The States is considering three really important policy letters in November: the 2017 Budget, which raises taxes and directs government spending for the year ahead; the annual report on Social Security Benefit and Contribution Rates for 2017; and the Policy & Resources Plan (which I’ll only touch on briefly in this update), which aims to provide a framework and a goal for all policy development during this political term and which, through the Fiscal Framework, directs how government finances can be raised and spent in future.
Setting the Scene
Before discussing the impact of these reports, it’s helpful to try and establish some context. Let’s start with the Household Income Report. This shows us that the median gross annual income per household in Guernsey is £42,738. It splits all of Guernsey’s households into five equal groups (‘quintiles’) by income, from poorest to richest. In the bottom group, there are households living on less than £17,758 a year – one in every five of Guernsey’s households; mostly pensioners and single parents. In the top group, there are households living on more than £87,765.
We also learn from this report that the six most common household types in Guernsey are: working age adults living alone; pensioners living alone; single parents; working age couples; pensioner couples; and couples with children. One- and two-parent households make up only 15.8% of the total; pensioners make up 21.6%. On p10 of the report, we see the median annual income for each of these household types. I have used this to invent six different households, to represent a cross-section of “ordinary Guernsey people” – and I’ll try to explore the impact of these reports through their eyes.
The next useful report is the Quarterly Population, Employment and Earnings Bulletin. I have used the version from March 2016, although the June 2016 bulletin was published while I was working on this blog.
This shows that the top five employment sectors are: finance (which accounts for 19.5% of the workforce, or one in five employees); public administration (15.7%); retail, wholesale and repairs (12.7%); construction (10.0%); and professional, business, science and technological activities (7.5%). Finance, public administration, and the professional sector are all sectors in which the majority of workers are employees of an employing organisation. 1 in 5 people working in retail, wholesale and repairs, and 1 in 3 people working in construction, are self-employed.
These five sectors alone account for two thirds of Guernsey’s workforce. The graphic below shows the earnings distribution in each. The top bar shows all earnings: the central yellow blob is the Guernsey median wage in Q1 2016 (that is, £31,215). The left-hand end of the bar marks the “lower quartile” at £21,399 – one in every four workers in Guernsey earns less than this per year. The right-hand end of the bar marks the “upper quartile” at £45,959 – three in four island workers earn less than this per year. The remaining bars show the distribution of earnings, in the same way, in each of the five main sectors. Two findings are especially striking: three in every four people working in the retail, wholesale & repairs sector earn less than the island median. On the other hand, nearly three out of four finance sector workers earn more than the island median. This begins to show how very differently the Budget and the changes to Benefit & Contribution Rates may be experienced by people working in different sectors of the island’s workforce.
What are the main changes to income tax, contribution rates and income support?
Personal allowances: A personal allowance is the amount of income you can have, on which you don’t have to pay income tax. The Budget makes three main changes to personal allowances. For working age people, the personal allowance is increased from £9,675 to £10,000 per annum. For pensioners, it is held constant at £11,450 per annum – the aim is to close the gap between the two allowances over the coming years. For the very richest people, £1 will be taken off their personal allowance for every £3 of income they have above the Upper Earnings Limit of £138,684. This means that anyone who has income of £168,684 or more will have no personal allowance at all. This measure is expected to affect about 1 person in every 33, and is expected to raise about £2.4million.
There are no changes to the basic rate of income tax. People will continue to be taxed on 20% of their remaining income, once the personal allowance is deducted.
Contribution rates: 0.5% has been added to all contribution rates from the start of 2017, to raise funds for the Long-term Care Insurance scheme. In addition, 0.1% has already been added to employer and employee (Class 1) contribution rates, to cover the cost of improved parental benefits when a child is born or adopted. From next year, contribution rates will be:
- Employer (Class 1): 6.6% of employee earnings
- Employee (Class 1): 6.6% of earnings
- Self-employed (Class 2): 11% of earnings
- Non-employed (Class 3): 10.4% of income
- Non-employed over pension age (Class 3): 3.4% of income
Income support: For households which do not have enough money to make ends meet, support is available through Supplementary Benefit. Each household’s needs are calculated based on the number of adults and children living in that household. The aim of Supplementary Benefit is to provide a basic level of income that meets essential needs; although the report from the Social Welfare Benefits Investigation Committee (SWBIC) in March found that the amount we currently pay is insufficient to protect some people from an intolerable level of poverty. It has not yet been possible to implement the improved rates recommended by SWBIC, so this year Supplementary Benefit rates have just been uplifted by inflation (0.6%).
There is a cap on the maximum amount of benefit any household can receive. In theory, a household with a large number of children could receive a high level of Supplementary Benefit (based on the formula, which seeks to ensure there is an amount included for each child) – however, there is a cut off at £609 per week, even if the calculated need of the household is greater. This will increase to £650 per week from 2017. This will only affect a small number of larger households – most families receive much less than £600 a week in Supplementary Benefit.
There will also be a reduction in family allowance from £15.90 per child per week, to £13.50. The difference in income will be transferred to the Committee for Education, Sport & Culture to fund the introduction of universal pre-school.
What will be the impact on islanders?
When governments want to properly understand the impact of tax or contribution changes, or benefit rates, they do so through a process of “modelling” – taking data about the whole population, and applying the proposed changes to it, to see what happens. I don’t have the data or the skills to do that, so instead I’ve taken my six example households, assumed that their financial situation is very uncomplicated, and made a crude attempt at calculating how much income they will have left after tax and social insurance:
This shows that the combination of tax allowances and contribution thresholds is pretty effective at protecting those who don’t necessarily have the ability to increase their income through work (i.e. pensioners), and reasonably effective at protecting those on lower incomes – although higher contribution rates for self-employed people result in them losing a bigger proportion of their income than employed people would with the same level of earnings.
Both my pensioner with £15,000 gross income and my single parent with one child with £25,000 gross income might be eligible for a supplementary benefit top-up of about £100 per week – however, their exact entitlement would depend on their living arrangements, including the amount of rent (if any) they were paying. Like many people on Supplementary Benefit and/or in social housing, my single parent is in work and earning a full-time salary, but that’s not enough to keep her and her child afloat without government assistance. That’s another reason why setting a decent level of Minimum Wage is so important – so that people can improve their own or their family’s financial position through work, without the States propping up inefficient businesses.
How are other charges, levies and co-payments being changed?
Housing: The Budget increases the rate of domestic TRP by 10.5%, raising it to £1.38 per unit. This continues a string of double-figure percentage increases in TRP since 2011. This could hit pensioners hard – especially people in the poorest fifth of households, like my single pensioner, many of whom are owner-occupiers who have paid off their mortgage, but who have only a very modest income to get by.
On the other hand, the Budget reforms Document Duty for people buying new houses: effectively reducing the cost for house purchases under £800,000 and increasing it for those above that level. This is done through stepped increases in document duty relating to the value of the house – as set out in para 4.62 of the Budget.
Alcohol and Tobacco: In keeping with the requirements of the States’ Drug and Alcohol Strategy and Tobacco Control Strategy, the rates of excise on alcoholic beverages have been increased by 5%; on cigarettes by 5.6%; and on other tobacco products by 8.1%. Non-communicable diseases (including heart, lung and liver disease) linked to alcohol and tobacco use remain among our biggest causes of preventable death, and higher costs of alcohol and tobacco have been shown to effectively discourage use – so these taxes, perhaps more than any others, have a direct and demonstrable link to a particular policy goal.
Fuel: Motor fuel duty will increase to 63.5p per litre (from 58.5p), while marine fuel will increase to 40.4p per litre (from 36.6p). The reason for the higher increase in motor fuel duty is to try and raise an equal value of tax compared to previous years, despite the drop in fuel consumption. The Budget recognises that this is not sustainable, and there is an amendment led by Deputy Roffey to try and look at other ways of raising tax on vehicle use, while the Budget itself proposes extending excise duty to other types of fuel in future.
Benefits in kind: Where employees receive benefits in kind (such as the use of a car, or accommodation) from their employer, these are charged to income tax using a fixed schedule of charges, as set out in para 4.24 of the Budget. Those charges are going to be increased by 3% per annum for the next three years.
Health and care: In the Benefit and Contribution Rates report, the price of prescriptions is set to increase from £3.70 to £3.80 per item. The weekly co-payment – which is the amount that a person in nursing or residential care, or their family, must pay towards the cost of care (alongside a larger benefit which is paid by the States) – has been increased to £195.16 per week, in line with inflation. For my pensioner couple, who are comfortably in the middle income quintile with an annual gross income of £35,000 (net estimated £31,390, as above), one partner going into long-term care could be financially as well as emotionally devastating. Assuming they have a weekly income of just over £600, the £195 co-payment for care will eat up a third of that straight away – before any money has been spent by the remaining partner on living costs, utilities, food, or the other necessaries of daily life. Recognising that most care homes charge additional “top-up” fees which will also need to be met, the remaining partner could be left with very little indeed. This just goes to emphasise the importance of the work that has been initiated through the Supported Living and Ageing Well Strategy, to revise care costs and make the whole system more sustainable.
What other financial assistance will there be?
Tax allowances: Changes to Personal Allowances were discussed above. It should be noted that, as the States tries to equalise personal allowances for people aged above and below 65, the additional “age relief” for people over 65 will not be made available to people who have their 65th birthday after 1 January 2019. In addition, new claims for a “Dependent Relative Allowance”, by parents of a young adult who is starting in full-time higher education, will only be permitted until the end of 2017. Both of these changes point towards a simplifying, streamlining, and shrinking of the scope of tax allowances in general.
Pensions and benefits: Last year, the States decided that the rate of old-age pension should increase by inflation + one-third of the difference between inflation and the rate of increase in earnings (which generally go up faster). Because inflation was so low at the time the report was being prepared (RPIX of 0.6%), this has resulted in a rate of increase of just 0.8% for pensions. The same rate of increase has been applied to all contributory social insurance benefits – unemployment benefit, invalidity benefit, parental benefits etc. The reason why some link with earnings (however slender) is retained for these benefits is because they are payable when a person is unable to work, as a form of income replacement.
Health and care: The weekly benefit payable when a person is in long-term care has increased to £807.38 for nursing homes, £432.46 for residential care homes, and £569.80 for residential with additional support (principally for older people with dementia). As discussed above, there is also a co-payment of £195.16, which people must pay towards their care; and people are very often required to cover additional “top-up” fees charged by the home. When a person enters long-term care for a short period, as respite care, Social Security will cover the cost of the co-payment (though not any top-up fees). For people living in nursing and residential care homes whose only source of income is Supplementary Benefit, that Supplementary Benefit is used to cover the cost of the co-payment, and the person is entitled to a small allowance of £30.55 per week, which is the whole of their disposable income.
Extra costs of living: There is a supplementary fuel allowance available to people on Supplementary Benefit between the months of October and April each year, to help meet the costs of heating during the winter. This is especially important where people are living in poor-quality rented accommodation which is not adequately insulated; and where people who are older or unwell would otherwise be faced with the choice to “heat or eat”. In 2016-17, this will be set at £26.03 per week.
Severe Disability Benefit is available to people who require high levels of care or support on a day-to-day basis, recognising that there are all manner of extra costs associated with living with a disability or long-term health condition. As with Supplementary Benefit, Severe Disability Benefit and its linked Carer’s Allowance (payable to the primary carer, if they meet certain criteria) will also increase by RPIX (0.6%) in 2017.
What are the implications for businesses and employers?
Employers will pick up a 0.1% increase in Class 1 contribution rates, as already agreed by the States; and businesses will have a 5% uplift in TRP on their premises. But the biggest question for businesses and employers, in respect of the Budget and the report on Benefit & Contribution Rates, must surely be: what does this do for the economic climate? The latest Annual Independent Fiscal Review points to ongoing economic uncertainty in the wider world, with potential knock-on effects for Guernsey, and the finance sector coming under pressure in particular. In light of that, the fairly steady, evolutionary nature of the proposals in both reports is probably going to be welcome – although both reports strongly imply the current approach is not sustainable, and more substantial changes will be needed ahead. On the other hand – and perhaps I’m pre-empting the debate on capital prioritisation which will happen in June 2017 – it is perhaps disappointing, from an economic perspective, that allocations to the capital reserve are (perhaps of necessity) given a fairly low priority within the Budget, and that more thought is not given in the Budget to the potential stimulus effect of major capital projects.
There is, however, one significant talking point in this Budget. Recommendation 13 asks the States to endorse the Policy & Resources Committee’s intention to investigate options to raise revenue “from those businesses that might benefit from public investment”, including telecoms and professional services. From the brief description in the Budget (paras 4.69-4.70), this looks like some kind of infrastructure levy, primarily designed to assist investment in digital connectivity and travel links. But there has since been an amendment led by Deputy Peter Ferbrache, which recommends introducing GST at 15% on the provision of legal and accountancy services. It is an interesting idea, and one which has led to vocal lobbying by the affected sectors. It has not been explained how much revenue this is hoped to raise, or why those sectors in particular have been targeted, so we may have to wait for the debate to consider it more fully.
The richest rich and the poorest poor
I set myself the challenge of understanding how the Budget and Benefit & Contribution Rates might impact on “ordinary Guernsey people”. Naturally, this has meant I’ve focused little on the richest rich or the poorest poor. They are, statistically speaking, “outliers” – but, for us as policy-makers, their experiences are just as important. I’m less concerned about the richest rich, who, by definition, can take care of themselves. (There’s a recommendation in the Budget to exempt distributions from non-Guernsey companies from income tax – which will apparently have little effect in terms of the amount of tax collected, as these are usually already covered by Double-Taxation Arrangements – which I’ll probably end up being persuaded to vote for, but which does seem like a bit of a sop to the hyper-rich.) But I am certainly concerned about the poorest poor, whose lives are often marked by all kinds of insecurity, poor health, and disadvantage, and to whom we owe it, as a government, to ensure they are not left behind if the rest of the community prospers.
The delay in implementing the recommendations of the Social Welfare Benefits Investigation Committee means that some islanders will continue to live in unacceptably straitened financial circumstances for at least another year. But it’s not just about the benefits system. If I can’t explore in depth the experiences of the poorest island households – including the one in five living on less than £17.8k a year – in this update, I can at least reflect that the mandate of the Committee for Employment & Social Security will require us to look at all manner of relevant issues – from protection against exploitation in employment, to access to suitable housing, to effective inclusion of children and adults with disabilities – and that this wider conversation might be a topic for another time!
States’ expenditure and the Policy & Resource Plan
Of course, the one thing I haven’t done, in talking about how the Budget will affect islanders’ lives, is to discuss its plans for the States’ own expenditure over the coming year.
The proposals in the Budget for 2017 are straightforward enough. Committees are being assigned a 3% reduction in their cash limit, and they will deliver on that smaller budget in whatever way they deem most appropriate. The proposals for 2018 and 2019 are more ambitious: Committees are expected to deliver 5% year-on-year reductions in spending, as part of a plan (set out in para 8.3 of the Budget) to return to a healthy surplus by 2019. In June, we were assured that the civil service leadership felt these three-year reductions were achievable – but I think it is clear that savings on this scale go beyond the scope of operational efficiency, and will require significant policy decisions to be made during this term. My guess is that the 5% targets for 2018 and 2019 will prove to be unimaginably challenging, especially in the wake of several years of the ‘Financial Transformation Program’, where budgets had already been pared back significantly.
This is a question we will need to revisit again in the debate on the Policy & Resources Plan (which I’ll blog on properly in a week’s time, once the deadline for amendments has passed). The policy letter covering the P&R Plan says, early on, that “it has become increasingly apparent that there is a structural element to the [States’] deficit, and tackling this issue must be a high priority.” In other words, after eight years of persistent shortfalls, the States must accept that there is a genuine mismatch between its income and its spending. (Put that way, it’s a pretty value-neutral statement: the P&R Plan makes it sound rather more catastrophic.) In any case, it will be instructive to go on to debate the P&R Plan and its Fiscal Framework two weeks after the Budget: we will just have had a lively conversation about whether our resources match our ambition for the year ahead – and, if not, what should give – and we’ll then be straight into the same conversation about the longer term.
“Responsible, fair, progressive and realistic”?
Here’s an admission: the 2017 Budget and the Committee for Employment & Social Security’s Benefit & Contribution Rates report are being debated back-to-back (ish) largely at the wish of the P&R President. As a member of ESS, I resisted it quite grumpily: by having the debate in November, we leave very little time to make the changes necessary to have new benefits and contribution rates up and running by January. I know our officers will deliver it without any trouble, but I resented having to ask that of them.
Nevertheless, I have fallen into doing exactly what the President hoped to achieve by having the two debated together – that is, to try and understand the combined impact of the two sets of changes – and have found it a very worthwhile exercise. So, are these two reports “responsible, fair, progressive and realistic”, as the Budget claims itself to be?
Well, they’re not bad. My biggest disappointment with ESS is our move to introduce restrictions on access to benefit for people in Part D Open Market accommodation, without a decent justification – I have spoken about this elsewhere, and won’t go into it again here. The Budget’s all right: it tries to be as even-handed as possible, within a fairly constraining Fiscal Framework. The move to rebalance tax allowances is welcome: hopefully it signals a willingness to consider a more progressive income tax system all in all (though I am being optimistic here). The emphasis on getting returns from States’ assets is a smart move, but has been talked up so much between the Budget and the Independent Fiscal Review that there is a risk it will start to look like the goose that lays the golden egg, when its actual impact seems likely to be fairly small. For us at ESS, one of the biggest challenges of the coming year will be to make real progress on welfare reform – and the Budget, too, can eat its ‘responsible’ and ‘fair’ credentials next year if it fails to find the resources to lift the most disadvantaged islanders above a standard of living which States Members have already agreed to be intolerable. So there’s a task and a half ahead of us…