Greg Jones, head of tax at DQ Advocates ‘does the maths’ on the 2021 Manx Budget

The time leading up to a national Budget is usually one of nervous anticipation: will I have to pay more tax next year? Will ’the pound in my pocket’ buy me as much?

I suspect this year many Manx folk will have been wondering, like me, just how much Covid-19 has cost our economy so far, and how on earth we are going to pay for it.

Alfred Cannan’s final budget before the 2021 election has answered some of these questions.

A headline £74 million deficit only partly masks the fact that this figure includes a transfer from internal reserves, and that the real deficit is closer to £200 million.

That’s a big sum for the Isle of Man - and a lot worse than I had hoped for.

Two factors are largely to blame. First, a reduction in income tax receipts of around £130 million, and secondly, actual government expenditure of £70 million on income support ie furlough and MERA payments.

Covid-19 has swept the world like a forest fire, and the IOM government has had to do what it can to save lives and keep the economy afloat, but clearly a continuing deficit of this magnitude is not sustainable.

Mr Cannan’s Budget is predicated on a return to pre-Covid public sector revenue levels by 2023-24, so we may have another two years of spending beyond our means to contend with.

What can be done to fix this?

Income tax rises. ’No news is good news’ was Mr Cannan’s announcement on taxation, his view being that now is not the time to make people pay more tax, but an increase in tax may well be necessary when the economy is back on its feet if we are to restore our depleted reserves.

It may well be that the island also has to decide whether a positive rate of corporate taxation should now be introduced - this may appease the EU, which is taking a renewed interest in "zero tax" jurisdictions, but risks alienating the corporate service provider industry.

A One-off wealth tax - is one of the options the UK is apparently considering: an independent commission has calculated that this could bring in £250 billion over a five-year period.

However unlikely this may be in the UK, it is probably even less likely here in the Isle of Man.

Foster niche industry sectors. Mr Cannan announced that £500K (approved by the newly-formed Economic Recovery Group, a committee of MHKs with £100m of public funding available to stimulate the local economy) will be hypothecated to assist the island’s fledgling medicinal cannabis industry (a growing sector, apparently!), and the hope is that, just as with gaming not-so-many years ago, this will soon convert into numerous well-paid jobs which contribute valuable personal taxes.

Government borrowing - the establishment of a bank consortium loan facility of £250 million gives the Treasury the option of borrowing its way out of trouble.

Reduce spending - government departments face ongoing pressure to trim their expenditure but one obvious way to address a shortfall is to reduce spending to what we can actually afford.

Privatisation - probably a bird which has flown. A few years ago privatisation might have been an option for a cash-strapped Manx Government but we live in different times and I do not believe this is on the cards.

For the moment we have cause to be grateful for the reserves carefully accumulated during the island’s good years. Maybe today is just the rainy day we have been saving for!