Guernsey Considering Tax Hikes To Address Structural Deficit

by Robert Lee, Tax-News.com, London

10 March 2009

Guernsey has warned that it will have to raise taxes in order to balance its finances over the coming years.

In the 2009 Budget Report the Treasury and Resources Department revealed an anticipated ongoing shortfall of GBP35-40m in annual revenues as a result of the new States Economic and Taxation Strategy, but now its consultants on the borrowing investigation have forecast, given global economic conditions, that the position could deteriorate further.

The structural deficit in States finances is set to increase to GBP60-65m a year as economic forecasts continue to get worse, Guernsey has announced this week. On top of a structural deficit of approximately GBP35-40m, Guernsey now estimates that the public finances will suffer a cyclical deficit of GBP25-30m per annum over the next few years, triggering the need for fiscal measures to boost States revenues.

Treasury and Resources Minister Charles Parkinson said that the proposed use of up to half of the States Contingency Fund to cover revenue spending shortfalls is now likely to cover just 2009 and 2010. Further income-raising measures would be required for the second phase of the Economic and Taxation Strategy, he warned.

His department is now considering revenue-raising options to collect an extra GBP52m a year – which would start within the next 12 months – to allow the States to balance the books year-on-year by 2017.

The Treasury Department has announced its intention, in conjunction with the Policy Council’s Fiscal and Economic Policy Steering Group, to investigate, model and cost a number of options for consideration by the States.

These could include the following:

• An ongoing real terms reduction in States expenditure – a 2% cut would equate to approximately GBP6m;
• Reducing or eliminating the States grant to the Social Security Funds (GBP17m in 2009);
• Reducing or phasing out Income Tax relief for mortgage interest, which currently costs GBP12-15m per annum;
• An increase in Excise Duties – an ‘across the board’ increase of 20% would raise GBP5-6m per annum; or targeted increases – a 20p increase in motor spirit duty would raise approximately GBP7m per annum;
• Increasing tax on rateable values tariffs – a straightforward doubling of the existing tariffs would raise GBP12m per annum;
• Increasing the document duty rate – based on the 2007 values, an increase from 3% to 4% would raise approximately GBP5m per annum;
• Transferring the annual interest on the Contingency Reserve Fund (approximately GBP6m) to general revenue;
• Increasing the basic rate of Income Tax – a 1% increase to 21% would raise approximately GBP10m per annum;
• Revisions to the Corporate Income Tax system;
• Introducing a higher-rate Income Tax band;
• Introducing a Goods and Services Tax – it has previously been estimated that a similar tax to that introduced in Jersey would raise in the region of GBP40m per annum.

“We are aware that we can’t eliminate such a significant deficit in one year without it having a serious effect on the local economy. Measures will have to be phased in over time, with the shortfall funded from the Contingency Reserve," explained Parkinson.

“Guernsey however does need to take urgent action to reduce the structural deficit. Any delay will impact on the ability of the Contingency Reserve to fund the shortfall – and the risk of Guernsey truly slipping into the red,” he warned.

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