30 November 2006
Agenda Item: A3
AMENDMENTS TO THE 2007 BUDGET AND NEW FISCAL FRAMEWORK
Purpose of the report
To provide the Council of Ministers with an opportunity to discuss the amendments lodged in respect of the 2007 Budget and associated legislation and to consider the proposed comments of the Minister for Treasury and Resources.
To provide the Council of Ministers with an opportunity to discuss the proposed rescindment of the Strategic Plan objective to establish a Stabilisation Fund and new Fiscal Framework (P133/2006) and consider the proposed comments of the Minister for Treasury and Resources
COMMENTS
Two amendments to the 2007 Budget (P130/2006) have been lodged by Deputy Southern and are attached for information. The Minister for Treasury and Resources will present his proposed comments to these amendments at the meeting.
An amendment to the Income Tax (Amendment No.26) (Jersey) Law 200- (P132/2006) has been lodged by the Minister for Economic Development in respect of the place of residence for a company and this attached for information. The Minister for Treasury and Resources will present his proposed comments at the meeting.
Deputy Southern has also lodged a Report and Proposition (P154/2006) asking the States to rescind its decision as part of the Strategic Plan (P40/2006) to establish a Stabilisation Fund. P156/2006 is attached for information. The Minister for Treasury and Resources will present his proposed comments at the meeting.
STATES GREFFE
MINISTER FOR TREASURY AND RESOURCES COMMENT ON
1st AMENDMENT TO BUDGET 2007 P130/2006
“This amendment is opposed in the strongest possible terms.
The cost of this amendment in terms of lost tax revenue in 2007 is estimated to be £2.2 million and, as no compensatory tax measures are proposed this will translate directly into an increased deficit of an equivalent amount in each and every subsequent year. This is at a time when the States is attempting to establish a sustainable financial position from which to address the changes to the corporate tax structure.
I should point out that there are a number of differences between this amendment and the increase in exemptions I am proposing for the next three years:
· The “20% means 20%” proposals are a package of measures aimed at making the Fiscal Strategy progressive
· As part of that package the target was for a net £10 million in additional revenues to be found from the withdrawal of allowances from those with higher incomes
· When the revised proposals were agreed in July (P58/2006) I was able to temper the effect on middle income earners and protect certain key allowances by raising £16m from higher earners and using £6m of this sum to raise exemptions over a three year period.
I would refute the statement that I have acceded to the principle of annually increasing tax exemptions. I have proposed three years of increases in exemptions solely because I have identified a recurring source of funding. Conversely this amendment increases States deficits without identifying any recurring source of funding.
Effect of Part a) of the Amendment
Although the stated intention of this proposition is for a better balanced budget, in reality it does the opposite. Part a) of the proposition reduces States income without any compensatory measures. It therefore increases the States deficit for 2007 and every subsequent year by over £2 million per year.
Who would benefit?
I would also wish Members to understand exactly who will benefit from this amendment. The Deputy uses somewhat emotive language and I would want States members to be clear that the 2002 Income Distribution Survey only showed that 24% of households were below the relative low income threshold (60% of median equivalised income), and this is not the same as saying that 24% of our population is living in poverty. Given that incomes are generally higher in Jersey than in other countries it gives us very little indication of the numbers living in real poverty in Jersey.
What needs to be clearly understood in any debate on tax exemptions and allowances is the distribution of taxpayers under the current taxation system. Approximately 65,000 people are liable to tax of which:
· 23,900 or 36% are protected by our generous exemption limits and pay NO income tax;
· a further 24,500 or 38% are middle income earners and are assessed at the marginal rate, these taxpayers have an average effective rate of 8%; and
· the remaining 16,600 or 26% are higher income earners and are assessed at the standard rate, these taxpayers have an average effective rate of 14%.
I therefore maintain the view that the amendment would have no benefit whatsoever for the poorest of the Island as they do not pay tax and so do not benefit from increasing the exemption limits.
Those that would benefit from this amendment are the group of 24,500 middle income earners who pay tax at the marginal rate and include taxpayers with income in excess of £60,000. The maximum tax saving that could be received by any taxpayer from this amendment is £138 and most would benefit from less than this.
If the Deputy really wanted to target more funding at the poorest of the Island then this should be done through the new income support system and not through this amendment.
Effect of Part b) of the Amendment
Part b) proposes using States reserves (i.e. the Consolidated Fund) to make up the increased shortfall between States income and expenditure. This is poor policy because:
· such a policy results in the States living beyond its means;
· it is unsustainable as eventually the reserves are used up; and
· by increasing the States deficit it adds to inflationary pressures.
There is also no need to reduce the Strategic Reserve transfer as although there is a £2 million deficit envisaged for 2007, there remains a healthy balance of £32 million in the Consolidated Fund, even after the £10 million proposed transfer.
This amendment does nothing for the poorest of the Island , adds to the inflation of the Island and increases the forecast deficit in 2007 and every subsequent year by £2.2 million.”
STATES GREFFE
MINISTER FOR TREASURY AND RESOURCES COMMENT FOR 2nd AMENDMENT to BUDGET 2007 P130/2006
“This amendment is opposed.
Although the amendment identifies that there is no revenue effect in 2007, it will increase tax exemptions from the year of assessment 2007 and so will reduce States tax revenues from 2008 onwards.
The cost of this amendment in terms of lost tax revenue in 2008 is estimated to be £1 million and as no compensatory tax measures are proposed this will translate directly into an increased deficit of an equivalent amount in each and every subsequent year. This is at a time when the States is attempting to establish a sustainable financial position from which to address the changes to the corporate tax structure.
In essence this is really a further attempt by the Deputy to frustrate the Fiscal Strategy, and specifically the “20% means 20%” proposals, which were only approved by the States a few months ago.
Who would benefit from the Amendment?
Without repeating all the detail from the first amendment of the Deputy, those that would benefit from this amendment are the 24,500 middle income earners who pay tax at the marginal rate and which include taxpayers with income in excess of £60,000.
Why Oppose the Amendment?
This amendment should be opposed on the following grounds:-
1. The proposed increase in tax exemptions of 2.5% for years of assessment 2007 to 2009 is part of the approved “20% means 20%” package of measures, developed through a long consultation process, to deliver £10 million additional tax revenues. The increases reflect the States target level of inflation and are also consistent with the current States pay policies.
2. The amendment, if accepted, will increase the States deficit by £1 million in 2008 and every year thereafter.
3. Increasing States deficits will add to inflationary pressures on the Island.
4. It does little or nothing to help the poor. The main beneficiaries will be middle income earners.”
STATES GREFFE
Comment by the Treasury and Resources Minister on
P154/2006: Stabilisation Fund Rescindment
“The proposition is strongly opposed for many reasons. Its acceptance would cause the Report and Proposition P133/2006 to fall and therefore jeopardise the whole purpose of the new fiscal framework, which is to improve taxation and spending policy in the Island and to create better conditions for economic growth and low inflation. The acceptance of P154/2006 would mean that we fail to take an important step in improving the economic management of our Island economy.
The key objections are that:
It fails to ensure that proper consideration will be given to the economic implications of tax and spending decisions
The States will not have to balance the financial position over the economic cycle thereby risking additional inflationary pressure in the economy
It represents a confusing approach to the Strategic Reserve policy that has not been fully thought through
There is no guidance as to when or how much of the interest on the Strategic Reserve should be used for stabilisation purposes
No assurance is given as to how the real value of the Strategic Reserve will be protected or increased in future years and hence the real value of the Strategic Reserve could be eroded in time
No attempt is made to improve on the current policy arrangements and learn from past experience
The Fiscal Policy Panel will not be established and there is no alternative proposal for feeding independent, public and expert economic advice into tax and spending decisions
The Deputy is selective in his critique of Stabilisation Funds.
I will now explain these objections to P154/2006 in more detail.
There is no mechanism to reinforce a prudent approach to fiscal management and it will mean it is quite feasible that money will not be taken out of the economy in good times and that interest from the Strategic Reserve will be put back into the economy at other times. Over the course of the cycle we will not be balancing our budgets and this will clearly undermine economic stability, economic growth and low inflation.
No explanation is given as to how the interest from the Strategic Reserve will be managed and made available to put back into the economy. If only one years return is available in any year then there is unlikely to be enough funds available to provide a significant countercyclical effect. If the opposite applies and cumulated past returns are available then there could be far too much money available to invest at any one point in time. How the interest from the Strategic Reserve could be used in the manner intended has clearly not been thought through.
The fact that the nominal return from the Strategic Reserve could be spent repeatedly would actually mean that the value of the Strategic Reserve could fall in real terms. There is no recognition of the need to manage the Strategic Reserve and build it up in the medium to long-term where possible so that we can be more confident it is able to meet its objectives of insulating the Island’s economy from severe structural decline or major natural disaster.
The interest from the Strategic Reserve would have two purposes: for strategic spending and to make fiscal policy more countercyclical. These objectives will at times be conflicting and it would be counter intuitive to decide that it was the wrong time to be putting money into the economy for stabilisation purposes but to do so for strategic purposes. The States Annual Business Plan is the time and means by which to make strategic spending decisions.
No recommendation is made as to how the current arrangements could be improved to prevent us repeating past mistakes and improving the Island’s economic performance.
The lack of distinction between money paid into the Strategic Reserve either to build up the capital value, or to be available for stabilisation purposes or to fund strategic spending will create a very confused policy. There would be a complete failure to put in place a clear and credible framework that businesses and the public can understand and see how it will operate and help deliver low inflation. There is no clear explanation of how the proposed set up would work and it would lead to confusion for members and the wider public.
The independent Fiscal Policy Panel would not be put in place and it follows that their independent advice on tax, spending and stabilisation issues would not be published. A major opportunity to improve the way we make key economic policy decisions in the Island would be lost.
Other Matters
1. There are a number of errors in the report which I would like to correct:
· The Chief Minister did not accept, as stated in the report, amendments to the Strategic Plan in respect of section 1.2.3 :
Improve overall fiscal framework by the immediate establishment of a Stabilisation Fund, into which the following funds will be transferred
ii) The capital receipts from property sales identified in Action 6.2.3 of this Plan, estimated to reach at least £4 million per year by 2009 (being the capital element of the savings arising from the Change Programme) (T&R), or
iii) The non-capital element of the Change Programme Efficiency Savings identified in 6.2 of the Strategic Plan (estimated to reach £6.64 million per year by 2009) (T&R).
and this part of the amendment was also rejected by the States.
Whatever the merits of the proposals for a Shared Equity Scheme (still to be debated), the first time buyers scheme has not been abandoned, and
I cannot recall ever having said that we shall “probably have to sell off all our utilities”.
2. I would also now wish to cover a number of statements in the report accompanying P154/2006 that are either misleading or ill-informed and to which members’ attention should be drawn:
· “Almost £200m is to be found from the economy at a time when the zero/ten black hole is looming”. This is a complete misrepresentation of the true situation. Firstly, the long-term aspiration is build up the Strategic Reserve by another £100-120m. This does not mean that these funds will need to be taken from the economy in the next few years. In addition, reinvestment of the return on the reserve would not take money from the economy and would actually help to build up the Strategic Reserve towards this level. Secondly, additional funds could be transferred into the fund from surpluses run in the future, not just the next few years.
· A further £40-70m could be needed to build up the Stabilisation Fund in future years and there are a number of potential ways that this could be achieved as outlined in my written response to Deputy Southern’s question of 7 November 2006. It is clear from the answer to that question that this does not mean that these funds will have to be found through higher taxation/expenditure cuts in coming years as they could come from the consolidated fund, the sale of certain investments or unexpected tax receipts.
· “The time for the creation of a Stabilisation Fund is clearly not now”. As the economy continues to perform strongly now is actually the most important time to consider introducing the Stabilisation Fund to ensure that we do not make tax and spending decisions that undermine our economic performance by being pro-cyclical and inflationary.
· “I believe that the need to top up the Strategic Reserve and to create the Stabilisation Fund will provide the reason and the motivation for the sale of our utilities.” Any recommendations by the Minister for Treasury and Resources on the sale of utilities will be based on a thorough analysis of the potential benefits it could bring and members will have the opportunity to debate such decisions in the future. Recommendations could be brought to the States if it is considered to be in the Island’s best interests irrespective of whether the Stabilisation Fund is in place and even under the proposals in P154/2006 could be used to build up the Strategic Reserve. Accepting the rescindment of P133/2006 will do little to influence the Minister’s recommendations regarding sale of utilities and indeed the ultimate decision of the States.
· “The examples of successful stabilisation funds discussed in P.133 come from countries who took the decision to adopt such policies in times of plenty”. If the report accompanying P133/2006 is read properly members will see that examples quoted include US States which introduced stabilisation funds during the 1990s when they were not experiencing windfall gains but wanted to try and improve their economic performance. The IMF also recommended a stabilisation approach in Kiribati long after their windfall gains from phosphate mining had subsided. “
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