The recently announced June budget reflects a buoyant economy that has contributed to record levels of Government Revenue in the year to end June 2006. After netting out expenditure, the overall budget surplus for the year was some £22.3 million, or some £18.50m more than the forecast of £3.80m.
While this performance is impressive from an accounting point of view, and down mainly to higher than expected increases in revenue items such as Income Tax, Company Tax, Exempt Company Tax, Gaming Tax, Rates and GibTel dividends, it is equally important to evaluate whether this performance is in the nature of ‘windfall’ gains due to an exceptional year or if it an indicator of things to come. This is a difficult question that will doubtless be the subject of much debate during the coming year.
Given this surplus, the Government has quite rightly seen it fit to plough back some money into the economy by way of reductions in taxes and rates.
The announced changes in income tax rates and bands are welcome news. The degree of benefits varies across income groups but all taxpayers should benefit by way of increased take home pay. The Chamber welcomes this element as it helps reduce the overall tax burden and contributes to Gibraltar’s competitiveness, these issues having been of concern to successive Boards over many years. Equally, the rates reduction is also welcome, as it supports the Camber’s view that the reasons for recent increases were less than compelling. Another positive development is the abolition of import duty on commercial vehicles. Finally, the Board also welcomes the scaling of social insurance contribution rates to encourage more part time workers and job sharing, which is another issue the Chamber has been highlighting for some time. On the administrative side, the combining of PAYE and social insurance collections into one collection system should simplify matters in this respect.
Also interesting is the new dual system of Income Tax scheduled for introduction in July 2007. The proposed alternative system, with no allowances, a flat rate of tax and a cap on tax payable, is a positive development. With the economy at (virtual) full employment, the Chief Minister is correct in saying that most future increases in demand for labour can only be met by recruiting from abroad. The proposed new tax system should help reduce the cost of employing such labour, who are unlikely to be into the whole mortgage/tax allowance scenario which so significantly reduces tax payable by local home owners. Once again, the cost of employing labour from abroad has concerned the Chamber for quite some time. The current proposal is seen as a first step to addressing this issue.
There are two budget measures, however, that may, in part, have an overall negative impact on business. The first is the abolition of social security contributions for employees aged 60 or over. (Employer contributions continue) While this is undoubted good news for such employees, it raises the question of how this shortfall is to be funded into the future. It could also raise issues of whether there is any incentive to employ over 60’s.
The second is the abolition of income tax on occupational pension income for those aged 60+. This is clearly good news for all pensioners. It is also good news for Private Sector pensions planning. The issue which raises concern is the effect this will have on financing public sector pensions into the future, as the Treasury will have foregone the previously available tax claw back. In essence, this additional cost of public sector pensions will need to be funded by the Private Sector.
The abolition of PAYE on occupational pension income applies to ‘approved’ pension schemes only. We feel this facility should also be extended to those in the private sector, who are virtually retired and continue to receive payments from their previous employers as a de facto pension. There are many people in such situations who are now ‘left out’. This matter will be taken up directly with the Chief Minister.
We also feel the need to highlight the statement in the Chief Minister’s speech that the effects on Government revenue and expenditure of the above budgetary measures were not taken into account in this year’s budget forecast. It would be very interesting to see what the effect would be as, among other things, it would help us in having a clearer view of Government finances over the coming year.
Finally, we feel the need to comment on various references made to “the out going President of the Chamber of Commerce” in the Budget Speech. In the first place, it needs to be remembered that the President is the spokesman for the Board and what he says or writes on behalf of the Chamber reflects the majority view expressed by that body. The fact that the out going president continues on the Board underlies this support. Secondly, it is inevitable that, at times, there will be differences of opinion between Government and the Chamber. To have these dismissed as “misinformed folklore” is neither appropriate nor constructive. Thirdly, there are some issues raised which, although contentious, are inescapably based on fact. It is a fact that the reduction of a discount (on rates) is a de facto increase. It is a fact that the financing of Civil Service pensions falls mainly on the private sector. It is appreciated that some inroads into containing this liability have been made via the various recruitment policies as explained in the Budget Speech but new entrants into the Civil Service continue to benefit from the non-contributory final salary based pension. Finally, it is a fact that the Public Sector has grown substantially and that this growth is again ultimately funded by the Private Sector.
The Chief Minister goes some way to explain that the size of the public sector has not gown disproportionably compared to various economic indicators. While this may be so, it begs the question of how big the public sector should be. Surely, the answer needs to be based on the needs of the Community at large and not on that Community’s (current) ability to pay?
The above Budget Measures, in general, show that the Government has taken on board some of the issues that have been raised by your Board over the years, which gives us some degree of satisfaction. The Board therefore looks forward to the Chief Minister’s stated intention to work closely with the Chamber over the coming year as a positive way to progress these and other issues. This is an implicit recognition that the Private Sector is the engine of the economy and that the Chamber of Commerce has an active and vital role to play in its development.