17 October 2012
There are three strategic debates used by the States for decision making. The Strategic Plan sets the governments priorities, the Medium Term Financial Plan sets the spending (now for a three year period), and the Budget sets taxes and the detail of the Capital Programme for the year ahead.
Today I am going to start with an overview of the economic situation which puts the Budget into context.
Then Deputy Noel will focus on the individual Budget and Taxation Measures, and run through this year’s Capital Programme.
The 2013 Budget presents a prudent, positive and constructive series of measures which are designed to safeguard our revenue and support economic growth.
The Strategic Plan set out seven priorities, with a particular focus on health, housing and jobs. This budget provides the resources to deliver on these priorities. It also takes account of the global economic situation.
Yesterday I returned from a week at the international monetary meetings in Tokyo where I learned first hand of the serious and ongoing economic conditions facing countries around the world.
Last Tuesday the IMF further downgraded the forecast for worldwide economic growth to 3.3% for 2012 and 3.6% for 2013, with one of the biggest downgrades being to the UK economy which is now forecast to decline by 0.4% this year.
The global economy has seen the slowest rate of growth since the end of 2009 when recovery from the financial crisis was getting underway.
The key focus of discussions during last week was the extent to which austerity measures, whilst necessary to resolve some countries serious debt problems, were actually deepening economic difficulties around the world.
The latest IMF forecasts predict that the Eurozone will shrink by 0.4% this year with much larger falls in Italy and Spain. Unemployment levels in many countries are at a record high, particularly amongst the young, and surveys of consumer and business activity are less than encouraging.
The outlook for the global economy depends very much on whether the EU and US policymakers can deal with the major short-term challenges they face. The IMF has made it clear that their forecasts assume that the EU and US can respond successfully, but that if they don’t then their forecasts will be downgraded again.
Jersey is not isolated from these global pressures. We are also facing challenges and our growth estimates have been downgraded. The gross value added (‘GVA’) for the Jersey economy fell by 1% in 2011.
We are all aware of the gloom and doom in the UK media and the shadow this casts over us. Added to this general mood of global negativity, we have had to absorb the difficult and necessary rebalancing of our public finances with the introduction of zero/ten, GST and 20 means 20 in the last few years.
We have also faced the loss of LVCR.
The Fiscal Policy Panel (FPP) advice has confirmed that there are still tough times ahead and we will need to use discretionary stimulus sooner rather than later.
The overall economic position for Jersey is set out in some detail in the Annual Report of the independent FPP, published on 1 October. This will help inform our debate in the States in the coming weeks.
Fiscal Policy Panel
The FPP provides important independent advice for financial planning. The panel's report sets out a number of recommendations that the Council of Ministers is presently considering. The recommendations most relevant to this Budget include:
- to accelerate fiscal support for the economy through more discretionary stimulus
- to be flexible enough to adapt spending plans
- to review the impact of the nature and funding of the planned capital expenditure
We are now considering how these recommendations might affect the proposals in the MTFP.
This Budget is an integral part of addressing the effects of this continuing global economic turmoil and builds on the FPP’s advice.
This Budget report explains how we are providing significant fiscal stimulus allocated in 2012 and 2013 through the Capital Programme. As the FPP report highlighted, we are putting £90 million more into the economy than we are taking out this year, and £74 million more in 2013.
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.
You only need to look at the situation in Portugal, following their Budget announcement, where many people will be paying an equivalent of one month’s salary more in tax per year to realise how fortunate we are.
Additionally, in 2013 we are allocating £56 million for capital spending, as part of the £222 million over the course of the MTFP.
This is one of the biggest initiatives ever undertaken for Jersey in terms of Capital spending, providing investment in infrastructure, education, housing, health and social services.
This Budget provides essential support for the new Economic Growth and Diversification Strategy, which will stimulate the economy and create employment opportunities for Jersey residents.
This Budget allows us to use the downturn to ensure that we position Jersey in the best possible place to take advantage of the economic recovery when it happens.
It allows us to concentrate on creating new business and employment in high-value sectors, like e-commerce, ICT, Intellectual Property and renewable energy. The newly formed Digital Jersey will be an essential component in delivering this.
It encourages innovation by establishing a £10 million Innovation Fund for projects that drive inward investment, increase Jersey’s competitiveness, promote economic diversity and create jobs.
Funding is also proposed to develop and expand new markets in the financial services sector, in Asia, GCC and BRIC countries. This will boost the good work of Jersey Finance and pay dividends for the Island.
We will also be using this time to undertake the biggest review of financial services that we have done in the last ten years, to ensure our key industry is well positioned for the future.
By providing certainty and stability in our tax regime, this Budget allows us to release the potential for economic growth. It is presented against a challenging economic backdrop and will provide the opportunity for positive action.
Before I hand over to my Assistant Minister, Deputy Noel, I would reflect for a moment on what a difficult year this has been for the Taxes Office.
I don’t want today to pass without remembering Malcolm Campbell, our Comptroller, who sadly passed away this year. We all miss him and the kindness and support shown to Malocolm and his family has helped them through a very difficult time.
Deputy Noel will now take us through the details of the Budget for 2013.
The Taxes Office has implemented significant and important changes this year. The start of this year saw companies being able to file their annual tax returns on- line. This work is part of the preparation needed to enable individual tax payers to file their tax returns on-line 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.
The Treasury has made progress on dealing efficiently with requests under the TIEA legislation. More TIEAs and Double Tax Agreements (DTA) have been signed this year, including DTAs with Hong Kong and Qatar, and a number of other DTAs are due to be signed in the coming months, including with Singapore.
As a Vice-Chair of the Global Forum, Jersey continues set the global standards on transparency and exchange of information on tax matters.
The Treasury have also spent much of the past year reviewing ways of raising additional revenues from companies that are not locally owned. A report and recommendations on this matter will be presented to the States next week.
We are publishing two important consultations alongside this Budget.
A Green Paper is being launched today on the ISE regime. ISEs are an important part of our GST regulations. They contribute some £9 million in revenues and the purpose of the work in this area is to ensure that this revenue continues on a sustainable basis.
Last year the Treasury reviewed the ISEs, raising an extra £600,000 in 2012. In repsonse, businesses explained that the regime works well on the whole, but for some trust and company administration sectors, the fees could better reflect the size of their business.
Treasury is now seeking views on how to improve the ISE system. All responses will be collated and legislation changes will be made next year.
A White Paper will also be published on improving the way information on the profits of Jersey companies is collected and analysed. It is essential to ensure that there is enough information to support policy changes to continue to protect our company tax regime. At the same time, we want doing business in Jersey to be as efficient as possible.
It is therefore proposed that this information should be collected by the Statistics Unit, through the surveys they issue throughout the year.
The 2013 Budget measures focus on three key themes:
- safeguarding tax revenues
The emphasis is on sustaining our current system of taxation, tightening compliance on tax collection and reducing tax avoidance.
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 aims to protect households on lower incomes and will reduce the number of people subject to income tax.
The 2012 income tax allowances will be maintained at current levels.
Last year, the States agreed to withdraw '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 taxpayers pay the tax that is due.
These new measures will be introduced from 1 January 2013 and are compliant with the EU Code of Conduct. They are designed to prevent Jersey residents from avoiding Jersey tax through the use of Jersey companies. The amendments will ensure that when taxpayers extract income profits from a company, by whatever means, those income profits are subject to income tax.
Therefore if a company reinvests its profits to grow its business, neither the company nor the shareholders will be taxed.
The new rules partly work by broadening the definition of distribution. The calculations use the taxable profits reported by the company, and hence anything which is not taxable in the company, such as capital gains, is not taken into account. To help people with the new rules the Taxes Office will publish guidance, with a number of examples.
An explanatory note will also be issued alongside this budget.
The Taxes Office will continue to monitor attempts to avoid paying tax and where appropriate use the general anti-avoidance rule.
Another important anti-avoidance measure proposed is designed to ensure individuals employed through a 'personal services company' pay tax on their income in the same way as an employee would. This is being introduced to strengthen the general anti-avoidance rules and make it clearer to taxpayers how and when it will apply.
Insurance Premium Relief
Last year a commitment was 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 is designed to raise an additional £500,000.
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.
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
In making these decisions on impôts, we have has consulted extensively with colleagues in Health and Social Services, Economic Development and Home Affairs. The following measures are proposed: -
Increase the duty on alcohol :
- 10% on spirits and wines
- 8% on strong beer and cider
- 5% increase on weaker beer and cider
Increase the rate of duty on all tobacco products by 10%, which will mean 38p on a packet of 20.
Increase the rate of duty on all fuels by 3p per litre.
Increase all Vehicle Emission Duty bands by 5%.
These measures support the Council of Ministers’ drive to reduce the effects on health of excessive alcohol consumption and smoking. And it is a first step towards harmonising the duty on alcohol content
As has been our practice in recent years these increases in duty will take effect from midnight on 31st December 2012.
In addition to the figures set out in the MTFP - these measures will raise an extra £1.2 million from tobacco duties, £1.3 million from fuel duties and £50,000 from vehicle emissions duties. Together these measures are designed to raise an extra £2.6 million from all impôt duties.
These duty increase will, to some extent, go towards the planned growth in Health and Social Services in 2013.
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.
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, and while our banking business has remained strong, evidence has come to light that further hundreds of millions of pounds might not being deposited or invested in Jersey during this period. This measure brings us back into line with our immediate competitors.
One important future measure that we wish to pre announce today is in respect of the age-related income tax thresholds. At present, and for 2013, the age at which higher income tax thresholds apply is 63. This is different from the States pension age which is currently 65.
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.
The proposed Capital Programme for 2013 is some £56 million. Over the 3-year term of the MTFP, we are planning to spend £222m on capital projects.
This is in line with advice from the FPP, which has recommended investment in capital expenditure as an important part of fiscal stimulus.
Proposals for the 2013 Capital Programme include:
Education Sport and Culture will be allocated £8.7 million, £7.7m of which will fund the replacement of St Martin's school. I am grateful to Senator Le Gresley and to the Constable and Deputy of St Martin for their support.
It is now vital to proceed with this project so it can be completed by September 2014 in time for the start of the school year.
Heath and Social Services will be allocated £10.6m for a £2.1m upgrade of the main operating theatres at the Hospital, and £1.7m to upgrade the Limes care home. This will also enable the building to be used as a step-up step-down facility in future, which supports the Health White Paper.
There will also be £4m for new facilities for Adult Care Homes and £2m for a new children's home.
Home Affairs will receive £1 million, which is the 4th tranche of funding for the new Police station.
Transport and Technical Services will be allocated £11.7 million, to fund the department’s continuing programme of updating the drainage systems and other essential infrastructure work. This is of course in addition to our expenditure on roads maintenance which is funded from our revenue budget.
£1.5 million is allocated to the Chief Ministers Department to fund further development to the government website, enabling people to do more online, from filling in forms to paying bills. This will make a contribution to the Island’s digital future.
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.
Now back to the Treasury Minister.
In the last 12 months we have modernised tax administration and improved collection as part of an ongoing process of change.
In this Budget, we are proposing to keep tax levels the same and support Islanders through increased personal exemptions.
We have also allocated significant funding to stimulate the economy and create jobs through investment in infrastructure, education, 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.
This is a Budget that holds a steady course in turbulent times.
However it does more than that.
We are in almost unique position to be able to achieve this level of economic stimulus without incurring debt and maintaining our key reserves.
I am pleased to be able to present a Budget that gives us confidence for the future.