Financial crisis looms – report says raid States reserves

Friday 30 January 2015

Islanders have been given a stark warning - the new black hole in States’ finances is here to stay, and we’re going to have to dip into the Rainy Day Fund to stay out of the red for the next few years.

A report from experts says that the yawning gap in States finances worth an estimated £72 million over 2014 and 2015 is a much bigger problem than was thought last year – and a much bigger issue than ministers were admitting before October’s election.

The report says it’s time to dip into the States reserves of hundreds of millions of pounds just to keep things ticking over, because the big cuts or tax rises needed to fill the hole would threaten Jersey’s fragile economic recovery, and ministers should aim to tackle the deficit in 2018 when the recovery is more solid.

And it says that it’s time to pump more money into major capital projects if they would give the economy a sustained boost, saying that the States should borrow if necessary to fund massive projects if they would help businesses – that might mean anything from an airport runway extension, a deep-water cruise ship berth, a new Eden Project-style tourist attraction or a new stadium for the rugby club. They also say that “transformational projects” to improve the efficiency of the public sector, like the e-government project that appears to have stalled, should not be delayed.

Today’s report by the Fiscal Policy Panel – a distinguished independent panel of UK expert economists – makes a number of conclusions that show that Chief Minister Ian Gorst’s new Council of Ministers has a big job on its hands.

They say:

- “It appears that there is a significant risk of a structural deficit. The States should develop a plan to deal with the structural deficit by 2018/9.”

- “Fiscal measures like large cuts in public expenditure or capital projects that could have a significant impact on the economy in the early stages of economic should be avoided.”

- “Public finances will move out of balance over the next 20 years as spending in areas such as health and the state pension increases faster than revenues.”

- “Structural change away from financial services into other parts of the economy which are less profitable and have less well-paid jobs would move the public finances out of balance.”

- “The States should act now and develop a clear strategy for raising productivity (in both the public and private sectors) and competitiveness in the Jersey economy.”

The most recent official stats for the economy showed that it flatlined in 2013 after years of decline following the 2008 crash, but the panel say they expect figures to show growth of 1.6% for last year, followed by 2% this year dropping off slightly for the next two years.

But they say that the economy is still in a precarious position, and that it’s now too late to try to fundamentally diversify the kind of business and industries that exist here because new sectors are unlikely to have the same kind of profits and high wages as finance.

The Fiscal Policy Panel makes it clear that the success of the finance industry in Jersey – which it says faces increased competition – is critical to the Island’s economic success, and that the States have to do what they can to support the key industry, including making sure that they can bring in experienced workers from outside the Island to fill key jobs.

They say: “The extent to which the finance sector is able to attract the people it needs from within the local labour force and through inward migration is critical as the demand for international financial services recovers. If this is limited by availability of skills locally and/or population controls then it will mean that Jersey’s level of potential output will be lower than currently expected and that the economy experiences capacity constraints more quickly.”