It was a Budget that most European finance ministers would give their left arm for – comforting the public sector with no pay freeze, cutting personal taxation, increasing student grants, even finally letting the sun shine freely on solar panels with electric cars rolling in tax free. And there is capital investment for future sustainability to boot.
Chief Minister Peter Caruana declared that despite the global economic climate it had been a good year for Gibraltar’s economy. “2010 will also be a good year,” he said.
But the 2010 has also sent the business community scrambling to their accountants to know just where they will come out on the heap once the 12% slash in corporation tax takes effect but is nibbled back by increases in commercial rates, water, electricity and Social Insurance increases. They’ll pay less tax on profit, but they’ll have to pay up front.
Mr Caruana himself made clear that the effect of the revolution in corporation tax, which brings the zero tax Exempt Company to an end on New Year’s Eve, remains uncertain. So much so that a £10m ‘buffer’ is being allowed for just to cushion government finances from any negative effects. But with a £27.7m surplus that is affordable.
The Budget is likely to get a mixed reaction from the public never keen to see increased costs yet now used to the government’s tax cutting policy. Household electricity and water bills are likely to be about 3.5% higher.
But presenting his fifteenth budget it was clear that a key theme for Mr Caruana was, that at a time when most governments are slashing, he is investing in the infrastructure and projects that can allow for future growth. As it is, Mr Caruana expects Gibraltar to sustain the average 5% plus growth in GDP (now standing at some £914m) experienced in recent years.
“This bleak global economic scenario, which people in Gibraltar will see day in day out on their televisions and in their newspapers in countries all around the world, but especially in Europe, is the global economic environment in which our economy operates.”
“But our position in Gibraltar could not be more different. This last year, our economy has continued to grow, the Government’s recurrent budget surplus stands at an all time record high and the number of jobs in our economy remain at near record high. No budget deficits, no public service cuts, civil service pay cuts or high government debt problems here!” he said.
All the indications are that the Government is determined to roll out its capital projects on a scale limited only by the physical capacity to deliver them. Last year £106m was spent and Government plans to spend £150m this year.
“Without this investment, it is the Government’s view that Gibraltar will be unable in the future to sustain its economic and social, and thus its political security,” said Mr Caruana.
And in a bid to circumvent the reticence of banks to lend generally and so as to prop up local business and home purchasing, the Government is even revisiting an idea that was once also the ambition of Opposition Leader Joe Bossano when in Government - a local bank involving the Government with private sector interests.
Mr Caruana also formally announced his plans to spread construction related works generated by the Government to local construction companies and suppliers on an equitable basis whilst changing the rules to make it difficult for all construction companies, not least foreign companies, to slip away from paying their PAYE.
In an unusual move the Government is also considering stepping into the Mid-Town project – as a shareholder in the first phase – to stimulate the production of office space whilst making the public share in profits generated.
“We are not willing to lend taxpayers’ money to developers to allow them to make a profit. So, the Government is negotiating with the developers of the Mid Town Project to become a majority shareholder in the development of the first phase, thus ensuring that taxpayers get their fair share of development profits,” he said.
Mr Caruana acknowledged that there were some areas of the economy which suffered the consequences of global factors to some degree.
“Some sectors have suffered a drop in business levels. In one or two other sectors, such as construction and banking, local companies have fallen victim to the financial fate of the parent company in the UK, Spain or elsewhere resulting in bankruptcy or job disruption here in Gibraltar. Despite these challenges it has been another good year for our economy,” he said.
Mr Caruana said that cuts in personal taxation across the board will benefit people already living and working in Gibraltar, and also make Gibraltar an increasingly attractive personal tax jurisdiction for newcomers.
“This will further enhance our ability to attract quality businesses to locate in Gibraltar, in turn creating more and better paid jobs for our people, especially our school leavers and returning university graduates, and generating more government revenue. In turn, that enables the Government to cut personal tax for everyone still further. Everyone has a big interest in the success of all parts of our economy, even the parts in which they do not work,” he said.
Mr Caruana declared the GSD as the tax cutting Party.
“We therefore wish to make still further progress this year on our well established tax cutting agenda,” he said announcing new thresholds.
And adding that the level of personal taxation is an important factor in an investor’s, professional’s and business man’s decision to locate a business in Gibraltar.
“Personal tax rates therefore also have to be internationally competitive to attract businesses to Gibraltar, which in turn creates economic growth, employment and further Government revenue,” he said.
The Chief Minister told Parliament that despite the global economic and financial climate, and unlike much of the rest of Europe and the world, employment levels in Gibraltar have held up very well during 2009. As at October they stood at 20,450 a slight fall of 59 from the previous year’s 20,509, but still the second highest figure on record, he said.
Employment in construction fell by 356 following the demise of Haymills and Bruesa, mainly affecting Spanish Nationals. However, it still stands at 2557, the second highest figure on record. Jobs also fell in financial services and education. However these were partly offset by an increase of jobs in wholesale and retail, transport and Commu-nications, health and social work and online gambling, resulting in a net overall loss of 59 jobs.
GOVERNMENT RESERVES AND DEBT
Mr Caruana explained to the Parliament that the Government’s capital expenditure programme is funded by, principally, borrowings, supported by the proceeds of asset sales and premiums.
“Funding investment in our future in this way is possible because of the very low levels of debt that the Government has maintained and also the success of our economy,” he said.
The Government has also consciously decided to bear the cost of unnecessarily large amounts of borrowing in order to assure its funding and liquidity needs in the current volatile international funding market conditions. A policy, which Mr Caruana noted had recently been complimented in a recent value for money review conducted externally on behalf of the Principal Auditor.
At the start of last year, net public debt stood at £139.1 million which represents just 15.2% of estimated GDP.
“Even in the unlikely event that the economy did not grow by the provisionally estimated 5% in the year to March 2010, current net debt would still constitute only 16% of estimated 2009 GDP! These are economically very low levels of net public debt,” said Mr Caruana pointing to the fact that the figure is 70% of GDP in UK.
THE PUBLIC SECTOR
Mr Caruana also told the Parliament that he was very glad that those who previously used to say simply that the public sector is too big, have now modified the message to one with which all agree, including the trade unions, that certain parts of the public sector need to improve efficiency, productivity and cost.
He said that discussions with the Trade Unions on a broad package of service wide reform measures are progressing very satisfactorily for all sides.
In the year to 31 March 2010, the number of Civil Servants fell marginally from 2289 to 2272. However, when you include all publicly funded employees, that is, civil servants, employees of Government owned companies and statutory Agencies and Authorities, the number rose by 197, from 4293 to 4490, reflecting mainly the temporary employment by a government company of ex-Haymills construction workers, and increases in GHA and Care Agency staff.
Public sector jobs accounted for just 22% of all jobs in the economy.
Government overall recurrent expenditure as a proportion of estimated GDP in the year to March 2010 was 33.5%. This compares with over 40% in the UK.
“Government has no intention of following the UK in freezing public sector pay. This UK measure responds to the state of public finances, the government’s budgetary position and the very high levels of public debt in the UK, none of which is the case of the Gibraltar Government. I will be meeting with the trade unions to agree a formula that will allow public sector pay to continue to rise in Gibraltar, without abandoning the parity link or principle,” he said.
THE PRIVATE SECTOR
On the Private sector Mr Caruana said there was no getting away from the fact that the global recession and the banking crisis and resulting credit crunch, are affecting everyone to some degree or other.
“Local businesses in every sector can be affected in a number of ways: falling external customer demand; exchange rate movements which can both affect demand and cost of stock; lack of credit availability; or the high cost of such credit as is available. In addition to such factors, some sectors suffer local effects such as cross border competition, sometimes on an unlevel playing field,” he said.
“The impact and significance of these factors is magnified in more difficult times, and there is then a tendency to bring down the protectionist shutters.
While the Government shares the objective of ending the most obvious examples of cross border competition unfairness, we equally believe that an open economy is, on balance very much in Gibraltar’s interests.”
The Government is convening a working group with the Chamber of Commerce and the Federation of Small Businesses in the early autumn.
Mr Caruana noted again the restricted credit facilities that exist for both commercial and personal borrowers as a result of the international credit crunch.
“Gibraltar general retail banking needs are principally provided by two banks, Barclays and Nat West, who both provide an extensive service and have shown, and continue to show a very welcome and much valued commitment to Gibraltar. Nevertheless, both these banks operate within policies relating to such things as lending criteria, risk assessment, project lending limits and country lending limits which are not decided in or specifically for Gibraltar,” he said.
“The Government believes that a market such as ours should have at least three general retail and commercial banks serving its needs. Gibraltar would therefore benefit from having a local, home grown and managed bank. To this end the Government is exploring the viability of establishing such a bank in partnership with private sector interests. A project paper has been prepared and will shortly be circulated to selected local private interests to test their appetite for such a venture,” he said.
Mr Caruana also announced support for the construction industry in a plan that will involve the suspension of the tender system.
He said that there is a significant Government capital works programme under way and access to this work has become much more important to all companies, in the
prevailing market circum-stances.
He listed factors that have contributed to the current challenging scenario for many local construction companies and local suppliers of building materials and plant and equipment. These include: • the fact that large non Gibraltar contractors tend not to sub contract or source locally; • a number of recent financial failures among construction companies have left many local subcontractors and suppliers with significant unpaid invoices; • this, he said, has in turn has lead to a loss of confidence by suppliers in extending credit to the construction industry.
Additionally many of the failed companies left unpaid PAYE and Social Insurance liabilities to the Government, a practice facilitated by the proliferation in the use by foreign construction companies of ‘brass plate’ single purpose vehicle companies as sub contractors and labour contractors.
“The Government attaches importance to the continued existence of a vibrant and competitive local construction industry populated by a variety of financially solid and well managed and resourced construction companies and building supplies and equipment companies.
Much as the Government values its own company, GJBS Construction Limited, it is not desirable or acceptable that others should not survive and prosper as well for lack of work,” said Mr Caruana.
The Government is therefore about to launch a temporary scheme the objectives of which are the following: (1) In so far as it is both lawful to do so (in the context of EU procurement/tendering directives) and the Government is able to protect the taxpayers’ interests to obtain value for money, to modify the Government procurement system to allow the Government to ensure a fair distribution of its construction work so as to sustain the greatest number of local construction and building supply companies, and thus jobs. Mr Caruana confirmed that this will require the temporary suspension of the tender system, and the fair distribution of work among eligible construction companies by the direct allocation of contracts, on the basis of transparent measured rates or informal market testing; (2)To minimise the Government’s risk of being left with unpaid PAYE, Social Insurance Contributions and other payments, by deducting PAYE and Social Insurance Contributions from all payments made to contractors and subcontractors; (3)To support the Employment Service in its task of helping its clients find work in the local construction industry, especially the long term unemployed.
Participation in the Scheme will therefore be conditional on co operating with the Employment Service in jobs for its clients; (4)Controlling the use of subcontractors to minimise abuses by labour only sub contractors, and where the Government allows the use of subcontractors, protecting them and their employees by controlling the possibility of contractors unduly delaying payments to subcontractors; (5) Ensuring a fair share of the business for local building materials and plant hire companies.
Commenting on the charges such as Social Insurance and municipal rates that increase for employers Mr Caruana observed that the “limited claw back” represented by these increases still leaves existing company taxpayers potentially very much better off. He emphasised that Government has since 2007 reduced the company tax rate from 35 % to 10%, a reduction in the tax rate of over 70%.
“In the hitherto benign tax administration climate, small businesses have tended to undervalue tax cut (which are only payable on declared profit) and to focus on taxes and costs that are payable regardless of profit, which are also harder to avoid,” said Mr Caruana as he signalled the instruction of much tougher enforcement.
“The Government’s fiscal balance cannot forever be hostage to the view that businesses are forever teetering on the verge of loss making. Nor is it logical to think that a business can survive for long in that permanent condition. In other words, unviable businesses cannot be sustained by the tax system or subsidies,” he said adding that the new company tax rate of 10% is therefore a trade off, under which Government adds a little to business fixed costs (thereby taking a little more from them from “above the line”), and in return more than halves the rate at which it taxes the remainder, from 22% to 10%. There is no other viable way,” he said.