benefit is removed as it is not something they had planned for in the long term.

The Minister has proposed that MITR is phased out, starting in  2017  and  taking  a  decade  to  complete.  This  phased approach  has  been  adopted  so  as  to  allow  existing  and potential future claimants to adjust to the change in tax relief available.

Based on the Taxes Office data available for the YOA 2013 it  is  estimated  that  the  majority  of  taxpayers  currently receiving MITR will not be impacted by the phase-out of the relief until 2021. Also, a significant number of taxpayers currently receiving MITR will not be impacted at all, as they will have repaid their mortgages during the phase-out period (paying less interest in each year than the applicable interest cap).

3

The eventual withdrawal of age enhanced exemption thresholds will adversely impact on pensioners, when one in three pensioners are already living in relative low income – twice the proportion of that in the UK.

This measure will not affect those pensioners who are living in  relative  low  income.  The  relative  low income  figures recently published by the Statistics Unit are: £11,700 (single person)  and  £17,600  (couple).  These  compare  to  the standard  income  tax  exemption  thresholds  for  2016  of £14,350 (single)  and  £23,000 (couple).  Therefore  no-one (be they pensioner or of working age) who is in relative low income will pay income tax in Jersey.

4

The forecasts for overall States income have increased by approximately

£9 million since the presentation of the MTFP 2016 – 2019

The States' income forecasts increased by £8.7 million in 2015, and are forecast to increase by £1.98 million in 2019 before the agreed 2016 Budget measures.

The  movements  in  income  forecasts  are  explained  in Section 12  of  the  Budget  Report  2016,  together  with  an explanation  of  the  changes  in  economic  assumptions. Appendices 1 to 6 provide further detail as to the movement in income forecasts for each area of income.

in July 2015.

5

The personal tax forecasts in the 2016 Budget compared to the MTFP 2016 – 2019 show a deterioration of £26 million.

The Panel has focussed exclusively on the personal income tax forecasts which show a small deterioration against the MTFP of less than 2%, but have not recognised the forecast increase  in  company  income  tax  of  £26 million,  which results in a broadly unchanged overall income tax forecast vis-à-vis the MTFP.

Findings

Comments

6

The trend over the last decade of downgrading personal income tax forecasts continues in this Budget, which raises questions about the accuracy of forecasting models.

There is always significant uncertainty regarding income tax forecasting in terms of assessing future trends in the key economic  variables  such  as  economic  growth,  inflation, employment and average earnings; how they might translate into trends in taxable income, and what the yield will be from that taxable income. The IFG highlighted that, at the time of their last forecast, there was even higher uncertainty in general terms, and advised that the Council of Ministers must  continue  to  maintain  appropriate  flexibility  in  the preparation  of  the  MTFP  Addition  for  2017 – 2019,  to recognise the potential range of outcomes and the risks for States income forecasts around the downside of the central scenario. There was a further slight reduction in personal income tax forecasts in Budget 2016 from 2016 onwards, which reflected the latest trends from ITIS in-year data for the first half of 2015 in respect of employment income. It is not yet clear that this trend did actually materialise in the full year data, and this will be considered in detail by the IFG as part of their next forecast.

Recommendations

To

Accept/ Reject

Comments

Target date of action/ completion

1

  An up-to-date impact study

is carried out on the impact on the housing market to include the rental sector, as a result of these changes to MITR. This is to be presented prior to the lodging of the MTFP Addition – currently due on 30th June 2016.

T&R

Reject

The Minister can see no value in commissioning further advice on the impact of the withdrawal of MITR  on  the  Jersey  housing market.  The  States  has  already received expert advice on MITR from  PwC,  which  is  wholly consistent  with  the  economic advice  relating  to  MITR  by respected  bodies  such  as  the OECD,  EU  and  Institute  of Fiscal Studies.

Consistent  with  advice  from PwC  that  the  phasing-out  of MITR  is  best  achieved  over  a relatively  long  period  of  time, the  Minister  has  proposed  that MITR  is  phased  out  steadily over a decade.

N/A

Recommendations

To

Accept/ Reject

Comments

Target date of action/ completion

2

  The implementation of

these changes are reviewed following the results of the impact study.

T&R

Reject

N/A

N/A

3

  The age enhanced income

tax exemption thresholds for taxpayers aged over 65 should not be removed from the year of assessment 2018 from taxpayers reaching the age of 65 after 1st January 2017 and that the age exemption thresholds should not be held at 2016 levels and instead should continue to rise in line with standard exemption thresholds.

T&R

Reject

Consistent  with  the  strategic priority,  the  Minister  is committed  to  delivering sustainable  public  finances. Currently,  the  enhanced exemption  given  to  taxpayers aged 65+ costs about £4 million per  annum.  With  the  ageing demographic,  the  cohort  of taxpayers  eligible  to  claim  the enhancement  is  growing  each year.  Based  on  the  data available, it is estimated that the cost  of  the  enhancement  will increase  by  approximately £300,000 each year as the cohort of eligible claimants grows. This is  unsustainable  in  the  longer term,  hence  the  Minister maintains that it is appropriate to limit  the  cohort  of  eligible claimants from the 2018 YOA.

N/A