Draft Budget Statement 2018 - Report - 27 November 2017

CORPORATE SERVICES SCRUTINY PANEL

DRAFT BUDGET STATEMENT 2018

Presented to the States on 27th November 2017

SR.12/2017

Table of Contents

1.Chairman's Foreword .................................................... 3

2. Summary ............................................................... 5

3. Key Findings ............................................................ 6

4. Key Recommendations .................................................... 8

5. Personal Taxation ....................................................... 10

Second Earner's Allowance ................................................ 10

Tax-Exemption Thresholds ................................................ 10

High Value Residents .................................................... 12

6. Business Taxation ....................................................... 15

Tax on Large Retailers ................................................... 15

Financial Services Company: Expansion of Definition ............................. 17

Deduction of Rates by Landlords Renting Property in Jersey ........................ 19

7. Other Taxation Measures.................................................. 20

Existing Stamp Duty Loophole .............................................. 20

Complication of the Tax Model ............................................. 21

The De Minimis Level and Goods Purchased Online .............................. 21

Current Year/Prior Year Tax ............................................... 22

8. Impôts and Vehicle Emissions Duty (VED) ..................................... 23

Impôts: Alcohol ......................................................... 23

Impôts: Tobacco ........................................................ 25

Impôts: Road Fuel ...................................................... 25

Vehicle Emissions Duty (VED) .............................................. 26

9. Capital Spending Programme .............................................. 28

10. Future Challenges ....................................................... 31

New Taxes/Charges..................................................... 31

Higher Education ....................................................... 32

11. Productivity ............................................................ 33

Income Tax Forecasts ................................................... 35

Appendix A: Panel Membership, Terms of Reference and Evidence Considered........ 37

Appendix B: CIPFA Report ................................................. 39

Appendix C: MJO Consultancy Report ........................................ 40

1. Chairman's Foreword

The 2018 Budget is described as continuing the work of the Council of Ministers in investing in health, education, infrastructure and promoting economic growth. It talks about ensuring we have sustainable finances for the long term.

In the Foreword it talks about achieving broadly balanced budgets by 2019, and states that the Budget 2018 is critical to the delivery of the financial plan and to securing Jersey's future.

These are all very exciting and laudable phrases.

I think it is fair to state that the Jersey economy is improving, and that employment is at an all-time high, however this does come with some caveats. It is also fair to state that this budget bears less electioneering give away' items than other budgets which have been produced just before looming elections.

This budget seeks to raise £10,200,000 by 2019, which partially replaces the funding lost by the failed health charge and waste charges. The books are notionally balanced, but this is only to the amount of £332,000 (after depreciation) against income of £788,177,000. I.E. whilst this is positive, it is extremely marginal, and comes after a continuation of an accounting adjustment which boosts income by around £8,000,000 - £10,000,000 in each relevant year. If this bookkeeping amount was not present, the picture would be far less flattering, and the books would not be balanced.

The Corporate Services Scrutiny Panel remain concerned over the medium to longer term income forecasts, and potential threats that face us. Whilst Jersey has to date been successful in meeting the trials with which it has been presented over the past few years, there remain challenges ahead. Not least (at the time of writing) the threat of a European Union blacklist, and also the impact of Brexit either upon the UK financial services industry or directly upon Jersey.

Rather than dealing with the medium term issues, this budget is actually a means of addressing the short-term issues that have arisen during the last year or so.

As part of our work looking at the budget, but also with the forthcoming population policy in mind, we have been undertaking some background work, some of which has already been published, and some of which will be published in the New Year.

It is interesting to note that Ministers have stated that someone earning under £34,000 is a drain on us'. What that means (we assume) is that in purely monetary terms (i.e. ignoring any economic or social benefit) such an individual may receive more support and benefits than they contribute into the system. This is an extremely emotive and difficult area, but it is something that we need to understand, particular with regard to any new population policy and how we assess the contribution of people coming to this Island. Our initial assessment is that this figure may actually be higher, depending upon individual / household circumstances. This may imply that a significant percentage of the population (between one third and a half) are not paying their way, even before they are retired. This must have affordability questions in a whole range of areas for the future (including pensions).

Looking ahead, at present the total amount of supplementation paid annually has been capped (until 2019) at approximately £65,000,000. This is a grant paid by the States (effectively by tax payers) to assist or subsidise contributions towards the State pension. As a rule of thumb, £65,000,000 is the rough equivalent of 4% GST. This is projected to increase by approximately £15,000,000 (1% GST) in 2020. Again, this is a matter which needs careful consideration, and again is something which will have to be assessed in conjunction with the proposed population policy.

It is interesting to note that in terms of income tax, 62% of money raised is collected from 20% of the population (based on 2014 figures). Therefore it would seem that there are issues at both ends of the scale of tax payers, and that both will need to be handled quite carefully. If we become too expensive for higher earners, then we risk becoming uncompetitive, and potentially the loss in tax would be disproportionately high.

We welcome the review by the Minister into anomalies concerning stamp duty, but do recommend that these should be resolved by the middle of next year. There would seem to be reasonably substantial sums of money that could be raised, with no increase in man power by dealing with this issue.

A more technical matter is the fact that two thirds of us still pay our tax in arrears. This equates to approximately £280,000,000.

For the individual, this means that when they have a year with much reduced earnings (for example when they retire), they will still have the tax from the previous year to pay.

For the States, there is a potential of a one-off timing gain of funds if they were able to properly (and carefully) resolve this matter.

A further matter which will have to be resolved at some point is the issue of the de minimis for GST purposes. The Post Office alone received at least 3 million parcels in 2016, and it has also been confirmed that the amount GST not collected on manifested goods is £1,600,000. The difficulty here will be the two competing tensions between consumers who wish to avail themselves of online goods, and whether this represents a non-level playing field for local retailers.

Perhaps the most alarming issue is what has happened to our standard of living. From the advice we have received it would seem that our standard of living, relative to that of the UK is falling. Indeed the UK may overtake us in around 12 years. One factor here is that whilst the population is increasing, the revenue being generated by each individual, on average, appears to be lower.

In conclusion, this is a budget for now, it is not one that looks to the future to the extent that it claims. Hopefully in a few years' time we will have emerged from this period of uncertainty and Jersey's economy and net position will have returned to the levels we used to know. However for the purposes of planning we should not be betting just on hope'.

2. Summary

1. The Draft Budget Statement 2018 (the Budget) was lodged by the Minister for Treasury and Resources on 3rd October 2017, and is scheduled for debate on 28th November 2017.
2. The aim of the Budget is to put forward proposals by the Minister for Treasury and Resources in respect of measures for generating income and outlining the government expenditure for 2018.
3. The Budget reflects upon Jersey's economic outlook and summarises its position, stating "Jersey's economy is continuing its recovery, with businesses feeling positive and employment at an all-time high."[1] We have found, in conjunction with the work undertaken by our advisors, that we can generally support this statement, albeit with caveats. Whilst the Budget does reflect to some extent a recovery, this must be understood to lie in conjunction with a myriad of potential threats. Uncertainties surrounding Brexit and in particular its impact on the financial services sector and the future dangers caused by potential "black listing" by the EU, are fundamental concerns. Similarly, the long-term future finances of the Island, including concerns surrounding productivity levels, need urgent address.
4. The 2018 Budget sets out several new taxation measures, as well as amending others. These include:

• the introduction of a tax on large retailers with profits over £500,000 and 60 per cent or more of trading turnover from retail sales in Jersey
• modifications made to the High Value Residents tax model; increasing the minimum annual tax payable and proposals to review this figure on a five-year basis
• raising the "second earner's allowance" so that a married couples income-tax exemption threshold, combined with the second earner's allowance, is equal to the figures for a co-habiting couple
• widening the definition of "financial services company" to capture more businesses within the 10 per cent tax rate
• increasing the impôts duties on alcohol and petrol/diesel by RPI
• increasing the impôts duties on tobacco by RPI plus 5 per cent (and plus 7.5 per cent for hand-rolling tobacco)
• raising the vehicle emissions duty by RPI, whilst simultaneously lowering the tax- exempt threshold to 50g CO2/km

5. Whilst we generally support the measures outlined in the Budget, it is felt that specific areas may benefit from increased engagement with stakeholders (such as with the new retail tax). More generally, we acknowledge that whilst this Budget does act sufficiently in the short- term (up to 2019), long-term revenue-raising issues are left unaddressed and will require solutions to be identified in the near future.

3. Key Findings

1. Finding: The Draft Budget Statement 2018 states that a review of the personal tax system is being conducted. This will seek to address the discrepancies about how similar households are taxed.
2. Finding: The Minister for Treasury and Resources agreed in the public hearing on 7th November that there was a need to review the personal tax system and that this would include modelling both the current system and alternatives for the future.
3. Finding: The Minister for Treasury and Resources agreed in the public hearing on 7th November that there was a need to review the personal tax system and that this would include modelling both the current system and alternatives for the future.
4. Finding: The approximate level at which a household becomes a net positive financial contributor (based on income tax, social security and long term care) is likely to be greater than £34,000.
5. Finding: Existing high value residents are protected by historical agreements from any increases in tax or any new tax models that may be introduced in the future.
6. Finding: New high value residents entering the Island will be subject to new taxation arrangements. These arrangements will not be subject to an annual increase but will be reviewed every 5 years.
7. Finding: There is uncertainty amongst the retail industry surrounding the overall impact of the proposed tax on larger retailers.
8. Finding: Companies trading in the provision of credit/finance to customers are operating in an unregulated market place.
9. Finding: The broadening of the definition of a "financial services company" for the purposes of the 10% income tax rate, will raise £3 million additional annual income.  
10. Finding: The finance industry has expressed concern at the impact of the broadening of the definition of a "financial services company", for the purposes of the 10% income tax rate, on the Island's competitive position.
11. Finding: The Minister for Treasury and Resources has stated that the likely impact of the ending of the deduction of rates by landlords renting property in Jersey, is that tenants will pay more.
12. Finding: An anomaly in Stamp Duty legislation means that certain properties, including in particular commercial offices, at present are not liable to stamp duty.
13. Finding: The potential income not collected due to the current anomaly in Stamp Duty legislation on commercial properties could be substantial.

14. Finding: The revised cost of the Grainville school capital project is 50 per cent higher than originally estimated, increasing by £5.3 million to £15.5 million.
15. Finding: The capital project to build the new Les Quennevais School has increased by approximately 14 per cent, from £40 million to £45.6 million.
16. Finding: Treasury officials have stated that they are identifying methods to change the way that capital projects are budgeted, so that more of the feasibility planning is done earlier, and therefore better estimates are provided.
17. Finding: The Minister for Treasury and Resources has stated that the 2018 Budget is a mechanism for dealing with short-term funding issues up to 2019, and not providing long- term funding solutions.
18. Finding: The Minister for Treasury and Resources has stated that he will be making an announcement about higher education funding alongside the budget and that he will be lodging funding proposals before the 2018 May election.
19. Finding: The Panel's advisors have raised concerns that the standard of living in Jersey, relative to that of the UK, is falling.
20. Finding: The productivity of Jersey's economy (based on GVA per FTE) is not increasing in line with the population.
21. Finding: The figures for the income tax forecast in 2018 and 2019 have been increased by £8 to £10 million each year, because of an accounting adjustment.
22. Finding: By 2021, on present projections there will have been little or no growth of real term earnings of Islanders in the last decade.

4. Key Recommendations

1. Recommendation: The review of the personal tax system, which is currently underway, should be completed before the 2019 Budget is lodged.
2. Recommendation: The review of the personal tax system, which is currently underway, needs to include modelling for variances to the marginal and standard rates of tax.
3. Recommendation: The threshold at which a person becomes a net positive financial contributor should be assessed, as part of the calculations that the Minister for Treasury and Resources has agreed to conduct as part of reviewing the personal tax system and model. This should also take into account any subsidies towards State pension contributions and the impact of any future population policy.
4. Recommendation: The Minister for Treasury and Resources should identify a mechanism in time for 2019 Budget, whereby historical agreements with high value residents are renegotiated to introduce a minimum increase in taxation, in line with RPI.
5. Recommendation: The Minister for Treasury and Resources should recommend to the Council of Ministers, that they should urgently address the lack of regulation for companies trading in the provision of credit/finance to customers.
6. Recommendation: The Minister for Treasury and Resources should publish the full assessment undertaken as to the impact of the change to the definition of "financial services company".
7. Recommendation: The Minister for Treasury and Resources should accelerate the work being done on correcting the anomaly in Stamp Duty legislation, and ensure that this anomaly is addressed with effect from 1st July 2018.
8. Recommendation: Given that Jersey's tax system is traditionally seen as "low, broad and simple", the Minister for Treasury and Resources should be mindful of the dangers of complicating the tax system in his review of the personal tax system.
9. Recommendation: The Minister for Treasury and Resources should examine options for bringing those of the taxpaying population currently on a prior-year basis of taxation, onto a current-year basis of taxation.
10. Recommendation: The Minister for Treasury and Resources should explore the possibility of fixed, long-term impôts duties on tobacco.
11. Recommendation: The Minister for Treasury and Resources should commence planning for the loss of road fuel duty revenue due to the increase in the number of electric and hybrid vehicles.
12. Recommendation: Planning for the eventual loss of road fuel duty should include considerations for a phased removal of revenue (for example over a 10 year period) for the purposes of estimating revenue receipts for budgetary and planning purposes.
13. Recommendation: The Minister for Treasury and Resources should examine other means of measurement for the Vehicle Emissions Duty, to ensure that CO2 is still the most effective means of taxation in relation to the health effects of car emissions on the population.

14. Recommendation: The Minister for Treasury and Resources should propose new, more accurate ways, by which to calculate the funding required for capital projects, before the 2019 Budget.
15. Recommendation: The Minister for Treasury and Resources should make public, where possible, the preparatory work being conducted in anticipation of Brexit and its effect on future Budgets.
16. Recommendation: The Minister for Treasury and Resources should produce income figures for the period of the MTFP2, which removes all accounting adjustments and all budget measures introduced during that period, in order to demonstrate the underlying trend of changes in income.

5. Personal Taxation

1. The adjustment of personal taxation levels clearly affects all Islanders. The 2018 Budget sets out several changes, including:

• increasing the exemption thresholds by 2.5 per cent for working age people
• changing the tax reductions for married and co-habiting couples to make them more closely aligned.
• increasing the minimum levels of taxation due to be paid by High Value Residents

Second Earner's Allowance

2. The 2018 Budget commits to making the taxation allowances for co-habiting and married couples more equitable. This follows on from the 2017 Budget, where an increase of £500 to the second earner's allowance was made, narrowing the gap in disparity.
3. The 2018 Budget proposal recommends a further £850 increase to the second earner's allowance, so that the combination of the married couples allowance plus the second earner's allowance is equal to two single person allowances.
4. The proposed increase will cost approximately £2.6 million from the 2018 year of assessment, reducing the State's income from 2019 onwards.[2]
5. The Draft Budget Statement stresses however, that:

"Although a significant step forward, this proposal does not fully equalise the tax treatment of married couples and co-habiting couples in all situations."[3]

6. The Budget also highlights that:

"A review of the personal tax system is currently underway which is seeking to address the discrepancies in the way that similar households are taxed."[4]

7. Finding: The Draft Budget Statement 2018 states that a review of the personal tax system is being conducted. This will seek to address the discrepancies about how similar households are taxed.
8. Recommendation: The review of the personal tax system, which is currently underway, should be completed before the 2019 Budget is lodged.

Tax-Exemption Thresholds

9. The 2018 Budget follows existing policy, by increasing the income tax exemption thresholds for working age taxpayers by 2.5 per cent. This is the most recent published figure for RPI (June 2017), whilst average earnings have increase by a similar 2.6 per cent.[5]

10. This increase would see a single working person's exemption threshold increase by £350 to £14,900, whilst a married couple/civil partnership would see a £600 increase to £23,950.
11. It was queried that why, given equivalent figures are so much lower in Guernsey, the Isle of Man and the UK (£9,675, £12,500 and £11,500 respectively), Jersey was once again increasing its levels and therefore lowering the total income tax revenue collected.[6]
12. The Minister highlighted, that rather than this being a concern, this should be seen as positive difference:

"I think it is a positive for local people to have the benefit of a higher exemption level. We have always been very generous in this area and we feel it is a positive thing to do."[7]

13. It was further stated by the Minister that, as well as being "generous":

"It takes into consideration the higher cost of living in the Island and we believe it is appropriate to support families in lower and middle incomes in this way."[8]

14. We further note that the Minister agreed during the public hearing that there was "the need to review the personal tax system" and that this would include "work in terms of modelling the current system and modelling alternatives for the future." [9]
15. Finding: The Minister for Treasury and Resources agreed in the public hearing on 7th November that there was a need to review the personal tax system and that this would include modelling both the current system and alternatives for the future.
16. Recommendation: The review of the personal tax system, which is currently underway, needs to include modelling for variances to the marginal and standard rates of tax.
17. We note that in the States Assembly on the 19th July, Senator Routier commented that £34,000 was the point at which somebody became a net contributor in terms of taxes paid.  

"If someone is coming into the Island and the job is attracting a salary of around £34,000, they are not paying the full social security contribution, they are not paying a decent amount of tax, so that person, being paid under £34,000, is a drain on us."[10]

18. The Panel has undertaken some additional work in this area which will be published in due course. However, it would appear that the level at which someone becomes a net contributor is higher than £34,000.
19. Finding: The approximate level at which a household becomes a net positive financial contributor (based on income tax, social security and long term care) is likely to be greater than £34,000. [11]
20. Recommendation: The threshold at which a person becomes a net positive financial contributor should be assessed, as part of the calculations that the Minister for Treasury and Resources has agreed to conduct as part of reviewing the personal tax system and model. This should also take into account any subsidies towards State pension contributions and the impact of any future population policy.

High Value Residents

21. A High Value Resident (HVR) is entitled to a preferential income-tax rate, of 1 per cent once their income exceeds a set threshold. For those HVRs arriving since 2011 that income threshold has been set at £625,000. Therefore a HVR must pay £125,000 of tax (£625,000 at 20 percent) before being subject to the 1% tax rate on any income above this amount.
22. The 2018 Budget seeks to introduce a new regime for those granted HVR status after the 1st January 2018. This new regime will mean that:

• the annual minimum income tax contribution will be increased by £20,000 to £145,000. This means that new HVRs will need to have a minimum income of £725,000 (£145,000 being 20 percent tax on a total income of £725,000). Any income above £725,000 will be subject to 1% tax.
• introduction of a mechanism, whereby if a HVR has insufficient income in any given year to pay the minimum £145,000 income-tax required, a top-up sum will be applied to bring it to this minimum level
• the minimum contribution will be assessed every 5 years, but will not increase

more than the accumulated RPI[12]

23. It was queried how the increase to £145,000 had been calculated and we were pleased to hear that an in-depth review had been undertaken. This was formed of two approaches; firstly identifying the position of Jersey in relation to other jurisdictions offering similar regimes, and then calculating the increases since 2011 arising from RPI. The Deputy Comptroller of Taxes stated that they had calculated;

"taking those two pieces of work in tandem, looking at the whole package we would stress here, not just tax contributions, the view was that it could be increased from 125 to 145, the income contribution that ultimately arises, while still maintaining a competitive regime on an international basis."[13]

24. We were also informed by the Minister that:

"in terms of our regime, we are probably one of the more expensive places, but we believe that justifiable by the benefits offered by those choosing to relocate here".[14]

25. This is at odds from the concerns expressed by Jersey Finance, who state that:

"...the proposed changes close the door to certain businesses which in our view are exactly the type of business that the Island wishes to attract...the proposed amendments...may serve as a disincentive, both in respect of individuals looking to establish a fund in Jersey as well as to individuals who are simply looking to invest locally in taxpaying entities."[15]

26. We agree with an increase in the minimum taxation threshold for HVRs and support the in- depth study that was conducted to ensure Jersey maintains its competitive position alongside similar jurisdictions.
27. We express reservations however, surrounding the five-year delay between reviews of this minimum threshold and feel that the responses given by the Minister in the public hearing were not sufficient. When queried, the Minister stated it was for two reasons:

"...largely around competitiveness, but also certainty."[16]

28. We were concerned however, to hear that there has been no measure proposed in the 2018 Budget to increase the thresholds for those HVRs already resident on the Island. When questioned, the Minister stated that this was because:

"There was a regime in place before that did not make provision for upgrading"[17]

29. The Minister confirmed, that because of this policy, we were unable to make retrospective amendments:

"Senator S.C. Ferguson:

Right, so that your hands are in fact tied due to historic agreements with the 1(1)(k)s. The Minister for Treasury and Resources:

The 2(1)(e)s, Senator, yes. That is right."[18]

30. Finding: Existing high value residents are protected by historical agreements from any increases in tax or any new tax models that may be introduced in the future.
31. Finding: New high value residents entering the Island will be subject to new taxation arrangements. These arrangements will not be subject to an annual increase but will be reviewed every 5 years.  

32. Recommendation: The Minister for Treasury and Resources should identify a mechanism in time for 2019 Budget, whereby historical agreements with high value residents are renegotiated to introduce a minimum increase in taxation, in line with RPI.

6. Business Taxation

33. Several new measures and modifications are proposed in the 2018 Budget. These include:

• a new tax to be applied to larger retail businesses
• expanding the definition of what constitutes a financial services company
• no longer allowing the deduction of rates by landlords renting property in Jersey

Tax on Large Retailers

34. The proposed introduction of a tax on retailers was agreed by the States Assembly as part of the 2017 Budget. The 2018 Budget brings forward a detailed proposal, setting out the mechanism for introducing the tax.
35. We expressed our concern to the Minister that implementing a top-level tax level of 20 per cent may make Jersey uncompetitive with the UK, given that corporation tax is currently set at 19 per cent and may be lowered to 17 per cent by 2020.[19]
36. The Minister gave assurances that the current difference of one per cent would have little impact, stating:

"You are talking about transfer pricing opportunities. We do not believe, with the current arrangements, where there is a 1 percent differential, so 19 percent corporate tax in the United Kingdom, that is likely to be the case."[20]

37. It was further stated, that with the UK intending to reduce its corporation tax levels to 17 per cent, although this was ultimately uncertain given Brexit, that:

"overall our economic analysis that was undertaken and distribution analysis does rather suggest that any changes to pricing are likely to not be affected."[21]

38. This is at odds with the concerns raised by those in the industry, with the Jersey Retail Association (JRA) claiming that the proposed rate is too high:

"The proposed tax rate of 20% is uncompetitive against UK corporation rates that are currently 19%, will reduce to 17% in 2020 and the current Government has committed to reducing UK corporation rates to 15%.[22]

39. The JRA expressed concerns that, if this is indeed the case, legitimate tax avoidance measures may be taken by UK based companies:

"Against this background, UK based companies with branches in Jersey will use legitimate transfer pricing to charge head office services, capital charges and brand

royalty fees to reduce taxable profits to the island. The JRA do not believe that the level of tax that the Treasury hope to raise will be achieved."[23]

40. This assessment is supported by one of our advisors, who states:

"Whilst we have no doubt that the Tax Office has strong intelligence around the trend of profits generated by these entities we would have some concerns around any behavioural change that such an extension of scope could drive in the financial strategies of the tax paying entities now in scope. In terms of tax planning it is not inconceivable that shareholders/owners may want to re-calibrate their financial strategies in a way that optimises investment within their businesses and minimises corporate tax exposure."[24]

41. This clearly conflicts with the position taken by the Minister. The conflicting views raise concerns about the review process that was undertaken before the proposals were made. The JRA highlights this, stating:

"There has been no consultation whatsoever with the industry on the proposed taxFurthermore, the EDTS&C have instructed an officer to develop a new retail strategy for the Island and this work is uncompleted, it is bizarre that the tax proposal has come forward in complete isolation to this strategy."[25]

42. We feel that clarification is required as to what consultation with the industry did in fact take place. Given the proposals will only raise approximately £5.7 million, the effectiveness and efficiency of raising revenue through this strategy is paramount.
43. This is also queried by one of our advisors, who asks:

"We would welcome the opportunity to have sight on the modelling that assesses/estimates the expected £5.7 million liability to tax for the extended range of businesses in scope."[26]

44. This is echoed by our other advisor, who expresses concern that:

"The introduction of the retail tax, for example, will inevitably result in attempts by States members to bring amendments to tinker further with thresholds and tapering provision and if successful, will add further caveats to the tax system and require additional revenue raising measures."[27]

45. This concern is supported by Jersey Finance, who state that:

"In our view, the basis for the Treasury and Resource Minister introducing these provisions was not fully articulated and accordingly, the ultimate intention of the provisions is unclear. The risk is that this could lead to uncertainty regarding whether

the long-term plan is to expand the number of companies that will be caught by this law..."[28]

46. Finding: There is uncertainty amongst the retail industry surrounding the overall impact of the proposed tax on larger retailers.

Financial Services Company: Expansion of Definition

47. The Budget proposes that the definition for what constitutes a financial services company, for taxation purposes, be widened, so that a larger number of companies are subject to the 10 per cent company income tax rate.
48. The Budget proposes that the definition be widened to include:

• "Companies registered under the Financial Services (Jersey) Law 1998 to carry out general insurance mediation business ("GIMB")
• Companies registered with the Jersey Financial Services Commission as a registrar
• Companies holding permits under the Insurance Business (Jersey) Law 1996
• "Finance Companies"- companies trading in the provision of credit/finance to customers"[29]

49. The Budget states that this will result in approximately 25 additional companies, 10 of which are locally owned, paying company income tax for the 2018 year of assessment. This will raise approximately £3 million for 2019.[30]
50. When queried, the Comptroller of Taxes confirmed that mutual insurance societies, if only trading with its own members, would still not be liable to pay tax under the new definition.[31] This was also stated to be the same for co-operative societies, although it was highlighted that tax would be applicable against any profits derived from trading with non-members.[32]
51. It was also confirmed that assessments had been conducted to measure whether there was a risk of any costs derived from the expansion of the definition being passed on to the customer. The Minister stated that "that was unlikely to be the case."[33] The Minister further clarified this assessment, stating:

"It is a competitive marketplace and it did not appear that there was going to be a material difference in terms of cost resulting from this particular move."[34]

52. We queried whether there were plans on introducing regulations for "Companies trading in the provision of credit/finance to customers" as these would be captured under the new definition. Given that this is still an unregulated marketplace, we were surprised to note the response of the Minister, who stated:

"There are no current plans to progress in the short term regulation of these companies."[35]

53. When queried whether the Minister was happy for credit companies to continue to operate unregulated, it was suggested to the Panel that the Financial Services Unit in the Chief Minister's Department was looking at regulations, not the Treasury Department.[36]
54. Finding: Companies trading in the provision of credit/finance to customers are operating in an unregulated market place.
55. Recommendation: The Minister for Treasury and Resources should recommend to the Council of Ministers, that they should urgently address the lack of regulation for companies trading in the provision of credit/finance to customers.
56. We were reassured however, to note the comments of the Deputy Comptroller of Taxes, who stated that as well as "within the legislation that has been lodged there are a number of targeted anti-avoidance rules", preparatory work was undertaken prior to the Budget being made public, to ensure companies did not simply adjust their structures to avoid taxation.[37] We were informed that the Department had gathered accounts and profit data from the companies concerned, in advance of the proposition being publicised. The Comptroller of Taxes stated that this was:

"So when we then receive accounts and computations in the future in the Tax Office, one of the things that may well be looked at is have things changes structurally for those business since the imposition of the tax."[38]

57. We also note the concerns of Jersey Finance, who state that,

"...it may have been helpful to provide an explanation regarding why the definition is being amended, so as not to, through uncertainty, discourage companies from doing business in Jersey.

Specifically we would have liked to see a clear statement, confirming that there is no intention for the Minister to seek to tax investment managers within the zero-ten regime."[39]

58. Finding: The broadening of the definition of a "financial services company" for the purposes of the 10% income tax rate, will raise £3 million additional annual income.  
59. Finding: The finance industry has expressed concern at the impact of the broadening of the definition of a "financial services company", for the purposes of the 10% income tax rate, on the Island's competitive position.

60. Recommendation: The Minister for Treasury and Resources should publish the full assessment undertaken as to the impact of the change to the definition of "financial services company".

Deduction of Rates by Landlords Renting Property in Jersey

61. The 2018 Budget implements the proposition adopted by the States Assembly in the 2017 Budget, which agreed in principle that a landlord renting out property in Jersey would be no longer entitled to deduct the cost of rates paid, when calculating the amount of rental income chargeable to tax.
62. We queried this measure and asked the Minister whether this would impact on those renting accommodation:

" Deputy J.A.N Le Fondré

By removing rates there is a deduction against expenses for landlords. This will inevitably push the cost on to the tenant. Do you agree Minister?

The Minister for Treasury and Resources

It is likely to have an impact on the tenant. I would not necessarily disagree with that."[40]

63. We note that this proposed measure is likely to only bring in £600,000 of revenue.[41]
64. In a submission to the Panel, we note that Jersey Finance states in relation to the 2018 Budget's proposals for Corporate tax that:

"For the most part we are satisfied with the proposed amendments outline in the draft statement. However, we feel this was an ideal opportunity to provide clarity in respect of the long-term plan for Jersey tax, to avoid any misconceptions and unnecessary concerns in the interim, so we would have like to see general tax policy issues better articulated and a clear strategy outlined in respect of the future of Jersey corporate tax."[42]

65. Finding: The Minister for Treasury and Resources has stated that the likely impact of the ending of the deduction of rates by landlords renting property in Jersey, is that tenants will pay more.

7. Other Taxation Measures

66. There are a number of taxation measures that warrant review and do not fall directly within either personal or business taxation. These measures are:

• the existing stamp duty loophole
• complication of the tax model
• the de minimis level and GST applied to goods purchased online

Existing Stamp Duty Loophole

67. The 2018 Budget highlights that there is currently no anti-avoidance rule within the Stamp Duty Law. The measures to amend this are being introduced by the 2018 Budget as applicable from the day that the Budget was lodged. This is in order to protect against any losses in the intervening period between the lodging of the Budget and its debate.[43]
68. The Budget refers however, to another area of stamp duty that still requires addressing. The 2018 Budget focuses on this, stating that:

"Work is continuing on the issue of the sale of Jersey real estate owned within a corporate structure by way of transfer of shares which crystallises neither a stamp duty charge nor a land transaction tax liability."[44]

69. The Budget also states that external advice is being sought by the Tax Policy Unit on addressing the loophole:

"Based on the advice received it will be determined whether it is feasible to bring forward amendments in the 2019 Budget."[45]

70. When we queried the timeframe for this work, the Minister stated that:

"There is some feasibility work being undertaken and the idea is to bring forward the amendment for the next budget, so that will be 2019."[46]

71. When asked why this process was so drawn-out, the response given to us was that it was a very complicated issue to resolve, given that the transfer of real property goes through the court, whilst for share transactions, nothing is registered in that manner. We were informed that at present the approaches taken by other jurisdictions was being explored, to see whether measures could be replicated in Jersey.[47]
72. It is worth highlighting the significance of this anomaly. To give one example, prior work by this Panel had identified that a single office block (JIFC Building 1) could be liable for stamp

duty of approximately £1.7 million.[48] This would be unobtainable if the current anomaly was utilised, with no stamp duty being paid on the building.

73. Finding: An anomaly in Stamp Duty legislation means that certain properties, including in particular commercial offices, at present are not liable to stamp duty.
74. Finding: The potential income not collected due to the current anomaly in Stamp Duty legislation on commercial properties could be substantial.
75. Recommendation: The Minister for Treasury and Resources should accelerate the work being done on correcting the anomaly in Stamp Duty legislation, and ensure that this anomaly is addressed with effect from 1st July 2018.

Complication of the Tax Model

76. We raised concern with the Minister that the taxation system was becoming more complicated, with the introduction of multiple taxes in recent years. This was conceded to by the Minister, who stated that:

"I would agree and concede with the fact that it has become more complicated since the introduction of Zero/Ten. Zero/Ten was absolutely essential in terms of maintaining our principle industry, in other words financial services"[49]

77. The reason for this concern is that the more complicated a tax system gets, the greater the impact on compliance and avoidance issues. When this principle was expressed to the Minister, he stated:

"Generally that would be a fair assumption."[50]

78. Recommendation: Given that Jersey's tax system is traditionally seen as "low, broad and simple", the Minister for Treasury and Resources should be mindful of the dangers of complicating the tax system in his review of the personal tax system.

The De Minimis Level and Goods Purchased Online

79. Whilst it is not covered directly in the 2018 Budget, it was felt that it was an area of importance to address with the Minister. The De Minimis level is defined as "the minimum amount of GST collected on imported goods. It is for private individuals, not businesses."[51] At present, this figure (which includes GST, CCT and excise duty) is £12. [52]

80. Jersey Post processed at least 3 million parcels in 2016.[53] During our public hearing the Minister informed us that figures of the total sum for manifested goods processed in 2016, and for which revenue from GST had not been gathered, was £1.6 million."[54] Given that the goods processed by Jersey Post do not include items arriving in the Island via some couriers and that the figure of £1.6 million is only for currently manifested goods, we would assume the total value of GST not gathered would be significantly higher.
81. The Treasurer of the States confirmed to us, that whilst at present not all parcels were manifested, by 2020 they would be.  

  Current Year/Prior Year Tax

82. We note that the population is still split between current year and prior year taxation payments. Our understanding is that this split is approximately two thirds on a prior year basis to one third on a current year basis calculation.[55] Given that the total income tax revenue forecast to be collected in 2018 is £418m, and assuming these proportions are correct, the tax revenue collected from those on a prior year basis calculation is approximately £280 million. [56]
83. The prior-year system means that retirees will have to pay their final "working-age" tax bill in the year after they have stopped working. This puts a financial strain on a retiree who may not have budgeted for their final tax bill effectively. We note however, that some consideration and effort has already been made to help those approaching the age of retirement.[57]
84. Finding: The taxpaying population is currently split between prior-year and current- year methods of tax calculations (two-thirds to one-third respectively).
85. Recommendation: The Minister for Treasury and Resources should examine options for bringing those of the taxpaying population currently on a prior-year basis of taxation, onto a current-year basis of taxation.

8. Impôts and Vehicle Emissions Duty (VED)

86. The 2018 Budget has increased the impôts duty on alcohol by RPI and the impôts duty on tobacco by RPI plus 5 per cent (7.5 per cent for hand-rolling tobacco). The duty applicable to road fuels has also increased by RPI.
87. VED rates have been proposed to increase in line with RPI, whilst the CO2 per km level at which no VED is applied has been lowered to 50gm CO2 per km (down from 100gm).

Impôts: Alcohol

88. It was queried as to why the duty paid on alcohol has risen higher than R.P.I. We calculated that between 2003 and 2017, the duty payable on one litre of whiskey rose by 82 per cent, while duty on a bottle of table wine had risen by 62 per cent (see tables 1 and 2 below). If this was in relation to the health benefits associated with reducing the consumption of alcohol, we queried why this year, duties had risen only by RPI and not above it:

 Table 1: 2004 Budget.[58]

 Table 2: 2018 Budget[59]

89. It was ascertained by the Panel that, whilst in prior years duty has risen by both RPI and over RPI (and indeed in at least one instance, below RPI), due to the value of alcohol increasing because of Brexit, it was felt that this year's increase should only match RPI.[60]
90. It was also identified, that the limited increase proposed in the 2018 Budget was partly due to the fact that a new licencing law had been lodged. The Minister stated that:

"This is a matter that needs to be addressed in our view before considering any further increases."[61]

91. Given that the increases identified in paragraph 88 were far higher than their equivalents in the UK, it was queried whether this would have had any potential impact on the tourism industry. The Minister did not directly address this concern in his response, but identified the dangers of consumption as a rationale for the higher increases:

"I think we also need to be mindful of the consumption. Per-capita consumption levels in Jersey are one of the highest in Europe. That has always been a focus of ours in increasing these rates in the past"[62]

Impôts: Tobacco

92. In the 2018 Budget, impôts duties on tobacco products are rising significantly higher than RPI. For most products the figure is RPI plus 5 per cent, with hand-rolling tobacco rising by RPI plus 7.5 per cent. This means that for hand-rolling tobacco, the increase in the duty is in fact 10 per cent.
93. Such a rise represents an acknowledgement of the dangers of smoking and its subsequent cost to the taxpayer. However, as we heard in a submission to the Panel, there are clearly also side effects which arise from a sharp increase in prices:

"There is also the question of any out of proportion rise in Impôts, which would place a much bigger burden on tobacco consumers in the Island. Last year's rise of RPI plus 5% increases the price of 200 cigarettes by £4.29We all have to ask the question; at what point will tobacco users shun duty-paid tobacco in favour of non- duty paid sources?"[63]

94. Whilst tobacco  is  clearly  a  harmful  product,  any  rise  in  pricing  needs  to reflect the understanding that tobacco is also an addictive product and one that people, if faced with a sharp rise in price, will still likely purchase regardless of the cost to themselves. In addition, this could mean that consumers move to the "grey" market, purchasing tobacco from sources where duty has not be applied, which circumvents the impact of increasing impôts entirely.[64]
95. Given the potential side-effects of unexpected increases in prices, we also query whether a different strategy for increasing duties could be considered.
96. One comment received from a stakeholder in the local tobacco industry, highlights the difference between the strategies employed in both Guernsey and Jersey:

"Our main concern for the next budget is that changes to Tobacco Impôts should be transparent and offer more stability, both for the industry and for consumers. We are disappointed there isn't a mention of a particular rate, such as that used in Guernsey, which would avoid the last-minute scramble over pricing."[65]

97. Recommendation: The Minister for Treasury and Resources should explore the possibility of fixed, long-term impôts duties on tobacco.

Impôts: Road Fuel

98. The increase on road fuel duty in the 2018 Budget is in line with RPI, at 2.5 per cent. This will mean an increase of approximately one penny on the current price of fuel. The Budget states that this will raise the duty collected from all road fuels by £500,000, to a total of £22.5 million in 2018.

99. In 2007, Jersey had one hybrid and four electric vehicles registered on the Island[66], whilst by 2016 these figures were ninety-eight and fifty respectively.[67] This supports the assumption that there will be a continued trend in the rise in the number of eco-friendly vehicles purchased, with presumably a similar decrease in the number of traditional petrol or diesel powered vehicles to compensate.

100. Given this trend, we queried whether the Minister had planned in the long-term, a measure

to replace the loss in revenue raised from fuel duty. The Minister stated:

"we get about £25 million or so from fuel duty in total. This is a considerable amount of money in terms of revenues and we are mindful that over the passage of time that will start to reduce. This is not the case currently so I think it is from a policy development perspective something that will need some fairly urgent attention as to how that might be replaced over time."[68]

101.  Recommendation: The Minister for Treasury and Resources should commence

planning for the loss of road fuel duty revenue due to the increase in the number of electric and hybrid vehicles.  

102.  Recommendation: Planning for the eventual loss of road fuel duty should include

considerations for a phased removal of revenue (for example over a 10 year period) for the purposes of estimating revenue receipts for budgetary and planning purposes.

Vehicle Emissions Duty (VED)

103. The 2018 Budget recommends increasing the VED rates in line with RPI, by 2.5 per cent.

It also simultaneously recommends lowering the nil rate VED band (below which no VED is due) to 50gm CO2 per km (down from 100gm).

104. We queried whether the Minister had in fact considered alternative measures for the

taxation of vehicles. This is because, besides carbon dioxide, there are a wide range of pollutants emitted by vehicles.[69]

105. The Minister assured us that:

"There is a Government policy to drive towards more sustainable forms of transport and as such there is a keen interest from the Department for Infrastructure to promote communication and travel that is less-impacting on the environment."[70]

106. However, they also confirmed that:

"...there are no particular measures in place at the moment or under consideration, above and beyond what is proposed here."[71]

107.  Recommendation: The Minister for Treasury and Resources should examine other

means of measurement for the Vehicle Emissions Duty, to ensure that CO2 is still the most effective means of taxation in relation to the health effects of car emissions on the population.  

9. Capital Spending Programme

108. The capital programme set out in the 2018 Budget is based on the Long-Term Capital Plan

(LTCP). The LTCP is currently under review and is proposed to cover the capital projects required over the next 20 years. Each MTFP subsequently sets out the programme of spends in more detail for the years covered by that plan (e.g. the MTFP 2016-2019). The annual Budget then approves a detailed list of projects to be completed in the forthcoming year.[72]

109. The 2018 Budget highlights that there has been a significant increase in the cost estimates

for the capital programme in 2018 and 2019:

"As a result of the updated 2018/2019 submissions from departments, the cost estimates for a number of projects already in the MTFP indicative capital programme were increased by £10,003,000 in 2018 and £1,598,000 in 2019."[73]

110. Given that the MTFP 2016-2019 approved a total allocation in 2018 of £43,233,000, this

represents approximately a 25 per cent increase in proposed spending.[74]

111. When queried, the Director of Financial Planning and Performance explained that:

"As part of the Budget process, we take the indicative capital programme as per the M.T.F.P., we backed out two departments to ask them to revisit the numbers that they had in for 2018 and for 2019 and, as part of that process, we have identified a number of schemes where we have had to reprioritise the funding, a number of schemes like Grainville, for example, and Les Quennevais have identified further costs, largely around inflation, and the hyperinflation that we are experiencing in construction at the moment with that."

112. Looking in more detail at the Capital Programme, there are a number of projects where the

costs have increased significantly. The Budget states that:

"The two biggest movements are on the Les Quennevais and Grainville School projects where the estimated total cost of the projects has increased by £5.6 million (to £45.6 million) and £5.3 million (to £15.5 million) respectively."

113. This means that the budget for the Grainville School Project has increase by a factor of 50

per cent of its original estimate, by £5.3 million to £15.5 million.

114. The Treasurer of the States highlighted that the reason for this increase was that detailed

feasibility works had produced a higher estimate than was originally predicted. He stated that this was primarily:

"exacerbated by greater inflation, but it is also something we need to look at so that we can understand it, because as you have said, it is against not just this particular build, it is against the other build as well. We are going to be looking to change the

way that we budget the capital so that more of this feasibility is done earlier and therefore better estimates are provided."[75]

115.  We were pleased to note this commitment from the Treasurer, the need for which is

supported by one of our advisors. In referring to an earlier piece of work conducted for the Panel, our advisor states:

"Within our report on MTFP II CIPFA specifically recommended that:

"Consideration  should  be  given  to  modifying  the  current  controls  over locking/securing/committing capital funding to allow for more flexibility and improved utilisation of funding sources.""[76]

116.  Our advisor also highlights the dangers of potentially over-funding Capital expenditure:

"Whilst the current position can be viewed as being extremely prudent approach and influenced by Article 10(8) of the Public Finances (Jersey) Law 2005 ("The Minister must not lodge a draft budget that includes a report that shows a deficit in the consolidated fund at the end of the financial year to which the budget relates" there is the potential for a level of volatility on the Consolidated Fund should a significantly higher level of committed capital expenditure crystallises in year."[77]

117.  The Treasury Department, following the hearing, presented the Panel with further details

on the Grainville School project. These stated that:

"The movement in the estimated cost is attributable to the evolution of the project to accommodate changing service needs, changing regulatory conditions, further detail revealed  through  feasibility  work  and  the  construction  market  conditions.  The feasibility  work  also  identified  some  difficult  site  conditions  that  were  not anticipated."[78]

118.  The Department also provided a table which set out in detail, the breakdown of the

increased costs to the Grainville School project.

 Table 3: Revised Cost for Grainville School Project[79]

119. One of advisors noted in relation to the overall position of the States reserve funds and

capital project spending, that:

"The States of Jersey manages the inter connectivity between the significant funds well. However, given the potential requirement to meet capital commitments as well as significant future capital projects such as provision for a new hospital from the Strategic Reserve, there is an overall lack of clarity on the precise level of balance on these funds which is not encumbered or committed."[80]

120.  Finding: The revised cost of the Grainville school capital project is 50 per cent higher

than originally estimated, increasing by £5.3 million to £15.5 million.

121.  Finding: The capital project to build the new Les Quennevais School has increased

by approximately 14 per cent, from £40 million to £45.6 million.

122.  Finding: Treasury officials have stated that they are identifying methods to change

the way that capital projects are budgeted, so that more of the feasibility planning is done earlier, and therefore better estimates are provided.

123.  Recommendation: The Minister for Treasury and Resources should propose new,

more accurate ways, by which to calculate the funding required for capital projects, before the 2019 Budget.

10. Future Challenges

124. Given the position of the 2018 Budget in relation to a climate of uncertainty following Brexit,

as well as the introduction of several new short-term taxation measures (with further changes to be debated in the coming year), it was felt that the future challenges to the Island's economy warranted consideration separately.

125. The 2018 Budget acknowledges this uncertainty, stating that:

"The post-Brexit reality is an uncertain one but our strong public finances and resilient economy are ready to manage both the opportunities and threats that will emerge. With our considerable reserves, minimal debt and net assets of more than £6 billion, our public finances are in a stronger position than those of most other places in the world."[81]

126. This position was also supported by our advisors, who comment that:

"whilst the short-term deleterious impacts were clearly overstated by many well- respected organisations, the long-term impacts remain uncertain with no agreement between the UK and the EU over the nature of future economic relations."[82]

127. Indeed, our advisor goes further, stating that:

"...the spectre of Brexit looms large over this Budget, particularly the concerns surrounding the future prospects of the financial services sector after March 2019."[83]

128.  Recommendation: The Minister for Treasury and Resources should make public,

where possible, the preparatory work being conducted in anticipation of Brexit and its effect on future Budgets.

New Taxes/Charges

129. Our advisor identifies, that the current process of introducing new taxes may not be an

effective mechanism. In his report, he describes this as "nudging the tax system":

"The danger with the current policy of nudging' the tax system and introducing new charges to raise revenue is that it creates fewer coherencies and more uncertainty. Businesses, households and the Exchequer all suffer."[84]

130. When queried whether the Budget was in fact proposing short-term measures rather than long-term economic strategies, the Minister explained that the aim of this Budget was partly:

"to address the shortfall from the States not agreeing to reduce the health charge through budget measures and if approved by the States Assembly on 28th November, raises £10.2 million and goes towards bridging the gap of the health charge not being introduced. I must emphasise though, this is dealing with the short- term issues up to the end of 2019. The long-term sustainable issues of funding health is something that will have to continue to be worked on until a measure is put in place to deal with it."[85]

131. The Minister further stated, that what was of long-term concern was that:

"the States Assembly, had not approved the health charge and so far it has deferred the waste charge. If you take those 2 items together, it is £26 million by 2019."[86]

132.  Finding: The Minister for Treasury and Resources has stated that the 2018 Budget is

a mechanism for dealing with short-term funding issues up to 2019, and not providing long-term funding solutions.

Higher Education

133. Given that funding proposals were absent from the 2018 Budget, we queried what

proposals the Minister would be bringing forward to fund higher education and when:

"Senator S.C. Ferguson:

When are you going to be lodging proposals relating to the funding of  higher education?

The Minister for Treasury and Resources:

I think I have made it clear that we would be making an announcement alongside the budget about how we were going to be dealing with higher education. That is still the case."[87]

134. The Minister further stated that "There has got to be a process of consultation that will be

undertaken as well" but that also that "There will certainly be lodging intended before the May election".[88]

135.  Finding: The Minister for Treasury and Resources has stated that he will be making

an announcement about higher education funding alongside the budget and that he will be lodging funding proposals before the 2018 May election.

11. Productivity

136. Productivity at its simplest can be seen as:

"a ratio between the output volume and the volume of inputs. In other words, it measures how efficiently production inputs, such as labour and capital, are being used in an economy to produce a given level of output.[89]

137. The calculations performed for Jersey are the GVA (gross value added) per FTE (full-time

equivalent employee).

138. Our advisor highlights the importance of such a figure in relation to a nation's standard of

living:

"The level of productivity in an economy is the single most important cause of a country's standard of living: faster productivity growth leads to a better standard of living and falling productivity growth leads to falling living standards."[90]

139. The Fiscal Policy Panel (FPP) highlighted in their October 2016 Report that:

"Improving Jersey's underlying rate of productivity growth is vital to raising Jersey's economic performance and competitiveness, improving public finances and ultimately raising the standard of living."[91]

140. The importance of improving the Island's productivity was also acknowledged by one of our

advisors, who highlighted that:

"It is not alarmist to draw attention to the productivity challenge facing Jersey... Currently, Jersey's GDP and GVA per head of population are 53 per cent and 33 per cent higher respectively than the UK's in 2016. However calculations by the Statistics Unit show that if current trends continue, it will only be 12 years before Jersey's GDP per head is level with the UK."[92]

141. If this forecast is correct, it would mean that within a relatively short period of time, the

average standard of living (if defined by GDP) in Jersey, will no longer be higher than that of the UK. It also reflects, that whilst the population is increasing, the revenue being generated by each individual on average is lower.

142. The advisor also queried why at present, it was believed that Jersey could not assess its

competitiveness against the methodology set by the World Economic Forum:

"It is therefore disappointing to see the number of red' flags in the latest update of the innovation review action plan and the conclusion on benchmarking that after considering a number of  potential frameworks, it is not considered possible to

objectively benchmark Jersey's competitiveness using the methodology used by the World Bank or World Economic Forum'. This conclusion is quite bizarre – the list of countries that use the World Economic Forum benchmarking methodology includes Haiti, Chad and Trinidad and Tobago along with developed countries (which surely can include Jersey)."[93]

143. The reasoning for such benchmarking, our advisor highlights in his report, is that without

assessment, investment to improve productivity may currently be misdirected:

 "If the difficulties with benchmarking are a resource issue then perhaps it would make sense to find resources from the Economic and Productivity Growth Drawdown Provision; after all, if there is no effort being made to benchmark money on productivity outcomes it might be that what is being spent is wasted money."[94]

144. Indeed, one of the conclusions in the advisors Report to the Panel was that:

"Living standards in Jersey will continue to fall and a greater sense of urgency is needed to address the productivity challenge'. There should be a requirement that competitiveness outcomes should be computed which conform to World Economic Forum standards."[95]

145. We note that an overall concern with productivity is acknowledged within the 2018 Budget,

which recognises that:

"The lack of productivity growth over previous economic cycles has been of particular concern and the most recent trends are not yet showing any real improvement. 2016 saw productivity (as measured by GVA per FTE) fall 2% in real terms. Productivity in the finance sector fell by 3%, primarily due to falling productivity in trust and company administration. Productivity for non-finance was flat, with increases in sectors including hotels, restaurants and bars, and construction, with falls in wholesale and retail and other business activities."[96]

146. The Budget also acknowledges the comments made by the FPP, and further states that:

"The Council of Ministers remains committed to playing its part in trying to achieve this."[97]

147.  Finding: The Panel's advisors have raised concerns that the standard of living in

Jersey, relative to that of the UK, is falling.

148.  Finding: The productivity of Jersey's economy (based on GVA per FTE) is not

increasing in line with the population.

Income Tax Forecasts

149. The Panel note, that as well as concerns being expressed surrounding productivity, the

advisor also highlighted changes within income tax forecasts since the MTFP2.

150. One of our advisors notes that:

"Since 2005, personal tax has accounted for a larger share of income tax receipts: in 2009, personal tax accounted for 57 per cent of total income tax and by 2016 this figure has risen to 81 per cent. By 2021, personal tax will account for 84 per cent of all income tax receipts."[98]

151. The advisor also notes a key aspect of the change in the income tax forecast from the

MTFP2. This focuses on the adjustments being made for recognising the current year basis (CYB), which is an accounting adjustment. The advisor states that:

"The CYB forecasts have been revised so they now assume £10 million for 2017 and £8 million per annum for 2018 and 2019. In short, the differencescan largely be explained by the CYB adjustment."[99]

This means that with the accounting adjustment and all proposed tax revenues removed, the income tax forecast is £8 to £10 million lower than that pictured in the 2018 Budget.

152. These forecasts are supported by the advisor's assessment of the real term annual

percentage change in earnings. Our advisor highlights:

"It's not difficult to translate how the impact of faltering productivity shows up in declining living standards... There have been real-term annual decreases in earnings in eight out of the last twenty-seven years; using recent forecasts for RPI and the growth of average earnings for 2017–2021 suggests that from 2019, inflation will again increase faster than average earnings."[100]

Graph 1: Real Term Annual Percentage change in Average Earnings[101]

153.  Finding:  The  figures  for  the income  tax forecast  in  2018  and  2019  have  been

increased by £8 to £10 million each year, because of an accounting adjustment. 154.  Finding: By 2021, on present projections there will have been little or no growth of

real term earnings of Islanders in the last decade.

155.  Recommendation: The Minister for Treasury and Resources should produce income

figures for the period of the MTFP2, which removes all accounting adjustments and all budget measures introduced during that period, in order to demonstrate the underlying trend of changes in income.

APPENDIX A

Appendix A: Panel Membership, Terms of Reference and Evidence Considered

Panel Membership:

Deputy John Le Fondré (Chairman) Deputy Simon Brée (Vice Chairman) Deputy Kevin Lewis

Senator Sarah Ferguson Connétable Christopher Taylor [102]

Review Terms of Reference

1. To consider the proposals of the Minister for Treasury and Resources in the Draft 2018 Budget Statement in respect of:

1. Personal Tax
2. Business tax
3. Impôts duty
4. VED Proposals
5. Any other tax proposals, as set out in the Draft Budget Statement 2018

2. To consider the Capital Programme for 2018-2019, as presented in the Draft Budget Statement
3. Evaluate the proposed central growth allocation for 2018
4. To consider the financial forecasts and the economic implications of the Minister's proposals in the Draft 2018 Budget Statement, including the potential impact of Brexit on the economy

Public Hearings

A public hearing with the Minister for Treasury and Resources was held on the 7th November. The attendees were:

• Senator A. Maclean, Minister for Treasury and Resources
• Richard Bell, Treasurer of the States
• Richard Summersgill, Comptroller of Taxes
• Paul Eastwood, Deputy Comptroller of Taxes
• Alison Rogers, Director of Financial Planning and Performance

The transcript for the hearing can be found here:

Evidence Considered:

The following evidence was also considered by the Panel:

1. P.90/2017, Draft Budget Statement 2018
2. States of Jersey Budget 2004
3. Written submissions:
   1. Jersey Retail Association (JRA)
   2. Channel Island Tobacco Importers and Manufacturers' Association (CITIMA)
   3. Jersey Finance
4. Advisors report: CIPFA (Appendix B)
5. Advisors report: MJO Consultancy (Appendix C)

APPENDIX B

Appendix B: CIPFA Report

CORPORATE SERVICES SCRUTINY PANEL

BUDGET 2018 REPORT NOVEMBER 2017

CIPFA

77 Mansell Street

London E1 8AN

Phone: 020 7543 5600

CIPFA FINANCE ADVISORY SERVICE Email: stuart.fair@cipfa.org

CIPFA FINANCE ADVISORY

Certificate No. 5631/06

Contents

1. Introduction

1. In October 2017, the States of Jersey commissioned CIPFA Business Finance Advisory (the commercial arm of the Chartered Institute of Public Finance and Accountancy) to support the work of the Corporate Services Scrutiny Panel in an assessment of the States of Jersey Budget Proposals 2018. This draft report outlines CIPFA's preliminary position on this work to 10 November 2017.

Our Approach

2. Our approach to this independent review has sought to draw together a broad range of evidence. The majority of the conclusions and recommendations contained within this draft report are based on document review. Budget setting and financial strategy components of the CIPFA Financial Management (FM) Model have been used as guiding principles.

Scope

3. Our scope of work included the main components of the Budget Proposition outlined within the Draft Budget Statement 2018 covering the following:

• Budget Modelling
• Income Tax and Corporate Tax Proposals yield Forecasts
• Impôts and Stamp Duty land Transaction Tax Changes
• Other Income
• Base Budgets
• Contributions
• Capital Programme

2. Budget Modelling 2018

1. Whilst the 2017 Budget setting process estimated a 2017 deficit of some £12.953 million the 2018 equivalent positions forecasts a surplus before depreciation of £2.481 million. The overall 2018 budget model positions a surplus before depreciation of £17,395 million increasing to £53.332 million by 2019 within the 20162019 MTFP Addition period:

2. As with the 2017 budget setting the proposed budget measures around the creation of additional income are, in overall context, relatively modest with £2.900 million being generated within 2018 itself and £10.200 million in 2019. This is illustrated in the following table:

Consolidated Fund and Strategic Reserve

3. The balance on the Consolidated Fund has significantly improved over previous forecasts with the brought forward to 2017 some £36.3 million higher than anticipated "...primarily due to the improvement in the 2016 general revenues income against the Budget 2017 forecast."[103] This has effectively facilitated an increased 2018 funding for the annual capital programme of some £42.233 million which is significantly up from the anticipated 2018 contribution estimated within the 2017 Budget submission of £26.2 million funded by the Consolidated Fund:

4. An additional £6.5 million of additional capital programme funding has been met by a transfer from the Criminal Offences Confiscation Fund.
5. As noted within the 2017 Budget setting process the actual balance within the Consolidated Fund is significantly greater than the acknowledged de minimis position of £20 million. With inyear positions typically exceeding £100 million it is right that the Fund is able to act as a for unforeseen movements in income forecasts. However a significant contributory factor in the growing size of the fund is unspent capital funding for specific projects typically arising from project slippage'.
6. For the financial year 2016 the nontrading components of the States spent some £40.9 million on capital expenditure. The 2015 Budget included a capital allocation of some £25.51 million from the Consolidated Fund with an additional £121.6[104] million of unspent approvals brought forward from previous years. Within our MTFP II Addition Report September 2016 we reiterated previous comments:

"Bringing in mainstream capital spend to profile is not one of Jersey's strengths and there has been a consistent track record of underspending to programme" As the mainstream capital programme is mainly funded from revenue allocations this consistent level of underspending can act as buffer' and some flexibility in managing capital/revenue funding. This is especially relevant where the initial resources tied up within the allocation approval process for indicative projects, that are likely not to spend, can be withdrawn/modified (subject to Ministerial approval). However, in terms of planning – such is the nature of the capital approval process where the entire funding is allocated in the first year – it must be extremely difficult to accurately predict the overall profile of capital expenditure in any given year and over programming' is not an option to account for natural slippage. The significant lack of consistency in profiled spending – particularly in final quarter of the financial year (40% in 2014 and 33% in 2015) does not indicate a controlled and coordinated approach being taken to the management of the capital programme.

A negative consequence of such controls could be the potential suboptimal allocation of capital resources especially where project cost estimates and timescales are inaccurate or impacted by optimism bias. Locking capital resources within the capital approval process – whilst appearing to be prudent, can lead to suboptimal decision making where there is a lack of rigour in the management of projects. There are processes in place that allows the redirection of such approvals on projects that are not being delivered subject to ministerial approval – however the current arrangements appear to lack agility and it is not apparent that the performance management arrangements around the Capital Programme produce the effective management and utilisation of such investments.

7. Within our report on MTFP II CIPFA specifically recommended that :

"Consideration should be given to modifying the current controls over locking/securing/committing capital funding to allow for more flexibility and improved utilisation of funding sources."

8. Whilst the current position can be viewed as being extremely prudent approach and influenced by Article 10(8) of the Public Finances (Jersey) Law 2005 ("The Minister must not lodge a draft budget that includes a report that shows a deficit in the consolidated fund at the end of the financial year to which the budget relates" there is the potential for a level of volatility on the Consolidated Fund should a significantly higher level of committed capital expenditure crystallises in year. As Article 16 of the Public Finance (Jersey) Law 2005 provides that once Capital Project approval has been obtained and Capital Expenditure has been incorporated within the Capital Planning vote this effectively "..authorises a States funded body (other than a States trading operation) to withdraw from the consolidated fund, in one or more financial years, commencing with the financial year for which the approval is given, to make payments due for a capital project, amounts not exceeding, in total, the amount approved for the project, net of any capital receipts that are intended to be used for the project."
9. In essence the balance on the Consolidated Fund is likely to be distorted and the prevailing ring fenced' commitment of funds does not provide clarity over the actual balance on the Fund or incentivise the most effective utilisation of capital resources. Our previous comments within the Budget setting process of both 2015 and 2016 still have resonance in this area:

"On the Capital Programme we believe that the States face challenges in improving the precision of key assumptions as well as capacity including performance management capability and ultimately, affordability. The appropriate legislative allocation approval process has created a dysfunctional impact upon Financial Performance and Strategy as it is driven largely by aspirational/expectation rather than reality. Continuation of the existing position will act as a significant impediment to the formulation of a robust financial strategy that informs both the annual Budget Setting process and the MTFP." [105]

"In summary, the 2015 forecasted position does not provide overall confidence that optimal resource utilisation decisions are being taken in the management of capital investment. Within our report on the MTFP 20162019 we made a specific recommendation which we would reaffirm within our Budget 2016 assessment:

Capital Programme Performance – it is recommended that the legislative framework around the Capital Allocation process and incorporation within the Budget process be reviewed to allow for the realistic delivery of the Capital Programme and that appropriate performance management arrangements are put in place to ensure delivery."[106]

10. We understand that in the course of quarterly monitoring departments are asked to identify any unspent capital allocations which are no longer deemed to be required for their original purpose. Such unrequired allocations can either be returned to the Consolidated Fund or can be reallocated to other projects. The 2018 Budget submission identified that the last review identified some £5.8 million across a number of existing capital project allocations which should be shown below to be reallocated. Source projects for this element of reallocation and destination projects are highlighted within the following extracted tables[107]:

Source projects of capital allocations to be redistributed

Beneficiary projects of capital reallocations

11. We understand that transferring such unrequired allocations mitigates an oversubscription to the capital allocations (projects against assessed allocations) down to £3.0 million in 2018

and £0.6 million in 2019. However against an overall level of unspent approved allocations of £121.6 million such level of reassignment is considered to be minimal and more needs to be done to ensure approved allocations are still relevant as the lack of certainty on capital funding requirements indicates sub optimal arrangements exist over the management of funds and capital project management.

12. In respect of fund management should £121.6 million of unspent approvals be actually required it is it is likely a call on other reserves outwith the Consolidated Fund would be required given the de minimis £20 million £30 Million operating requirement on that fund. There are strict controls on funding activity from the Strategic Reserve funds and the Strategic reserve should not be used "to defray directly expenditure of the States."[108] Whilst funding revenue expenditure is prohibited Capital Expenditure has been funded by transfers from the Strategic Reserve although we note that there are controls around such transfers. Indeed we understand that such funding cannot be withdrawn from the Strategic Reserve unless proposed by the Minister and agreed to by the Assembly although the 2018 Budget proposals do not include the funding of Capital from the Strategic Reserve. The 2018 Budget submission highlights a growing balance with the 2018 forecast being £843.602 million. This is significant up on the 2018 forecast embedded within the 2017 Budget setting process. Tables from both estimate exercises are appended below:

Strategic Reserve balance and estimated returns (September 2017)

Strategic Reserve balance and estimated returns (September 2016)

13. The States of Jersey manages the inter connectivity between the significant funds well. However, given the potential requirement tomeetcapitalcommitmentsaswell assignificant future capital projects such as provision for a new hospital from the Strategic Reserve, there is an overall lack of clarity on the precise level of balance on these funds which is not encumbered or committed.

Other Funds – Social Security Fund

14. It is noted that the Social Security Fund is being increased as a result of an imbalance between Social Security Contributions from contributors, States Grant fixed at £65.3 million for 2018 and 2019 and actual benefits paid including administration costs. The service analysis is highlighted below which shows a net revenue surplus of £8.3 million is budgeted to be achieved in 2018:

15. A critical aspect in the formulation of contributions is the extent that the burden falls upon contributors and the extent the States is required to provide a grant (£65.3 million in 2018/and 2019). Initial analysis indicates that where annual household income exceeds £44,000 the contributor becomes a "net contributor" in terms of overall tax paid, taking into account supplementation. Below this level the contributor is a net recipient in terms of likely benefits. Background on contributions is produced below:[109]

"Contributions to the fund are paid by working age adults (5.2% of earnings) and their employers (5.3%) up to the Standard Earnings Limit (SEL). Employers also pay 2% on earnings between the SEL and the Upper Earnings Limit (UEL). Individuals without an employer are required to contribute both elements. Contributors with earnings below the SEL, but above the Lower Earnings Limit (LEL) are treated as if contributions up to the SEL have been made to protect pensions and benefit entitlement (known as supplementation). The States provide an annual grant to the Fund, which partly covers the cost of supplementation. The amount is governed by a formula and is set for the period of the MTFP. In the 2016 MTFP the States agreed that, as a shortterm measure, the value of the States Grant to the Social Security Fund will be frozen at the 2015 level throughout the MTFP period (20162019) to help to maintain balanced budgets throughout the fouryear period.

Contributions have been forecast for the period using the central economic assumptions on average earnings (which affects both individuals earnings and the three earnings limits), and employment"

16. The two questions that arise are:

• Does the level of £44,000 represent the most equitable placement of net contributor status relative to social security contributions – in the context of overall income tax?
• What is the optimal grant the states should be funding given the likely development of fund balances and any potential adjustment to contributions?

17. We aware that a review is currently being carried out in this area. However given the significance of the level of grant and the likely profile of balance on the Social Security Fund it is critical that a considered strategy on contributions is set and a revised profile of grant be formulated based upon an evidence based methodology.

3 Income Tax Proposals and Yield Forecasts

1. The proposed Budget 2018 Tax measures apply to both personal and corporate tax streams as follows:

Personal Tax Proposals

• Income tax exemption thresholds to be increased by 2.5% for working age people, delivering a tax reduction of £91 at 26% for a single person, and £156 at 26% for a married couple/civil partnership
• Second earner's allowance to be increased by £850 to £5,850 delivering a further tax reduction of £221 for married couples/civil partnerships where both are earning.
• Enhancements to the tax regime applied to high value residents, including requiring future high value residents to pay more
• Minor amendments to the rules applying to pensions and pension schemes including greater flexibility in accessing small pension funds

Business Tax Proposals

• Subjecting the profits of larger corporate retailers to tax at 20%
• Extending definition of "financial services company" to bring more companies within the scope of the 10% company income tax rate
• Increasing some International Services Entities ("ISE") fees paid by businesses
• Disallowing the deduction of rates by landlords renting property in Jersey consistent with the 2017 Budget amendment
• Legislating for the taxation of nonJersey limited liability partnerships
• Introduction of a Stamp Duty antiavoidance provision

2. In context the impact of Personal and Business Tax proposals has the following revenue impacts across 2018 and 2019 of matching year of assessment to revenue implications:

3. Overall proposals apply only £2.9 million of additional income growth but there is no Income Tax impact with consequential revenue implications falling within 2019 onwards. This is illustrated within the following table:

4. The impacts of previous year Income Tax proposals should feed through to the baseline for 2018. Predicted 2017 Income Tax proposal impacts are shown on the following table:

Estimated Estimated Estimated Measure impact on impact on impact on

2017 taxation 2018 taxation 2019 taxation

Income Tax (£) (£) (£)

Increase standard income tax exemption 2,200,000 2,200,000 2,200,000 thresholds by 0.9% (June 2015RPI) and

maintain age enhanced exemption thresholds

Grandfather entitlement to age enhanced 300,000 exemption thresholds

Phasing out standard child allowance and APA from 645,000 1,290,000 1,935,000 standard rate taxpayers

Modernise WEIA andCCTR 100,000 100,000 100,000

5. Robust forecasting is critical to underpinning the overall budget model as Income Tax accounts for some 74% of income raised as taxes and is some 68% of overall states income. The latest income tax forecasts reflect marginal adjustments although the transitional adjustment for the transfer of prior year tax payers to current year basis is a consistent theme:

Figure 58 Revised income tax forecast 20172021

6. On consistent application of the Current Year Basis adjustment we remain to be convinced that this level of adjustment consistently applied effectively introducing a significant annual additional level of tax to the estimate – reflects the correct treatment. Within our report on the MTFP II Addition we made specific reference to our concerns including reference to a Tax Briefing Note which sought to explain that the recurring impact of the change in the impact of movement to current year basis would be minimal. The recurring adjustment has now increased from £7 million to £8 million with an expectedadjustment of some £10 million in 2017. These comments are outlined below. [110]

"It is noted that the IFG have chosen to add some £7m of recurring additional Personal Tax income as a result of the accounting treatment change to CYB. This is arguably inconsistent with previous advice provided as contained within the 2015 Tax Briefing Note for the June 2015 submission of the MTFP. This advice included the following provision outlining the background to the change:

Section 7. Impact on the States of Jersey Financial Report and Accounts

The proposed amendment will require a prior year restatement in accordance with IAS 8. As CYB tax income is currently recognised when the final assessment is raised a year in arrears, the recurring impact of this proposal is minimal. There will be a one-off increase in revenue in 2014 to recognise tax charged for the year of assessment 2013 for which payments were received in 2013 as payment in advance and to recognise payments collected in 2014 in respect of CYB taxpayers 2014 year of assessment. The effect on subsequent years is limited to the year on year movement in the CYB assessed income as tax accrued will be recognised in the year of assessment.

Appendix 5 – Current Year Basis Taxpayers Recommended Basis for MTFP II Addition Forecast outlines the impact of the proposed changes. We remain to be convinced that in the graduated transition in the movement towards estimating Personal Income Tax on a full CYB basis (with only 19.5% of taxpayers meeting this criteria in 2015) would produce a recurring additional Personal Income Tax additionality of some £7m per annum. If CYB tax revenue has previously been recognised a year in arrears in the financial statements, with any tax collected through the Income Tax Instalment Scheme (ITIS) in the current year recognised as a payment in advance, we would have expected the graduated transition to produce a minimal year on year change (consistent with the above advisory note) – not a recurring additional yield of £7m. In any event the change to CYB introduces the requirement to apply a higher level of estimation than with the previous treatment. With this increased level of estimation comes a corresponding higher risk of inaccurate predictive positions. Should there be a lack precision or an unrealistic level of expectation on tax forecasts or component making up the estimate including forecasts on economic growth, such Tax estimates may lack credibility and damage confidence in the MTFP as the central mechanism for the formulation of financial strategy and related political decision making."

7. It was our understanding that there would be a reducing taper' effect as the number and impact of taxpayers falling into this category would reduce through time – a graduated transition. The consistent embedding of such an annual adjustment in materiality terms requires to be substantiated.

8. The Income Forecasting Group have used the August 2017 economic data endorsed by the Fiscal Policy Panel (FPP) in the formulation of forecasts. The main movements in forecast are extracted from the Draft Budget Statement 2018:

1. Outturn data – there have been a number of new data:

Financial services profits for 2016 were significantly lower than forecast. o FTE Employment growth in 2016 was higher than forecast

Finance sector compensation of employees grew by only ½ per cent (nominal) in 2016; leading to a lower expectation for compensation of employees overall.

2. Financial services profit growth – growth expected to be slower in 2017 and 2018.
3. Nonfinance profit growth expected to be slower in 2017.
4. Inflation – expectations for 2018 are lower.
5. Average earnings – 2018 expected to be slightly lower (in nominal terms, due to lower inflation).
6. Employment growth – is now expected to be faster in 2017 and 2018.
7. UK policy interest rates – are now expected to be slightly lower throughout the forecast period. The changes in these assumptions have had knockon effects on the nominal and real economic

growth (gross value added GVA) assumptions, with real growth estimated to have been slower in 2016 but a little higher in 2017 and 2018. The FPP has not made any change to forecasts for GVA growth in 20192020.

9. For 2017 actuals we have not had access to the latest inyear positions but the forecasted position appear to exceed the 2017 budget position.

Underlying Assumptions on Yield

10. Personal Income Tax, in terms of proportionality is the largest component of Income Tax coming in at an approximately 83.5% of overall yield and is significantly influenced by employment related indices. Revised economic metrics (central trend scenario) used by the Income Forecasting Group as at August 2017 were as follows:

11. The changes from the March 2017 to August 2017 are relatively significant and are reflective on the relative uncertainty and instability of current and expected economic conditions including uncertainties around Brexit. The changes were as follows:

12. In using these revised economic indicators (and a central rather than an upper or lower range forecast) a revised set of Income Tax forecasts have been produced based on economic indicators which incorporate rates of growth in average earnings in 2018 of 2.5% and 2019 of 3.0%. However looking at year on year changes overall growth levels on yields exceed these metrics: