The State of Our Nation (Part One - Cutting our Cloth)

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%.

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