Pre-election tax cut scrapped as income forecast plummets

Friday 18 July 2014

Plans for a pre-election tax cut have been shelved after a major hole emerged in tax forecasts for the next two years, prompting a package of emergency measures to balance the books.

The 2015 Budget is announced this morning, and it shows the States income tax receipts are predicted to be far lower than was thought seven months ago. It also sets out what will happen if those forecasts come true, with the Treasury needing to find £33m in 2014 and £39m in 2015, just to balance the books. The Budget lists the measures which would be taken to do that, including finding at least £20m of new savings next year.

The new income forecasts for this year and next were produced in May by the Income Tax Forecasting Group, which includes the States Treasurer Laura Rowley, the States Economic Adviser Dougie Peedle, and the former States Chief Adviser Colin Powell. 

The predicted low tax receipts are being attributed to pay freezes and the lack of bonuses in the private sector.

Across 2013, 2014 and 2015 they mean that the States now expect to get £95m less money than they were banking on in their main financial plan, produced in 2012, which is the document on which they have based all of their recent spending decisions.

If the forecasts are right - and the Treasury says it will know more in September - the Budget contains a long list of measures which will be taken to make sure the States "current account" - known as the Consolidated Fund - doesn't going into the red, which is illegal. They include

• taking a lot more money out of the utilities, 
• asking all States departments to make up to 4% cuts in their budgets in 2015,
• cutting or delaying payments to the new Long Term Care Fund, which pays for elderly care,
• paying off the States pension debt more slowly,
• taking money out of various States funds, such as the Criminal Offences Confiscation Fund.

The States Treasurer said the cuts would be made without affecting States services, or meaning job losses. 

Once that's all been done, the States' "current account" will be a little over £13m in the black in 2014, and then back to zero in 2015, by which time the Treasury is banking on the economy having recovered enough to deliver more tax.

It also points out that income tax receipts have actually been much higher than the forecasts in every year since 2005 - with the exception of last year. 

Treasury Minister, Senator Philip Ozouf, had wanted to make further tax cuts this year, to bring the marginal rate down to 25%, as set out a new Long Term Tax Policy, but denied that the new package constituted "emergency measures".

Referring to the pre-election tax cut to bring the marginal Income Tax rate down from 26% to 25%, he said: "It would have been nice to do it, but clearly the income forecast shows it is not affordable for next year".

Commenting on the list of measures which will be taken to plug the predicted tax gap, he said: "If this is right, we are putting the right measures in place to deal with it". 

 The 2015 Budget will be debated by the States on 22nd September, and it is likely there will be amendments proposed by States Members.