They say ‘a week is a long time in politics’. It certainly proved to be for Hilary Clinton and, for that matter, David Cameron. A lot has happened in 2016. The world has been changing fast and we need to be able to adapt and keep up.
We need to be smart and agile enough to identify and deal with the threats we face. Equally we need to invest in protecting and developing our economy. We need to be bold enough to seize the many opportunities that will emerge. We need to create the right environment to maintain business confidence and attract inward investment.
There has hardly been a more important time for strong, decisive, innovative and forward thinking government – as Chamber have suggested and I believe this Council of Ministers provides.
Today I will talk a little about the current state of our public finances and forgive me if I give you a somewhat more positive picture than you might have gathered from the media. As we have recently published budget 2017 I will also pick out some of those highlights.
To begin, I’d like to reflect on the start of this political term, after the last election in late 2014. One of the first jobs the new COM faced was to develop a new Strategic Plan. Many politicians don’t like looking too far into the future; it can be costly and doesn’t usually help win the next election!
But this COM was prepared to look at the difficult issues and not ‘kick the can’ down the street to burden future generations.
In doing so it quickly became clear that significant new funding would be required to make critical investment into areas like health, education and core infrastructure. In some cases these areas had been underinvested in for many years, if not decades. With the costs of funding the public sector continuing to rise, and income under pressure, there was never going to be a popular outcome to the changes that would be necessary.
Change is difficult and unsettling for everyone, the staff who see their jobs changing and being threatened, and Islanders who see changed or reduced services, increasing fees, charges and taxes. Historically Jersey has placed a very low tax burden on Islanders and funded a wide range of quality public services. Many of those services were free or heavily subsidised at the point of delivery, unlike virtually anywhere else in the world.
We were not in a unique position of course. Governments across the world were facing similar complex economic, social and environmental challenges, declining tax revenues, and increasing costs of regulations and demand on services. We could see that an ageing population would mean fewer people paying the taxes to fund, in particular, health care and pensions for a higher proportion of older people. These challenges needed solutions.
First we developed a strategic plan that set a direction, a vision for the Island's future, and identified key priorities. Then we put together a Medium Term Financial Plan that laid out how we were going to fund these priorities while moving towards balancing budgets by 2019.
Some misinterpreted or misrepresented the financial plan at the outset, remember the headlines about a £145m ‘black hole’? Let me put the record straight, that £145m was only ever a planning figure and included significant new investment to dramatically improve services, invest in infrastructure and support jobs and the economy through recession.
There was never any intention to rack up £145m of recurring spending by 2019 with no plan to pay for it! If a solution to funding wasn’t found, the investment would have been cut back, it’s a simple as that. But why let the truth get in the way of a good story? Sensationalising it in that way did make for some exciting headlines!
In the two years since then we have seen a steadily improving economy that is performing much better than expected.
- Our economy grew in 2015 by 2.2%, more than double what we had included in our forecasts
- The latest labour market data shows total employment in June 2016 was 60,320 – the highest on record and 2.1% higher than a year ago
- Average earnings increased by 2.1% in the year to June 2016 – the fourth year in a row that earnings have increased at a faster rate than headline inflation
The low inflation we have seen since 2013 has contributed to the sustained growth in real earnings, as have lower prices for things like oil and food, although BREXIT and the fall of sterling is beginning to increase inflationary pressures. We do have to be aware that this period of very low inflation is probably coming to an end. In November the sterling index was 20% below its value from the previous year – if this continues we are likely to see more inflationary pressure, leading to higher prices.
Private sector employment was 3.1% higher than a year ago, reaching 52,480 and also the highest on record. By contrast public sector employment was 3.8% lower than in June 2015. This was the second consecutive annual fall and demonstrates the progress being made with public sector reform and the importance placed on controlling government expenditure.
We are doing much better at controlling Government expenditure, but there is much more to do. For the first time the MTFP capped government expenditure by law and total net revenue expenditure is set to fall over the period 2016 – 2019.
Our public finances remain in a strong position - Jersey has little debt, significant reserves and assets of nearly £6 billion. By 2019 we will have broadly balanced budgets. In stark contrast, the UK government has debt of £1.7 trillion – that’s 88% of their GDP. Not to mention their most recent annual budget deficit of £76 billion – that’s 4% of their GDP.
Our medium term financial plan is all about investment and future planning. It continues the reforms of the public sector to cater for the changing demographics. It recognises the need to put technology at the heart of reforming a modern public service.
Budget 2017 supports this plan, it supports broader government policies in heath and the environment and it raises an additional £3m pa by 2019 in a measured way to add flexibility should income fall.
Long term planning
Managing a successful future will require strategic direction and investment over many years, so the Council of Ministers is introducing a new approach to long term planning that reflects international advice and well established practice. Its key elements are to focus on the impact policy changes have on people’s lives and on government - working together with the private, voluntary and community sectors to tackle the biggest challenges facing our Island.
A wide-ranging survey has gathered views from more than 4,000 islanders – asking how Jersey is doing and where we should aim to be by 2036. The results are due out later this month. In brief – respondents said their highest priorities were the environment and low crime, and their concerns are taxes and the cost of living, including housing.
As we develop a new long term plan our population policies continue to focus on migration which delivers the greatest value. In recent years Jersey has experienced record employment growth, and earnings are growing. We had 420 more people working in financial services in 2015. That includes 320 more in construction - building new offices and homes - and 560 more in private sector health and educational services - providing care and related services.
We have agreed in the MTFP to employ more teachers and health workers. This is positive news that many jurisdictions would envy. However, migration in 2015 was higher than is acceptable in the long term. We need to focus migration on businesses and organisations that deliver the highest economic and social value - so we get more tax from the essential workers that these organisations need to bring to our Island.
The Statistics Unit are working on an e-census, to give us more information on the composition of our workforce and the drivers of migration. The Economics Unit are assessing the value of migration to Jersey, helping us to better target migration and get more value from it.
Chamber’s president has commented recently that your members would like to see a government which is forward-thinking, collaborative and innovative. This government has put a lot of work into developing a long term plan that will set a path for Jersey to 2035 and beyond. I call that forward thinking.
Chamber has monthly and quarterly meetings with Ministers, its members are invited to ad hoc meetings on specific issues like the Medium Term Financial Plan and Budget and Chamber will have a seat at the table as waste charges are developed. I call that collaborative.
And the public sector is innovating all the time, through public sector reform and the adoption of technology and development of e-gov. In 2015 departments delivered savings of £12 million. They did this through voluntary redundancy, vacancy management, service redesign and a review of benefits. We have completed 123 “Lean” projects across states departments – these represent new and improved ways to deliver better services, more cost effectively.
For instance Customs have increased their postal interceptions while also reducing overtime by nearly 44%. We are spending £55,000 less per year on recruitment advertising. By the end of this year we are projected to save a total of £34 million.
Budget 2017 maintains the principles of our long term tax policy, that taxes should be low, broad, simple and fair. It proposes no fundamental change to our system of taxes, duties and charges, although we are reviewing ways to improve yield and compliance. It increases the level of income people can earn before they pay any income tax and helps working parents with the cost of child care.
These allowances are far more generous than in the UK or Guernsey and means that 30% of the lowest earners in Jersey pay no income tax. At the same time, and perhaps less good news for some, it increases duty on tobacco, alcohol and vehicle emissions, which damage our health and environment and put pressure on public spending. It also proposes a higher level of stamp duty for residential property valued over £3m and introduces a new band at £6m.
Jersey knows the value of a healthy business sector and we will continue to maintain a tax structure which encourages investment, growth and creates significant job opportunities, particularly for our young people. This Budget also asks all companies taxed at the 0% rate to provide more information to the Comptroller of Taxes.
This data will inform future policy-making and support any debate on international tax standards.
In particular it potentially opens the opportunity to find a way to tax some non-locally owned companies trading in Jersey.
It has been suggested that some single people without children or a mortgage may be paying more income tax here than in the UK. If you compare only income tax there are indeed some single people for whom this would be true. However this is a very narrow and unreasonable comparison.
A much fairer comparison would include Social Security and Long Term Care contributions in Jersey versus National Insurance in the UK. On that basis a single person without children would be £360 per year better off in Jersey than in the UK. That difference widens further if you include comparisions with VAT, GST and other charges.
Jersey must remain a financially-attractive place for younger and single professionals to want to work and live, be they local or immigrant workers. That’s why, in my last Budget, I announced a plan to gradually remove the tax system’s existing bias towards older workers and higher-earning pensioners.
Over the next few Budgets we plan to align the amount people born after 1951 can earn tax-free with the allowance now only available to people born before 1952.
It’s also not accurate to keep suggesting that the tax burden is falling disproportionately on “middle Jersey”. Tax data clearly shows that the top 10% of earners provide more than half the personal taxes collected each year that fund services for all islanders.
Turning to impôts, it is never popular that these are often increased by more than inflation, primarily to support broader government policies. This is in recognition of the significant impact on public finances of alcohol and tobacco consumption. There are around 500 Hospital admissions each year wholly attributable to alcohol. One in five of all crimes involves alcohol and almost 500 incidents of domestic violence involving alcohol have been reported to the States of Jersey Police since 2012.
Based on UK figures the annual cost of alcohol related harm to Jersey is estimated to be £30 million. To put this into context the duty raised in 2015 from alcohol was £17.2 million – that leaves a £12.8 million shortfall which has to be found from general tax revenue, paid for by all of us.
Studies also demonstrate that the influence of price on alcohol consumption is very strong. In effect when the price of alcohol goes up, drinking goes down and longer term so will the cost to the health service and other government departments.
Likewise tobacco. The cost of dealing with the effects of smoking far exceeds the duty charged. Based on a UK per capita cost of smoking, the annual cost of smoking to Jersey is estimated at £26.5 million. The duty for tobacco is £15 million - leaving an 11.5 million shortfall for us all to make up.
The economic burden that smoking places on our island society is significant. It includes the direct costs of smoking related illness, lost productivity and the cost of smoking related fires. Smoking remains the biggest cause of preventable illness and premature death - with tobacco killing around half of its users.
There were over 2,500 admissions to Jersey General Hospital for adults aged 35 and over with a primary diagnosis of a disease that can be caused by smoking in 2014. Studies show that increasing the price of tobacco through taxation remains the single most effective way of reducing smoking.
It’s difficult to decide how far taxes can be used to encourage a healthier lifestyle, but it’s no wonder islanders are confused about what we are doing and what we should be doing – when our own local newspaper can’t make up its mind. In a JEP editorial on 19th October putting up duty on alcohol and tobacco is described as “flogging this cash cow and making Jersey an even more expensive place to visit” – (it’s still cheaper here than most places).
Yet another editorial less than 2 weeks later on 27 October asked - “is it time for a sugar tax?” and went on to state “as obesity continues to rise it is clear that it could well be time for a firmer approach by local leaders.” The use of taxes to influence a healthier lifestyle is clearly an emotive issue!
As we enter a period of increased uncertainty and volatility as a result of the UK’s decision to leave the EU, the US election and more, our economy is performing well. While Brexit and global uncertainties will bring challenges they will also bring opportunities. Jersey has been trading with Europe from outside the EU for many years. The wide range of financial and professional services firms conducting business in or from Jersey have chosen to be here based upon our current market access arrangements. We don’t envisage any meaningful negative impact on their business models - indeed we see continued opportunity for Jersey to help move capital to and from both the UK & Europe,
The recent independent reports on Jersey’s ‘Value to Britain’ and ‘Value to Europe’ clearly identify the positive economic benefit that Jersey generates for our neighbours. We look forward to continuing to play an important role in stimulating tax receipts, jobs and economic growth in these markets into the future.
When this government took office, we assessed Jersey’s position and put in place plans for the medium and long term. Budget 2017 supports the recently approved MTFP. This is an agreed four year plan that draws on more than £100m of reserves to support the economy in a responsible way, largely through infrastructure investment and restructuring. By using some reserves in this way we lessen the impact on Islanders and allow the time necessary to complete the transformation of the public sector.
Jersey has little debt and significant reserves. Our Common Investment Fund (where our cash is pooled and invested) has been averaging almost 9% returns in recent years. Ironically BREXIT has proved positive to our investments. As an example the Strategic Reserve had grown to £853m by the end of September.
We have a firm financial plan and a proven track record of fiscal discipline and remain agile in the face of rapidly changing global environment. We will continue to draw on the expert independent economic advice as the local and global outlook changes. And we will ensure we maintain enough flexibility in our plans to respond to any changes or sudden shocks.
Some of our decisions have been difficult and, I have no doubt, unpopular, but they are all focused on trying to keep Jersey competitive and a great place to live and work. Jersey is in better shape than virtually anywhere else and we should all be proud of it.