Government response to VAT bombshell

Tuesday, 17 November 2009 22:43 Chris Blyth
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Given the severity of the VAT “tax raid” by the UK on the Island’s expected income in the next two years, it cannot be a surprise that the Manx Government needs time to evaluate a fully considered response. However, the response to date is one of complacency, of “traa dy lioar”, and the continued protection of self-interest within our bloated public sector.  It also fails to recognise the reality that the UK Government faces a long term financial crisis, with major budget deficits forecast for some years to come – and, it has to be suggested, the probability of further “salami slicing” of the Manx VAT  revenue in coming years.  

This budget crisis is, in reality, a crisis of government itself  - of a government which has used  the years of economic growth to increase the size of the public sector, and rewarded itself generously whilst doing so, but without taking the necessary steps to improve service efficiency.

The situation therefore demands serious and urgent measures to clarify the government’s intentions.  This is the opportunity for major reform of our public sector –reform which is necessary given the lower productivity, higher wages, and better pensions compared with the private sector (but which has largely funded such excesses).  Were this to be a business (as opposed to a client state), action would already have been taken.   A 20% cut in the government’s revenue MUST require surgery to the headcount, and some reduction in the services to be provided by the sector.  We now have approx 8200 “full time equivalent” employees in the public sector  - more than the size of our economy can possibly justify – and we should be looking to reduce this to no more than 7400 within the next 12 - 18 months  i.e. a minimum of a 10% reduction from the current position.  And thereafter, arguably further reductions to a target of perhaps 7000.  We need :

 

IMPACT ASSESSMENT

Headcount Reduction of 10% £28.0 – 29.0 million per year
Salary Freeze £8.4 million first year (say 3% increase on £ 280million salary bill), and a further £8.7 million in the second.
Pension Contributions increase £7 million per year (increasing current contributions from 1.5% to 4% minimum immediately, and with a view of increasing progressively in later years to a minimum of 10% of salary – when the employee contribution would be worth an extra £24 million
Pensions Consultancy £2 million saved by cancelling the Hymans Robertson consultancy.
Absenteeism Procedures Assumed into the headcount reduction savings
Purchasing Controls Given the size of Government and the overall cost of materials and equipment used throughout all departments, it is difficult not to believe that savings of £15 – 20 million per year are possible

 

And all this would send a clear message of serious intent - a range of programmes to ensure our public services focus on, and do provide, true “value for money”.  And it would also send the right message to the tax paying public  - that government was itself addressing the key internal fundamentals of public sector headcount, cost savings, efficiencies and reform - BEFORE looking to cut programmes and services, and BEFORE seeking to raid the reserves, or to increase taxes. Which is exactly what any Chief Executive in the private sector has had to face in the past two years - of no salary increases, no bonus payments, of cost savings, cut-backs and redundancies

Yes, it looks inevitable that both company and personal taxation will have to rise to help meet the budgetary task set for us by the UK, but government MUST demonstrate its own commitment and discipline before expecting the taxpayer and the private sector to “pick up the pieces“.   Given the very fragile nature of the economy at present – and the very real stress in the hospitality and retail sectors in particular – the market can ill-afford further penalties such as major tax hikes which exacerbate costs, or reduce incentives.

But, does our Chief Minister and his government have either the vision or the courage to provide the leadership that is urgently required ?  Given the performance to date, the answer is “no” – no vision, no courage, and no leadership......   and once again, it is likely to be the “front line” troops in lower paid jobs, the taxpayer, and the small businessman who will pay the penalty for these omissions.

 

Chris Blyth

Booilley Vooar
Ballaragh
Laxey
IM4 7PN