This is the full speech that Treasury Minister Eddie Teare MHK delivered in Tynwald today.
There are many themes that run through today’s budget statement, but linking them all is work.
Government needs to work through its fiscal challenges. Our economy needs to grow and provide our community with opportunities to work, especially for the young, and we need to reward work by retaining low and competitive rates of taxation.
The last few years have seen those in work having to deal with low or no pay rises, increasing levels of some taxes and charges, reduced benefits and yet household expenses have continued to rise because of inflation.
The result has been a real decline in their standard of living.
Those not in work have been protected, to a certain extent, from these changes by inflationary increases in pensions and other benefits.
These factors have been in my mind as I have worked on the budget, and I hope to make some positive changes with the limited resources which I have available today.
I wish first to update this Honourable Court on our progress in meeting our financial challenges. The news is good.
We achieved a lower deficit in the first year than planned, are projecting a lower deficit this year and the same deficit next year as a year ago. Overall we will rebalance the revenue budget using around £3 million less of the Reserve Fund than originally envisaged.
We will balance the revenue budget in the 2015-16 financial year.
This outcome has not happened by chance, but by hard work, and I need to pay tribute to my Council of Ministers colleagues with whom I have gone through many hours seeking to find new savings while protecting front line services.
The way that we will manage cost savings over the next few years, and which are set out in the Pink Book, may surprise some Honourable Members.
For example, we are not used to delivering services such as catering or cleaning from single Departments: but if we are to function effectively as one organisation, and if we are to save money this approach makes sense.
During the last year, the government reviewed all of its services through the Business Change Steering Group.
I am currently chairman of the group, ably joined by Mr Ronan, MHK and Mr Wild, MLC.
Their support and the work of a small, part time team have been invaluable.
Not only have we reviewed all of our activities to discover if there are alternative means of delivery, but the Council of Ministers has also prioritised all £926 million of gross spending, in order that we can deliver savings in those areas that have minimum impact on the public.
In managing the change process we have been careful not to “slash and burn”.
We have managed our changes so that Government has lost over 600 actual jobs, with just a handful of compulsory redundancies.
Government’s employee costs have been held down at £312 million in the current financial year, and it will be lower again in the year ahead.
That is a saving of £50 million this year, and £60 million next year, compared with the bill we would have faced if salary rises had followed inflation.
Those who claim that Government is not getting smaller simply do not see the facts and I sometimes wonder whether they want to. Gross Government spending has fallen from 25 per cent to 20 per cent of GDP in the last four years.
In the United Kingdom public expenditure is more than 46 per cent of GDP.
The rebalancing of our revenue budget is a critical short term objective, which we will achieve.
I am not assuming that the job will be done at that point.
In the longer term we must achieve truly sustainable public finances.
I will develop and present to Tynwald next year a new fiscal strategy which will set us on that path.
It will need to deal with the depletion of our internal funds, the rebuilding of our capital fund and how we are to meet the growing costs of pensions, healthcare and social care provision mainly brought on by the ageing population.
I believe that we need a national debate about these issues, as they are complex, and the potential solutions will be seen by some as divisive. But we cannot ignore the ever increasing cost pressures on public services. The Government plays a vital role in the wellbeing of the whole community, but it has limits, and we need to be open in discussing where those limits will be.
To assist everyone in understanding how the national finances work, I am today launching a website which allows everyone to see budgets in detail: both for last year and for the current year. As part of our policy of openness I expect that this Government will make far more information available to the public over the coming years.
There is plenty more work to do. The restructuring of Government is primarily about creating organisations that can respond to these key policy challenges.
In the future I expect all government departments to be able to demonstrate how they are responding to the three core aims, “grow the economy”, ”balance the budget” and “protect the vulnerable”, and Treasury will play an active role in all three.
So we have changed more than many appreciate. But the work is not done, and major challenges still lie ahead. We are working through our difficulties.
Madam President, I will now turn to our economic performance.
I believe that we are at a turning point for the global economy.
There are indications that the financial crisis has worked its way through and that some countries are showing signs of a recovery.
Amongst those are the United States and the United Kingdom. The Eurozone remains the main area of concern, with high deficits and unemployment in a number of large countries.
The strength of the UK economy will present some challenges to us.
Interest rates could rise more quickly than we expect, and a strengthening currency could make it more difficult to export beyond the sterling area.
In general though we should welcome a recovery in our major trading partner’s economy; as it will bring additional economic activity to our shores and also give a welcome boost to consumer confidence.
The Isle of Man is now in its 29th year of unbroken economic growth.
We are quoted as being the 8th most wealthy nation on earth in terms of per capita GDP
Our economy is for the first time ever the largest of the Crown Dependencies.
Theseare marks of success that we can feel proud of as a nation, but they may not ring true with the average person.
Those in work have seen an average 8.5 per cent fall in their incomes in real terms over the last five years.
This is not unique to the island; as earnings in the UK have grown below the rate of inflation too.
Savers have seen reduced returns on their investments.
Borrowers however have had access to low interest rates on mortgages.
I expect inflation to track close to the UK rate in general going forward, at between 2 and 3 percent.
I expect growth to be between 3 and 4 per cent in real terms this year.
I wish that there was more we could do to ensure that earnings keep pace with inflation.
I certainly expect the two to be much more closely aligned in the years ahead. But when finances are tight, I still feel it is better to retain jobs than make pay awards, and the evidence is that this has been a success.
Unemployment has risen, albeit modestly, to a rate of around 2.6 per cent or around 1,200 people.
The diverse nature of our economy has protected us from larger increases, especially in financial services, where banks and other institutions have been cutting back on staff globally.
We are winning more of these restructuring decisions than we are losing: for example the scale of job losses and unemployment in Jersey is higher than here, with comparable unemployment figures 50 per cent higher.
In the public sector we have lost 8 per cent of our staff: over 600 actual jobs since 2010.
Since 2009 the United Kingdom public sector has also shrunk by 8 per cent.
Total employment numbers have remained almost static over this period, so this is a manageable rate of decline, with new private sector jobs replacing lost public sector ones.
In steering the Isle of Man economy forward, it may be simplistic but I believe that creating jobs and maintaining confidence, are the key.
We need to create jobs, develop new sectors, and retain a well educated and flexible labour force.
The Department of Economic Development’s Vision 2020 is a blueprint for the future of our economy, and it is to this that I will now turn.
Vision 2020 forecasts that our economy can grow by 3 to 4 per cent each year to 2020, with the e-business sector being a key source of growth.
This growth will generate substantial additional Government income, which will be instrumental in funding public services while helping to maintain our low levels of taxation.
The joint public/private work to implement the Vision 2020 plans has commenced.
In 2014 DED will lead efforts to promote Vision 2020 in our community and to deliver the planned growth.
Financial and professional services grew in 2013 and are predicted to continue to do so in 2014.
The international life insurance and professional services sectors continue to perform well.
At the same time, some areas have seen small reductions in employment over the last year, notably banking and fiduciary sectors.
These changes are being driven principally by global economic forces, not factors unique to the island. Indeed, the island is faring better than many of our competitors.
For example, the UK banks now find it less attractive to raise funds through savings banking in offshore centres due to the availability of cheap funding from the UK Government through ‘Funding for Lending’.
Also, because of low interest rates, people are holding fewer assets in bank savings as they can achieve a better return on their money in other products.
As a result, several savings banks have closed local operations or reduced staff levels, both in the Isle of Man and in other international finance centres. At the same time, we are seeing substantial growth in new areas including corporate banking.
Some small fiduciaries have been acquired as the industry consolidates in the face of rising international regulatory requirements, not least FATCA.
These changes were anticipated and were included in the government’s projections for the year.
Indeed, job losses of over 200 were projected for the year across the banking and fiduciary sectors and the current data indicates the actual levels will be closer to 100 in 2013-14, with similar losses in 2014-15.
We have been working particularly hard with the banking sector, the Channel Islands and the UK Treasury in order to protect our interests as the UK moves ahead with its new banking regime: effectively to split retail and investment banking in line with the recommendations of the Independent Commission on Banking.
We expect to know how this will affect us in the next few months.
I believe that we have done all we reasonably can to help the UK Treasury understand how our banks provide real value to the UK economy.
2014 will also be an important year in terms of automatic exchange of information, with FATCA and related work being implemented in concert with the local industry.
The Isle of Man’s registries continue to provide world-class service to their growing global client base and help to generate substantial revenues for our financial and professional services businesses.
In 2013 the Ship Registry grew at twice the rate of the world’s fleet - a performance which has elevated the Isle of Man to 14th place in the table of global shipping registers by tonnage with 40% of the fleet Asian-owned. Just three years ago, the Isle of Man did not even feature among the world’s top 20 registries.
The Aircraft Registry was voted the best in its class in the world in 2013 by an association of aircraft lawyers and it continued to grow to 9th place in overall rankings, overtaking the UK and France.
The Department of Economic Development is continuing to invest in its registries, for example it is developing new IT systems to provide more online services for clients.
The registries are forecast to continue to grow and so aid further economic growth.
As ever, finding new growth is essential.
The government has therefore committed substantial additional funding from the Marketing Initiatives Fund to the Department of Economic Development to promote the Island in key international markets: as identified in partnership with the private sector as part of the Country Strategy.
As a result, we show continuing commitment to supporting financial and professional services and have clear plans to support the industry through this period of global change.
E-Business is the fastest growing part of economy: it continues to grow at over 10 per cent a year and accounts for around 14 per cent of National Income. It offers great potential to create many new jobs, spending in the local economy and government revenue.
DED is working closely with the private sector in other areas.
Two key points of focus will be skills development to provide the skilled workers required and international marketing to help local businesses win new revenues and to attract further new businesses to the Island.
We have launched a new initiative with the private sector to review the school curriculum so that our young people can gain the ICT skills they will need to flourish in future.
In terms of marketing, the government has recently committed an additional £350,000 over the next 2 years to promote e-business, both helping local businesses to grow as well as attracting new investors.
Our engineering sector has continued to grow and is projected to generate over 50 additional jobs every year for the foreseeable future. The key challenge is securing the skilled engineers needed.
Therefore I am delighted to inform this Honourable Court that this Budget includes additional Revenue and Capital funding of nearly £1m for the Department of Education and Children to turn the Hills Meadow training centre into a dedicated engineering training centre of excellence.
This is a vote for opportunities for our young people and growing the economy, and I would hope that all Members of this Honourable Court will support this.
In 2013 the Government and the private sector in partnership, modernised the two-year training programme and increased student numbers from 12 to 18. This will double to 36 from September 2014. This will give our young people excellent job opportunities in a high-tech industry with a great future.
The tourism sector maintained a similar level of performance in 2013 compared with the previous year when we saw good growth in terms of both leisure visitor numbers and economic contribution.
The principal success in 2013 was the Classic TT Festival of Motorcycling.
The new format attracted many more visitors, showing that such long-standing events can still deliver growth.
The Department of Economic Development is keen to explore in 2014 how we can continue to grow the TT and Classic TT. Research in the UK shows that the TT remains the island’s best known feature, so it remains a vital part of the island’s brand.
Conditions in the domestic economy remained tough in 2013.
That said, both Treasury data and industry leaders indicate that the retail sector returned to growth in 2013 as consumer confidence improved.
We also saw signs of improvement in the property market, with the number of transactions recorded at the Land Registry in 2013 exceeding those in 2012 by about 15 per cent.
Although construction remained depressed for the fifth year in a row, the number of new planning application approvals, including new private residence projects for high net worth individuals totalling around £30m, lead me to expect that activity in this sector will pick up in 2014.
Let me now turn to the international environment.
Madam President, 2013 was a pivotal year for international tax matters. Tax has been front page news and was a central theme of the G8 and the G20.
This could have been a problem for the Isle of Man but instead we have seen the Island’s reputation enhanced.
Multinational companies are increasingly recognising that their reputation is more important than the amount of tax they pay.
This fact is influencing business location decisions and emphasises just how vital it is that the Island protects and enhances its international reputation.
The Isle of Man has, since it made its first commitment in 2000, consistently and diligently adhered to international standards on tax transparency and information exchange.
It has also recognised and prepared for new standards when they start to emerge.
Last year, in my Budget speech, I introduced FATCA as being the latest in a long line of international measures aimed at clamping down on tax evasion.
Since then, in October, the Isle of Man became the first jurisdiction to sign a FATCA agreement with the UK. A similar agreement with the US was signed in December.
The Orders to give effect to the US agreement are, in fact, on the Order Paper for this sitting of Tynwald.
Whilst there have been some comments in the USA that the Republican Party will try to have FATCA repealed, I feel that this is not an immediate prospect having more to do with the mid-term elections and the influence of the Tea Party.
It was my belief then that the FATCA model of automatic exchange of information would become the next international standard. Twelve months on and my belief is becoming reality.
The OECD is now finalising a global model of automatic exchange of information with a new “common reporting standard”, based on the FATCA model, published at the end of last week.
In support of this, the island was one of more than 30 countries to sign a joint statement backing a move to a single global standard for the automatic exchange of information between tax authorities and calling on others to make the same commitment.
I think it is worth repeating again here today the Chief Minister’s statement announcing this move.
‘As the joint statement says, tax evasion is a global problem requiring a global solution.
The Isle of Man welcomes the movement towards a single global standard, which will lead to greater tax transparency while minimising compliance costs for business and government.’
FATCA therefore continues to grow and much time and effort will be dedicated by the Assessor and her officers in the coming years to ensure that the Island participates in this initiative.
I also recognise the enormous amount of time and effort that local financial sector businesses will need to continue to invest to ensure they can comply with these new rules. Ultimately it is the actions the island takes and the way in which it adapts to new standards in practice that influences the way the international community views us.
Moving on from FATCA, in November last year the island became the first Crown Dependency to join the Convention on Mutual Administrative Assistance in Tax Matters
This multilateral convention provides for exchange of information and will significantly extend the island’s network of bilateral tax agreements.
The inclusion of the island in the Convention was first recognised at a ceremony held in Jakarta during the sixth meeting of the Global Forum on Transparency and Exchange of Information for Tax Purposes.
During the same meeting, the Isle of Man was also awarded the top “compliant” rating by the OECD Global Forum.
Of the 50 countries reviewed to date we are one of only 18 to receive the top rating in tax transparency.
This is a significant achievement and, to put it into perspective, this rating is higher than that awarded to either the UK or the US and, again, we are also the first Crown Dependency to receive this rating.
Madam President, it is the island’s positive response to tax transparency that led, in September, to the UK Prime Minister, David Cameron, recognising in the House of Commons that the Isle of Man is not a tax haven.
In addition, following the British-Irish Council Summit in November, the then Minister of State for Justice, Lord McNally, wrote to the Chief Minister to reaffirm his support for developing the Island’s partnership with the Ministry of Justice and other key UK Departments.
Lord McNally said: ‘The relationship between the UK and the Isle of Man is a positive and mutually beneficial one and it is vital that we continue to be good neighbours to one another….’
Madam President, Tynwald has unfailingly adhered to its policy on compliance with international standards. Officers and the local business community have together ensured this policy has been implemented effectively. It is this behaviour that counts when it comes to reputation and recognition.
The recognition achieved in 2013, together with the Global Forum’s award of the top international rating for tax transparency, have helped to make it a truly monumental and ground breaking year for the Island, and will ensure that the Isle of Man continues to be recognised as one of the world’s leading international business centres.
I will now turn to our financial performance.
As I said a few minutes ago, we are on course to deliver a balanced revenue budget next year. Our expected deficit in 2013-14 will be £26 million, but we will draw down the £31 million stated in my budget last year, and use the surplus of £5 million to augment a number of internal funds.
The lower deficit has been the result of additional tax revenues of around £2 million and reduced spending of around £3 million. The funds which I will top up are -
The Legal Costs Reserve continues to be called upon as a result of uncontrolled Legal Aid and other costs associated with large, complex court and tribunal cases.
I have to say that I do not believe that the current arrangements strike the right balance between justice and cost.
It is the public who are paying for these cases to come to court, and whilst I have no desire to interfere in the process of justice, I do think it is time to look seriously at ways of reducing the bill to the taxpayer.
I will therefore begin a process of consultation with the Attorney General’s Chambers.
The Agricultural Development Fund will be renamed the Agriculture and Forestry Fund and will be topped up with £1.7 million.
There are two exceptional events that have necessitated this. Firstly, the exceptional snow of last spring resulted in the Department of Environment Food and Agriculture paying in excess of £500,000 in compensation for lost livestock. Secondly, our forests have been badly affected by Phytophthora (fitoftora) ramorum, otherwise known as sudden oak death, a dangerous disease that will require large scale tree felling.
I have set aside £1.1 million in 2014-15 to ensure that the majority of this happens next year.
The Insurance Fund pays for our annual premium. The Fund needs to be bolstered in order to be able to pay the 2014-15 premium.
This expenditure, around £2 million per annum will be brought back into Treasury revenue expenditure in 2016.
Finally Madam President, I propose subject to Tynwald approval, the creation of a new Health Inspection Fund.
This fund is being proposed as we are aware that the quality review currently underway at Nobles Hospital may result in recommendations to bolster resources in some areas.
Having said this, the Council of Ministers wants to ensure that any increases in health budgets are targeted and that all possible efficiencies are found prior to giving additional funds.
An Internal fund is a better way to deal with this issue than simply increasing the vote of the department.The resources are set aside but will only be used if necessary.
We will carry forward around £32 million in our operating balance to next year. In 2014-15 we will reduce both the net and gross spending of Government. The deficit will be £11 million, the same as expected a year ago.
The changes to next year’s budget are both organisational and driven by the need to save money. For the first time the Council of Ministers considered all £926 million of gross spending, not by department but by outcome.
Council rightly determined that it was the cost of running government - the administration - that needed to be reduced before we made changes elsewhere. I was on record a year ago in stating that I wished to take £10 million a year from the overheads of government. In 2014-15 we will be up to £7 million and by 2015-16 we will have achieved this objective.
Saving money on the support functions means that we have to deliver them differently.
So we have centralised budgets in areas such as payroll, HR and Information Technology.
We have extended centralisation further in areas such as estates and vehicle fleet management.
But we have gone further and looked at catering and caretaking services.
I don’t pretend that these changes are easy, or that they do not cause uncertainty or disquiet in certain quarters.
What I can say categorically is that your Council of Ministers faced with the financial challenge to deliver rebalancing and find additional resources for front line services did what was right, and found savings in a way that minimised the impact on the public.
These new savings, totalling £4 million in 2014-15 are of similar size financially as the combined impact of the Sewerage Charge and the means testing of child benefit.
So I will not accept that the burden of the rebalancing has been met solely by the population: we are reducing the size and cost of government itself.
We now employ around 600 less (sic) people than we did in 2010.
That is an 8 per cent drop.
When you consider that two thirds of our staff work in front line services for example, Health and Social Care that is a significant fall in the rest.
We are rising to the challenge of reducing the size of government, whilst protecting front line services.
We will rebalance the revenue budget in 2015, but that will not mark the end of the journey.
There are other issues that many Honourable Members are aware of and concerned about.
For example, we need to rebuild our capital fund and our internal funds, which have been reduced dramatically over the last few years.
We need to move from rebalancing to sustainability in the public finances, and that requires consideration of the longer term challenges such as an aging population, pension costs or environmental change.
All difficult decisions, but ones which cannot be avoided if we are to leave a positive lasting legacy.
We also need to reform our benefits system, to be fair to taxpayers and to those whom we support.
I am concerned that some people abuse the generous level of benefits we provide, and so I will be considering altering eligibility criteria for those convicted of benefit fraud.
I am also concerned about the growing numbers of people on income support who are of working age, and may indeed be able to work.
By way of illustration the number receiving Income Support has risen by 64% in the last 10 years, three times the rate of increase in claimants of other benefits. If our claims experience had been the same as the UK over the last decade the annual amount paid would now be £14 million less.
So I will produce a new Fiscal Strategy next year. The reason I am not doing so today is that in order to plan with certainty we need to conclude our discussions with the UK about the new revenue sharing arrangements under the Customs and Excise Agreement.
By way of an update I can report that the data collection work, which covers both household and business surveys, is progressing well.
I would like to take this opportunity to thank all those individuals and businesses who have helped the Treasury.
We are now starting to analyse and understand the huge amount of information that has been submitted. I expect to be able to discuss our findings with the UK Government this year, and to have agreed the details of the new arrangements by the time of my next budget.
We have reviewed and updated the Capital Programme for 2014-15.
In particular we have sought to focus budget on construction activity, such that I am able to announce a 14 per cent rise in the overall value of construction activity in the programme next year, a rise of £6 million from £44 million to £50 million.
The largest scheme for next year is the IRIS programme, with some £9 million spend planned.
That is over £100 for every person on the island, and double this year’s household sewerage charge.
IRIS is a key system for protecting and enhancing our environment.
We do not want to go back to pumping raw sewerage into the sea, close to our beaches. I am pleased to report that capital costs have fallen substantially below previous estimates, which will help to alleviate the burden on rate and taxpayers
This also seems an opportune time to mention the Manx Electricity Authority.
The merger with the Water and Sewerage Authority will bring synergy benefits, in administration, billing and equipment to name but three.
Treasury believes that the MEA has now reached its peak debt in terms of the amount owed back to the Capital Fund.
We should remember that the Capital Fund is, in effect, internal to government, with external debts being the two bonds for the utilities totalling £260 million.
In the years ahead it will, as part of the Utilities Authority be repaying to the Capital Fund more than it borrows each year, and this will finance a growing proportion of our future capital programme.
I have heard comment to the effect that the public are paying for the MEA debt.
If we did not have a plan for the repayment of capital funds the public would indeed be paying, in terms of a lack of new school buildings, roads or even sewerage treatment works.
The plan outlined protects all these and deserves support. It deals with a problem that has been unresolved for the last decade.
Madam President, I will now mention our investments briefly. Under the stewardship of my colleague Mr Braidwood, our invested funds have grown strongly in value in the last year, such that they remain at roughly the same level now as they did a year ago, despite the need to withdraw over £90 million from the Reserve Fund.
Despite this we cannot rely on stock market growth to protect us from the need to balance the budget.
The good news is that the Reserve Fund should now still be in a healthy position once this is complete.
Another piece of good news was released yesterday.
Pinewood has announced that it has signed an agreement with the Welsh government to advise it on its new £30million television and film investment fund. They now join us as part of the growing regional film and TV media investment portal.
I will now turn to Taxation and National Insurance.
TAX AND NATIONAL INSURANCE
Our system of taxation remains attractive, easy to administer and fair.
It continues to be my aim to keep it this way and, as I have said previously, I will not raise additional income simply as a means of balancing the books.
Our taxation strategy is clear and continues to put in place the agreed principles for a regime which, so far as possible:
• is fair;
• supports economic development;
• is easy to understand and to comply with;
• is simple to administer; and
• continues to build the Isle of Man’s international reputation.
The Income Tax (Amendment) Bill 2013 completed its legislative passage prior to Christmas and I am pleased to note that Royal Assent is to be announced imminently.
This Bill includes legislation to stop the use of personal service companies for tax and national insurance avoidance purposes.
The new law will be effective for the 2014-15 income tax year and I hope Honourable Members will agree that this will stop a practice which goes against the fundamental principle of fairness and is therefore unacceptable.
With such low rates of income tax we cannot afford to allow blatant abuses such as this, and I will continue to clamp down wherever I see avoidance taking place.
There is a paradox in that some people expect services such as education and healthcare, to be available, but try to avoid their obligation to contribute towards the cost.
We have now gone for three years without an increase in personal allowances.
I am not concerned that the increase in the United Kingdom personal allowance to £10,000 will affect our competitive position because our overall system remains highly favourable.
However, I am conscious of the continual income squeeze on our working population.
Therefore the measures that I am proposing today are aimed at ensuring that this section of our community, which we rely upon to grow our economy, is not adversely impacted.
The time is right for an increase in personal allowances.
I will increase the personal allowance by 2 per cent from £9,300 to £9,500 for a resident individual; and to £19,000 for jointly assessed married couples or civil partners.
This increase will remove over 250 people from paying income tax and save a jointly assessed couple up to £80 per year.
There will be no changes in the rates of personal income tax or what is known as the 10% band, and therefore 10 per cent will be paid on the next £10,500 and 20 per cent tax will be paid on income above the level of £20,000.
These amounts are doubled for jointly assessed married couples or civil partners.
In January 2012, the Department of Social Care introduced a new benefit called Employed Persons Allowance or EPA which replaced two existing benefits, Family Income Supplement and Disability Working Allowance.
The EPA is currently taxable and this results in increased amounts of benefits actually being paid simply to meet the additional tax liability arising from it, which in turn results in increased administration costs.
This in my view is madness and I therefore intend to make this benefit exempt from income tax.
Unfortunately I cannot do this within today’s Budget as the Income Tax (Amendment) Bill 2013 will amend the section of the Income Tax legislation dealing with the taxation of benefits from April 6, 2014.
I will however be bringing an Order before this Honourable Court in the near future.
Whilst individuals in employment have continually been asked to pay more tax with reduced tax relief for certain allowable deductions at a time of static salaries, those in our community who have retired have enjoyed regular annual increases in their pensions.
During the five years to 2012, there was a 22 per cent overall increase in the State Retirement Pension and Manx Pension Supplement compared to only a 10.8% increase in average full time earnings.
I therefore feel that it is right to reduce the age allowance for those aged 65 or over from £2,020 to £1,000.
My aim is to reward those people in employment and therefore I can see no reason to have more beneficial income tax allowances to those in retirement.
I have decided this year to maintain the Personal Allowance Credit at £500 for individuals and £1,000 for married couples or civil partners. Over 9,500 people in receipt of low levels of income continue to benefit from this payment; over one third of which are pensioners.
My final word on personal taxation concerns the Tax Cap. This policy was introduced in 2006 with the aim of attracting wealthy entrepreneurs to the island.
Whilst there has been much discussion in this Honourable Court and elsewhere regarding this measure I was particularly pleased to received Members’ unanimous endorsement of the Tax Cap policy in supporting the Taxation Strategy presented to this Court in January 2013.
I remain convinced that in order to succeed in balancing our Budget we need to maintain an attractive tax regime which includes a Tax Cap aimed at encouraging High Net Worth individuals to take up residence and support business development on the island.
Reviews have been carried out to provide details of the economic benefit that our Tax Cap policy brings to the island.
The companies that can be identified employ in the region of 360 staff and for the 2012/13 tax year paid in excess of £27.5 million in remuneration and remitted more than £2.25 million in ITIP and £4.4 million in National Insurance contributions which coupled with the tax paid by those subject to the tax cap brings a total direct benefit of £15.8m to the exchequer.
The total economic benefit will be much greater in that additional jobs will be created and supported elsewhere in the wider economy.
These are jobs and revenue that may have gone elsewhere without this policy. Treasury would be delighted to give Honourable Members more background information upon the competitive pressures that we face in this area.
One important point that our entrepreneurs have repeated since 2006 is that they need certainty and stability.
This is also the message we need to send out in order to attract more wealthy people to the island.
Therefore, to this end, I intend to introduce a specific statute to put in place a five-year election for the Tax Cap.
Once an individual elects for the cap they will pay the set amount for five continuous years, even if their income decreases.
Only in very rare circumstances and at the Assessor’s discretion will they be allowed to opt out of the cap.
The Assessor of Income Tax will publish a Practice Note setting out further details today.
This achieves my aim of maintaining certainty for those that will elect for the Tax Cap and it also ensures stability in Treasury revenue receipts from these taxpayers.
I hope that Honourable Members will agree with me that this is a positive move and a necessary updating of the Tax Cap.
In 2012 I introduced the National Insurance Holiday Scheme to encourage the creating of new jobs on the island.
In the first year, there were 585 new jobs to which the holiday applied, from 272 different employers.
This year the figures have been just as impressive with 549 new jobs from 222 different employers.
That is more than 1,100 new jobs that have been created over the past two years.
Last year, I announced that this holiday will continue for another year until April 2015 and I confirm that this will be the case.
National Insurance Contributions are intrinsically linked to the payment of benefits and pay a proportion of Health Service expenditure.
As Honourable Members are aware there is a review of benefits and National Insurance currently being undertaken by a team of external consultants with the support of officers from both Treasury and the Department of Social Care.
This review will assist the Council of Ministers in the development of future policies to ensure that benefits are properly targeted and financed in a way that ensure the long-term viability of our benefits system.
We must remove disincentives to participating in the workforce whilst maintaining our focus on the most vulnerable in our society.
I therefore do not propose to make many changes in the area of National Insurance until I see the conclusions of the review.
Last year, I asked the Assessor to review the charging of National Insurance Contributions on benefits in kind.
However, I have also asked that further consideration of this matter be put on hold until the main review is concluded. We can then move forward with our planned strategy.
The rates of Class 1 National Insurance Contributions in the Isle of Man for 2014/15 will remain at the current levels of 11% for employees and 12.8 per cent for employers, and the employees’ additional rate will remain at 1 per cent; the rates in the UK are 1 per cent higher.
The Lower Earnings Limit will increase from £109 per week to £111 per week from April 2014 in line with the increase announced in the UK. This is the point at which an individual starts to build up rights to such benefits as Jobseekers Allowance and Basic State pension. The employee threshold will remain at £120 per week and the employer threshold will remain at £117 per week.
The Upper Earnings Limit will remain at the current level of £784 per week.
Finally, the Class 3 weekly contributions will be increased to £13.90 per week.
Madam President, I would now like to turn to company taxation.
The zero/ten regime of taxation for companies is in my view is the cornerstone of our economy and it is vital that it continues.
Continued growth in taxation receipts provides irrefutable evidence that our strategy is working well. Over 1,100 new jobs have been created in the past two years with an anticipated increase in ITIP of £6 million.
I have no doubt that our zero per cent company rate is one of the main catalysts in attracting new business to the Island; it assists the expansion of existing businesses, and contributes to our uninterrupted economic growth.
For this reason I will not change any aspect of taxation for companies.
However, if we are to continue to reduce the cost of government we must be constantly seeking to streamline those administrative processes which are labour intensive, and in some instances contribute little or nothing in the way of revenue receipts.
I am convinced that the growing use of online services can assist us in achieving this goal whilst also providing greater flexibility as to when people transact their business with government.
The range of Online Tax Services has continued to expand, as has their use.
ne in five individuals now use this service to file their annual tax return, and I previously introduced legislation making it compulsory for employers for use the online service, which is working very well.
Whilst contributing significantly to our economy as employers, due to our zero rate, the majority of companies on the Island pay little or no income tax.
Over 50 per cent of companies are now submitting their annual tax return online and therefore I feel that the time is right to ask the Assessor of Income Tax to introduce a compulsory online filing requirement for companies from April 2015.
Madam President, my message this year is clear - it is only through increased productivity and job creation that our economy will continue to grow.
This in turn will help us in our budget rebalancing process and beyond, and it is our responsibility to foster an environment in which this can happen.
When considering my speech and thinking about my summing up, the first thing that strikes me is that I have not conveyed adequately either the huge change programme which we have embarked on, or the pace of change which we have generated within Government.
A budget is after all just a snapshot in time.
This administration has been accused of not changing fast enough, of putting off difficult decisions and of not steering the right course.
Nothing could be further from the truth.
My experience is that the Council of Ministers has spent more time on the big issues and on the strategic policy making than ever before in the last year, and it started with a realisation that we needed to reform ourselves.
So we have restructured the political centre, have created a Cabinet Office to drive change at the centre of government and have restructured our budgets to centralise and save money in those areas not directly affecting the public.
In summary, we are working through our problems, and finding solutions, whether they are political, organisational or financial.
This government brings solutions whilst some only bring criticisms. What are their solutions?
When you change things you inevitably upset some people.
Politicians are good at listening and sometimes act on these complaints.
But consider the whole not the part. Do you believe that we are heading in the right direction, even if you cannot agree with every action?
I am convinced that we are, and that we are emerging a stronger, more focussed and more corporate organisation as a result.
I have not tried to be radical this year, more of a steady Eddie.
This is a deliberate approach, as I feel that we are making good progress and there is no need to make change for change’s sake.
But there are new concerns that are emerging, as we put to bed the problems of the past.
Foremost amongst those is to spend less time on managing the short term challenges of rebalancing the budget, to spend more time on building long term sustainable public finances.
To do this needs all of us in this Honourable Court of Tynwald to work together. It feels to me as if government as a provider of all things to all people in a one size fits all approach cannot continue into the future. Our citizens demand more complex and individual responses to their problems, which places increasing demands on our resources and our professionalism in response.
In essence it’s a challenge to the public service to be excellent, and one we must aspire to meet.
So today I will lay out the big issues we need to address.
Government must spend less than it receives, so that our public sector and the services which it provides are sustainable into the future.
We need to reform our welfare system and to look again at our employees’ pensions.
We need to remodel our Health Service, as it cannot at present provide all things to all people, and is even less likely to be able to do so in the future.
We need ensure that public services are there for people when they need them, and tailored to their individual needs and means.
I don’t have all the answers to these issues, but I do know they need to be found. We must have the courage to be able to discuss calmly with our community the challenges we face, and then the wisdom to find solutions.
The three core aims of this Government “to grow the economy, balance the budget and protect the vulnerable” can sometimes seem to contradict each other. But at their heart they don’t.
We need growth, we need financial security and we need a society that protects the weakest. I have tested my Budget for 2014 to see if it meets these three objectives and it does.
I commend it to this Honourable Court.