Budget reveals £79m tax windfall with States given option to relax spending control
- Pillar 2 global minimum tax revenues revised upward to £79m for 2027, representing a £63m increase across 2025-2026, though authorities warn these revenues should not fund ongoing commitments
- Two budget options presented for first time: Option A with £4.2m surplus before investment returns requiring 1% real savings, or Option B with £11.5m deficit but addressing priority pressures with 1.3% cost increase
- Funding gap remains at £47m under Option A or £63m under Option B despite £91m improvement in 2026 forecast
- New vaping duty of £2.20 per 10ml introduced alongside 6.3% alcohol duty increase, though new tap relief scheme reduces duty by 9.7p per pint for qualifying draught products in hospitality
- £15m economic growth fund proposed for 2027-2029, with tax cap increases and new entrepreneur tax cap to attract business, whilst charitable donation limits rise from £10,000 to £50,000
Key terms
Guernsey's 2027 Budget has revealed a dramatic surge in expected tax revenues alongside an unprecedented choice between two spending options, as the island's government grapples with persistent financial pressures despite short-term improvements.
The Policy & Resources Committee has disclosed that revenues from the Pillar 2 global minimum tax will reach £79m in 2027, reduced by 15 per cent for uncertainty. This represents a £63m increase across 2025-2026 compared to earlier projections, driven by actual receipts data from Jersey showing businesses have not restructured their affairs as extensively as feared.
For 2026, the estimate stands at £77m, with £75m expected for 2025.
However, authorities have cautioned these revenues are expected to decline over time as business models adapt and should not fund ongoing expenditure commitments.
The 2026 forecast shows a net surplus before investments of £43m, representing a £91m improvement over the original budget. Yet approximately £45m of this improvement relates to non-recurring factors including adjustments to 2025 estimates.
For the first time, the committee has presented two distinct expenditure budgets for 2027, asking the States Assembly to decide which approach to adopt. The committee has acknowledged that achieving the 1 per cent savings target will be highly challenging.
Option A, with committee net expenditure of £700.4m, reflects the States' existing resolution to achieve 1 per cent real-terms savings and would deliver a net surplus before investments of £4.2m. However, this requires significant service prioritisation.
Option B provides an additional £15.7m, bringing committee net expenditure to £716.1m. This addresses priority funding pressures but represents a 1.3 per cent real-terms cost increase and would result in a net deficit before investments of £11.5m.
Despite the improvements, a funding gap remains: £47m under Option A and £63m under Option B. The Policy & Resources Committee has stated that the underlying funding gap has not been resolved and further action will be required to place the public finances on a sustainable long-term footing.
The budget proposes several taxation changes. The personal income tax allowance will increase by £650 to £15,850, reflecting inflation only. Mortgage interest relief will see phased withdrawal recommence, with a maximum of £2,000 in 2027, £1,000 in 2028, and zero from 2029, raising approximately £1m in 2027.
Significant increases are proposed to tax caps, including the open market cap rising from £60,000 to £65,000 in 2027, then £75,000 in 2028, £85,000 in 2029, and £95,000 in 2030. The maximum tax-free charitable donations will increase from £10,000 to £50,000, costing approximately £350,000 but benefiting charities by up to £12,500.
The States are asked to endorse introducing an entrepreneur tax cap as soon as practicable to attract entrepreneurs to the Bailiwick, with details to be developed jointly by Policy & Resources and Economic Development committees.
Corporate tax proposals include extension of the 10 per cent intermediate rate to prescribed businesses and full profits of relevant companies, expected to generate approximately £2.5m in 2027.
Domestic tax on real property will increase by 4.3 per cent under the Budget, reflecting inflation only, across all bands. Commercial TRP will see a 4.3 per cent inflation increase for most sectors, but targeted freezes will apply for hostelry, retail and warehousing sectors following tax reform approval, costing £253,000. Commercial car parking will see a 15 per cent increase, representing RPIX plus 10.7 per cent.
Alcohol duties are proposed to rise by RPIX plus 2 per cent, a total of 6.3 per cent, adding 4.1p per pint. However, a new tap relief scheme will provide a 10-15 per cent discount on qualifying draught beer, cider and wine in containers of 20 litres or more for the hospitality sector, costing approximately £342,000 annually but reducing duty by 9.7p per pint for lower-strength products. Spirits are exempt from tap relief.
P&r wants tobacco duties to increase by RPIX plus 5 per cent, a total of 9.3 per cent, adding 89p per packet and generating an estimated £8.4m in revenue. Duty-free allowances will remain unchanged following a review that concluded economic and connectivity risks outweigh potential health benefits.
A new vaping duty of £2.20 per 10ml will be introduced under the plans, effective from 9 November 2026, with a 50ml duty-free allowance. This is estimated to generate £700,000 annually and £116,000 in 2026. The rate will be frozen for 2027, with the differential between vaping and tobacco duty to be reviewed for the 2028 budget.
It is proposed that fuel duty will see an inflation-only increase of 4.3 per cent, adding 3.9p per litre to bring the rate to 94.4p. Vehicle first registration duty will also increase by 4.3 per cent for inflation.
The budget proposes a £15m fund for 2027-2029, allocated at £5m annually, to support economic growth initiatives funded from Pillar 2 revenues. Priority areas include finance sector strategy 2035 implementation, workforce participation through childcare and early years support, connectivity improvements, cyber security, and removing barriers to growth, notably housing.
Projects must demonstrate clear economic benefits, measurable outcomes and value for money. Proposals will be jointly approved by Policy & Resources and Economic Development committees.
Despite requesting 1 per cent real-terms savings, committee submissions exceeded targets by £33m. Final submissions were £33m above the agreed target despite work undertaken to identify savings. However, five committees met or exceeded individual savings targets, with 73 per cent of the overall 2027 target identified, equivalent to £5m of the £6.8m required.
Health & Social Care identified £2.3m in savings, whilst Corporate Services identified £500,000.
A £6m spend-to-save initiative is proposed for projects delivering recurring savings, with £5m reallocated from existing routine capital and £1m from the 2027 budget reserve. Initiatives require business cases demonstrating clear savings, with payback typically expected within two years.
A priority-based budgeting pilot programme is underway across three areas: the States Property Unit, Environment & Infrastructure, and Adult Disability Services. The pilot has identified 154 services, which have been described and costed, with 27 method changes identified and service level options equivalent to 8.5 per cent of pilot area budgets. A second pilot group will commence in Q1 2027.
The budget reserve stands at £26.7m under Option A and £30.1m under Option B, compared to £16.9m originally budgeted for 2026. This includes provisions for unsettled pay awards, vacancy adjustments, formula-led variations, government work plan initiatives, and spend-to-save projects.
The 2027 GDP growth forecast is 0.5 per cent, representing modest real growth. Inflation, measured by RPIX, stood at 4.3 per cent in June 2026, compared to the 3.4 per cent forecast in the 2026 budget. The Bank of England rate currently sits at 3.75 per cent, with potential for increases if inflationary pressures build.
The housing market has seen residential transaction volumes strengthen in recent quarters. Average prices have stabilised and are rising nominally but lagging inflation. The rental market continues its upward trend, though the rate of increase may be slowing. Construction activity reached 408 properties under construction in Q2 2026, the highest level in over a decade.
Health & Social Care will receive between £267.5m under Option A, representing a 0.9 per cent increase versus 2026, and £270.6m under Option B, a 2 per cent increase. The 2026 forecast shows an overspend of £742,000, primarily due to lower vacancy rates than the assumed 7 per cent. The budget reserve transferred £2.4m for off-island acute services.
Education will receive between £96.0m under Option A and £97.6m under Option B. A potential £2.2m reinvestment opportunity exists if a philanthropic gift to Elizabeth College and Ladies' College proceeds.
Overseas aid will receive £6.2m, representing a 10.6 per cent increase versus 2026. This includes £400,000 in additional funding, continuing the path to a 0.2 per cent of GDP target by 2030.
Aurigny's 2026 forecast loss stands at £9.7m, with a budgeted loss of £5.7m for 2027. However, projections are subject to considerable uncertainty pending the air policy framework outcome and operating model review.
Guernsey Ports forecasts a £300,000 net surplus and £2.9m operating surplus for 2027. A funding requirement of up to £1.1m transfer from general revenue has been approved. The entity reported a £1.6m overdraft at the end of July 2026. Non-commercial public service activities funding arrangements are under review.
Guernsey Waste will see a funding methodology change, with future support based on operating deficit excluding inert waste activities. The 2027 operating deficit, excluding inert waste, stands at £2.1m. Support is capped at £2.3m in 2027, increasing with inflation thereafter, allowing retention of inert waste surpluses for the future inert waste project.
Guernsey Water forecasts a £1.7m net surplus for 2027. Additional borrowing of £1.5m is required in 2026 and £1.6m in 2027 for infrastructure.
Guernsey Dairy forecasts a small operating surplus for 2027. The essential works project is proceeding as a major project, capital funded from the general reserve.
Beau Sejour Leisure Centre will receive extended funding of up to £700,000 annually, adjusted for inflation, from the Channel Islands Lottery Fund for 2027-2031. The centre delivers an estimated £1.4m in annual social value. Major redevelopment or rebuild has been prioritised as a pipeline project.
The budget identifies several key uncertainties that could materially affect outcomes. Each additional 0.5 per cent on pay awards costs approximately £2m. Each 1 per cent variance in Health & Social Care represents approximately £2.7m, whilst each 1 per cent variance in income tax is worth approximately £5.4m.
Pillar 2 revenues remain subject to behavioural assumptions, with no receipts expected until mid-2027. The additional long-term revenue remains highly uncertain and should not be assumed to provide a sustainable source of funding for ongoing expenditure commitments.
Economic growth initiatives may not fully spend the allocated £5m in the first year.
Worst-case scenarios project a £31.6m deficit before investments, whilst best-case scenarios suggest a £27.1m surplus before investments.
The expected net cash outflow for 2027 stands at £75-80m. Some £160m in unallocated bond proceeds plus up to £200m in new borrowing are available for the major projects portfolio. The general revenue reserve will not be depleted further, in line with States resolutions.
The guiding fiscal principle remains long-term permanent balance, generating ongoing operating surplus sufficient for day-to-day public services, necessary capital and transformation projects, agreed strategic policies, and maintaining or rebuilding reserves to appropriate levels.
Deputy Charles Parkinson, Treasury Lead for the Policy & Resources Committee, said: "This Budget recognises a simple reality: sustainable public finances and a strong economy go hand in hand.
"While we must continue to exercise restraint and improve the efficiency of public services, we also need to invest in the long-term success of the Bailiwick.
"That is why a central feature of this Budget is a new programme of investment in economic growth - £15m over the next three years. This money will be used only on projects where there has been a clear demonstration of measurable economic benefits, together with robust evidence that they represent value for money.
"The Budget also includes targeted support for local businesses and measures to maintain Guernsey's attractiveness as a place to live, work and invest.
"Taken together, these proposals are designed to support economic activity while ensuring we remain focused on the long-term sustainability of the public finances.
"In short, this is a Budget for growth."
Q&A
Q: What are the two budget options being presented to the States, and what's the key difference?
A: Option A has committee net expenditure of £700.4m with a 1% real-terms savings requirement, delivering a £4.2m surplus but leaving a £47m funding gap. Option B provides an additional £15.7m (£716.1m total expenditure) to address priority pressures but represents a 1.3% real cost increase, resulting in an £11.5m deficit and a £63m funding gap. This is the first time two distinct expenditure budgets have been presented, with the committee asking the States to transparently decide which approach to adopt.
Q: Why have Pillar 2 tax revenue estimates increased so dramatically, and can this money be relied upon long-term?
A: The estimates have increased by £63m across 2025-2026 compared to earlier projections, driven by actual receipts data from Jersey showing businesses have not restructured their affairs as extensively as feared. For 2027, the estimate is £79m (reduced by 15% for uncertainty). However, authorities have cautioned that the additional long-term revenue remains highly uncertain and should not be assumed to provide a sustainable source of funding for ongoing expenditure commitments, as these revenues are expected to decline over time as business models adapt.
Q: What is the new tap relief scheme for alcohol, and how does it affect pub prices?
A: The new tap relief scheme provides a 10-15% discount on qualifying draught beer, cider and wine sold in containers of 20 litres or more for the hospitality sector. While overall alcohol duties will increase by 6.3% (adding 4.1p per pint), the tap relief reduces duty by 9.7p per pint for lower-strength qualifying products. The scheme will cost approximately £342,000 annually but is designed to support pubs and bars. Spirits are exempt from the tap relief.
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