GST

I made a commitment in my Manifesto of 2012 that I would oppose GST should it be proposed to the States. Originally it has been the intention of the autohors to include GST as a recommendation in the Personal Tax and Benefits Review. However, as a result of the strength of opposition, this was watered down to ‘let us keep looking at it’. I still could not support this recommendation as it would basically enable it to be easily brought in for the next term. The reasons for my opposition to GST are set out in my speech. I usually like to keep my speeches relatively short, but I felt the importance of this debate required a lengthy riposte. Fortunately, the recommendation was defeated. Of course, there is nothing stopping it being brought back in the future. I will oppose it unless all other avenues have been exhausted to be able to manage a balanced budget.

 

Sir,

Last week I was attacked by a certain ex-Deputy for having an open mind.  Apparently the fact I wanted to have further information before making an evidence based decision was seen as a bad thing – whatever hat I was wearing.

I am sorry, it may be considered a failing, but I always like to start with an open mind. And make evidence informed decisions. The last 4 months has shown me just how important such an approach is.

And,  in terms of  today’s debate, what I can say is, I have read and researched the evidence for quite some time, to enable me to make an informed decision about whether we should look further into a broad based consumption tax now. And I have made up my mind that, based on all the evidence put in front me, from the research I have undertaken, not just from the last 6 weeks but over several years and from first-hand experience – no we should not.

Of course, when it comes to taxes, as well as death and childbirth, there is never a convenient time for any of them, but this isn’t about not understanding the need for change. I believe we do need to rethink our approach, which is why I welcome this debate now and why I will be laying an amendment to seek to explore alternatives.

Now instead of repeating much that has already been said that supports my standpoint,  I would like to focus on why I believe even considering GST, particularly now, will be dangerous to our economy.

But before I start I would like to know  where is the comment from the Commerce and Employment Department? We were treated to a 12 page document from C&E on the perils of a width and emissions tax, but when faced with a report that will have a significant impact on virtually every business on this Island, we have silence.  And I have to say I was astonished to hear that the C&E Minister Deputy Stewart would support further research into GST when his department is meant  to encourage local businesses and look for ways to promote a positive environment in which to conduct business on Guernsey.

So why should we be concerned about the threat to our economy by even considering GST now?  Well, firstly we need to consider business uncertainty.

We have heard a lot about how we must be very careful in how we discuss possible changes to our corporate tax system as this might cause business uncertainty. Well, the same goes for GST. If I were thinking of setting up a business involved in the provision of goods and services, particularly where I would be having to compete against those from off-island,  I would think long and hard about setting up before I knew where the States were going on GST.

We are already an expensive place to do business, all a broad based consumption tax will do is increase costs and have inflationary consequences, in addition to adding to the administrative burden. And to pick up on a point my colleague Deputy Luxon made yesterday, remember, it is far easier for a large firm with a separate accounting function to absorb those extra costs than smaller owner-managed businesses.

Just looking at Jersey’s GST website, there are pages upon pages of what you can and can’t claim, advice for different businesses, various options such as partial exemptions as well as when and how to pay, that it will clearly be a more unproductive activity at a time when we need to reduce the obstacles we put in businesses way. And on that note I think the red-tape audit, which for me was an important part of the Economic Development Framework could not come soon enough.

 

Secondly, I am concerned about some of the assurances given in the report regarding the shape that a GST would take here.

The report talks about a turnover based threshold that would exempt some businesses from paying VAT, and there is an indication that this might be similar to that in Jersey, which is currently as high as £300k. However, as picked up by Deputy Conder,  given the relatively small size of Guernsey businesses, where more than two thirds employ less than 5 people according to the latest Facts & Figures booklet, that threshold would have to be much lower to obtain the £50m claimed could be raised. But I suspect the truth is that businesses may be forced to register as the costs of not doing so may be prohibitive if they can’t reclaim input tax. So, there’s a Catch 22 – register and spend more time and money on administration, or don’t register and incur increased costs of goods and services themselves. Lose, lose. The small businesses will lose out the most.

Thirdly, I have concerns about the assumptions of economic growth.

 

Paragraph 1.1.15 states that growing the economy is not within the mandate of the review, but assumes a modest level of economic growth. However, was that taking into account the introduction of a broad based consumption tax?

There is no getting away from the fact that GST undermines economic growth for two reasons. Firstly, it disincentivises productive behaviour by driving a larger wedge between pre-tax income and post-tax consumption.

And secondly, it makes for bigger gov­ernment and bigger government means, in a static population,  a transfer of people from the  productive sector of the economy to the public sector, diminishing economic efficiency.

It would make perfect sense to consider talking to Jersey as a means of mitigating the administration costs, though I believe it will be of limited benefit unless we adopt Jersey’s system wholesale. By the way I suspect the fact the reviewers think GST will be cheaper to administer than income tax probably says more about the adequacy of our income tax systems than about the administration of GST. And in terms of Returns Creator – Deputy Perrot, speak to those that have to use it and you may get another word back to describe it other than brilliant.

But of course, when considering administration costs, we shouldn’t just focus on GST. As the Deputy Chief Minister stated yesterday, this is a package of measures, we should not look at GST in isolation. I agree we shouldn’t. We shouldn’t forget all the supposedly mitigating measures that will need to be brought in through pensions and benefits and how they will be administered.

These are not going to come at nil cost to SSD, or whatever department becomes the one administering benefits in the future. GST may  possibly be efficient in terms of tax collection but how many more SSD staff will be needed to handle the increased benefits claimed?

And this brings me to the final and what I consider to be the fundamental reason why I can’t accept recommendation 38 and it revolves around this one sentence in the report, and I quote, ‘Data suggests that, while a consumption tax in isolation may be regressive, it is possible to mitigate much of the regressive nature through the pension and benefit systems.’

 

My greatest criticism of this report is that little consideration has been given to the ability to pay. In fact, that phrase is only used twice – one being a quote from a respondent to the consultation and the other, ironically, to justify the introduction of the £1 prescription charge for those who currently do not pay.

The only way I could conceivably accept a GST would be if there were exemptions. I fundamentally have a problem with the taxing of food other than, possibly, as a means of influencing behaviour. And Certainly at a time when we are seeing food banks appearing across the Island. And what about fuel and power? This could have serious consequences for those on lower incomes. But, the truth is we could not afford to make such exemptions.  We are too small an economy. Or, if we did, the rate of tax would have to be put at a much higher level to compensate.

Deputy Perrot’s likening the purchase of a litre of milk to a tax and calling it regressive is complete nonsense.  Charging GST on a litre of milk is what is regressive. Definition from the Oxford Dictionary –  (Of a tax) taking a proportionally greater amount from those on lower incomes: indirect taxes are, as a group, regressive

But we are told, there is more detail that needs to be ironed out – what after 2 years? It’s hardly rocket science. It is broad based – so there are going to be very few exemptions, there will be a threshold, but then that is likely to be meaningless anyway, and it’s going to be 5%!

And, if the writers of this report don’t know broadly how this broad based consumption tax will work, how can they say it will raise £50m and how can they provide 16 pages of how their favoured scenario will affect a variety of households?

 

And, on that front,  according to this report there will be people adversely affected. For instance, it states that 30% of couples with children will benefit, which means a huge 70% won’t. Whether that means it won’t affect them at all, or they are badly affected is unclear, as is how many of them may have to start claiming benefits. But is that what we want? Making more people dependent on benefits? Giving them even less disposable income that can be circulated in the economy?

That’s not a future I want to see.

Life since 2008 has been bad enough for businesses, which has had a direct knock on effect on jobs and wages such that we are now seeing net migration. The introduction of a broad based consumption tax would cripple our economy at a time of ever increasing costs, red tape and though emerging, still fragile growth.

Back in 2012 I said it was imperative we got the Personal Tax and Benefits Review right. That if we got it wrong it could have a lasting detrimental effect for the future of Guernsey’s economy. Getting it right means rejecting recommendation 38,  supporting this amendment and supporting our local businesses and  I urge members to do just that.



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