Business group urges spending restraint over GST in tax reform debate
- The Confederation of Guernsey Industry has called on Deputies to prioritise spending restraint and economic growth over GST introduction
- The business group proposes income tax increases as the central measure to address the island's structural fiscal deficit
- CGi estimates a 3% income tax rise three years ago would have generated £45 million by 2026
- The organisation questions whether the Revenue Service has capacity to administer a new GST regime given existing backlogs
- CGi cites 2014 research showing GST would disproportionately impact lower-income households and key economic sectors
The Confederation of Guernsey Industry has urged the States to prioritise spending restraint and economic growth measures over the introduction of a goods and services tax, ahead of an upcoming debate on tax reforms.
The business organisation has called on Deputies to ensure any package of tax reforms balances raising additional revenue with improving public sector efficiency and supporting long-term economic growth.
Policy & Resources proposals for a sweeping set of tax reforms, including a 3% GST, attempting to plug a massive hole in the island's public finances, will be debated this week.
The package includes a new lower 15% income tax rate, a major overhaul of social security contributions, savings and increased contributions from business.
The CGi maintains that income tax should form a central part of addressing the island's structural fiscal deficit, alongside reductions in spending and measures to stimulate economic growth. The group has also proposed increases in company registration fees, corporate taxation and the introduction of deferred pensions as part of a broader package of fiscal measures.
Garin Dart, CGi chair, said: "Deputy Parkinson advised the CGi in May that a 1% increase in the rate of income tax would raise £5 million annually. Had this been increased by 3% three years ago, cumulative additional revenue by 2026 would have reached £45 million and made a significant contribution to narrowing the funding gap."
The funding gap is currently estimated at £50m per year and is forecast to rise to £80m by 2027 and £130m by 2035 as demand for healthcare and pensions increases as does the need to spend on infrastructure.
Mr Dart added: "Income tax alone is unlikely to address every aspect of the Island's funding challenges. It remains, however, an effective and straightforward mechanism. The collection systems already exist, changes can be implemented quickly and rates adjusted without creating an entirely new tax administration."
The CGi chair also distanced the organisation from other local groups, stating: "I also wanted to emphasise that our views are also not aligned with recent public statements made by other local groups, suggesting that all businesses support the GST proposals."
Whilst the debate has largely focused on whether GST should be introduced, the CGi's primary concern is how the tax would operate in practice. The organisation has questioned whether the Revenue Service, which continues to manage significant backlogs, has the capacity to administer an entirely new tax regime.
Mr Dart said: "This is the perfect storm. Given the challenges and cost overruns experienced with projects such as MyGov, Agilisys and the redevelopment of the PEH, Islanders would inevitably question the States' ability to deliver another major infrastructure system at this time."
The CGi has also cited research commissioned by Henley Business School in 2014, which concluded that GST was likely to have a disproportionately negative impact on key sectors within Guernsey's economy and would be regressive, affecting lower-income households most significantly.
Mr Dart said: "If GST is introduced, it should be accompanied by measures that encourage investment, strengthen consumer confidence and stimulate economic growth. We also believe expenditure restraint should precede any new taxation wherever possible."
What the 2014 Henley Business School Report said
Professor Dominic Swords' report, commissioned by the Guernsey International Business Association and the Confederation of Guernsey Industry, identified three critical concerns with GST: damage to key economic sectors, disproportionate impact on small businesses, and regressive social effects.
The report warned that GST would severely harm retail, travel, tourism, and hospitality sectors that depend on Guernsey's "No VAT" status as a competitive advantage.
At the time, Guernsey faced a projected £20 million deficit, driven by the global economic slowdown affecting financial services, the zero-ten tax regime introduced in January 2008, and an ageing population creating long-term demographic pressures.
The island's economy had contracted in two of the five years before the report was produced, with growth falling to around 2 per cent from pre-2008 levels of 3-4 per cent. GDP stood at £2,010 million, with per capita income of £30,000 ranking Guernsey in the top 12 globally.
Professor Swords said that GST raises revenue by diverting market expenditure from businesses and consumers to government. "A GST generates its revenue at the expense of businesses or consumers: or a mix of the two. Businesses have to pay a proportion of their revenue to government that they would otherwise keep: their margins are reduced. Consumers have to pay more for what they buy which means that real incomes will fall."
The report identified five key economic impacts of GST: consumers pay more for fewer products, businesses receive lower revenues, government receives a portion of market revenue as tax, reduced overall market activity creates "deadweight loss", and hidden implementation and compliance costs emerge. At very low GST rates, net revenue might actually be negative once hidden costs and economic impacts are factored in.
Guernsey's retail sector was showing particular health, with a town centre vacancy rate of around 2 per cent compared to 10 per cent in England and Scotland and 17 per cent in Wales and Northern Ireland. The £333 million annual retail market includes £317 million from residents and £16 million from tourists.
The "No VAT" status drives visitor numbers, with tourist ship visits rising from 62 in 2012 to 84 in 2013, with 106 planned for 2014. Industry reports indicate that 80 per cent of high-end jewellery sales are based on the non-VAT status.
At the time a theoretical 3 per cent GST was expected to generate £10 million in headline revenue, but the report suggested the net figure could be only one-third of that amount once sales reductions, low-income compensation, and business compliance costs were factored in.
The tourism and hospitality sector accounted for 8 per cent of island employment, with a true economic multiplier of around 10 per cent of GDP when including food suppliers, construction investment, and related service industries. Global tourism was forecast to grow 54 per cent through 2021, with the industry targeting 4 per cent annual growth in Guernsey.
After introducing GST, Jersey saw visitor numbers decline by 7 per cent in 2009, followed by further drops after the rate increased to 5 per cent in 2012. Jersey's 335,000 staying leisure visitors contributed £17.90 per visitor in GST, representing 4-5 per cent of total tax take.
For Guernsey's 150,000 staying leisure visitors, potential GST revenue would be £2.7 million annually, but the report argued that declining visitor numbers similar to Jersey's experience would be expected.
Professor Geoffrey Wood's 2013 Fiscal Review, quoted extensively in the report, stated: "Against the background of a slower average rate of economic growth than in the previous decade, and mounting demographic pressures, the States is unlikely to find itself in a position where it is able to support all future demand for services without changes to either the level or structure of services it provides or the amount of revenue it raises."
In an interview, Professor Wood noted: "Since the revenue is falling short of expenditure, to correct the situation, and they do need to correct it, they either need to raise taxes or cut spending. And it's not my job to advise which they should do but the island should surely always remember that it's become so prosperous as it has by being a low tax jurisdiction."
Guernsey's unique business demography posed particular challenges for GST implementation, it said. Some 67 per cent of employees work in businesses with 1-5 people, rising to 70 per cent in construction, 58 per cent in wholesale and retail, and 53 per cent in hospitality.
The report noted that setting a GST registration threshold too low maximises negative impact on small business costs and administration, whilst setting it too high loses intended revenue generation. "This unique business demography of a large proportion of small businesses would make a GST particularly expensive and inefficient to operate on the islands as it would place a large administrative and compliance cost on these important local businesses."
Implementation and compliance costs primarily fall on businesses rather than government budgets. OECD estimates suggest up to 2 per cent of GDP in business activity costs, with a conservative estimate of 1 per cent of sector activity.
Nobel economists Becker and Posner warned of "rate creep", where GST appears initially successful in raising revenue but becomes politically easier to increase than income or corporation tax, with a "hidden and destructive effect on business prosperity".
GST's regressive nature means lower-income households, which spend a higher proportion on necessities, are disproportionately affected. UK data shows 10-25 per cent of household budgets spent on food and non-alcoholic drinks, with lower-income families at the highest proportion.
Comparable jurisdictions require 10-25 per cent of GST revenue for low-income compensation, creating system complexity, increasing administrative costs, damaging the "simple tax" reputation, and distorting employment incentives.
The report recommended exploring existing tax mechanisms before introducing entirely new taxes. Options included reintroducing vehicle-based road use taxation, reforming Tax on Real Property rates and banding, and extending the 10 per cent corporate tax band.
Internationally at the time, 115 countries had GST or VAT, with rates ranging from 2 per cent in Afghanistan to 27 per cent in Hungary. The modal rate is 18 per cent across 13 countries, whilst 20 per cent is most common in 11 countries including the UK.
Hong Kong rejected it in 2006 despite fiscal pressures, reasoning it would harm the territory's core proposition as a low-tax trading centre. Turks and Caicos Islands abandoned GST plans in 2013 over concerns about harm to the tourist industry and excessive complexity for a simple island economy.
Professor Swords' primary recommendation was not to introduce GST due to potential detrimental features and major risks to future prosperity. The report argued that a more thorough reassessment of the future vision for public services should be at the centre of solving the fiscal challenge.
"Taking a fundamental strategic review of spending should be a precursor to a decision about the revenue side of the equation," the report states.
The report recommended separating short-term and long-term issues, noting that the £20 million fiscal gap is a distinct challenge from the demographic time-bomb, and these should not be conflated to avoid a "short-term fiscal fix" that harms long-term development.
A debate was needed on what size and shape government should be, the role of the public sector in supporting an ageing population, the balance between state and private provision, and a 2020 vision for island development.
"If additional tax revenues are required they should optimise the use of existing tax mechanisms first before considering an entirely new tax," the report concludes.
The consultation process involved 33 stakeholders representing the Chamber of Commerce, tourism and hospitality sector, construction industry, financial services including banks and fund managers, accounting professionals, and the insurance sector.
"The overwhelming conclusion of this report is that a GST should not be introduced to the States of Guernsey at this time."
Core reasoning includes that Guernsey's global reputation as a "low tax jurisdiction" with "No VAT" status is a strategic asset, GST contradicts Economic Development Plan priorities, it would damage sectors critical to economic diversification, the demographic time-bomb requires a separate long-term strategy, and alternative revenue options are available without introducing a new tax.
"We should be driven by these long-term goals rather than by short term expediency," the report concluded.
Q&A
Q: What is the CGi's main recommendation for addressing Guernsey's fiscal deficit?
A: The CGi maintains that income tax should form a central part of addressing the island's structural fiscal deficit, alongside reductions in spending and measures to stimulate economic growth. They also propose increases in company registration fees, corporate taxation and the introduction of deferred pensions.
Q: How much revenue would a 3% income tax increase have generated?
A: According to CGi chair Garin Dart, Deputy Parkinson advised that a 1% increase in income tax would raise £5 million annually. Had income tax been increased by 3% three years ago, cumulative additional revenue by 2026 would have reached £45 million.
Q: What are the CGi's main concerns about introducing GST?
A: The CGi questions whether the Revenue Service, which continues to manage significant backlogs, has the capacity to administer an entirely new tax regime. They also cite challenges with projects such as MyGov, Agilisys and the PEH redevelopment, and reference 2014 research showing GST would disproportionately impact lower-income households and key economic sectors.
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