Minister for Treasury and Resources
26 th November 2008
AMENDMENTS TO Draft BUDGET STATEMENT 2009 (P158/2008)
- Purpose of Report
- The Minister of Treasury and Resources is asked to agree Comments to the various amendments lodged in respect of the draft Budget Statement 2009.
- Background
- The draft Budget Statement is scheduled for debate at the States sitting beginning 2 December 2008. A number of amendments have been lodged, and where appropriate draft Comments have been prepared and are attached to the report.
3. Recommendations
The Ministers is asked to agree the draft Comments to the Budget amendments and agree that they be forwarded to the Greffe for lodging in advance of the Budget debate on 2 December 2008.
Head of Financial Planning for Decision meeting 27 November 2008
26 November 2008
BUDGET STATEMENT 2009 (P158/2008): SECOND AMENDMENT – COMMENT
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COMMENT
The Budget Statement 2009 (P158/2008) includes proposals to allocate £2.4 million of the £5.8 million agreed in P138/2008 in September to an increase in income tax exemptions limits by 5% instead of 3% in 2009. The balance of £3.4 million is being allocated to targeted benefits through the additional expenditure proposals (P163/2008) for the Income Support scheme and GST Food Costs Bonus Scheme.
Those proposals represent respectively the Treasury and Resources Minister’s and the Social Security Minister’s interpretation of the States decision on P138/2008.
Deputy Ferguson is presenting this amendment, and a complementary amendment to P163/2008, as an alternative interpretation which would transfer £500,000 from those less well-off in receipt of benefits on Income Support to those low to middle-earners who pay tax at the marginal rate. The effect of the amendment would be to allocate the £5.8 million funding approximately equally between those on the Income Tax system and those who are in receipt of benefits, either through the Income Support scheme or GST Food Costs Bonus Scheme.
The Treasury and Resources Minister takes the view that the majority of the £5.8 million should be targeted to the less well-off. However, the Minister accepts that it is ultimately for the States to determine the appropriate allocation. It is important that Members are aware that the Deputy’s intention is that this proposal be neutral to the financial position of the States and Members should only contemplate supporting it if they are also prepared to support the complementary amendment to P163/2008.
MINISTER FOR TREASURY AND RESOURCES
BUDGET STATEMENT 2009 (P158/2008): THIRD AMENDMENT – COMMENT
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COMMENT
The Minister opposes this amendment because it raises a number of unintended inequities and problems within the existing interpretation of the Income Tax legislation which are explained at length in the supporting report.
Furthermore the amendment would also result in income tax revenues being reduced and the States financial position worsened by an estimated £400,000 in 2010 and subsequent years.
In last year’s budget the States agreed to the Minister for Treasury and Resources’ proposal to increases allowances for those parents with children in higher education from £5,000 to £6,000 per child, an increase of 20%. This was to provide additional help to reflect the additional costs of higher education.
The Minister would also wish Members to be aware that parents with a child on a typical three year degree course will actually receive four years of the £6,000 annual allowance. This is because the current interpretation allows a full year’s allowance to be claimed for Year 1 of that degree where the “child” would only attend for one term, typically starting in September. In Year 4 when the “child” would only attend for two terms, typically until June of that year, a further full year’s allowance may be claimed.
The Minister will be opposing this amendment for the reasons stated above and also in the attached report. However, the Minister is prepared to commit to a review being carried out in conjunction with the new Minister for Education, Sport and Culture to consider ways in which support can be provided to mitigate the increased costs faced by parents with children in higher education. The intention would be to identify proposals which could be brought forward in the 2010 Budget.
MINISTER FOR TREASURY AND RESOURCES
BUDGET STATEMENT 2009 (P158/2008): FOURTH AMENDMENT – COMMENT
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COMMENT
Summary
The Minister for Treasury and Resources opposes both parts of this amendment.
This amendment is, according to the Deputy, designed to take into account the advice of the Fiscal Policy Panel (FPP). It is in fact, totally contrary to the latest recommendation of the FPP which is:-
“There should be no further withdrawals from the Consolidated Fund to fund discretionary expenditure increases or tax reductions until the extent of the economic slowdown and the underlying strength of the fiscal position are clearer.”
The FPP noted that in the Business Plan the States agreed a significant, permanent increase in States spending, yet the recent increases in States Income may prove to be temporary. In these circumstances the FPP recommends that the States should not further erode its financial position by increasing spending or reducing taxes.
The amendment to further increase exemption thresholds from 5% to 6.4% would permanently reduce States income by £1.7 million a year, and would be of no benefit whatsoever to low earners who do not pay tax.
The proposal to delay 20 means 20 by a year would be a £3.8 million tax give away to the highest 24% of earners in Jersey. It would be a regressive tax measure, of no benefit to those on low to middle incomes.
It is highly likely that neither of these amendments, together amounting to £5.5 million will be affordable in the medium term, so these tax reductions now would almost certainly result in even greater tax increases in the future.
PART 1
The Minister for Treasury and Resources opposes this amendment.
The Deputy’s amendment appears to be aimed at providing further support to Islanders, recognising the downturn in the economic cycle, the effect of the agreed measures from the fiscal strategy and the recent higher food and fuel prices. However, it targets the additional support only to those taxpayers suffering Income Tax at the marginal rate. Persons not liable to Income Tax, or those paying under “20 means 20”, would be unaffected by this amendment.
The question to be asked is how much support is required. The States originally provided for the effect of the GST on the less well-off by adding £2 million to Income Support as well as providing a new Winter Fuel allowance. In the recent States Annual Business Plan 2009 a package of measures was approved to increase the Winter Fuel Allowance and begin an energy efficiency programme including energy advice and home insulation grants amounting to £1.2 million p.a. In addition an extension of the transitional relief within the income support scheme was agreed at a cost of an additional £5.75 million over the next five years.
In terms of income tax exemptions, these have been raised by 14% in the last three years, including this year’s proposals, at a cost of over £16 million.
Finally, the States agreed P138/2008 in September this year which provided an additional £5.8 million to help mitigate the effect of GST and higher prices on food and fuel for those on low and middle incomes.
The basis for this Amendment seems to be that the increase of 5% in the tax thresholds proposed in the budget for 2009 may not be sufficient. It is a fact that the RPI figure for September 2008 was 6.4%, but all commentators now suggest that inflation has peaked and the September figure is not indicative of future levels. What is also important to bear in mind is that the proposal of 6.4% is for income tax exemptions for 2009, and for the majority of taxpayers this will affect tax to be paid in 2010, when inflation is expected to be much lower.
We are currently forecasting small deficits beyond 2009 and we are warned by the Fiscal Policy Panel that all the risks to our financial position are on the downside. We are also advised that no further discretionary expenditure or tax reductions should be made until the extent of the economic slowdown and the underlying strength of our fiscal position are clearer. Even when such expenditure is required, it should fulfil all relevant criteria, including that of being temporary in nature.
These are undoubtedly difficult times, but the States has made a significant contribution to assist those on low and middle incomes over the past couple of years. Consequently, States members should seriously consider how a further structural tax cut of £1.7 million can possibly be justified at this stage.
For the above reasons, Members are strongly urged to reject this amendment.
PART 2
The Minister for Treasury and Resources also opposes this amendment.
The second part of the Deputy’s amendment is targeted at those taxpayers on the standard 20% rate, typically middle to high earners. The 20% means 20% proposals provide the progressive element within the Fiscal Strategy. Taken in conjunction with the Goods and Services Tax, it means that Jersey’s overall tax arrangements remain broadly progressive, with those on middle and higher incomes contributing somewhat more than the less well off.
Members may need to be reminded that in broad terms, 25% of households pay no Income Tax whatsoever, the next 50% suffer Income Tax at the Marginal Rate, and only the top 25% of households actually fall within the “20 means 20” tax band.
The estimate of the cost of the proposed amendment in income tax revenues foregone from those higher earners is £3.8 million.
It is also important that we now have certainty and stability in our Tax Code, following what has been 5 years of quite remarkable change, of a complexity and character never seen since Income Tax was first introduced into Jersey in 1928. We should not tinker with the Tax Code in anticipation of changes in economic fortune which may or may not happen. Much business and consumer confidence has been derived from our determined and robust approach to deliver those measures which were identified at the outset, and now is not the time to be taking a backward step, even for one year.
I would repeat the advice from the Fiscal Policy Panel, reiterated in their latest update, that no further discretionary expenditure or tax reductions should be made until the extent of the economic slowdown and the underlying strength of our fiscal position are clearer. I would also remind States members that we are currently forecasting small deficits beyond 2009, which would increase by £3.8 million in 2010 with this proposal, and we are warned by the Fiscal Policy Panel that all the risks to our financial position are on the downside.
The Deputy is quite correct that the financial effects of his amendment would not be felt until probably late in 2010, since it refers to the 2009 year of assessment. By that stage those taxpayers affected by ”20 means 20” will have already experienced the first two years of the tax, the years in which most revenue will be collected. The Deputy recognises this in his introduction.
However the advice from the Fiscal Policy Panel is that in the event of the Island facing recessionary pressures, if and when that may occur, additional funding is best directed to those with least discretionary spend, i.e. the less well off. On those grounds alone, this amendment is misguided.
For the above reasons States members are strongly urged to reject the amendment.
MINISTER FOR TREASURY AND RESOURCES
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