Isle of Man Budget 2017

Home Publications Isle of Man Budget 2017

 The Treasury Minister has presented his first budget and there is much to be applauded, but also some areas of concern.

It is great to see that the Island has had another year of positive economic growth, this does seem to be concentrated in certain sectors and not particularly apparent in the domestic economy which is a concern, but we should be proud of another year of growth.

Growing the economically active population is a critical element of the plan to rebalance government finances and also to help deal with the challenges of the move to an older population with greater needs for health and social care provision.  The budget statement confirms that there are 500 more taxpayers compared to this time last year, which is great news.  For the overall plan to succeed, we need to see at least that level of net inward migration every year, coupled with overall economic growth of 2.75%.    

It will be interesting to see the results of the census when they are released, anecdotal evidence points to a fall in the population, which might make the challenge of continuing to grow the economically active population more difficult to achieve.

In terms of business growth, one barrier, to all sectors, seems to be a shortage of skilled staff. In the long term there is a challenge for the education system to offer courses and qualifications to meet the needs of local employers, and we have seen many positive moves in this area in recent years.  In the short term it is vital that the work permit system, and the affordability and availability of housing and office space, do not continue to be a barrier to local businesses, and inward investment.   The efforts of the Department for Economic Development and the effective application of the Enterprise Development Fund will be key in delivering this growth.

The headline grabber in terms of specific changes in taxes and rates was undoubtedly the increase in the personal allowance from £10,500 to £12,500 per taxpayer from 6 April 2017, meaning that the Manx allowance will for the first time since 2012/13 exceed its near neighbour in the UK.

The corresponding reduction in the 10% tax band by the same £2,000 does diminish the overall tax saving created, but should still lead to many taxpayers being £200 a year better off.

Interest relief on loans taken from Manx lenders has been reduced again so that only £5,000 of interest qualifies rather than £7,500. With only 10% tax relief given and this being a deduction against chargeable income rather than a deduction from the taxpayer’s tax liability, the actual benefit of this, although still welcome to some, has been materially eroding over recent years.

It remains to be seen how many employers will offer their employees a new bike and equipment worth up to £1,000 so they can enjoy the tax-free benefit in kind introduced in the Cycle to Work Scheme.

There were no proposed increases in employment National Insurance rates (so the upper NIC rate of 1% is still lower than the rates in the UK) and a £1 a week increase in the lower earnings limit saves most employed people a few extra pounds a year. Not so happy perhaps will be self-employed individuals who, granted, finally see the end of the need to pay Class 2 NIC from April 2018, but equally will see a 3% rise in their basic Class 4 NIC contribution requirements, an increase which could lead to an extra liability of over £1,000 per annum. Class 4 NIC contributions do not carry the same statutory benefit rights as employed individuals enjoy, so it must be hoped that there is some reworking of the benefit rights assigned to Class 4 NIC payers because of this rate increase.

The political fever surrounding the tax cap came to the fore. With decreasing numbers of ‘tax-cappers’ (under 50 according to Government figures) the tax gathered by the cap is comparatively small. The cap payable is due to increase in stages from the current £125,000 p.a. to £200,000 by 2020/21. Most of the current tax-cappers will have entered into a 5-year election which expires on 5 April 2019, presumably meaning that if they want to reapply for a 5-year tax cap, they will re-enter it at the £175,000 p.a. level, incurring an extra £250,000 over the life of their second capping election. Some taxpayers will accept this, while others may look to maximise the current cap they enjoy to ensure that they do not need a second capping election, which in turn would see a loss to Treasury.

The committed infrastructure spending should also be welcomed.  If this is properly managed, and work is awarded to local contractors wherever possible, then we should all benefit from the trickle down / multiplier effect of local spending.  Appropriate infrastructure spending should also help attract new businesses and residents to the Island, thus supporting the overall aim to balance the books.

It is clear that the public sector pension funding remains a key challenge, and one where we do not yet have an overall plan.  The reserve will be exhausted by 2022, and then there is an additional annual cost of approx. £55m which will have to be funded from general revenue.  This remains a key challenge for the current Government.

In terms of the overall position, in headline terms it is a concern that there is no realistic prospect of a balanced budget before 2022, but our government is not alone in facing challenges over this time scale, however unlike the UK we cannot rely on debt so we do have to have arrive at a position where we can live within our means.

There are various different measures in the pink book but it is clear that approx. £330m is planned to be transferred from reserves between 2016 and 2022.  This is on the assumption that the economy (including our share of VAT receipts) continues to grow.  £170m of the total is the depletion of the pension reserve over the next four years.  This is offset by underlying growth in the National Insurance Fund, and other reserves too.   If we consider the NI fund to be ring fenced for specific expenditure then we are looking at a real decline in non-ring fenced reserves of £67m over the next four years.

So, in conclusion, the main messages coming out of the Budget speech are not a surprise.  We need significant growth in the economy and the economically active population over the next five years. Neither of these will be easy to deliver, but it is positive that Tynwald has adopted a budget with these as central objectives.