Jersey’s government should be ready to raise taxes to protect the economy as islanders suffer job losses, soaring costs and a house price slump in a ‘worst case scenario’ Brexit, economists have said.
The finding comes in a new report by the Fiscal Policy Panel (FPP) – an independent group of experts tasked with analysing how Jersey will be affected by the global economic factors, and advising the government accordingly – outlining the predicted impact of the UK leaving the EU without a deal.
While the report note that Jersey “starts from a strong position” with “robust” public finances and planned budget surpluses, this, the economists predict, will not be enough to protect against being hit by the knock-on effect of US-China tensions and Brexit turmoil.
Among the FPP’s conclusions is a prediction that there would be a big increase in the prices of goods “due to both the anticipated depreciation of sterling and the potential for trade barriers”, with inflation in 2020 expected to average around 5%. Wages would therefore be less “in real terms”, stretching less far than pre-Brexit.
Pictured: The price of goods and services are expected to rise significantly in a 'no deal' Brexit scenario.
House prices could also slump by as much as 5%.
Due to the anticipated higher cost of living, the panel has also forecast a drop in demand for services, which “is expected to hit both employment and profits in the non-finance sectors”.
The finance sector will still be at risk, however, with the Bank Rate expected to fall to zero in 2020.
The panel explained: “While the Bank of England has stated that “the monetary policy response to Brexit, whatever form it takes, will not be automatic and could be in either direction”, individual members of the rate-setting Monetary Policy Committee have recently commented that they would most likely vote to reduce Bank Rate in the event of no-deal.
“This would have knock-on impacts on profits in Jersey’s financial services sector, which the Panel has forecast to grow more slowly in 2020 and 2021 under a no-deal scenario but faster in 2022 as rates increase.”
Pictured: Jersey's finance sector could see its profits knocked.
Under the FPP’s suggested ‘worst case scenario’, Jersey’s economy would therefore shrink by 2.5% overall in 2020, and a further 1.4% in 2021.
To protect against this shock to the economy, Jersey’s government should therefore be open to new revenue-raising measures or expenditure cuts, the panel said.
At this moment of economic turmoil, the panel also urged careful consideration and caution with regards to implementing the Government Plan, which makes ambitious proposals to invest £91million in schools, the future hospital project, cybersecurity, sewage work improvements, finding a permanent government HQ solution, and solving the question of what to do with Fort Regent.
“The Government Plan will need to consider and set out how the proposed capital programme can be delivered in a way that does not put excess pressure on the limited resources available on-island,” the panel noted.
The FPP was also supportive of an increase in long-term care contributions.
“The FPP’s view is that the early part of the forthcoming Government Plan period is an appropriate time to plan an increase in the long-term care contribution, while the economy is running above trend. Consideration should also be given to whether a larger increase could be appropriate in order to provide additional flexibility regarding future increases in the rate.”
Pictured: The FPP said the Government Plan will have to be delivered in a way that "does not put excess pressure on the limited resources available on-island".
They also recommended strengthening the Strategic Reserve and assessment of the current use of the Stabilisation Fund – a money pot saved for economic shocks.
In their concluding remarks, the panel made it clear that the Economic Framework – the Economic Development Minister’s yet-to-be-published roadmap for driving the economy forward – must have a strong focus on enhancing productivity in the private sector.
Commenting following the report’s publication, the Minister, Senator Lyndon Farnham, reminded islanders that the scenario outlined by the FPP “is based on significant disruption to trade and a large depreciation of sterling”.
“This is not the most likely outcome of Brexit,” he maintained, before expressing confidence in the government’s existing preparations for the UK’s departure from the EU.
“Our public finances are also robust, and we have significant reserves. The Council of Ministers has taken steps to replenish the Stabilisation Fund, which can be used in circumstances like this. We have transferred £50 million into the fund this year, and a further £36 million transfer is planned next year. This will help to ensure that the Government can respond to any changes in the economic cycle,” he said.
Pictured: Senator Lyndon Farnham, Minister for Economic Development.
Turning to the panel’s observations on the Government Plan, he added: “The priorities set out in the Government Plan remain important under either scenario and we must ensure these are funded in a sustainable way. It is also important that we seek efficiencies under any circumstances. We must always strive for the public sector to deliver services in the most efficient way.
“The Government look forward to the Panel’s Annual Report, which will be published next month, and which will provide us with detailed advice.”
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