Slowly the dust settles and the consequences of some of June’s budget announcements are now coming sharply into focus.
At first, the Chamber’s broad view of the budget was that the cut in the corporate tax burden would be welcomed by local businesses on the one hand, but this would be largely nullified by a number of other cost increases on the other.
Increases in electricity prices are understandable given the rise in oil price although it would be easier for business planning purposes, if such costs were adjusted annually by inflation rather than having larger but more infrequent hikes. Similarly, the rises in the minimum wage and social insurance charges will be hard for some members to cope with, but these have not increased for a number of years. We welcome the phasing-in period for the former, as it will enable member companies to plan ahead and budget for the increase when it is introduced in January 2009. We would urge that future rises in social insurance are also phased-in with a six month notice period to enable firms to plan and budget accordingly.
The Chamber naturally welcomes the accelerated cut in corporation tax from 33 to 27 per cent. Our members would also like some indication of next year’s likely corporate tax rates ahead of the sharply lower rate envisaged in 2010/11. Many members plan their business more than 12 months ahead and often two to three years in advance and having some guidance on next year’s likely rate, would greatly assist them with this planning.
The news that the top rate of income tax was being cut from 40 to 38 per cent was helpful although it only affects the small number of people using the Gross Income Based (GIB) system and only if they earn over £100,000 per annum. Twinned with the progressive erosion of allowances available, implies that Government policy is looking to encourage taxpayers to migrate to the GIB system over time and thus the Government should be able to reduce income tax rates for all, over the medium term.
In its statement the Government said that in 2007/08 Government revenues increased by £19.5m on the previous year and that this was despite the tax cuts made in the previous year. Such a case for reducing taxes further could not have been made more clearly.
However there are also causes for concern. The flow of investment into Gibraltar has made the prices of many goods and services rise way ahead of inflation. Tiger economy growth rates of 12.7 per cent may sound impressive but therein lies a danger that if the economy continues to expand at this rate, inflationary pressures will merely exacerbate cost increases for local business. With a full schedule of public and private sector building projects in the pipeline, this investment flow looks set to increase substantially. The impact of this will add to the inflationary spiral. What is more, the Government does not possess the monetary policy tools to control this growth and must rely instead solely on the blunter fiscal measures of tax, spending and allowances to manage economic expansion.
We do not share the view of the Government that reductions in interest rates, a fall in the oil price or a weakening Euro are distinct possibilities in the short-term. The evidence in recent weeks in fact, shows quite the opposite. Such external factors should certainly not be relied upon as a basis for managing inflation.
The Chamber welcomes the changes to the tax treatment of occupational pension schemes so that directors and shareholders of companies will be able to participate in approved schemes. In a similar vein, we look forward to the introduction of concrete measures to rein in the costs of public sector pensions. These continue to act as a significant burden on local businesses and prevent many firms in the private sector from providing staff with pension schemes of their own.
The Chamber is glad that the Government has acknowledged that there are unacceptable levels of absenteeism in the public sector and hopes that this will be properly addressed. Such levels are another unnecessary cost, apart from being deeply unfair to those workers with high work attendance records.
As the Government has announced its intention to increase its borrowing powers greatly to fund the planned investment programme in public infrastructure, the Chamber looks forward to sharp reductions in Government arrears. The scale of public and private sector investment is a clear sign of the level of confidence in Gibraltar’s future. However, in a rising interest rate environment, it would be prudent to collect money that was owed first before borrowing further to spend on these projects.