04 December 2012
Sir, today I present the 2013 Budget.
Since I rose to give last year’s speech much has happened: a new Assembly; a new Council that has been working on the confirmation of our Code Compliant Corporate Tax Regime; a new Strategic Plan; and work to refine those Strategic priorities and identify the resources to deliver them.
We have strengthened and restructured the process of decision making. The Strategic Plan sets the priorities, the Medium Term Financial Plan sets the spending, now for a three-year period, and the Budget sets taxes and the Capital Programme for the year ahead.
Sir, Jersey, unlike others, has a history of sound public financial decision making. This hasn’t happened overnight.
Last week, I had the great pleasure to welcome back to the Treasury my predecessors, former Senators Jeune, Horsfall, Walker and Le Sueur.
Each one played their role in maintaining strong public finances.
To name just a few of their achievements over the last 30 years:
- former Senator Jeune set up the Strategic Reserve
- former Senator Horsfall introduced Loan Sanctions to enable some major capital projects to proceed, including La Collette, the Airport and the Marinas
- former Senator Walker pioneered the development of the Public Finances Law and dealt with overspends
- former Senator le Sueur diversified and protected our tax base, through the introduction and maintenance of Zero/Ten, GST, ITIS and ‘20 means 20’ and set up the Stabilisation Fund
Today, as the Medium Term Financial Plan comes into legal force, sees a further evolution of our Public Finances Law.
This means that for the first time, this is a Budget that has been coordinated as part of a wider, longer-term strategy for both tax and spending.
Global economic context
Sir, the worldwide economy continues to see very slow rates of growth and continued pressures. Just last week the OECD significantly reduced its growth forecast for the next year and states that the risk of serious global recession cannot be ruled out.
The Eurozone and US economies face their own political and economic challenges that cast a shadow over future global prospects. Jersey is not isolated from these global factors – we are still facing uncertain times.
There are several important key trends, which will continue to influence both global and local decision-making over the next few years. Centres of economic activity are continuing to dramatically shift, with a rebalancing of investment flows from developed markets to Asia.
Governments around the world are under pressure to maintain safety nets, achieve growth and restore their fiscal position. These challenges are being faced at a time when tax receipts have gone down by more than 20% in some major economies.
Stricter regulation and the early repayment of debt by some are creating huge challenges to financial institutions meaning that banking sector profits are still very suppressed compared to pre-crisis levels.
Local economic context
Jersey has faced market pressures, seen growing unemployment and its local businesses under increasing strain. Some things like the move to retailing on the internet are difficult to resist; others we can help with.
Our core industry, financial services, has also been impacted by the frequent changes to international regulation. However, despite these challenges, we are well placed to take advantage of the opportunities arising and ever-growing globalization. As growth in emerging markets drives more wealth, particularly in the Middle East, Jersey’s historic and continued engagement in these regions will bring benefits.
We were fortunate last week to be visited in Jersey by His Excellency the Ambassador of The United Arab Emirates. His Excellency was extremely positive regarding future relations with our Island.
In the Ambassador’s gracious remarks about Jersey’s finance industry, he highlighted the acceleration of the ‘green’ economy and a focus on renewable as another area of common interest.
Sir, one of the features of this year has been our focus on the digital economy. The development of technology means that outsourcing and ‘offshoring’ is becoming more common; this is an area of great potential for Jersey.
This Budget complies with recommendations of the Fiscal Policy Panel:
- accelerating fiscal support for the economy in a timely, temporary and targeted manner
- being flexible so that fiscal policy can adjust to changes in the economy
- we are also reviewing the impact of the planned capital expenditure and the way that it is funded
Investing in Jersey’s future
This Budget addresses the effects of the continuing global economic turmoil, while at the same time building on the FPP’s advice to support growth, and take advantage of the opportunities we have.
Sir, there are not many places in the world that are able to add 2-3% of GVA in stimulus, without incurring debt and still maintaining significant reserves. By taking the difficult but necessary decisions to reduce our public finances we are now well placed to invest in growth.
The Medium Term Financial Plan provides essential support for the new Economic Growth and Diversification Strategy, which will stimulate the economy and create employment opportunities for Jersey residents.
Additional funding for the many different Back to Work Schemes, which have been so successful in providing vital support over the last two years, will continue.
We are also focused on creating new business and employment in high-value sectors, like e-commerce, ICT, intellectual property and renewable energy, with a new focus on enterprise and inward investment, building on our investment in Gigabit Jersey.
Establishing an Innovation Fund with a target of £10 million will drive inward investment, increase Jersey’s competitiveness, promote economic diversity and create jobs, and I am pleased £5 million of funding has already been identified.
Additionally, the funding allocated to develop and expand new markets in the financial services sector will make a difference.
The biggest and most comprehensive review of financial services ever undertaken is now underway, designed to ensure our key industry is well positioned for the future.
Sir, as well as providing certainty and stability in our tax regime, this Budget goes a step further and allows us to release the potential for economic growth.
We have been particularly mindful of the fact that recession has been very difficult for local business and that enabling the construction industry is one of the best conduits for getting money into the economy.
This is something Government can help to address.
Stimulating growth in the local economy requires investment. This Budget proposes investment in the Capital Programme over the next 3 years of £222 million.
And seeks approval for projects scheduled to start in 2013 amounting to £56 million. One of the biggest capital spending initiatives ever undertaken for Jersey, providing investment in infrastructure, education, housing, health and social services.
In line with advice from the FPP, which has recommended investment in capital expenditure that has economic value in its own right is needed anyway and can meet the 3 Ts.
Education, Sport and Culture get their £7.7 million, some of which will fund the replacement of St Martin's school.
Heath and Social Services get £10.6 million for a £2.1 million upgrade of the main operating theatres at the Hospital, and £1.7 million to upgrade the Limes Care Home.
There will also be £4 million for new facilities for adult care homes and £2 million for a new children's home.
Transport and Technical Services will be allocated £11.7 million to fund the department’s continuing programme of updating and enhancing the drainage network and other essential infrastructure work. This is over and above their annual revenue budget.
This is of course in addition to our expenditure on routine planned maintenance, which is funded from our revenue budget.
£1.5 million is allocated to the Chief Minister’s Department to fund further development to the government website, enabling people to do more online, from filling in forms to paying bills.
Other capital proposals totalling £3.8 million will be used for the replacement of assets such as vehicles.
And finally, a significant investment of some £18.8 million is being made in the Social Housing Programme, following on from the injection of an extra £27 million agreed by the States earlier this year.
Looking to the future, Treasury is working with departments in drafting a long-term capital plan. Council of Ministers would welcome the involvement of States Members in its development in the first quarter of next year.
Long-term capital plans need funding. Work is underway on reviewing and evaluating a wide range of funding options for future investment in the Island’s infrastructure over the next 25 years or more.
We must look a long way ahead so as to be prepared, especially in light of the requirement for a new hospital, investment in social housing and improving the infrastructure for managing water and sewerage in a safe and sustainable way.
These investments in infrastructure are for the benefit of future generations as well as our own.
Departments are committed to managing their allocated capital expenditure effectively and delivering projects on time and within budget.
They understand the importance of capital expenditure to the economy and in its support of local businesses. For example, TTS, Health and Housing are all undertaking feasibility studies on their major projects that will inform the long-term capital plan.
Changing how we do things
In addition to this shift towards long-term planning, other ‘positive changes’ are also underway in our day to day work in the Treasury.
The start of this year saw companies being able to file their annual tax returns online. This work is part of the preparation needed to enable individual taxpayers to file their tax returns online in future.
Throughout 2012, investigation officers in the Taxes Office have been focusing on higher risk cases – this means we are recovering more tax on income, which taxpayers have failed to declare. On average each collection officer has gathered an extra £250,000 a year of undeclared tax.
The Treasury has made progress on dealing efficiently with requests under the TIEA legislation. More TIEAs and Double Tax Agreements (DTAs) have been signed this year, including DTAs with Hong Kong China, Qatar and Singapore.
Sir, in a moment I will set out the Budget Measures for 2013. This may be a good point at which to pause and remind Members of the information published earlier in the year about the Island’s taxpayers.
- the bottom 40% of taxpayers contribute only 2% of income tax revenues as those on low incomes are protected by their entitlement to exemptions
- the top 20% of earners pay 70% of all income tax
Sir, we have an income tax system which means that those who are earning more pay more and those who have low incomes are protected by their exemptions.
Sir, the 2013 Budget focuses on sustaining our current system of taxation, tightening compliance and reducing tax avoidance, while doing all we can to stimulate growth and create jobs.
A number of administrative changes are being proposed, including:
- changes in exemptions for non-residents
- benefits-in-kind for directors
- the penalty regime for non-resident landlords
These changes seek to clarify how the law should work and so enable revenues to be collected when they are due.
With regard to anti-avoidance measures, last year the States agreed to withdraw the 'deemed distribution' arrangements to ensure that the tax regime met the requirements of the EU Code of Conduct Group.
In doing so, the Treasury said it would protect revenues by introducing targeted anti-avoidance measures to ensure that everyone pays the tax that is due.
Introduced from 1 January 2013, these distribution rules are designed to prevent Jersey residents from avoiding Jersey tax through the use of Jersey companies.
They will ensure that when taxpayers extract income profits from a company, by whatever means, those income profits are subject to income tax.
However, unlike the deemed distribution arrangements, if a company reinvests its profits to grow its business, neither the company nor the shareholders will be taxed.
The calculations included in the distribution rules are based on the taxable profits reported by the company.
Therefore anything, which is not taxable in the company, such as capital gains, is not taken into account.
To have consulted on these rules in advance would have flagged the tax planning opportunities to more taxpayers.
So, immediately after lodging, the Treasury met with local tax advisers to discuss the implementation of these rules.
The feedback that we have received is that the rules appear robust and achieve their aim of preventing avoidance.
Some concerns were raised, particularly regarding the complexity of the law. We have listened to the feedback received.
Firstly, a concern was raised that the rules may discourage investment by shareholders into local trading companies. That was never the intention.
To address this, we have excluded commercial loans to trading companies from the scope of the rules, so as not to hinder business activity.
The second change is the introduction of a simplified basis of taxation, which will be available to all taxpayers by choice.
Under the simplified basis all distributions will be taxable; removing the need to complete the calculations.
The expectation is that this measure will prove popular with those taxpayers with simpler tax affairs, such as small trading companies, where the amount of tax payable is unlikely to be different if they complete the calculations or apply the simplified basis.
The Taxes Office will continue to monitor attempts to avoid paying tax and, where appropriate, continue to use the general anti-avoidance rule.
Another anti-avoidance measure is being proposed to ensure individuals employed through a 'personal services company' pay tax on their income in the same way as an employee would.
All of these measures are being introduced to strengthen the general anti-avoidance rules and make it clearer to taxpayers how and when those rules apply.
Moving to income tax measures, it is proposed to increase income tax exemption thresholds in line with inflation.
At 3%, this is higher than the average increase in earnings and will benefit taxpayers by more than £5 million.
This will protect households on lower incomes and will reduce the number of people subject to income tax.
The 2013 income tax allowances will be maintained at current levels.
With regards to age-related income tax thresholds, the age at which higher income tax thresholds apply will remain at 63 for 2013 – this is different from the State pension age of 65.
As already pre-announced when the budget was lodged, with effect from the year of assessment 2014, the age for the higher thresholds will be increased to 65 and thereafter will change in line with the State pension age.
However, this will not affect those who are and will be already entitled to the higher relief in 2013.
Last year a commitment was also made to review the opportunities to go further with '20 means 20' for those on higher incomes.
As a result, we are proposing to withdraw income tax relief on life insurance premiums for higher earners. This should raise an additional £500,000.
The stability of our tax regime for inward investment is critical.
Less than 18 months ago, in July 2011, a significant increase of 25% was made to minimum contribution levels of high net worth individuals.
Making any further changes now would raise a negligible amount of additional revenue and risk undermining Jersey’s appeal to attracting new high net worth Individuals.
Goods and Services Tax
There is no change in the rate of GST, which remains at 5%.
Two minor administrative changes are proposed to deal with anomalies in the current system: -
- Relief for bad debts is being clarified in the law, to support current practice
- Share transfers of domestic property are being brought into line with other types of property sales
These are simple clarifications and generate no changes to the amount of tax collected.
Stamp Duty and Land Transaction Tax
This Budget also proposes an extension of the relief on stamp duty for first time buyers from £400,000 to £450,000, which was brought in last year.
This will encourage first time buyers and provide further stimulus to the housing market.
Today, I have lodged a Report and Proposition seeking States’ approval to establish a Deposit Loan Scheme for a six month trial period.
This will lend up to a maximum of 15% of the price of a home to first time buyers, where they cannot afford the full deposit but can afford to make repayments if a low interest deposit loan is available.
Funding will come from the Dwelling Houses Loan Fund and if States approval is given, the scheme will be launched in early 2013.
This is a timely and appropriate step to take that supports the original aim of that Fund which was to allow Islanders to attain home ownership.
To help our banking deposits it is proposed to reintroduce the £100,000 cap on probate duty.
This will ensure that Jersey is not at a competitive disadvantage when trying to attract further deposits into the island.
This cap was removed in 2005. While our banking business has remained strong, evidence has come to light that further hundreds of millions of pounds might have been deposited or invested in Jersey during this period. This measure brings us back into line with our immediate competitors.
Sir, we are listening to taxpayers and consulting with them to improve aspects of the tax system.
Two consultation papers were issued around the time of the draft Budget.
ISE green paper
Last year we reviewed the International Services Entity (ISE) regime which operates as part of the GST system.
That review told us that businesses are generally happy with the regime, but that trust companies consider that some of the ways it applies to them and their clients could be improved.
As a result of that feedback, a commitment was made last year to look at ways to improve the fairness and transparency of the fees charged to trust companies and their clients.
A green paper was published on the same day as the Budget which examines different ways of achieving this.
Depending on the feedback received, changes in next year’s Budget will be considered.
Company information white paper
Sir, since the Budget debate I have issued a detailed consultation on the issue of non-Jersey, non-finance companies. A second consultation paper was issued in October, this time on collecting company information.
One of the key findings of that review was that the Treasury needs to improve the quality of the information routinely collected on company profits.
Our company law requires companies to prepare information on their profits, and we need to improve the way we collect that data.
This will mean that we have enough information to make the most appropriate choices when setting tax policy in the future.
The white paper on collecting company information proposes a way to improve the collection of information, without creating an undue additional administrative burden for companies and for the States.
A summary of the responses received will be published after the consultation period ends in January, and changes will be put into place next year.
Sir, duties have become the dominant issue in the Budget debate. I made it clear whilst there would be no new taxes I would propose some duty increases.
Sir, changes to impôt duties brought forward when the budget was lodged include:
- 10% increase on spirits and wines, equivalent to £1.04 on a bottle of spirits, and 12.5p on a bottle of wine
- 8% increase on strong beer and cider, equivalent to 3.8p on a pint
- 5% increase on weaker beer and cider, equivalent to 1.6p on a pint
- 10% increase on tobacco products, equivalent to 38p on a packet of 20
- 6.9% increase on all fuels, equivalent to 3p per litre
- 5% increase on all vehicle emission duty bands, which will mean an increase of between £1 and £66 depending on the level of CO2 emissions of the specific vehicle and place of registration
These measures would raise an extra:
- £1.4 million from alcohol duties
- £1.2 million from tobacco duties
- £1.4 million from fuel duties
- £50,000 from vehicle emissions duties
Together these measures would raise around an extra £4.1 million from all impôt duties in 2013 – this is vital to fund some of the service improvements approved as a part of the MTFP.
As has been our practice in recent years these increases in duty would take effect from midnight on 31 December 2012.
These duty increases would, to some extent, go towards the planned growth in Health and Social Services in 2013.
However, since the Budget was lodged on the 17 October, there has been some debate over the increase on both fuel and alcohol.
When taxes and duties are removed from the selling price in the Island it is apparent that alcohol prices in Jersey continue to be high compared to those in the UK.
Duty on alcohol
As an example, a litre of whisky, excluding duty and GST, in Jersey is typically £7.64 compared to as low as £2.61 in the UK. A pint of beer is typically £2.92 in Jersey compared to an average of £2.42 in the UK.
In deciding the rates of duty increases, consultation takes place in particular with the Ministers for Health and Home Affairs.
It is apparent from these consultations that alcohol is having a damaging effect on society.
In the words of our Chief Medical Officer of Health
“By every available measure, the extent of alcohol consumption in Jersey is wreaking damage on our Island society, our health and our economy”
Alcohol is responsible for massive costs to the taxpayer of Jersey including in relation to healthcare, policing, social security sickness payments, prison and probation.
The rise in alcohol duty proposed is low compared with the real costs to this Island that can be attributed to alcohol consumption.
Increasing the rate of duty is the right thing to do.
Increasing the price of alcohol, as well as reducing its availability and making people more aware of the dangers of drinking, are the most effective measures to achieve reductions in alcohol consumption, particularly in the young, and those who drink the most heavily.
Sir, I make no apologies for introducing a measure to make alcohol less affordable. Those who enjoy sensible drinking within the recommended limits will feel little impact from the proposed increase in duty.
Duty on fuel
Sir, with regard to duty on fuel, I have noted and understood the comments and concerns put forward by Deputy Baudains of St Clement.
As a result I have this morning proposed an amendment to the Draft Budget Statement 2013, which will reduce the increase in fuel duty to 1 pence per litre; this represents an increase of 2.3% instead of 6.9%.
The financial implications of this amendment are that the increased revenue estimate of £1.4 million from fuel will be reduced to £479,000.
To compensate for some of the loss in revenue as a result of the fuel duty amendment I will be proposing a further amendment to the increase in tobacco duty.
It was proposed to increase tobacco duty by 10% – it is now proposed that tobacco duties should increase by 13.2%.
This amendment would increase the duty on a packet of 20 cigarettes by 50p.
The financial implications of this amendment are that the increased revenue estimate of £1.2 million on tobacco will increase to £1.6 million.
The overall effect of these amendments in 2013 would be a decrease in impôts revenue from an anticipated £4.1 million to £3.6 million.
By reducing the proposed level of increase on fuel and increasing the proposed duty on cigarettes we can stay close to the level of income necessary to fund spending proposals within the MTFP.
CSR and future savings
Because of the MTFP, spending limits will now come into force from 1 January 2013.
It is important that we remember that both the Budget measures and spending allocations are presented on the basis that the CSR savings will be met.
While three-year planning will provide flexibility with regards to timing and reduce administrative burden, it does not mean we can be complacent.
A huge amount of progress has already been made to deliver savings and we must give credit to the departments that have worked so hard to achieve this.
Increasing efficiency in tax administration, reorganising the States’ plant nurseries, reducing fraud in Social Security, making savings through better procurement of insurance and improving the management of States housing are just a few examples of the good work done by States departments.
We are also now reviewing ways that we can find more savings in 2014 and 2015, to allow us the flexibility to respond to market conditions.
Foundation for the future
In the last 12 months we have modernised tax administration and improved collection as part of an ongoing process of change.
We have kept tax levels the same and provided extra support to Islanders through increased personal exemptions.
We have also allocated significant funding to stimulate the economy and created jobs through investment in infrastructure, education and training, housing and healthcare.
This is a Budget that supports the long-term aims outlined in the MTFP, in line with the recommendations of the Fiscal Policy Panel.
We are in an almost unique position to be able to achieve this level of economic stimulus without incurring debt and still maintaining our key reserves.
This Budget builds on the strong financial foundations laid by our predecessors, and provides a vital next step towards Jersey’s future economic prosperity, by providing stability, certainty and growth. I commend it to the Assembly.