The structure of the economy is such that it is NOT CAPABLE OF PRODUCING INCREASES IN REVENUE INDEFINITELY

The structure of the economy is such that it is NOT CAPABLE OF PRODUCING INCREASES IN REVENUE INDEFINITELY

Having spent 47 years in Parliament, economic minister SIR JOE BOSSANO must know what he is talking about. This is an excerpt of what he said about the current Budget:

The GDP measures the value of the output of the economy and it is not a measure of the recurrent revenue of the Government. 

The way we measure the output is by the income method which takes the income from work, from company profits and from the rents on property to arrive at the value of the output. These three are the main elements of the calculations.

This measures the size of our economy. The bigger our economy is, as a general rule, the higher we expect the government recurrent revenue to be. However it does not mean that it is always so and it does not mean that the size of the increase in GDP is the same as the increase in government revenue.

So statements that we can afford to spend more money in any given year because the GDP has grown are not correct. The following figures for the different years conclusively show this. I have chosen the figures from the GSD administration to avoid members opposite thinking that this is something peculiar to the present Government.

In that year there was GDP growth of some £93M and Government revenue by £13.9M.

The appropriation bill that we bring to the house, the budget, shows what departments estimate they need to spend on the provision of recurrent public services.

This is currently affordable since we project a surplus at the end of the year based on an estimate of revenue that is sufficient to cover the expenditure. However the fact that we're able to meet an increase in expenditure in a particular year doesn't mean that we're going to be able to keep on increasing recurrent spending at the same pace in the future given that we're not able to project the revenue figures into the future. This would have been true especially of this year had we left the EU in March and will be true after October if we leave then.

I believe the nature of the structure of the economy is such that it is not capable of producing increases in revenue indefinitely to meet the kind of increases in expenditure we have been experiencing over the last few years and that therefore we should be thinking how we can develop a different economic profile that will provide greater security of income or we will have to introduce effective measures that will secure greater efficiency to enable us to continue to meet the rising level of expenditure, in one area through savings in another.

Both are difficult to achieve and it will probably have to be a combination of the two.

Affordability in one year does not imply sustainability in the medium term, and therefore what I issued last year was a health warning which applies equally to this year’s estimate of revenue and expenditure.

Like the health warning on a packet of cigarettes that many choose to ignore but some take heed of.

I do not expect that my health warning will be as effective and produce a change of direction. But it is my duty to give the health warning because if I see the danger signs, I say nothing and then things go badly wrong, I will have failed to do my duty.

Let me also make clear that I'm not saying that, because the danger signs are there it means that the indications are that the results are inevitable.

Predicting the weather is an uncertain science and predicting Economic and Fiscal results months or years ahead even more inexact.

One can say that if A happens B will follow, and we can say what the probability is that A will happen but what one we cannot say it that it is 100% certain to happen.

So if we look at our GDP and our Revenue streams, we can say that over the last 7 years revenue heads 1/1 and 1/2, and 2/1 have produced 85% of the increase in government’s revenue.

These are income tax, company tax and import duty, the share of each within the 85% of the increase in revenue has been 23%, 50% and 27%. The last one is not growing anymore and unlikely to grow in the future it was £174m in 2018, £176m in 2017 and £167 in 2016 and being the size it is, is not easily replaceable by a new source of revenue.

The first two, Income Tax and Company Tax yields are not evenly spread throughout the economy.

The biggest contributor in the private sector to both is the gaming sector and within this there are few companies that account for the bulk.

So those are some of the factors that constrain our ability to deliver large budget surpluses to be able to put money into the Rainy Day Funds. The bigger our annual recurrent expenditure gets the bigger the Rainy Day Funds we would require to provide protection.

So for all these reasons, that are scientific analytical tools I feel concern and the need to express it. Given the analysis and the reasons that I am providing why do I say that it will not be heeded?

Experience has taught me something about human behaviour.

As a general rule people do not take heed of things they do not want to hear.

When I was in the Union and members would not listen to me when I was advising them that the route they wanted to follow could finish up very badly for them, I would give my members the following example.

I used to say if you feel unwell and you go to the Health Centre and the GP gives you lots of tests and comes back with bad news what do you do? He tells you have a serious condition that is potentially terminal unless you go into surgery, which is never risk free and you have to decide quickly. You go home. You don't sleep that night; you don't know what to do. So then you say to yourself suppose he's wrong I want a second opinion I will go private and get a better analysis of what's wrong with me.

You do that. The result is that the private sector doctor says you are ok and puts your mind at rest. He tells you, you have nothing to worry about; it is just indigestion take some tablets. You are over the moon, you say to yourself what a good thing I didn't listen to that guy in the Health Centre. But of course if he was right, 6 months later you're dead.

But most people still tend to believe what they like to hear and not what they consider to be unpalatable views.

Let me say that the moral of the story is that I had a good success rate when I was doing it in the context of Union Members but obviously it's a success rate that is not transferable to the political arena.

So why did I issue a warning last year and have repeated the same this time? Because the reaction I have had indicates to me that those who disagree with me are not analysing the validity of the arguments but simply reacting because they don't want to hear them.