Updates« Return to Comments from Geoff Cook
The State of Our Nation (Part One - Cutting our Cloth)
Monday 26th July 2010
Given recent tentative steps toward recovery in the global economy following the worst slowdown for 70 years, it is clear that the focus in many countries has turned from stimulus measures to austerity programmes.
Jersey, whilst showing commendable resilience, could not expect to chart its way through such stormy economic waters with out some impact, and all sectors of the economy have felt the effects of the slowdown, which will in time reduce government revenues.
As with most countries this has prompted a slew of reviews in Jersey with the Comprehensive Spending Review (CSR), Business Taxation Review (BTR) and the curiously named Fiscal Strategy Review (FSR), which is in reality a review of personal taxation and indirect taxes.
Following comment from a number of Jersey Finance members it has been suggested that a dissemination of views and feedback received to date would be helpful in terms of contributing to the debates which naturally arise. With the benefit of advice and views from trade associations and other members I am therefore going to comment on each of these reviews in turn over the next few weeks with particular reference to the potential impact on the Finance Industry and de facto the Jersey economy. I begin this series with comment on the Comprehensive Spending Review.
D is for deficit
Current Treasury estimates are that Jersey is heading toward a £100m deficit and it is proposed that this is dealt with through £50m of cuts and £50m in increased taxes. The latter appear to be subject to consultation but not the former. This is putting the proverbial cart before the horse, as the balance achieved between spending cuts on the one hand and tax increases on the other must ensure the imperative of a competitive and sustainable economy. If this balance is not achieved taxation measures become a tax on jobs, the tax base reduces and the increased tax rates result in less, not more tax being collected.
C is for Consolidation
The UK Coalition government has recognised the importance of a balanced and competitive economy with a broadly 80:20 approach in favour of cuts, with the goal of reducing government spending to more sustainable levels. This core strategy is complemented by a blend of tax increases (VAT to 20%) and tax reductions (Corporation tax to fall to 24%) in order to increase revenues and grow jobs, by making business more competitive.
Other countries such as Canada, Sweden, Australia, and Ireland have all faced similar challenges and a number have used the opportunity to redesign public services in order to deliver higher outcomes at lower costs.
Jersey too is now looking at an austerity package but perspective is important and clearly, with no government debt, no recourse to borrowing and without the (undesirable) option of printing money, the Jersey Government deserves great credit for putting some funds by in the good times and the introduction of a range of fiscal stimulus measures.
S is for Spending
However, a closer examination of spending patterns does not speak well of the States track record in controlling expenditure, managing costs nor in achieving reductions in spending, as the rising States net revenue expenditure graph indicates.
In a report entitled ‘Setting the Scene’ dated January 2008 the Jersey Comptroller and Auditor General notes:-
“As far as increases in expenditure are concerned, in all but one of the past ten years, [1]GGE* has increased by more than the annual increase in the Retail prices Index (RPI).”
The graph below illustrates the percentage growth in spending by the States over and above inflation in the period 1997 – 2006.
Given the overall slowdown in economic activity in the last two years some slowing in government spending could reasonably have been anticipated. However the summary of Financial performance in the States Accounts for 2009 indicates that spending overall increased by 6.6% with inflation at 1.7%.
How is it then that States expenditure has consistently outpaced inflation over many years?
Without further in depth analysis which is beyond the scope of this article it is difficult to determine the detailed root causes but I hope to return to this subject in future articles. The most obvious explanation is simply that the money was there to be spent. In a period of unprecedented economic prosperity, largely funded by the Finance Industry, tax revenues have been high. There appears to have been little if any focus on ensuring the size of government, and the level of public expenditure, could accommodate the inevitable variations in the economic cycle.
Time is likely to reveal that growth in the world economy in the period upto 2007 was exceptional and that a number of countries have allowed the underlying structural size and cost of government to grow to unsustainable levels. Perhaps Jersey has looked too often to the UK in terms of mirroring the provision of a government infrastructure, framework and services designed for a population of 60m plus, a framework of public finances which the UK Coalition government has acknowledged is too large, with planned reductions of between 25% and 40%.
That said there are two major factors which have contributed significantly to the inflation plus trends in public spending in Jersey:
H is for Headcount
Our Government has got larger. Between 1997 and 2009 Public sector employment grew by 950 jobs, over 16%.
In fact this situation is probably understated in that a number of quasi government institutions such as States Trading Committees, the Jersey Financial Services Commission, the Jersey Competition and Regulatory Authority and others are not included in the figures and would increase the total number of government or quasi government employees to 8,180. In addition statistical changes have also likely depressed the growth figures on a comparative basis since 2007. The increase in the size of government is more than twice the rate of population growth in the same period.
In reality therefore public service employees comprise around 15% of the working population and approximately 9% of the total population. To put it more simply almost 1:10 of the Jersey population work for the government in some shape or form.
My point here is not to pass a value judgement on the size and quality of public services but to question their rate of growth and sustainability given the new economic reality all countries are faced with.
P is for Pay
With around two thirds of government costs relating to salaries the level of remuneration in government is a major component of expenditure. It has traditionally been the case that public sector workers have not enjoyed the same financial rewards as the private sector. Better pensions, better working hours, greater job security, and earlier retirement dates were all taken into account in determining pay levels. However, this may no longer be true according to the following extract from a recent study by independent Think Tank , [2]‘Policy Exchange’, on the public sector in the UK.
“People used to say that public sector workers had great pensions to make up for their low salaries. That’s now out of date, as public sector workers have much better pay, as well as better pensions and conditions. People in the public sector are better paid and have pensions worth more - while enjoying shorter hours, more time off, and earlier retirement. There is scope to make savings without being unfair.”
So what is the reality in Jersey?
An objective examination of pay is illuminating with average weekly public sector earnings in Jersey at £810 per week, according to the States publication ‘Jersey in Figures 2009’. The average for all employees in the Jersey workforce is just £620 per week.
In May 2008 the Comptroller and Auditor General quoting a Hay Group survey and Statistics Unit remuneration report suggested that… “average remuneration within the Island’s public sector appears to be higher than in almost all of the Island’s sectors”
Government has grown both in size and cost considerably faster than would have been warranted simply to keep in step with inflation.
Against this challenging backdrop the Council of Ministers has decided to introduce measures which, if approved, will ultimately cut States spending by £50m recurring. We know how they have arrived at this figure but we do not know if the figure is the right one. The targets for cuts have been identified and Ministers are tasked with coming up with plans to deliver the reductions.
But more fundamental questions need to be addressed. The current government approach has all the hallmarks of a tactical and pragmatic reaction to a looming problem as opposed to a carefully crafted strategy.
Bigger questions need to be asked and answered.
- How large should government be?
- What is the appropriate size, range, and quality of public services for a jurisdiction with a little over 90,000 people?
- What can be achieved by ensuring that the provision of services is both affordable and proportionate?
- Have the structural causes of inefficiency been addressed?
- What savings could be achieved if government were the funder and regulator of services, but not the provider?
Surely only when these questions have been answered will we know the extent and opportunity for efficiencies and reduction in public spending and the need for tax increases should they ultimately be required.
Every avenue must be explored, examined and exhausted before we turn to the option of raising taxes whomever they may be levied on. Tax takes value out of the productive side of the economy. It raises costs for employers, the cost of living for employees, and has a negative effect on competitiveness, reducing employment and economic activity in the process.
The Jersey Finance Industry employers and employees, through direct and indirect contributions pay around £6 out of every £10 in tax revenues collected in the Island. The Finance Industry is an export industry and operates in a highly mobile and competitive market place. Whilst the industry has shown resilience in the face of the crisis, employment is down [3]4%, profits in banking, the largest financial services sector, are down 47%. Placing further costs and burdens on the financial mainstay of Jersey society is a sure fire way to trigger a downward spiral in employment and falling revenues which may be very difficult to arrest.
Jersey solutions must be specific to Jersey circumstances but there are valuable lessons which can be learned from others experience. In Ireland a 10% pay reduction has been introduced, Portugal has targeted the cost of public pensions and introduced a 5% wage reduction programme. France has decided not to replace half of all those retiring from the civil service.
Measures introduced in the private sector to combat the downturn have included four day weeks, pay freezes and bonus scheme withdrawal and either reduced benefits or greater contributions to pension schemes with adjusted retirement dates.
One very simple and effective measure is the recruitment freeze. The French model of replacing only a portion of leavers and retirees and focusing this remaining recruitment on the frontline enables rapid consolidation whilst protecting essential public services. Given a natural turnover rate of circa 8% a complete recruitment freeze would achieve a reduction of 16% in the size of government in just two years, without the need for compulsory redundancies, unwinding much of the expansion.
‘Policy Exchange’, recently published a comprehensive study on deficit reduction options which concluded:-
“We argue that, since consolidations based on tax rises often fail, resulting in large falls in output in the short-term and rises (not falls) in deficits, whilst those based on spending cuts are most likely to be successful, it is very important to signal, early and credibly, that the consolidation will be largely spending-cuts-based.”
[4]The Economist recently set out three guiding principles for effective deficit reduction:-
“First, most retrenchment should come from cutting spending; second any new taxes should focus on consumption; and third, both spending cuts and tax increases should be designed not just to cut the deficit but to refashion government”.
The single guiding principle of the Comprehensive Spending Review must be to redesign public services in order to achieve higher outcomes at lower cost. At the moment we seem to be some way short of this objective.
In the next issue in this series I will turn to the subject of Business taxation and specifically the consultation which is currently open and running until the end of August.
In the meantime I would strongly urge all finance industry employers and employees to respond to the consultations either via Jersey Finance or directly to the Council of Ministers.
[1] GGE = Gross Government Expenditure
[3] Financial Institutions Survey 2009
[4] The Economist June 19th 2010
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