Tuesday 07 February 2023
Select a region
Opinion

OPINION: It's not just about GST

OPINION: It's not just about GST

Tuesday 17 January 2023

OPINION: It's not just about GST

Tuesday 17 January 2023


Deputy Peter Ferbrache has written an open letter to the Bailiwick outlining the need for tax reform and explaining why the proposals up for debate next week are about much more than just GST.

"Dear Editor,

With just days to go until the States begins what is probably its most important debate of this political term, there has been a lot of discussion and commentary. The Tax Review is a fork in the road that will shape the future of our Island for years to come, whichever way members vote.

Screenshot_2023-01-13_at_14.33.13.png

Pictured: The S&P Ratings were published on Saturday, confirming Guernsey had been downgraded to a "negative" outlook.

If it wasn’t already known, the news today (Friday) from credit rating agency S&P makes clear that the world is watching to see if we will do the responsible thing and agree a plan that puts our future funding of public services and the balance of public finances on a sure- footing, which right now it is not. There is growing pressure on services, particularly health and pensions, because the make-up of our population is changing with many more now reaching the age where they will need those services. If we fail to address that, if we kick the can down the road, confidence in this Island as a place to do business will weaken, damaging our economy. This is no longer the time for populism or politicking.

But understandably people are concerned about what it means for them, and how they will afford to live in an Island which is already expensive. So while there are lots of aspects of this debate worth discussing, here I’d like to tackle two things in particular – how this tax package will result in lower and middle income households being better off, and whether GST will rise in the future.

GST has dominated the discussion so far, and as a result other parts of this tax reform don’t get the same attention. But they’re crucial to how people will be affected overall. The plan includes a new 15% tax band for earnings up to £30,000. That means for most people you will see your income tax drop by £900. That’s £900 per year more in your pay that actually reaches your pocket. In addition, personal allowances would rise by £600, putting another £120 in your pocket. And crucially, the introduction of social security allowances would mean someone earning £30,000 would get another £700 from their own pay back in their pocket. Straight off the bat, nearly £2,000 currently taken out of people’s pay as tax is now back with them to spend, save or invest as they choose.

gst retail shops town

Pictured: GST has dominated debate, with retailers now warning shops will close if the goods and services tax is brought in.

Yes, on the other side of the scale is a 5% GST. We’ve been at pains to show how in real life, for most lower and middle earners, the money that you keep from your income will be more than the additional money you’ll spend because of GST. And we know that with confidence because for years we have done a lot of ongoing data analysis on household expenditure, based on many surveys which many Islanders have taken part in, and I thank them for that. We’ve got a really good picture of how different types of household on various income levels spend, and what they spend it on, meaning we can do some really accurate predictions on how much 5% would add to that spend. On ourfuture.gg/tax-review there are more than 20 case studies to see how different people would be affected, and I’d really encourage people to go there.

You may then ask, if people see their overall tax contribution fall, how does this actually raise money? It does this in a few ways. First of all, it brings in more from higher earners. Already personal allowances are gradually removed for those over £90,000 but they will pay the full rate GST on anything they buy, and they are bigger spenders meaning a lot of the money raised by GST comes from that group. (As an aside, it’s also a type of tax that is very hard to get around paying - no matter how you structure your tax affairs, a GST means when you purchase something, you pay that tax.) Alongside their GST spend, higher earners will also pay more through social security contributions through higher rates which form part of the social security reforms that make up this package. Secondly, a GST casts a wider net, bringing in tax from more people than currently pay income tax. For example, the GST that comes from money spent by visitors to the Island alone would be approximately £6m.

In addition to the money raised from GST, businesses will contribute much more through this package of measures compared to now, largely through the reforms to social security. That means out of the £55m being raised, around £27m comes from businesses and not from individual islanders.

The net gain in terms of public finances from all this is around £55m, which makes a big difference in meeting the rising demand for healthcare, social care and pensions while introducing a more progressive tax regime and reducing the overall tax contribution for most lower and middle-earners.

But as I say there is a lot of scepticism. Some say they simply don’t believe it, which I’m sorry to hear, but I’d encourage them to look at the detail of the proposals on ourfuture.gg or if they’d like more detail, in the policy letter (also available on ourfuture.gg) because the numbers don’t lie.

Peter Ferbrache skint

Pictured: Deputy Ferbrache says the island needs to change the way tax and social security are collected or services will be cut.

There are others who believe this is the thin end of the wedge, and while those on lower incomes may be better off initially, it’s only a matter of time before GST is hiked up. I can understand that concern but I’m not sure there’s as much evidence to support it as some people think. Some point to Jersey where the rate was increased from 3% to 5% a couple of years after their GST was introduced, which is fair enough. But similarly I think its important to look at the full history, because that increase took place in 2011, and more than a decade later it is still at 5%. Other jurisdictions’ experiences with their own consumption taxes show they can go up, but they can go down too. As part of supporting its economy during the pandemic the UK applied significant reductions to VAT for areas such as hotels and visitor attractions. Even outside of the pandemic, you only have to go back as far as 2008 when the UK government reduced VAT off the back of the recession.

Like any fiscal measure, there may be good reasons in the future to increase or decrease any tax and GST is not special in that sense. The very recommendations we’re talking about now include a reduction in income tax - the aforementioned 15% band. And if income tax is a guide on whether taxes ae more likely to rise or fall, we should note that income tax hasnot increased beyond 20% in Guernsey. So despite the claims that ‘once its in it’ll be easy to put it up’, that’s not what real-life experience tells us. In addition, two States Members are proposing to impose a requirement that any future increase in GST faces tougher checks and balances when it goes to the States for approval, so it can be very robustly challenged and I fully support that. But of course we can’t tie the hands of future governments, and we can’t know what challenges Guernsey will face in the future. They may decide it is right to raise GST, that may even be part of their own broader package which offsets those future increase in other ways. But our intention right now is not to try and sneak this in at a low rate and then ratchet it up as soon as it’s through the door. We mean what we say when we propose a 5% GST, no more, no less.

I hope this helps to assure some of those concerned that this package of tax measures will hurt those on lower incomes, which is the opposite of what it is designed to do. But I hope we do take seriously the urgent need to secure the future of our essential public services as demand rapidly grows, with a competent plan that restores confidence in our Island and protects our economy.

Kind Regards,
Deputy Peter Ferbrache, 
President of the Policy & Resources Committee





Sign up to newsletter

 

You have landed on the Bailiwick Express website, however it appears you are based in . Would you like to stay on the site, or visit the site?