Isle of Man News - POSTED Tue 15-02-2011

Treasury Minister Anne Craine's Manx Budget speech in full

by John Gregory

Treasury Minister Anne Craine's Manx Budget speech in full

HERE is Treasury Minister Anne Craine's Budget speech in full:

 

Mr. President,
The budget I am presenting today is designed to meet the needs of the Island and its economy, but in putting it together we have had to be more aware than ever of the global economic and political conditions that leave us steering a course on an ocean of uncertainty.


We need only look at our neighbours on either side to see how difficult even large economies are finding the global situation. We are not and cannot be immune from such pressures.

The climate of the international community has shifted dramatically over the last couple of years.

 

It may be a cliché, but nonetheless it is true; the world has changed. This has and will continue to have implications for all the external relations we have, with the United Kingdom, the European Union, and the world at large.

This time last year we were recovering from the news that the renegotiation of the Customs Revenue Sharing Arrangement would leave us with a shortfall of over £100 million.

 

My honourable friend and predecessor, Mr Bell set in place a five year plan to rebalance our Budget and we are about to embark on year two of that plan. Today is about taking stock, assessing our position and planning for the future.
In considering where we were a year ago, and where we are today, I am encouraged by the way Government, collectively, has responded to the challenges we have faced.

 

Whilst we all desire certainty and stability, external factors often mean that we do not have that luxury.

That is the reality we face and we have to accept that we will need to respond to and manage a variety of financial and economic challenges for the foreseeable future.


The reductions in revenue we faced were significant, but we have sought to protect as much as possible, services provided to the public.

 

We must continue to strive for maximum value for money from our resources so that we can deliver the best Government services that we can afford to the people of the Isle of Man. I realise that some people say that cost reduction has not gone far enough, but at the same time others say that it has gone too far
already.

 

Through this Budget we have striven to find the most appropriate balance between these conflicting views.

So, today's budget has two main priorities:

Firstly to ensure that we continue to make progress in rebalancing the public finances. And, secondly to maintain and develop the economic success that we currently enjoy.


Maintaining confidence is key to the continued economic development of the Isle of Man.

 

It is understandable that individuals and companies are cautious about the future but it is Government’s role to create the right environment for them to succeed. We need to continue to reduce our expenditure without damaging wealth creation.


My budget today is not about grabbing headlines; it is about doing what is right and not jeopardising the economic success we have all enjoyed over the last twenty five years.

If I compare what we have achieved in reducing our levels of public spending, with that of the United Kingdom, what strikes me is how far we have come already.

 

Our spending in 2011-12 in gross terms is almost unchanged from that in 2009-10. In the United Kingdom
over the same period it is 8 per cent higher.


We are reducing spending because we need to, but we are doing it in a measured fashion, with continuing pressure to provide services in a more cost effective way.


An example is the shared service centre for finance processing, which will be created from this April.


The development of one stop shops for government services will offer a better service to the public, and save government money on running a multitude of counters.

 

The first of these will be introduced in Douglas. We are already improving and expanding the range of online services with 60,000 transactions online last year.

For the private sector, the twin pressures of reducing costs and improving service are self evident. Government accepts that it too must change, implement new arrangements and continue to respond to the financial challenges ahead.


Contrary to the views of some, Government has already taken significant steps to reduce spending. Staffing costs have reduced by 8 per cent or £26 million.

 

We know we have to go further in reducing public expenditure. It will not be easy, but it is essential.

However, today's Budget is one of cautious optimism. The underlying economic performance is strong.

The global financial crisis continued to dominate the economy last year, although much of the concern moved from the financial world towards other sectors.

 

There are now signs of recovery in the world’s leading economies, although levels of debt will affect the speed of
recovery and the potential for growth worldwide.

In particular sovereign debt levels are an ongoing cause for concern.

 

Tensions in the Eurozone are clear for all to see and there is little prospect of these tensions diminishing in
the short term.

 

The European Central Bank has held Eurozone interest rates at a record low of 1 per cent for over a year. Spending cuts and tax rises can be expected to cool eurozone growth and inflation, and keep interest rates low.


Despite the spare capacity in the UK economy, there is continuing concern over inflation, which is making for difficult decisions in respect of base interest rates.

 

The now most commonly quoted annual inflation measure, the CPI, is 4.7 per cent in the UK compared to an
average EU rate of 2 per cent.

The Island's RPI inflation rate stands at 5.5 per cent and the CPI rate at 4.9 per cent.

 

Housing costs were stable over the last year, although of the two largest components in the index, fuel
costs rose 8.2 per cent and food prices by 7.6 per cent.

 

The Island's own inflation situation mirrors that of the UK.

 

So if expectations of a falling UK rate later in the year and in 2012 are fulfilled then we can expect the same overall trend here.

Looking longer term there is concern about inflation, with the real possibility of this ultimately transmitting into the real economy and producing higher future general inflation.


This will lead to difficult discussions between employers, including the Government, and their workforces; with employees seeking increases in pay to match inflation.

 

I acknowledge this, and will return to this matter later, but I have to say to Honourable Members that pay restraint is a key aspect of cost control, and we cannot ignore this fact.


Unemployment on the Island fell virtually throughout 2010. It ended the year at just 1.9 per cent of the working population. Over the year the number of unemployed fell by 83, this following an increase of some 300 over the two previous years.

 

The 2010 figures provide a testimony to the continuing resilience of the local economy in the face of tough market
conditions and to the success in developing new sectors less affected by current global financial issues.

 

By comparison, during the last slowdown in the Island's economy in the early 1990s, unemployment rose to just under 1,900, and remained around twice the current level for three years.


In recent years the Isle of Man has actively diversified its economy to ensure its continuing prosperity.

 

This has resulted in unbroken growth in real terms averaging over 6 per cent a year for over a quarter of a century. This is an achievement few developed economies have been able to match.


Growth over the year to March 2011 will likely have been around the 4 to 5 per cent mark, as projected previously.

 

Forecasting the future for any economy is particularly difficult at the moment, but if expectations of continued recovery in the UK and further afield are fulfilled then we would anticipate this growth being exceeded in 2011/12.


This growth has been built in the main on financial services.

 

We have won the award for Best International Finance Centre for 7 of the last 8 years.

 

The Finance sector employs over 20 per cent of the workforce. At the same time, however, the proportion of National Income earned in this area has been reducing gradually, largely due to the success of the Island's efforts to diversify into new, high-growth sectors.

At the end of September 2010 total bank deposits of some £62 billion were holding steady, and were little changed over the previous year.


From a manufacturing sector employing around 3,000 people we have seen double digit growth rates and contributions to major projects such as the Airbus A380 and Boeing 787 Dreamliner 'super-jumbo' aircraft.


We have a thriving shipping sector which employs 600 people. Its success led directly to the setting up in 2007 of the Isle of Man Aircraft Registry for private and corporate aircraft, which now has over 330 high quality aircraft on its books and is driving growth in support services on the Island.


The Isle of Man is recognised as one of the most dynamic and reputable jurisdictions in egaming, which led to our inclusion on the UK’s e-gaming 'white list'.

 

The sector now employs around 650 people. The ongoing success of existing companies in the sector has
also helped to encourage a growing number of e-gaming businesses and software development companies to start operations here.


We have helped to fund and conduct major promotional events in the UK, Europe, the Middle East and Asia, working ever more closely with the Island’s private sectors.

 

This work needs to be targeted, based on continuing our strong public-private sector approach and must involve mobilising the many ambassadors we have supporting business, investment and tourism in the Isle of Man.

As I referred to earlier a further sign of the Island's resilience is the fact that housing values have been maintained over the last twelve months.

 

In September 2010 the average price of a house sold on the Island was almost £290,000, an increase of 2.6 per cent over the year, even though sale volumes were down.

We can see an economy


- That has shown resilience,
- that continues to grow across a whole range of activities,
- that is still creating jobs, around 200 over the last 12 months, and
- that has retained its economic base to allow for development into the future.

So in summary we continue to have a strong local economy, generating employment and revenues in a wide number of sectors.


Our international relationships are in the main very positive.

 

We continue to deliver our commitment to achieving and retaining recognised international standards through the signing of Tax Information Exchange Agreements and Honourable Members will recall that I have signed agreements with Canada, Bahrain and India within the last month and in the last year also added China and Portugal to the list of 23 countries with which TIEAs or Double Taxation Agreements have been completed since 2002.

 

We have continued to promote good practice through the hosting of the Small Countries Financial Management Programme, attended by representatives of countries as diverse as the Cook Islands, Lesotho, Montenegro and Belize.

 

The IMF report received in 2009 was very positive, but where areas were identified we have continued to work on improving our levels of financial regulation.


It follows on from all of these international issues that I should, as I turn to taxation policy, address the issue at the forefront of the minds of many in the business sector and the wider community - that is zero-ten - and so this is where I will begin.


Mr President, this is a matter of significant importance to the Isle of Man and our economy, and so I think it is worth taking a few minutes to recap on our actions to date and the position in which we find ourselves today.


We introduced zero-ten in response to the findings of the group set up by the European Union to monitor compliance with the Code of Conduct for Business Taxation.

 

Based on a commitment given in 2002, we announced that we would abolish tax exempt companies and the like, and replace them with a simple regime based around a standard rate of tax of 0% and a rate of 10% for banks and for companies deriving their income from Manx land and property.

 

It is well known - indeed it is on public record - that the Code Group said in 2003 that a zero-ten system would not be harmful.

Since that time we have been made increasingly aware that many member states of the European Union have signalled that they are unhappy with the zero-ten system in the Isle of Man.

 

Indeed, Honourable Members will have realised from comments made just before Christmas by Lord McNally in his role as a member of the Ministry of Justice with responsibility for the Crown Dependencies that the United Kingdom is not prepared to support the Island's cause in this area.


The Code of Conduct Group has always been a political body: far more than it is a tax oversight committee.

 

We have needed to keep the political nature of what we are dealing with at the front of our minds, and not fall into the trap of assuming that we can deal with the Code Group purely in relation to the finer points of tax law.

In November last year, the Code Group said in its report to the European Union Council of Finance Ministers, ECOFIN, that our tax measures – and I quote here – "give rise to harmful effects".

 

Even that phrase can be taken as a political one, because the Code of Conduct itself gives us definitions of how to determine if tax measures are harmful or not.


In our case, Mr. President, the Code Group considered a draft evaluation prepared for it by the European Union Commission.

 

That draft evaluation indicated that if our zero-ten system was considered together with our attribution regime for individuals, then there may be an issue with the principles of the Code of Conduct.

 

The problem with this approach is that the Code of Conduct concerns itself with business taxation, and the attribution regime in the Isle of Man is a personal tax measure.

In order to deal with this additional political problem, the Code Group recommended to ECOFIN that a High Level Working Party should be set up to look at the scope of the Code of Conduct. ECOFIN has indeed set up that Working Party, and it met on the 31st of January.


Our understanding is that the High Level Working Party will report back to ECOFIN, which is meeting in Brussels as I speak today, that the attribution regime for individuals can be taken as being within the scope of the Code of Conduct.

 

The Code Group will then be mandated to return to the work which it had put on pause last November.

Throughout this process Mr. President we have consulted with and listened to the concerns of the private sector. We know that zero-ten is very important to their business.

 

Equally important is the need for stability and clarity in respect of our future in this area.

We have taken steps, along with Jersey to challenge the opinion of the Code of Conduct Group that our measures are harmful.


However, based on what I have said over the last few minutes, this Court will realise which way the wind is blowing. A political process which says in November 2010 that we should be expected to change our tax system is unlikely to reach a different conclusion in 2011.


Mr President, it will be no surprise then that I am therefore announcing today the abolition of the attribution regime for individuals for accounting periods beginning after 6 April 2012.


I will introduce appropriate legislation to give effect to this change in due course.


What we need to achieve is a time of calm co-existence with the European Union, and the wider world when we are not under constant attack because of our tax system.

 

The Isle of Man will continue to be known for its competitiveness, but I anticipate that we will need to make further changes, such as enhancing the transparency of business and the level of cooperation between the Island and its economic partners.

I must look in the future both to provide what the Isle of Man's private sector says that it needs if it is to carry on prospering, and to provide the European Union with certainty that we do not seek through our tax system to cause harm to its economies.


In summary regarding this important piece of tax policy, having decided to remove the ARI, we believe that there is no basis for changing the zero-ten system itself. In the last ten years or so we have seen enormous changes in our tax system at home and our tax cooperation internationally: and there will be more to come.

 

For today's budget I will take this opportunity to repeat part of a statement made by the Chief Minister to this Court in
October 2009, which is that we will "…develop and position the Island and its future tax regime, so the Island can continue to remain competitive and at the same time be accepted by the international community as responsible and co-operative…"

I will continue to update Honourable Members regularly as we build the fine details on the
foundations which I have just set out.

 

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