We’re on target to put public finances on an even keel

BELL: 'We are stepping up our support for the economy'. PHOTO: Mike Proudfoot MP120118 (3).

BELL: 'We are stepping up our support for the economy'. PHOTO: Mike Proudfoot MP120118 (3).

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The Isle of Man is going through some big political and economic changes in the wake of the changes brought about after the VAT agreement was altered in the UK’s favour. Chief Minister Allan Bell writes for iomtoday about the challenges his government is facing.

The Isle of Man is going through a period of change. It is natural that when the process becomes controversial people will focus on the headline issues of the day and perhaps lose sight of the wider context. The public rightly expect change to be fair, to be even-handed and reasonable in the circumstances.

They expect the effects of change to be balanced across all levels of society, with a clear impact inside government as well as on the service users outside.

When a particular issue comes to a head it is an understandable response to ask why other matters are not being addressed first.

I agree entirely that the overall pattern of change should be fair and balanced. I have made it clear that there should be no sacred cows as we explore all options to rebalance the island’s public finances following the reduction in our share of VAT revenue.

However, the nature of government – its diversity, complexity and role in the local economy – does not allow a simple, single solution to our problems. Change is progressing on a variety of different fronts and at different speeds, which can make it harder to see the broader picture.

It might be helpful, therefore, to provide an overview of some of the areas where change is happening.

Nearly three years have passed since the island first began to feel the impact, in the financial year beginning in April 2010, of revisions to the VAT sharing arrangement with the UK which reduced the Manx government’s projected income by about one-third.

That first year did see a 2 per cent increase in the top rate of income tax, but with the recognition that further tax rate rises were not the way forward if the island was to remain competitive as an international business centre.

The central plank of the budget rebalancing strategy is to contain government’s own costs, the largest single component of which is employee costs totalling more than £300 million. In real terms we have saved more than £50 million under this heading with staffing reduced by 400 posts and 300 actual staff. There is further to go on this front and the Scope of Government exercise also carries implications for the size of the salary bill.

As in the private sector, wage settlements have fallen behind inflation which has meant an effective pay cut for civil servants amongst others. Staff are also paying more towards their retirement as a result of reforms to make public service pensions more sustainable.

Government is now reviewing public sector redundancy packages to make them more realistic, and has tightened up on staff sickness absence. The dispute over ending paid lunch breaks for bus drivers shows that we are serious about tackling terms and conditions which can no longer be justified.

The Transforming Government initiative is improving efficiency and bringing significant savings through the centralisation of internal functions in such areas as finance, human resources, procurement and estates.

The modernisation of the island’s criminal justice system, meanwhile, is expected to streamline operations in a complex, costly but vitally important area.

When talking about government expenditure it is helpful to appreciate the difference between revenue and capital spending. Revenue spending is on committed ongoing costs such as pay and benefits, and is funded from taxation income. Capital spending is on one-off projects, usually investment in the public infrastructure such as building work, and is funded from a central pot.

The capital budget has been trimmed back but this type of spending, particularly the bricks and mortar element, is vital to support jobs in the construction industry as well as to maintain the infrastructure.

I do sympathise with the public’s confusion when they see an expensive capital project being rolled out at the same time as a revenue service is facing cuts. However it is misleading to argue that scrapping one could save the other, and politicians who suggest this should know better.

In relation to the Scope of Government we are committed to the principle that government should be smaller, simpler and less bureaucratic. Services are being reviewed across government to identify those which could be better delivered through alternative structures. Pre-school education along with the mobile and children’s libraries have of course already been transferred to private operators.

The potential role of local authorities in the realignment of services will also be examined, particularly in housing and in waste collection and disposal. On the last point, government’s decision to phase out the £5.7 million annual subsidy for waste disposal should encourage local authorities to develop their collaborative working in the interests of efficiency and the environment.

An island which must keep taxation down for the sake of its economy and employment cannot also sustain the generous universal welfare provision that was the traditional model of high-tax countries.

This fundamental truth is nowhere more obvious than in the field of social policy, where government’s strategy is to target resources towards those most in need. Its logical consequence is that those who can afford to pay for themselves, and who enjoy the advantages of a benign tax regime, will benefit less from public funds.

Reform of social policy is much more than a cost-cutting exercise. It is one of a number of areas where the fiscal challenge created by the VAT revenue reduction has highlighted difficult issues and anomalies that needed to be addressed in any event. In the case of social policy major outstanding matters include the demands of an ageing population and the importance of helping individuals, particularly young people, to take responsibility for their own lives.

At the same time we are stepping up our support for the economy so that young people will still have employment opportunities. Amid the global turbulence of recent years the island’s economy has proved remarkably resilient, thanks to the diversity and enterprise of our business community. But the international environment is changing radically, the most striking example of this being the emergence of FATCA-style automatic exchange of information as the new global benchmark in tax co-operation.

The island has a strong record of recognising and adapting to changes in the wider economic climate. But we cannot take continued growth for granted, and we must drive forward with the economic development and diversification that is needed to generate the jobs of the future. That means being bold, imaginative and open to new ideas.

I believe that the island’s success in maintaining economic growth, combined with the fact that the budget rebalancing process so far has not been as painful as some expected, may have led to a degree of complacency about the scale and seriousness of the financial challenge facing the government.

Let us not forget that in the budget for the current financial year spending on public services is propped up by £55 million – more than £1 million a week – taken from reserves. That is all part of the budget rebalancing plan, but this unprecedented subsidy does demonstrate the gravity of the situation.

The rebalancing strategy is on target to put our public finances back on to an even keel. Government’s overriding responsibility to the people of the Isle of Man is to make sure that this happens.

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