The government is bracing itself to lose between £80m and £137m due to the virus crisis, with the public purse struggling to make its way back to ‘normal’ for another two years.
The estimates came in an extensive report published yesterday by the Income Forecasting Group (IFG), an independent panel tasked with predicting how hard public finances will be hit by the pandemic.
Prior to the outbreak, the government was expecting to see its income rise by £25m in 2020.
But the IFG has now erased that forecast, instead producing two potential scenarios:
Pictured: The forecasts in comparison to where the Government Plan had placed public finances over the next few years (IFG/Government of Jersey).
The more optimistic ‘base-case’ is based on the assumption that economic lockdown lasts three months, with moves towards ‘business as usual’ taking place gradually over a further three months.
The ‘downside scenario’, however, is based on a longer period of economic restriction and more severe impacts on the economy.
In the ‘base-case’, around half of the forecast losses (£51m) are from lower income tax takings.
According to the IFG’s predictions, tax revenues should start growing again in 2021, but won’t get back to 2019 levels until after 2022.
Meanwhile, GST is predicted to drop £20m, stamp duty is expected to be down £15m, while income will also be down £8million from reduced impôts, £6million from other income and £6million from increased provisions for bad debts.
Although decreases in duty payments equal several million in the IFG’s projections, one area which saw an increase was tobacco consumption. Intelligence from the trade and receipts so far in 2020 have shown that duty paid tobacco consumption has increased by at least 20% since travel to the island was restricted.
Trade in bars, restaurants, hotels and clubs is down 70 – 80% according to initial indications from suppliers. However, as a result of this, islanders appear to be increasing their consumption of alcohol at home, by buying drink from supermarkets, convenience stores and wine and spirit shops.
Pictured: Whilst trade in licensed premises has taken a major hit, islanders have turned to other outlets to get their alcohol.
The report states: “One large island retailer estimated that alcohol sales had increased by 6% so far this year but showed signs of now slowing slightly given certain supply-chain issues and a levelling-out of stockpiling purchases which occurred prior to the coronavirus lockdown."
It is also suggested that the hospitality industry will be adversely affected by travel restrictions as they lose out on the visitor economy.
These predictions are based on various assumptions made about how the economy will fare over the next few years – informed by a number of factors including the Fiscal Policy Panel’s (FPP) economic assumptions published in March, revenues last year and this year, Treasury forecasts, data from Revenue Jersey and IFG intelligence.
Currently considered by the Group as the “most likely outcome”, the base-case forecast could be subject to change – either reflecting an improved outcome as a result of economic interventions by Government or moving closer to the ‘downside’ end of the scale.
Set out in the report, the outcome could vary from this baseline due to a range of factors still being so uncertain. These include:
Further unknowns include the impact of Brexit, any changes to the way Jersey’s finance industry is regulated, and longer-term challenges such as low productivity and demographic shifts.
The IFG says it will therefore be closely monitoring a variety of economic indicators including rates of employment, global economy forecasts and data from Government business support schemes arising out of the covid crisis to “consider the extent to which the outcome may diverge from [its] base case forecast.”
Pictured: The group say that various economic indicators will have to be closely watched to see if they will have to adjust their forecasts.
In terms of the major threat to public revenue – the stark decrease in income tax – the report gives an indication of where gaps will start to form across the island’s different industries...
According to the report, based on discussions between Revenue Jersey and banks, the recent reduction in interest rates could result in a “significant reduction” in their tax liability for 2021.
As a result, the IFG say: “tax on banks has been assumed to fall 35% in 2021, with around half of this being recovered in 2022.”
In terms of the rest of the industry, the Forecasting Group say: “There are likely to be pockets of the financial services sector seeing a more significant reduction in profits in 2020, but others may see some profit growth.”
The IFG predict a “significant fall in property income” of 15% in 2020. Tax from property development and rental is also assumed to fall this year, by 9%, due to added pressures on commercial landlords and a reduction in demand.
Further to this, IFG also report a decrease in those on the high value residency scheme, suggesting a dearth in the sales of more expensive properties.
Pictured: Property from income is expected to take a dive due to corona virus.
Data from Locate Jersey on HVR arrivals for 2019 and expectations for 2020 onward suggest that there is going to be a decrease in uptake of the scheme over the next few years. This also has a knock-on effect when it comes to high-value property income through stamp duty.
The report states: “2020 has seen a strong start in the transactions over £2m made by High Value Residents, with several transactions having been made totalling c.£2m stamp duty. However, discussions with the Director of High Value Residency, and the reduced economic assumptions of the housing market this year, lead to continuing uncertainty in this component of the forecast.”
In terms of retail, the economic forecasters expect that there will be a significant crash in the amount of corporate tax that can be paid by the sector, declining by an expected 50%. This reflects the fact that only essential food and pharmacy outlets could continue during lockdown, whereas other shops would have seen “a significant fall in sales and therefore likely to have limited profits in 2020.”
The expected 50% is due to the fact that “roughly a third of the tax is estimated to come from activities that have been completely or largely halted, temporarily, due to the restrictions put in place to reduce infection. A further third are likely to be severely restricted by the reduction in footfall, with the remaining third coming from activities that are less affected (e.g. food).”
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