Geoff Southern writes:-
A JEP editorial recently pointed to the irony of the States spending two days debating cycle helmets and only minutes on the so-called structural deficit of £64 m now facing us as “lacking a sense of proportion”. In the same edition of the paper the Business Editor, Peter Body, described our financial problems as needing, or about to get, “outright butchery”. As Jersey faces up to a public finance crisis of perhaps unprecedented proportions, public spending has become the key political battleground. Very little has been heard so far to counter the approach taken by the Treasury Minister which proposes deep cuts in public spending and thereby in public services. This paper seeks to open up the political and economic arguments that need to be debated at this time of economic turbulence, and to lay the grounds for rational decisions for solutions to the problems we face.
I start from the position, shared by many politicians and others, that Jersey’s public services are a vital bedrock in sustaining the local economy and the community both in good times and now, during what we are told is the worst economic recession in living memory. They ensure essential investment in infrastructure and support for business, and can mitigate the worst social and economic consequences of the downturn. But as public services come under increasing pressure to cut costs and jobs, I believe that the view that spending cuts are the only option needs to be robustly challenged. For Jersey to emerge successfully from the current recession in a strong position for the future, we need to strengthen and sustain our public services.
Cuts or Investment?
The recent Budget saw the welcome confirmation of Fiscal Stimulus spending amounting to some £44 m for 2009. Unfortunately only about a quarter of these funds have made it through the bureaucracy in 2009; the greater part of these funds have yet to be spent. We also saw the announcement of two major reviews over the coming months:
Comprehensive Spending Review (CSR)
Fiscal Strategy Review (FSR)
Underlying these major reviews however is a general principle held by the Treasury Minister that there should be, and will be, substantial cuts in public spending and services. This has seemingly taken place without a full discussion of the alternatives or the implications of cuts to public services.
The first cut has already taken place: the arbitrary, unilateral and perverse decision to impose a pay freeze, and thereby an effective cut in public sector pay, removing at a stroke some £7m from circulation in an already depressed economy. In both the short and long term this will come to be seen as a serious error. It will worsen recruitment and retention problems in essential sectors such as nursing and social work; it has further depressed employee morale and the trust in the ability of our ministers to protect hard pressed public sector employees; it will see the return of above inflation pay claims as the economy recovers.
Senator Ozouf boldly assumes that spending cuts are the answer. He is actively pursuing 10% reductions in public spending by 2013. This will entail “radical changes to service provision and some reduction in staffing levels”. What does this mean? The JEP business editor has tried to put this in real terms. It means massive job cuts in the public sector are likely. His pro-rata estimate of 600 jobs lost is close to my own estimate of 400. Examination of previous lay-offs at Jersey Post, JT and JNWW with the associated cost savings suggests that redundancies on this scale may come about.
The first thing to recognise is that, according to the Chief Minister’s own figures, this number of redundancies will immediately impose a further negative impact on States revenues of up to £14 million annually, in lost income tax and additional Income Support payments. One might add to this, redundancy payments of around £3 million and an unknown sum in indirect taxes, as spending is curtailed. Let us say a further £20 million added to the so-called structural deficit. The net effect of this sort of cut would inevitably be a worsening of the recession, perhaps producing a “double dip” as the recovery is further delayed. Unemployment has hit 1,300 including some 300 “actively seeking work” on Income Support. The bill for Income Support is already running at £76 million annually. Do we really want to further increase that with another 400 public sector workers thrown on the scrapheap? I believe it is the last thing we should do.
As the Minister so clearly puts it, there are only 2 options to address what he calls the structural deficit - either raising taxes or cutting public spending. He has set his face firmly against raising taxation on many occasions. By announcing his twin comprehensive reviews last year in the Budget debate, the Treasury Minister cleverly avoided any major debate on the correct way to deal with public spending and the recession. This has put off any real discussion until the Annual Business Plan (ABP) in September 2010. The quality of this debate is also likely to be less than adequate since whilst details of the 2011 CSR will be revealed in April and lodged in July for September debate of the Business Plan, the level of overall cuts stretching into 2013 will not be known. Neither will the results of the Financial Strategy Review be clearly known. States members will be asked to choose between spending cuts and taxes without seeing the full picture.
That the content of these reviews is in any way likely to be impartial, fair and comprehensive must also be questioned. Despite several assurances given to the States that the Fiscal Review Steering group would contain members who favoured progressive tax measures, the Minister has failed to keep his word. The ministers of Economic Development, Treasury and Social Security along with the Chief Minister and the two Assistant Treasury ministers cannot be said to represent a good cross-section of economic thinking even when joined by the Constable of St Peter. The review will undoubtedly follow the tired old low-tax, low-spend free market approach that has already let us down.
In a superficial exercise which has nothing to do with the economic realities but merely exposed States members’ political prejudices, members were recently asked to say what “balance” they would find acceptable to address the £50m deficit between cuts on the one hand and tax increases on the other. Unsurprisingly figures like 70/30 or 60/40 in favour of cuts predominated.
This article seeks to provide a different context, to question the urgency of calls to cut the public sector deficit, and to set out the case for the vital role played by the public sector during the current recession and beyond. Our premise is that sustaining public services is vital to economic recovery and the future prosperity of the island.
Recovery is the best way to tackle the public deficit in the long term, and that means planning for a budget deficit in the short term until the recovery is firmly under way. Cuts in public spending would only have an effect on future competitiveness and would impact on the most vulnerable and needy in society. As argued by David Blanchflower, respected economist and former member of the Bank of England's Monetary Policy Committee:
'Lesson one in a deep recession is you don't cut public spending until you are into the boom phase.'
We know from history that, without effective government intervention, the cost of recession is borne hardest by those who lose their jobs and by the vulnerable and poor that depend most on public services. We also know the big mistake made in the late 1980s and early 1990s was to give priority to macro-economic policy to fight inflation over employment and welfare policies. The words of David Blanchflower must be taken seriously. We must be sure that we are well into recovery before we make spending cuts. The proposal from PAC to make cuts earlier is even more dangerous and must be firmly rejected.
Jersey is a wealthy jurisdiction. Average pay is among the highest in the world, while marginal personal tax rates for the highest earners are low for a country with fully developed public services. We have been for many years, and still are, a low-tax, low-spend jurisdiction. The time has surely come to abandon the concept that we can continue to apply the same low-tax business model to the Jersey economy. Tax increases for the better off will not be popular but will be necessary and preferable to slashing those services on which the poorest and most vulnerable rely.
The time has surely come to start to address the gap between the rich and poor. The commitment to do so was reluctantly accepted by the Council of Ministers in amendments to the Strategic Plan. This must involve due consideration of truly progressive tax and social security policies as part of the Fiscal Strategy Review. However given the make up of the review panel a fair and honest assessment of progressive policies looks extremely unlikely.
How did we get here?
Frank Walker was often prone to repeat his adage “We are where we are” to preclude debate on how we got here. Today we are told that the recessionary position we find ourselves in is the result of hidden and uncontrollable market forces – almost a force of nature. We are the innocent victims of the world economy. This is not so. The worldwide recession has been caused by over-reliance on a single industry, banking, and the worst hit have been the most dependent, and with the lightest regulation. Does that fit Jersey? I believe it does. We are certainly way ahead of our competitors in terms of our dependance on financial services according to the Foot Review of British offshore financial centres.
So we are the most dependent of the offshore centres on the finance industry. We are a monoculture. Are we equally the innocent victims of market forces or have we contributed to the position we find ourselves in today?
Who is to blame?
No one would deny that we have a serious problem with the state of the island’s economy. The recession has resulted in a halt to the recent economic growth we have experienced and as a consequence, we are faced, according to the Treasury minister, with a large “structural deficit”. Discussed below is the extent to which we can describe the deficit as “structural” or “cyclical” and examine a number of decisions made by our government to determine to what extent our ministers have added to the problem of the deficit.
Examination of the 2010 Business Plan figures (June 2009) show the dominant influence of two negative elements:
Mistake 1 The single largest contibutor to the defecits we face is the decision to adopt the “zero/ten” company tax policy. This was a conscious decision taken by the current Chief Minister and supported by the current Treasury minister to give up £80 to £100 million tax revenue from companies. A 10% rate for non-finance companies effectively allows foreign companies to trade in Jersey for free. The 10% rate for finance companies reduced their contibution by half. The aim was to compete with the Isle of Man and satisfy the EU Directive on Business Taxation. The policy was a failure. We threw away £100m in tax revenue only for the EU to reject the scheme. We have to think again.
Mistake 2 The introduction of the regressive GST on all goods and services (including essentials) effectively transferred half the tax burden from companies to ordinary residents, especially the least well off. Further tax revenues (£10m) were to come from “20 means 20” on middle earners; £5m or so from IT IS and the remainder (£20m) was to be found from growth in the economy. The ministers gambled on the continuance of the rampant growth in finance sector GVA (up by 20% over the years 2005 to 2008) and in profits (up by a massive 35% in those years). This proved to be an expensive gamble; it has also failed. Negative growth is now predicted at -4% in 2009 and -2% in 2010 following the world banking crisis.
Mistake 3 At the end of 2008 the States exhausted itself in a long and bitter debate over the replacement of the EFW plant. I do not wish to revive the debate over the pros and cons of this decision here. However, the Treasury minister immediately brought a new proposal before the exhausted Assembly to pay for the EFW plant all in one go, in a single payment of £110m, instead of over a period of years. This had the effect of emptying the Consolidated Fund at a stroke. In addition to the £150 m we have in the Stabilisation Fund to contribute to assisting with the effects of the recession, how much better it would be to also have the £110 m to help cushion the blow.
The Treasury Minister repeatedly refers to the deficit as structural and not cyclical. A structural deficit is more serious and requires drastic action according to him. The fact is that the “structural” change to our economy and tax generation was the choice to adopt zero/ten. The blame for this lies entirely in the court of Senators Ozouf and Le Sueur. The economic downturn losses above are absolutely and clearly cyclical. They result from the “automatic stabilisers” of reduced tax revenues and increased expenditure on benefits during the recession. This situation will improve as the economy recovers. It should not be used as an excuse to launch massive ideologically driven cuts to the public sector.
The cyclical nature of the economy is clearly illustrated by Figure 1.3 above. The downturn in the economy over the years 2001 to 2004 showed similar reductions in GVA to those predicted for this recession. There was no panic then to slash the public sector workforce and thereby make the downturn worse. There should not be now.
How big is the problem? - 1
There is no doubt we are in a mess over the economy. The questions which need to be answered are how big is the mess and how do we set about clearing it up? Indeed first we have to ask which mess are we talking about? Well, there is the mess made by the recession and the mess we were already in (the £90 m revenue deficit caused by the mistaken move to zero/ten) that the recession has simply brought to the surface. The first thing to do in attempting to deal with the issues is put the situation in context. We remain a wealthy juristiction as shown here (Jersey Economic Trends, 2009).
Not only that, but we are undoubtedly a low-tax low-spend economy (T & R minister may 19th 2009).
Not only do we have a much lower spend overall than the OECD average , we have a lower “social” spend as well. I include Luxembourg in the comparison for those who wish to argue that our lower spend is a merely a product of our high GNI. If further proof were needed we need only consider the comparison made by Peter Body in Business Brief of March 2010, entitled “Who’s better off” summarised here:
The Business Editor of the JEP, an experienced observer of local economic issues describes the initiatives of the Treasury Minister and the PAC to slash 10% from public spending over 3 years or 2 years, respectively, in the following terms:
“Now they (PAC) propose immediate butchery in public services… Personally I believe it is simply crazy to expect a large complex organisation like the States to be dramatically restructured over three years let alone two. The obvious danger is that services the public have said they want and value will be damaged irreparably. Now we have PAC, panicking even more (than the Treasury minister) …. Certainly if you look at government spending elsewhere as a proportion of GDP, Jersey’s figure is very much lower than just about anywhere else.”
Public services are major employers and purchasers of goods and services. UK studies suggest that for every £1 spent on public services a further 64p is generated in the local economy. They create jobs, provide decent pay and pensions and set a benchmark in terms of equal opportunities. The imposition of a public sector pay freeze in 2009 may appear to be a popular short-term expedient, but it has fostered a deep resentment amongst public sector employees which will have long-term negative implications. The public sector pay target has been below inflation for the last three years. Further attacks on terms and conditions would not only reduce spending power in a key part of the economy, but also lead to recruitment and retention problems already evident in the nursing and social service sectors.
Siren calls for a deflationary package of public spending cuts in order to 'balance the books' are just ‘knee-jerk’ reaction and show no real understanding of the impact on front-line public services or indeed the potential to plunge the island into a 'double dip' recession. There is strong evidence, as Peter Body points out, that suggests the public is against such a strategy in any event. Senator Ozouf has set his mind firmly against any tax rises, and uses misleading figures to frighten the public into accepting massive cuts in public services which will harm the least well off and put recovery at risk.
The Treasury minister makes much play of the prospect of GST rates up to 12% by 2014, a figure produced by the CAG in response to a request from the Corporate Services scrutiny panel. This figure is however totally without any grounding in reality. It was produced on the two unlikely conditions that:
a)the States takes no steps to reduce increases in spending to below 6% annually, and
b)no other taxes are raised to meet potential deficits.
Such a scenario is completely unreal. Nonetheless Senator Ozouf is content to use this specious figure to bolster his one sided arguments for his failed Thatcherite policies.
He is equally unashamed by his repeated partial use of the facts and figures. For example he states accurately that States spending has risen by 30% over the past 5 years. He conveniently fails to put this apparently shocking fact in its proper perspective. He pointedly fails to mention the following significant changes in the economy over the same period:
Put into the context of an economy in growth mode with banking profits and overall GVA on the rise a growth in public spending is to be expected. As John Clennett (a previous Comptroller of Income Tax) stated in his recent contribution to the tax and spend debate: “States revenues and expenditure have been broadly in line and budgets have been balanced”. Interestingly the 21% growth in income tax revenues over the period 2003 – 2007 is made up of a 51% increase in personal tax and zero growth of company tax. In 2008, GST, most of which is paid by individuals,was added to further exacerbate this shift away from company tax on to the individual resident.
How Big is the problem? - 2
We have all been immersed in tales of total doom and gloom in the UK media regarding the size of projected deficits in the UK and elsewhere. These are given for selected economies below. Note that the UK leads the way with nearly 12% of GDP in 2010. Whilst Philip Ozouf concentrates on the misleading 30% increase in spending and the spectre of 12% GST, the reality is far different. Far from being 12% or even 6% in terms of GDP our deficit, taking the latest projection of £64 million and GNI around £4,000m, is running at 1.6% of GNI. This is hardly the stuff of catastrophe that others are undergoing, requiring massive reductions in the public sector. No wonder the treasury minister alternates between describing our position as “serious” and “fantastic”.
If we are in a “fantastic” position as the minister says, then why does he insist that draconian cuts to spending are the only way forward? He says to a sympathetic gathering of businessmen “I am not afraid to make bold moves to cut spending and keep Jersey working.” The problem is that his cuts may well stop the recovery and worsen the recession.
Borrowing unashamedly from David Blachflower, I have a question for Philip Ozouf, Terry Le Sueur and Alan Maclean. What plans do you have to get unemployment down any time soon? If you want to transform a recession into a depression, go ahead and cut public spending. I would advise against it and so, I believe, would John Maynard Keynes.
Voters want jobs.