Thursday, 16 June 2011

Hope for the Best, by All Means, but Prepare for the Worst, too.

A couple of years ago, I tried to start a discussion on cuts on another, more popular blog, to a disappointing lack of response. Here I get a good quality of comment, though, despite my small readership, so I shall revisit the topic, with a bit of copy and paste from last time, but some updates, too, and hope that we can create a really good thread between us.

Anyone with intentions to stand for Election this year should have been looking through their 2008 policies, if they had any then, and scrapping the many things that have been overtaken by events, and then shaping a new raft of policies for the 2011 elections, to carry us towards 2014.

The hard thing with looking three years and more ahead though, is that the short-term future is looking exceptionally unpredictable right now. Will our economy return to growth? Will it continue to gently decline? Will something spook the finance industry and leave our economy with bricks where the wheels were? All three possibilities are still two-figure percentage chances from where I am looking.

If it were certain that growth will return, then it would be easy to write a nice manifesto. There is probably still a need for some alternative taxation to fill the “Black Hole” that is Terry le Sueur's legacy, despite the GST hike, but with more money about, it would not need to bite too hard.
The tougher parts will be to prepare for further decline and outright crash. Many left-leaning people will probably be appalled that I even mention cuts, but if the money is not appearing in the income column of the ledger, it should not be in the expenditure column, either.

The only eager votes for a manifesto of cut this, slash that and snatch the other are going to come from the hard-right wingers I, and probably most of my readers, oppose, so we can't be shouting too loudly about intentions to do it. However, if things are still grim by the end of 2011, and the old guard are the scapegoats in the General election, then the erstwhile opposition are going to be faced with a dirty job that someone has got to do, and we really ought to have a clear idea of how we are going to go about it.

The latest figures show that States revenues are still buoyant, so there has maybe been a less pressing need for spending cuts and tax hikes than we have been led to believe. However, there is a lag of a year or two in the full effects of the recession filtering through to taxation, so it may be that something awful is about to emerge from the pipeline. And we need to be prepared to deal with it, if we aspire to replace the current government.

A fall of a few percent in revenue can largely be made up in the traditional manner, by corresponding rises in the rates of existing taxes and duties. However, these have already been jacked up faster than many people can easily adjust to in recent years, and any government doing much more of that will rapidly lose public confidence. The lost opportunity to lose the Social Security cap will have to keep on being revisited until there is a result. The diminishing progressivity of the Income Tax system is somewhat perverse, and also will have to be tackled by a new regime. I thought the way government budgets work is that they cost the activities and purchases they consider necessary to run the state in their chosen manner and then work out how much tax they need to raise. Jersey, with its love of quaintly different ways of doing things, currently goes for a different strategy of deciding how much tax to ask for, and then seeing what it buys. And, between falling profits in a global downturn and tax breaks for those rich enough not to need them very much, the tax yield is not likely to buy as much in the near future as it did in the near past. So, the C-word does have to be bandied about: CUTS!

In a diverse career, I have been an established officer in the UK Civil Service for a spell, and I get a little irritated at attacks made on a stereotype sixty years or more gone in real life. I think the popular image of the idle and arrogant man in a pinstripe suit and bowler hat leisurely making arbitrary decisions about the affairs only applies to the Bill Ogley/Mike Pollard type of senior manager, not at the levels that commonly interact with the general public. I don't think for a moment that large-scale redundancies in the public sector would do anything other than serious social and economic harm.

However, any organisation will tend to gather dead wood over a few decades, and a thorough audit, once in a generation, on the principles Leslie Chapman laid down in the 1960's, will inevitably show up a few jobs that are there because they have been done, rather than because they still need to be done. I know that the States of Jersey do already have an Audit Department that does these kind of surveys, due to a small quango that I used to be involved with receiving their attention, but they don't get the publicity they deserve.

So, the first level of cutting should be a rolling out of this thinking on a broad front. If a few percent of public sector jobs can be identified as dispensable, then their holders can be transferred to other more essential posts as they fall vacant through natural wastage, and the overall size reduced. A key factor will have to be the independence of the audit, though. If senior management are challenged to produce plans for reducing their own empires, then, humans being human, they tend to select those who would be most sorely missed as the priority for cuts, so making the plans unacceptable.

The big challenge, though, is how we would cope with a big fall in the size of Jersey's economy, say a quarter or a third? When even John Boothman, the avuncular ex-banker the finance industry often trots out to give it a human face, famously admitted that the finance industry could “leave at the click of a mouse”, there is no case for assuming it will continue to dominate our future as it has our present. There would need to be expenditure on helping the unexpectedly destitute, on top of all the usual business, so even more of the latter would have to be stopped. Law and order, and sanitation infrastructure would remain essential, and nobody would want to see medical care or education shaved too closely. But what of the rest? Opinions will be shaped by individual circumstances, but where would the consensus be found? No more roadworks, save essential utility repairs? Close the States Communication Unit, that just produces derided propaganda, and the Statistics Unit that only publishes useless and misleading “information”? Refreeze the Town Park, and halve the gardening in the existing parks? Across-the-board culls of Civil Servants? Whatever you look at, there would be more losers,than winners, but don't forget I am not asking how do we want Jersey 2014 to be, but how would we cope if the bottom had fallen out by 2013?

Depending on whether I get worthwhile feedback, I may make this the first of a little series, also taking a look at the options in less disastrous situations, and maybe following up any interesting tangents from the reader comments.

I am writing this to open a debate, not have a rant, so I beg you to consider what your idea of the “least-worst” cuts in a collapsing economy would be, and submit them by clicking the Comments option. (Tip: If you have never commented on a website before; if your answer is more than a few words, then draft in a word processor, copy and paste, because blogs don't reliably save at the first try.)


Anonymous said...

I am undecided about standing in the elections again. Simply, the prospects are so bleak I cannot see an acceptable way forward. It is going to be so very ugly.

Tom Gruchy said...

Which question comes first - the size of the economy or the size of the population?

Presumably Greece now starts to address its problem on the basis of an established population figure (give or take a small transient immigrant element).

Jersey's population is not fixed or stable and certainly not made up primarily of "locals."

92,000 may be the starting point as the current winter population but the Ozouf plan is for expansion of both the population and the economy.Is that what is really wanted or desirable?

The real question is what should be the MINIMUM population for Jersey? Choose a number and then try to determine how much wealth has to be generated - that might be a more normal way of going about things. But Jersey's perverse system has few normal certainties such as coal that is running out or a car factory that can produce X cars per week.

The finance business can generate huge wealth in a tiny office space and may not need many staff at all.

So who is to decide the sizes and the distribution system and the relationships between them?
Obviously, this cannot be determined by politicians in a free market economy. But for the sake of your discussion why not say that Jersey's population should ideally be 80,000 in winter.
Does that make the plan more or less difficult to dtermine?

Anonymous said...

Jersey Finance released the following figures as part of a quarterly report for the financial services industry as at 31.12.2010:

Banking deposits - £161.6bn.
The Net Asset Value of funds under administration - £184.7bn
The value of funds under investment management - £21.4bn.

Thus Jersey is sitting on £367 billion. This, if taxed properly, should be enough to fund the States budget. It cannot be said there is no money; its just that so little touches the side.

The pursuit of Cuts is purely ideological. It is the consequence of refusing to tax the wealthy and corporations. Instead the government taxes wages and salaries. In other words working people are paying to keep the finance industry in the island.

Tom Gruchy said...

Perhaps anonymous can explain where the £367 billions actually is and in what form?

I certainly have never been able to comprehend the concept of such huge funds supposedly hanging about vaguely in Jersey because I believe that the very same "funds" are also claimed to be hanging around in Guernsey, IOM, the Caymans and City of London and fifty other places too.

My belief - largely held for the sake of sanity - is that the whole "assets" game is totally bogus and virtually any amount can be claimed according to the weather.

Of course, when a particular sector, bank, business or national economy goes "pop" - as many are now doing - the accountants then rush around trying to put a figure on the "loss". But, in reality there is still no reality.

Some real people lose their everything, a few go to jail and one or two jump from windows but visibly others manage to cash-in on failure (vultures by any other name)and prosper.

Our economy is just one small integral part of a very sordid international game and of course we cannot levy a small tax on "assets" held here because they are not, in fact, held here at all.

Sadly, we should not aspire to sit back in our deckchairs with the champers to hand as a long term project. Ultimately, all wealth has to be generated by some poor sods doing actualy phsyical work and we cannot pass that particular parcel.

We might find some Chinese and Indiams to exploit for a while to keep us in the lifestyle to which we have become accustomed but I suspect that we all realise that growing the humble Jersey spud - for all its faults -is a much more useful and appropriate business activity in such a place as this.

Ugh, It's Him! said...

Anonymous #2:

Firstly, as Tom has also pointed out, the funds that are boasted about are not necessarily ours to tax. We are like car park attendants, and it is not really our place to pay the dues on the limos in our lot ourselves.

Secondly, you have altogether missed my point. I am asking how we would want a future government to manage the consequences of finance leaving at the click of a mouse, and you are suggesting a provocation to make them do so.

I fully agree with the analysis in your final paragraph. However, now they have gone and made that bed for us with the 0/10, we shall just have to lie in it. If working people don't subsidise the finance industry, not many of us will still be working. I for one need the three-quarters of my pay the States let me keep, so I'd rather put up with it than starve.

Anonymous said...

Tom Gruchy,

I've rarely read a more mis-informed and prejudiced comment on any Forum. There are misinterpretations or just plain errors in every paragraph bar the one that seems to revel in people committing suicide because of their financial predicament.

If it wasn't so deluded , your level of understanding of how the financial world works, and how it benefits the island, would be funny. However, people like you, who, because of their ignorance, don't even realise that they personally benefit from the industry, would be happy to see it go without understanding one iota of the financial and social implications that would bring.

The one positive to take from your comment however is that if that is indicative of the stregth and understanding of people's argument against the industry being here, the industry should be safely paying for the benefits you either can't, or won't, acknowledge you receive personally, for a lot longer yet.

Tom Gruchy said...

At least the Grecians have had the good sense to sack their Finance Minister. Probably makes them feel better. Like Ouzo - ozone - rings a bell!

Ugh, It's Him! said...

Anonymous #3:

While I am reassured to learn that Tom's view is generally incorrect, it would be a help if you could explain just which bits are wrong, and why.
The offshore finance industry's own marketing suggests the deal is that the client can pretend their money is invested elsewhere to taxmen, shareholders and ex-wives, while it is still all theirs, really. It is an easy assumption to think that they are actually doing what they say they will.

Anonymous said...

David, you know full well that it is inflammatory nonsense to suggest that is the way the finance industry markets itself, and you really should know better than that. If you can find one example of literature which suggests that 'the client can pretend their money is invested elsewhere to taxmen, shareholders and ex-wives, while it is still all theirs, really', I'm sure the JFSC would welcome a copy. That sort of crap is worthy of the likes of Tom Gruchy.

As for his 'beliefs'

1) that the whole 'assets' game is totally bogus
2) That in reality, there is no reality
3) That assets in Jersey are also claimed as assets elsewhere
4) That he can't comprehend big numbers
5) That our economy is part of a big sordid game
6) That assets held here are not held here
7) That wealth is only created by people doing physical work
8) That the only appropriate activity for Jersey is to grow potatoes

I'm sorry. It must be obvious, even to somebody with no experience of the finance industry, that those are not the 'beliefs' of a rational man. He quite obviously is so riven by blind hatred and jealousy of the industry which he is too blinkered to see pays for the majority of this islands public services, that it would be a waste of time attempting to answer any of his his issues. Perhaps instead of hanging around in the Royal Square all the time bothering people with a camcorder, he would care to do a little research before spouting his nonsense. Quite how I would answer his existensial 'that in reality, there is no reality', I can't even begin to imagine.

As I said in a previous comment, if that is an example of the type of person who opposes the finance industry, I look forward to years more success, and paying for those types of peoples healthcare, pension, street cleaning, sewage services, social security, and other things which he would no doubt be up in arms about were their funding suddenly cut off.

Ugh, It's Him! said...

Anonymous #3/4:

I said the offshore finance industry rather than the Jersey one because the most egegious example I have seen was this:-

The SCF Legal Department is delighted to announce the introduction of their new Seychelles PIF’s – Although technically introduced under the 2009 Foundations Act, the legislation did not provide proper thought-out ‚Äòregulations’ which have now been addressed by our Legal Department very much in the way they drafted such ‚Äòregulations’ in the past for Panamanian PIF’s. In pr?©cis, SCF Seychelles PIF’s can now provide an extremely cost-effective method of protecting your hard earned money from vexatious 3rd party actions, the taxman, potential or existing husbands or wife’s combined with unparalleled levels of confidentiality. So powerful and relatively inexpensive are these structures that our legal team firmly believe that most clients (new or existing) should now carefully consider using them in their structures as in most ways they are far more powerful than even trusts in their halcyon days!

What exactly is a Seychelles PIF and how can it help me? A Seychelles PIF, like all private interest foundations, is a self-owning separate legal entity and therefore doesn’t have any ultimate beneficial owners, the very basis of virtually all modern anti-avoidance legislation. In other words, whilst you may have gifted or donated money or money’s worth to your Seychelles PIF it is technically no longer yours but the PIF’s although, provided there has been no duress, you will have retained the right to end the existence of your PIF at any time of your choosing but most importantly all legally. A SCF Seychelles PIF in many ways is similar to other SCF PIF jurisdictions but local legislation has provided a very flexible and user-friendly template.

The advantages of a SCF Seychelles PIF include:

* Initial Donations can be as little as US$1.00
* There is a local Statute of Limitations where-by transferred assets will be totally protected after the expiry of a 2 year period
* Local banking facilities include such British banks such as Barclays Bank
* Absolute confidentiality as only the PIF Charter is publically recorded and not the much more expansive SCF Regulations
* You will no longer be the ‚Äòultimate beneficial owner’ of any transferred assets
* Seychelles PIF’s can be used to reduce ‚Äòsurplus’ assets before a marriage
* They prevent further taxation or at least double taxation of PIF assets
* They are generally no more expensive than setting up a basic IBC company structure whilst ‚Äòtraditional’ PIF jurisdictions such as Switzerland and Liechtenstein would cost multiples of the amount for a Seychelles PIF
* They can be ended at anytime by the Founder of the PIF
* SCF Seychelles PIF’s have anti-flea or duress clauses where-by if anyone or indeed even a court demand that you close or otherwise act against your own declared interests or desires (save for illegal activities) the Foundation Council will be obliged to ignore your instructions
* SCF Seychelles PIF’s can be drafted to meet your exact needs
* SCF Seychelles PIF’s can act very much like trusts but often avoiding probate, capital gains and inheritance tax issues

Why an SCF PIF? Are they not the same as every one else’s PIFs? The answer is simply no! Only a SCF PIF will come with SCF ‚ÄòRegulations’ that have been drafted by our in-house lawyers who have over 15 years experience of drafting such instruments and further can create any ‚Äòbespoke’ changes you may require especially when there are a number of potential beneficiaries.

Our people are a bit less blatant, but that is the game they are competing in.

Ugh, It's Him! said...

I can spell better than I can type. Apologies to pedants for the way I spelt "egregious" in the last comment just now.

Anonymous said...

"The lady doth protest too much, methinks."

Anon’s intellectual defence of the finance industry and its benefits to Jersey ends up in personal abuse. Why? Is it because there is no defence possible and personal sniping is the only substitute? Shoot the messenger of unpleasant news.

With living standards falling for working people in an enviroment of rising unemplyment, rising inflation, stagnant wages, no pay rises, GST increases etc, who exaclty is benefitting? The divide in wealth is widening and working people are suffering.

Anonymous said...

Are you seriously trying to criticise what Jersey does by suggesting that we offer competitor business to that which is described by that document from the well known and meticulously regulated offshore finance location, The Seychelles, which looks like its been written by an eight year old ?

You are unwittingly demonstrating a severe lack of understanding about what actually happens here. If you want to garner support from anybody in criticising the industry, why not try and educate yourself a little about what the industry actually does before making such ridiculous comparisons, otherwise nobody with any knowledge is going to take you remotely seriously.

Ugh, It's Him! said...

Actually SCF are a London firm, like the parent companies of most of our own finance industry. Yet, if you read through a few marketing pitches for Jersey offshore finance companies, they are offering similar facilities, even if they are more coy about suggesting why the client might want such things.
Jersey's reputation may not, or not yet, have sunk as low as the Seychelles, but it is not a whole lot better. And when Richard Murphy suggested Jersey could do more to make operating through Jersey a sign of squeaky-clean honesty of the clients, you all told him no, he doesn't understand that that would miss the point. So, I think a lot of the money in my pocket did come here originally through scams and shams to keep other money out of the reach of those with a legitimate claim on it, and, while I don't lie awake over it, I am not quite happy about it, either.