TREASURY Minister Eddie Teare MHK today delivered his budget to Tynwald.
It is repeated word-for-word below.
A year ago I laid out this hovernment’s plan to rebalance our budget over a three-year period; one of the three key objectives of this administration.
Today marks the completion of the first year, and allows us to look back on what has been achieved to date, but also to remind ourselves of the task ahead. Of course the challenge to rebalance the public finances began long before I became Treasury Minister.
I said a year ago that we would rebalance our budget by 2015-16, and I would stress that we are on target and have clear plans to deliver on this commitment.
I said that we would publish budgets in detail, for the next three years, and we have published those budgets today.
I said that this would provide clarity on how we will go about the rebalancing and over what period.
I can inform you that all departments have provided Budget impact statements to Treasury, and each minister here is in a position to explain in detail the consequences and changes that will need to be made over the next few years. Press releases will be issued by departments with detailed information later today.
In working with my Council colleagues to determine priorities and allocate resources we have had at the forefront of our minds the other two objectives of government, to grow the economy and to protect the vulnerable. All of these objectives will be threads running through much of my speech today, and lead us to question current policy in a number of areas.
I believe it is fair to say that Government is involved in too much at present, and as a result runs the risk of losing focus on the critical services upon which we all depend.
We are going to have to be much more rigorous in distinguishing between the vital and the ‘nice to have’‟. For example, why does government run loss-making attractions without fully understanding their tourism benefit and why does government run cinemas, or loss-making restaurants and sawmills at all? This is why we now need to reconsider, and act, on the Scope of Government report.
Of course reducing some services will provoke inevitable criticisms in this Honourable Court. To those who will criticise I would reply by quoting Nick Clegg:
‘To oppose everything is to offer nothing, and the country will not be duped. The biggest divide in politics today – here and around the world – is between those who offer eadership and those who only offer dissent. It’s the difference between braving the storm to steer the ship away from the rocks, or waiting until morning only to find you’re left with a wreck.’
I am, and will remain a leader rather than a dissenter, and we will see this job through.
Now is not the time to vacillate – further firm decisions and actions are required if we are to deal with the unprecedented pressures which we face.
Madam President, constructing budgets is about finding balances. There are the obvious balances between taxing and spending, but also balances to be struck between -
• the public sector and the private sector
• employers and employees
• producers and consumers
• the employed and the unemployed
• the young and the old, and
• the fortunate and the not so fortunate.
Some in this Honourable Court gloss over these complexities, and believe you can treat hovernment spending the same as household spending. The fact is you can’t.
We simply won‟t achieve our aim to grow the economy if we withdraw too much money from it, too fast. This has been recently confirmed by the reports from the World Bank and the IMF.
Government decisions inevitably have consequences that reflect back on society and the economy, and what is portrayed as simple can be inherently complex. We have an obligation to look at the whole picture, and not just one piece of the jigsaw.
So balancing and rebalancing budgets is a continuous process and I believe our record shows we have got this process right and have taken the right action at the right time.
Consider the headline figures. Government has lost around 400 posts and 300 staff since 2010. Our levels of unemployment have risen far less than any of our competitors, and our economic growth has remained stronger than any comparable nation.
Indeed year on year there are more people in employment than ever before and the number of self employed and the number of VAT registrations have also risen.
This growth has a positive effect on the nation’s finances.
A year ago we anticipated using £55 million of our reserves to meet the shortfall between expenditure and receipts in the current year. Thanks to strong growth inpersonal and corporate tax receipts, I now forecast us to need £47 million.
Over the next three years the total use of reserves required will not be £92 million, as forecast in last year‟s Budget, but £89 million and we are still on track to return to a balanced Budget in 2015-16.
There are clouds on the horizon, and the longer term income projections are uncertain, but the underlying performance of our economy should give confidence that we will deliver a balanced budget in two years’ time.
Given that it is the strength of our economy which is providing the income to reduce the deficit, it seems appropriate to consider the local economy next.
Economic Performance
The bedrock upon which our island’s prosperity rests is our economy. Further economic growth is critical to balancing Government‟s Budget as well as providing a high quality of life for current and future generations.
We have retained a strong and growing economy in the face of a continued worldwide slowdown in economic activity.
We sometimes forget how far we have come. A generation ago average earnings were only two thirds of those in the United Kingdom. They are now on a par. Income has been redistributed towards the less well off through the welfare payments system and by the lowering of the standard rate of personal income tax and increases in personal allowances, such that some 28 per cent of income earners are now not taxed at all, while the top 10 per cent of taxpayers generate 59 per cent of Treasury personal tax revenue.
In respect of the size of the public sector relative to the private sector we have already undertaken significant rebalancing. The ratio of government gross spending to GDP - the share of national income spent by the state if you like - has fallen from 24.8 per cent in 2010/11 to 22.4 per cent this year, and after this Budget it will fall again to an anticipated 22 per cent in 2013/14. So I would vigorously challenge those who suggest we are not doing enough to address the public finances.
As I indicated previously, I am acutely aware that rebalancing, whether through reduced spending or raising taxes and charges, has the potential to deflate the domestic economy and tip struggling local suppliers into further difficulty, with repercussions for income and employment. So far at least, the rebalancing has been managed without significantly depressing our local economy.
Unemployment stands at 2.6%, below the 3% performance target ceiling set by government.
The economy continues to grow, currently at an estimated 3% in real terms.
This Budget will continue to balance austerity with the need to sustain further economic growth. Without this we will doubtless find ourselves „chasing our tails‟, with the economy in a downward spiral. As it is, by sustaining growth, incomes and employment we are managing to generate public revenues close to forecasts. Most of our competitors would be delighted to be in our position, with a current deficit below 1 per cent of National Income.
Our fortunes are inevitably and inextricably linked with the global economy and the United Kingdom‟s economic performance in particular. Naturally there are real concerns over the strength of the recovery and recent IMF and OECD forecasts have seen downward revisions both to global and UK growth rates, as governments, not least in Europe, continue to struggle in the face of personal, corporate and public debt. But if the current consensus of an improving international outlook over the next 5 years is borne out then I think we can have confidence in our own continued economic progress.
I am also pleased to report that, against a difficult global backdrop, our island has performed well.
In 2012 the National Income of the OECD countries grew by 1.4 per cent; ours grew by 3 per cent in real terms.
At the end of 2012, unemployment in the OECD stood at 8%; ours at that time, was 2.3 per cent.
The global economic outlook remains challenging, with the OECD forecasting growth of 1.4 per cent in 2013. I remain confident that the Island can grow at more than twice this rate.
The Island‟s exceptional economic success over the last 30 years – and particularly following the global economic downturn since 2008 – has not been luck, but rather due to sound Government policies and concerted public and private sector joint efforts to deliver sustainable growth.
While we have seen limited job losses in key sectors such as banking due to global economic forces, we have seen new and often better paid jobs created in rapidly expanding sectors such as ICT and e-business, notably e-gaming.
As a result, the Isle of Man has avoided recession, our average earnings relative to the UK are better than ever and our economy is more diverse than at any time in living memory.
Local Business Sectors
I will now turn to considering the performance of our local business sectors. At the outset I would like to thank all those in the local business community who I have spoken to in the last few months and who have shared their thoughts and understanding of the current state and future prospects for the Island‟s economy. It is clear that there is a two-speed economy, with growth in export sectors, and more difficult local conditions. We need to ensure going forward that the benefits of growth are shared across the entire economy.
The Department of Economic Development has helped to create over 130 jobs in key export-earning sectors.
These include -
• Currently assisting seven new manufacturing companies to set up on the island. Two are in engineering, two in aerospace and three are in general manufacturing. They are forecast to create up to 30 new jobs. We have helped the aerospace cluster to grow such that they are looking to treble apprentice numbers to 36 each year, providing skilled new jobs for our young people.
• Four new businesses have set up in information and communication technology (ICT) creating 15 new jobs. This figure is likely to rise.
• Nine new gaming licences have been granted this year, and two new companies have commenced trading. Thirteen jobs are likely to be created in the next year from these businesses. E-gaming has been a critical sector for us in recent years and now accounts for 8 per cent of National Income and well over 700 jobs.
• Eight new businesses have been established in investment management and fiduciary services. These businesses have created a total of 15 new jobs so far which is anticipated to rise to up to 42 over the next year.
• The Aircraft Registry has been rated the best register for corporate jets in the world by a society of international lawyers. The Department of Economic Development’s expertise has helped the local private sector to create 80 jobs at an average salary of £40,000 to support these aircraft. The local private sector then has the opportunity to win further business from these valuable clients.
• The Ship Registry has worked hard to attract new shipping business to the island. For example, the Ship Registry has been promoting itself in Asia for over eight years. The first Asian ship joined the register four years ago and today Asian shipping accounts for 28 per cent of the tonnage on the Isle of Man ship register. Again, this is bringing new jobs and incomes to the island.
All this growth is vital, as it provides jobs and work for large numbers of local businesses from restaurants to construction. It also forms part of a general diversification of the economy. Therefore, while it is anticipated that there may be further job losses in some parts of financial services in 2013, we estimate a net gain of over 150 jobs on top of these in 2013 from across these export-earning sectors. This vital growth will be achieved through a wide range of specific, targeted, joint initiatives with the private sector. It is also consistent with my Department‟s assessment of overall growth. The Minister for Economic Development will provide further information to Tynwald concerning specific initiatives in the coming days, but I can give a flavour of them now.
SPECIFIC NEW INITIATIVES IN 2013
I will start with the construction sector. As we are all aware, this sector continues to struggle due to an absence of demand from both individuals for housing and businesses for commercial work. As a result, Government remains a key source of activity. In addition to Government‟s substantial capital programme, I am able to confirm that we intend to grow the public sector housing programme to £18.7 million in 2013/14, an increase of £4.7 million compared to the projected expenditure in 2012/13.
Our film industry continues to prosper following the purchase of shares in Pinewood Shepperton. Four films have been put into production since last October twice the number made in the previous 12 months. I can today announce that our latest film will be ‘A Christmas Candle’ starring Susan Boyle, and our own Sam Barks, which will begin filming in the next few weeks.
Moving onto financial services, I am sure that Honourable Members are all aware of both the Foreign Account Tax Compliance Act from the United States, usually called simply FATCA, relating to the exchange of tax information, and the Vickers Report proposals to separate UK retail and investment banking.
Both Treasury and the Department of Economic Development will continue to work with the private sector to determine the operational details and timings for the introduction of these important reforms.
In addition, the Department of Economic Development will launch new financial support packages combined with marketing campaigns targeted at key decision makers in order to both protect the thousands of existing jobs on the Island in these sectors as well as to vigorously pursue new jobs.
Finally, I want to highlight efforts to aid the long-term unemployed. Prior to 2008 the island typically had 20 people unemployed for more than a year. Since then that figure has grown steadily to nearly 200, a third of whom are under the age of 25.
The Council of Ministers sees this as an immense social as well as economic cost that our community cannot afford. It is vital that Government helps people to be as self-sufficient as possible, rather than create a culture of low-esteem and benefits dependency.
I am delighted to report that the Department of Economic Development is leading a major new initiative, in partnership with the Department of Social Care, to ensure that everyone currently unemployed for over a year is given additional support, targeted to their specific needs, such that we will halve the number of long-term unemployed to less than 100 over the next two years.
This will include additional job skills training, vocational training, work placements and other such positive steps to aid individuals into paid employment.
In addition, there will be closer scrutiny of claimants to ensure they take advantage of these additional opportunities and, where they fail to do so, to review their benefits where appropriate.
This major initiative has already commenced and is involving government departments, local authorities and the third sector as well as private employers. The Department of Economic Development has re-deployed staff to this important task, which I am confident will both assist those people to fulfil their potential, as well as reduce the cost to the taxpayer.
INTERNATIONAL ENVIRONMENT
Let me now turn to the International environment. I would like to give an update on current international issues.
There have been significant changes in this area in the last year, highlighted by the recent media attention on some global Companies Tax practices. We need to continue to play an active part in the international community, and to position the island accordingly.
FATCA is the latest in a long line of international measures aimed at clamping down on tax evasion, this time by automatic exchange of information. The United Kingdom and the USA signed the first of these agreements last year and the number of agreements with the USA continues to grow. However, I believe that this is just the beginning and that the FATCA model will ultimately be rolled out within Europe and beyond and it is very likely that it will replace the planned second EU Savings Directive.
The Isle of Man continues to be at the forefront of developments in international tax compliance, transparency and exchange of information, and punches well above its weight in this arena.
The Assessor and his officers have worked tirelessly over recent months on twin-track negotiations with both the USA and the UK. Those negotiations are substantially complete, and I can confirm today that I expect a FATCA agreement with the USA and a similar agreement with the UK will be signed in the near future.
These are extremely important agreements for the Island. The US agreement will mean that our businesses can continue to operate and compete on a level playing field with their counterparts throughout Europe and the rest of the world.
Following the UK negotiations, we will have a package of linked agreements with the following elements.
A memorandum of understanding between the Isle of Man Government and HM Revenue and Customs which I have signed today will introduce in April of this year a bespoke Isle of Man disclosure facility for UK taxpayers wishing to regularise their tax affairs; based on the Liechtenstein model. This facility will enable UK taxpayers to put their past and future tax affairs on the correct footing. If they come forward and use this facility they will be able to take advantage of a number of special terms, including, for example, a bespoke service with a quick turnaround and a reduced penalty rate.
We will also have an agreement for automatic exchange of tax information with the UK similar to that with the USA. The details governing this new form of co-operation will be set out in an inter-governmental agreement, the main body of which has been agreed at officer level, and the exchange of information itself will be provided for in an amendment to our double taxation agreement with the UK. People who are resident but not domiciled in the UK will be subject to an alternative reporting regime under this agreement, in recognition of their different status under UK tax law. This is in keeping with our desire for a level playing field internationally.
I want these various agreements to be in place in the near future so that businesses have certainty and can continue with their preparation for the changes which will result.
The first reporting of information under the US FATCA agreement will be in 2015, and this Government will continue to do all that it can to assist financial institutions with their planning and to keep the associated costs to the minimum. Detailed public guidance will be a key part of that assistance.
I would like to put on record my sincere thanks to the numerous business organisations and their representatives who have worked closely with Government on FATCA-related matters. I accept that our new moves on tax transparency and international co-operation are not welcomed by everyone in the private sector; but the excellent liaison which has been taking place has allowed Government to explain its position and has allowed the business community to put forward many constructive points which have assisted the negotiations.
Madam President, we are now entering a new world of automatic exchange of tax information. The Isle of Man already has many tax information exchange agreements and double tax agreements with countries all around the globe. We will continue to build on these agreements and seek, where we can, to shape the future of international tax cooperation.
I will now turn to the financial forecasts.
CURRENT YEAR ESTIMATES
As I stated in my introduction, future income forecasts remain volatile, with a number of concerns. However, for the current year our latest forecast is that, due to increased levels of income, we now project a lower deficit of £47 million compared to an original deficit of £55 million. Net spending will come in at or around the original budget of £539 million.
So in the current year we are £8 million better off than planned. We have reduced income forecasts in 2014-15 by £5 million, and require £3 million less to rebalance the budget overall.
I have also considered the level of our unallocated cash balances, our current account if you prefer. It is known in the Pink Book as the Operating Balance. Historically, Treasury has always sought to maintain a balance of at least 5 per cent of net spending, for any contingencies that may occur during a year. For example, the operating balance in 2006-7 was projected to be £32 million or 6 per cent of spending at that time.
Over recent years the operating balance has grown, due to a combination of higher receipts and lower actual spending than expected in the annual Budget. By the start of 2012 then, the operating balance represented £56 million or more than 10 per cent of our annual spend.
Holding this level of cash in this way makes little sense, especially when there are a number of reserve funds that are in need of additional resources. So I have decided to make a number of allocations this year to reserves, which I will detail shortly.The net result of these allocations will be to reduce the Operating Balance to £30 million or 5.5 per cent of spending by April 1, 2013.
These transfers can obviously only be used once, and should be seen as the deliberate use of past surpluses to meet future requirements. I have therefore resisted the temptation to use them to offset or postpone the ongoing spending reductions that we still need to find.
So I will, with Tynwald’s support, transfer £6 million to the Land and Property Acquisition Reserve. I would remind Honourable Members that this Reserve exists solely to allow government to act quickly in acquiring strategic sites when they become available. There are a number of locations under discussion at present, and I need to be able to move quickly and acquire these if agreement over terms with vendors can be made.
I will also top up the Insurance Fund and the Legal Costs Reserve in order that they are able to meet current levels of expenditure for the next 12 months.
I will transfer an additional £2 million, on top of the £5 million approved last year to the Housing Reserve, to enable the continuation of first time buyers‟ support and the refurbishment of our own Housing stock.
Finally I will transfer £9 million into the restructuring fund. Having taken on responsibility for the Transformation Programme, I am acutely aware that although much has already been achieved, we need to accelerate and enhance our performance, if we are to deliver the required savings by 2015-16. So the fund will be used for accelerating the Transformation Programme, for reviews of services within the Scope of Government report, and for redundancy costs should these be required.
I am setting us the target of achieving £10 million of annual savings via the Transformation Programme by 2015-16, recovering today‟s investment every year thereafter. Let me tell you what we have already achieved. In Estates we have
consolidated the functions of a number of departments, and will save £200,000 in the year ahead. By the end of three years, there will at least a million pounds of savings. In finance, we have achieved in two years more than half a million pounds of savings, and removed more than 20% of the cost, with more to come. Centralised procurement has resulted in almost a million pounds of savings since 2011, with contracts put in place that will deliver a further £600,000 of savings over the next two years. The Strategic Management of Assets has resulted in more than £3 million of disposals in the current year, money that can be used to finance a growing part of our capital programme. This team has also reduced rental costs by £700,000 per annum. I haven’t even mentioned projects to make savings in human resources, or in mobile working, in the reform of Criminal Justice or for growing online services.
We know for example that, done properly, online service delivery can be up to 20 times cheaper than by phone, up to 30 times cheaper than by post and an incredible 50 times cheaper than a face-to-face transaction. So by delivering more of our services online we will not only reduce the cost of service delivery, but will also meet the growing demands of the public who want to choose how, when and where they are able to access government services and information.
We will expand shared services into areas such as vehicle and plant maintenance.
Honourable Members it is simply wrong for anyone to claim that government is not looking at its own efficiency, as I hope that the above demonstrates. But as I mentioned a minute ago on top of all this there is also the need to conduct the reviews of activities identified in the Scope of Government report, and to provide funding for redundancy costs should redundancies prove necessary. To this end it is vital that the Member for Michael [Alfred Cannan} completes his negotiation on a new Compensation and Injury Benefits Scheme as soon as possible.
We estimate that government needs to lose around 100 staff a year in order retain a cap on overall salary costs. Pay restraint minimises additional losses over and above this amount. Voluntary early retirement schemes such as MARS help minimise the need for compulsory redundancies. The Implementation of the Unified Pension Scheme and the programme to reduce levels of sickness in Government has also contributed to improving the efficiency of public sector functions. But we need to ensure that we are able act flexibly in determining the future scope of our activities.
Future Estimates
In 2013-14, we expect income to rise by 4.8%, and expenditure to rise by 1.7 per cent, and the anticipated deficit to reduce to £31 million, in line with our plans of a year ago. In 2014-15 the deficit will be £11 million and in 2015-16 we will rebalance our budget, no longer requiring a transfer from reserves.
Like all forecasts they assume we can bring in the revenues required over that period. As you will have already realised, the International environment could impact greatly on our ability to deliver this income. So we need to be prepared to reduce spending further in the years ahead, in order to anticipate any falls in income.
We also need to be flexible and fine tune the budgets of all departments in years two and three, as and when priorities change.
What we have done in setting three-year targets is to prioritise Health and Social Care, and to a lesser extent, Education and Home Affairs. Spending on Education will still be 10 per cent more than the UK in real terms. The State pension will rise by 2.5 per cent to £110.15 per week with an enhancement of £53.75 per week for those eligible for the Manx Pension Supplement.
Child Benefit will be frozen, and for higher earners withdrawn in April 2014.
We have limited the rises in Income Support, Employed Persons Allowance, and Jobseekers Allowance to 1%, in line with changes in the United Kingdom. Despite these measures, benefits still represent 29 per cent of all government spending, and are still growing as a proportion of the total. There is an increased workload as a consequence of the ageing population and increasing life expectancy, and this impacts Health spending as well as benefit costs.
This is why we must now look at the long term future of the State Retirement Pension, and Pension Supplement. Changes in the United Kingdom are planned to result in a far higher Basic State Pension in 2017, and this gives us the perfect opportunity to review our own arrangements. We also need to ensure that entitlement to a range of other benefits or discounts, for those in retirement, are aligned with the rising State Pension Age.
Whilst looking longer term I also want to address the concerns over the long term costs of Social Care. There are a number of significant social and financial challenges that the Minister for Social Care and I must start planning for now.
Capital Programme
There is no avoiding the fact that we will have, for the foreseeable future, a lower level of capital expenditure than we have had historically, resulting from the drop in our overall income. Within these reducing totals however, we will ensure that we prioritise work that contributes to the overall aims of government, rebalancing the budget, growing the economy and protecting the vulnerable.
We have committed £44 million to construction activity next year. So there will be work on improving schools at Ballakermeen and QE 2, an extension to the neonatal unit at Nobles Hospital, work on Mill Road Yard in Peel and the extensive local authority housing programme.
We have supported capital bids that reduce costs, grow income or provide economic activity. We can also ensure that we deliver a higher proportion of our capital spending, which helps both us and the construction industry.
I have also made provision to transfer £35 million from the Reserve Fund, into the Capital Fund in order to repay the remaining additional Manx Electricity Authority borrowing from 2005. This is due for repayment or refinancing in July 2013. There are various alternatives to a straight repayment from the Capital Fund and we will consider all options including raising loans direct from the public if it is more cost effective than traditional routes, consistent with our overarching objective to minimise the ongoing cost of this borrowing to the authority.
We will also reintroduce a higher annual transfer from revenue to capital as soon as we can afford to do so. This is an objective that stretches beyond our three-year targets, and currently begins in 2015-16.
Reserves Performance
Our Invested Funds have remained under the very able stewardship of my colleague the Member for Council Mr Braidwood.
Our investment performance has been encouraging. Over the last year our Reserves have risen by more than £100 million, more than double the amount we needed to draw down from the Reserve Fund. Further appreciation has been seen in recent weeks. Of course we cannot rely on rising markets to meet ongoing spending requirements, but our invested reserves provide the strength that underpins the work we need to do, and they give confidence to investors and credit reference agencies alike that we can achieve what
we say we will.
Tax and National Insurance
Last year some Honourable Members suggested that my Budget was not aggressive enough in this area and that there should have been tax rises to help balance the books.
However, I repeat that I do not agree with a ‘tax and spend’‟ policy. This only breeds complacency. It will not deal with the underlying issues which will have to be dealt with sooner or later.
We have an economy which unlike many of our competitors, continues to grow. We must ensure that this continues as it is through increased growth and not higher taxes that our receipts from taxation will rise. We must and will remain competitive. We do not operate in isolation.
Today many will be expecting me to increase income tax and national insurance contributions leading to a greater overall tax burden. However, although there are some new taxation measures that I will propose today, they will not adversely affect the majority of our taxpaying public.
Only last month the Tax Strategy gained unanimous support from this Honourable Court. The overarching aims of the strategy are to have an income tax and national insurance regime which contributes sustainable revenue to the Isle of Man Government and 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.
Madam President, I continue to be driven by fairness and although our income tax and national insurance regimes are simple in comparison to other jurisdictions, there still remain individuals who try to avoid or reduce their liabilities. This is not acceptable and it is for this reason that I will be shortly introducing a new Income Tax Bill in another place to stop avoidance through the use of ‘personal service’ companies‟.
Through these companies, individuals who would otherwise be employed can reduce their income tax liabilities, together with their own and their employer‟s national insurance contributions.
Secondly many of the island’s employees receive what are termed ‘benefits in kind‟‘ from their employers. These benefits include, for instance, cars and accommodation; and although they are subject to income tax, they are not subject to national insurance. This is another point of fairness. If an individual receives a salary, it is subject to both income tax and national insurance; and yet if he or she receives the same amount in the form of a benefit in kind it is only subject to income tax.
I have therefore asked the Assessor to review this area with a view to ensuring that all employees contribute fairly to the National Insurance scheme.
Honourable Members, we have low rates of income tax and national insurance and I am sure that you will all agree with me that everyone should pay their fair share.
This year alone the Income Tax Division will collect an additional £3 million of income tax through their compliance activity. This ranges from cases of simple errors or omissions to detailed investigation cases.
If you think that you can get away without paying tax on your income please think again. The income tax division has highly trained officers reviewing many cases. If you have income which you do not declare there can be severe repercussions and stringent penalties. It is only a matter of time before we catch up with you.
Taxation for individuals
Similar to last year, I propose that there will be no changes in the personal allowance, the rates of tax or in what is known as the 10 per cent tax band. This means that the tax-free personal allowance will remain at £9,300, 10 per cent tax is paid on the next £10,500 of income and 20% tax is paid on income above the level of £19,800. These allowances and levels can be doubled for jointly assessed married couples or civil partners. The Personal Allowance Credit remains at £500 for individuals and £1,000 for married couples or civil partners.
I do not intend to raise the maximum income tax liability, which is commonly called the ‘tax cap’‟, and it will remain at £120,000 and £240,000 for a jointly assessed couple.
I would like to reiterate that the tax cap policy is working and working well with the number of wealthy entrepreneurs coming to the Island continuing to grow. In the year prior to the introduction of the tax cap Treasury only received £2.8 million in revenue from those individuals who would have qualified. Compare that to the latest information that I have and we are now collecting almost £10.5 million directly from our tax caps.
However this is not the full picture because these individuals also contribute to the economy in other ways including providing over 370 jobs which generate in excess of £10 million in income tax and national insurance.
This policy of attracting wealthy entrepreneurs to the Island is more important now than it was when it was introduced in 2006.
Madam President, I do not intend to change any other personal income tax measures for this year, as my main objective has been to maintain a competitive tax regime across a wide range of earnings in order that we may continue to attract the skills needed to develop the economy further.
National Insurance
During the debate on the taxation strategy last month several Honourable Members touched on the issue of increasing the rates of national insurance paid by employees and employers. However, I can confirm that for the coming income tax year national insurance rates for employees and employers will remain at their current levels.
During the debate it was also questioned why work has commenced on a review of the reciprocal social security agreement that operates between the Island and the UK.
I would like to remind Honourable Members that this reciprocal agreement controls both our income from national insurance and our expenditure on certain benefits including the state pension. The UK is currently reviewing all aspects of their national insurance system. This includes the way that they raise and collect national insurance and the payment of certain benefits. They have already introduced real time posting of employers information and are aligning national insurance thresholds and definitions to their income tax system. Is this really right for the island?
Our income tax system is by comparison much easier to operate and completely different in structure. It is therefore unlikely that the two national insurance systems could continue to operate as one with the current reciprocal agreement. Last month the UK published long anticipated proposals which will reform the state pension. These proposals are far-reaching and both the Department of Social Care and Treasury will be studying them closely over the coming months to judge what impact they might have on pension provision in the island. The Department of Social Care must also continue to review our benefits regime and whether the current agreement is fit for purpose.
Madam President, it is for these reasons that a complete review of the reciprocal agreement is important.
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Finally, the UK Government Actuary‟s Department expects to report to the Department of Social Care later this year on the state of the Manx National Insurance Fund. This report projects forward likely income and expenditure for the fund and is used to determine future rates of national insurance. The last report indicated that there was no immediate need to increase national insurance rates.
It is for this reason that I do not feel it is necessary to increase rates now. We do not know what the review will recommend or what the impact will be for the island of the single tier pension.
Madam President, this year I do intend to introduce some minor changes to the National Insurance system, the details of which are published in the Budget document. The overall effect of these changes will ensure that national insurance revenue continues to be sufficient to meet the overall liability placed on the Manx National Insurance Fund.
The changes will place a small increased liability on those earning over £40,000 a year whilst ensuring that those earning less will see a small reduction in their liability.
Before I move on from national insurance I would like to inform you all of another success story. Last year, I introduced a National Insurance Tax Holiday for new jobs created on the island. This holiday was only available if the job created was additional to the current workforce and in that way I hoped it would encourage job creation on the island.
I am pleased to announce that since its introduction only a year ago some 387 new jobs have been created by 200 different employers. These figures are correct as at February 6. Due to this success in the first year, I intend to extend the holiday scheme for a further year to April 2015.
I want to turn now to company taxation.
As Honourable Members are aware the zero ten company regime is now acknowledged by the European Union as not harmful. It is an attractive aspect of the island’s economic offering.
The reason for its introduction was to remain competitive and encourage economic growth and employment. Treasury benefits through taxation of the employment that is created. This year tax receipts from employees have continued to grow and are now at an estimated £111 million. This increase of over £5 million since last year, results from a combination of measures in last year‟s budget to limit deductions and growth, and, in my view, the success of the zero/ten policy.
To remain compliant with the EU Code of Conduct our generally applicable rate for companies must remain at zero.
One area of our current company regime that has caused much debate is the taxation of our larger retailers. Although the majority of these companies do not pay Manx income tax they do pay much higher rates of corporation tax than ours, to the United Kingdom Exchequer. It is therefore wrong to think that they pay less than our own smaller retailers. These multinational companies provide many jobs and contribute to our economy in that way.
I promised a year ago that I intended change in the taxation of these companies and I am delivering that today. I consider that it is only fair that large retailers should contribute more to the island’s annual tax take. After all the taxpayer funds the infrastructure upon which they rely to enable them to trade and it is only right that they should contribute towards the costs.
So I will introduce a measure that will increase the tax rates for the largest retailers on the island to 10 per cent. This is done with the knowledge that a report will have to be made to the European Union but with the confidence that our generally applicable rate for companies remains at zero.
The EU Code of Conduct requires that we cannot treat companies owned off-island any differently from those owned locally and therefore this will be a rate of tax introduced across the board for all retailers on the island with a taxable profit of more than £500,000. This rate will commence on April 6, 2013.
The revenue I expect to collect from these large retailers will be in the region of £3.5 million annually.
Finally I would like to congratulate the staff of the Income Tax Division who despite taking on the administration and collection of National Insurance and increasing demands from the international arena, have managed to reduce their complement by more than 12 full time posts. This represents a cut of almost 10 per cent, yet their performance continues to improve with many people now receiving their assessments and refunds much earlier in the year.
I will say no more about taxation for now Madam President, as I think that my message is clear, fairness and transparency, and move to summing up my Budget.
Madam President,
This is a Budget that keeps us on the course we have set. We are where we expected to be at this time last year.
We are delivering.
It is not radical; it does not make changes where none are required.
It keeps the focus where it should be - on our progress towards rebalancing our finances, whilst concentrating on the stimulation of economic growth and on the consequences for the people of the Isle of Man over the next few years.
There is no doubt that most of us as politicians sometimes find it hard to say no. Good reasons can invariably be found as to why particular Government spending should be retained.
But we have to move from this, to a position where we prioritise spending even more rigorously, and as a result there will inevitably be many difficult decisions over the next few years.
Our responsibility is to manage this process, and to show the public how well we can manage the money they trust us with. Our objective is to deliver as many services as we can afford, within this new financial reality.
I know my Council colleagues have embraced that challenge.
But we shouldn’t ignore the positives either.
We remain a strong and growing economy, and compared to most of the world are in a good financial position.
This year‟s Budget is titled Firm Foundations. You need these if you are to build anything that will stand the test of time. We have looked across the whole of Government and prioritised spending for the next three years. We now know how we will rebalance the Budget by 2015-16. The next two years will be about building that lasting achievement of a re-balanced budget. Our house will be in good order.
If I may paraphrase, this is a house built out of brick, not straw, and we will not be blown off course by any dissenting wolves.
I believe we have made great progress over the last twelve months, both in determining our priorities, and balancing the various difficult issues we face. I accept that there are other balances available. Honourable Members will have different priorities, and different political outlooks, but I would urge Honourable Members to offer alternatives not just criticisms, and to consider the whole, not just the part in doing this. I will not hide from exposing those Honourable Members who offer criticism without offering credible alternatives.
That said we do need to listen, and to respond and be prepared to change our plans going forward. That is why it is good to publish longer term budgets, as they create debate about our priorities, a debate that needs to be had if we are to get the balances right.
I would like to thank the Treasury Honourable Members, past and present, who worked with me on those three year plans - Mr Lowey, Mr Braidwood and Mr Henderson. They remained focused on the need to examine all Departments‟ plans equally, and offered wise counsel in decisions relating to the allocation of resources.
I also support the Chief Minister in his approach of taking these issues to the public in the Council of Ministers‟ public meetings. They have been very informative and helpful.
We have to make the difficult choices Honourable Members. We can‟t agree with everyone who makes a good case. The money just isn‟t there to allow it. We cannot vacillate, we have to make decisions. Time is not on our side.
My challenge to you then in looking at our longer term budgets is - are we wrong to prioritise the ill and the vulnerable, and to spend more on the Health and Social Care of our population? I don’t think we are. The fact is that we are working to an end point, 2015-16, and some changes need to come in earlier to deliver by that date.
For example, the introduction of the tax on retailers comes in this year 2013-14, but only delivers its full amount in 2015-16. However even then there will be much more work to be done.
Internal reserves will have to be replenished. The capital fund, on its own, will need an additional £30 million per annum if we are to sustain activity.
So what I am saying is judge us at the end point, not half way through. Savings sometimes take time to deliver, but it doesn‟t mean they are not being pursued as vigorously as some of the more public changes recently announced.
Before closing I would like to put on public record my sincere thanks to the Chief Financial Officer, Mark Shimmin, who retires at the end of April. I have found his commitment inspiring and his advice invaluable. I will miss him but wish him well in his well earned retirement.
I expect to look back on this budget in the years ahead as an important milestone on the road to rebalancing. This is when we accept our responsibilities Honourable Members, to show that we are committed to the task in hand and not just standing on the sidelines.
I have said this Budget is about laying firm foundations for the future of this island. Firm foundations in terms of sound public finances, but also for a smaller more sustainable government, for the development of the economy and for the generation of employment opportunities for our people.
It is also a Budget about fairness. About paying a fair share of tax and fairness to the sick and the vulnerable who need additional support. Fairness to our children and grandchildren, and their children, who in years to come will reap what we sow today.
I call on you to join me in building a firmer future and I commend this budget to this Honourable Court.