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Budget 2016: Teare's dose of realism

Proposals for next stage of rebalancing

The Treasury minister may win few hearts with his final budget of the current parliament: he is more concerned with focusing minds on the precarious state of public finances.

Dominating Eddie Teare’s ‘budget of realism’ is a fixed intent to balance the books once and for all – and for every one of us to understand what it will take for the Island to live within its means.

Balancing expenditure with income over the next six years is do-able, he tells us – but will require a severe dose of realism. The familiar remedy remains unchanged: driving economic growth, reining-in spending, finding substantial savings and lowering expectations of what the state can provide.

Mr Teare insists there is no need for panic or knee jerk actions - but it will be a tightrope walk if government is to balance the books in coming years without dipping into reserves, while honouring its key commitment to protect society’s vulnerable.

Cost reduction ‘paramount’

This year’s Manx budget sees the start of the government’s Medium Term Financial Strategy (MTFS), a six year ‘long view’ to 2021-22, during which Treasury aims to slow and then stop drawing on  reserves, which have plugged the loss of  VAT revenue and the public sector pensions deficit.

Despite the squeeze, there is no appetite for raising the Isle of Man’s headline tax rates of 10 and 20 per cent, the zero-10 company tax regime or the tap cap, which are all unchanged.

A £1000 increase in personal tax allowance is predicted to lift around 2000 of the lowest-paid workers out of the tax net altogether.     

That aside, tight control of costs is at the top of the agenda, and a tough target has been set.

Treasury has allowed for an increase in government expenditure across the board of just 1.58% per annum, a plan to cut costs based the premise that income will grow above inflation, and spending kept below it.

It relies on entirely positive scenarios - from departments keeping within their budgets to amicable pay and pension settlements. Whether such optimism is itself realistic remains to be seen.

Budget overview

Government’s gross income is expected to grow by 1.7% in 2016-17 to £955.5 million, with a budget surplus of £0.3 million. A £2 million surplus due in the current financial year (2015-16) was wiped out, largely due to an over-spend at Noble’s hospital and lower-than-expected income and corporation tax receipts. Together they produced a deficit of £9.6 million.

For the year ahead, income from Customs and Excise duties of £336.5 million remains the largest single contributor to government coffers.  It is unclear how this crucial input will vary in coming years, as the Isle of Man’s share of the VAT pool long-term is still being negotiated with the UK.

Income tax is expected to raise £212 million, and to increase annually by 3%, on the assumption the Manx economy continues to grow.

The overall government employee bill - the largest cost element in running public services - is put at £348 million, while £212 million is budgeted for non-employee costs.

The budget contains a £79 million payout from general revenue on welfare payments, topping-up £240 million from National Insurance contributions.

Pension contributions of £35.3 million fall far short of the £107 million bill for 2016-17, representing 10% of overall revenue spending. It is a stark funding gap, to be covered in part by a transfer of £45 million from the Public Sector Pension Reserve.

The figures underline the scale of Mr Teare’s ambition, not only to meet expenditure in the medium term from revenue alone, but ultimately to replenish reserves from projected annual surpluses of tens of millions of pounds.

Economic equation = growth + savings

A strategy for economic growth will see £10 million injected into an Enterprise Development Fund and a tax holiday offered to commercial developments which create new jobs. A tax-free relocation expenses package aims to meet local firms’ demand for skilled workers, while a new Government bond, currently being considered, could boost large capital projects.

Plans for expenditure control and economic growth sit alongside a five year programme for savings of £14 million.

Recently agreed new terms for new starters, both civil servants and manual workers, are among measures to reach a savings target in 2016-17 of £1.9 million. The Digital Strategy is expected to lop £5 million off government costs by 2021, while annual savings of £1.2 million are earmarked through ‘more effective’ commercial procurement.   

Strategic risks inherent

The host of measures outlined in today’s budget, if tight controls are maintained, are expected to bear fruit. But they are reliant on the emergence of a smaller, smarter government - still the Holy Grail - and Mr Teare concedes his savings plan assumes government will have slimmed down and shed ‘significant’ numbers of staff by 2021.

In the meantime, wage-capping will only allow for a below-inflation 1% pay rise for government workers for a three year period - which might prove difficult to achieve as reduced pension terms continue to be thrashed out with unions. 

Mr Teare's budget programme comes with a number of major risks, among them the fundamental possibilities that tax revenues do not grow as forecast and changes to the delivery of government services are not achieved.

And as with any grand plan, there is the danger of unforeseen events requiring funds not offset by savings or growth.

It may be seen as a budget of realism in setting-out the Island’s fiscal challenges. Realistically it may prove a balancing act of immense dexterity in what is an election year.

You can read the government's budget plans in Treasury's pink book by following the link:

https://www.gov.im/media/1350454/iom-government-budget-2016-17-pink-book.pdf

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