Isle of Man Budget 2016

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 The Treasury Minister has presented a budget which contains little drama in terms of changes to tax rates or headline services, there are some positive moves, but it does also highlight some matters of concern. 

Firstly, looking at the positives, the fact that this was a budget presented on the back of 33 years of continued growth is unquestionably a credit to the Island economy as a whole. The changes to income tax allowances whereby the 0% band increases and the 10% band correspondingly reduces will no doubt be a welcome benefit to the less well paid Island residents while not impacting upon those who earn in excess of £19,000.  Although most benefits remain unchanged, the basic State pension has been earmarked to increase by 2.9% from the week commencing 11 April 2016, equivalent to an increase of 3.35 per week.

We were anticipating developments on the extension of employee's National Insurance to workers who are above the State retirement age as this had been mooted during last year's Budget and consulted upon during the year; however this proposal has not been taken forward.  This is a surprise as it did seem equitable, we don’t think it is unreasonable for all employees to be treated in the same way, providing their extra contributions provide some benefit to them.

Another positive, from a business perspective, is the confirmation that there will be no changes to the company tax system.  This remains the cornerstone of our economy and key to the future as continued growth is identified as a key requirement to deal with the structural deficit.  Minor changes to the starting point after which National Insurance commences will have a very marginal annual saving for employees and a likely bearable cost to employers, but will align the system better and make it easier to administer.

Interestingly, and one to watch evolve, was the mention of Treasury investigating the possibility of issuing a public Bond system to support capital projects, in particular infrastructure and housing projects.  Separately Mr Teare announced that he hoped to present to Tynwald a final deliberation on the UK/Isle of Man VAT sharing negotiations which are drawing to a close, and although Mr Teare advised that the final adjustment would not have a material impact upon the Budget, he could not advise the Court further on whether this would be an immaterial increase or immaterial decrease in revenue, only that the immaterial change would be backdated to 2013/14.

Looking at some of the more concerning aspects of the detail set out by Mr Teare.

Over the next six years £365m is planned to be drawn down from reserves.  This is a staggering sum as it represents approximately half of our usable reserves (if the National Insurance fund is ring-fenced).  The overall strategy is now planning to eliminate the structural deficit over the next six years.  There are a series of caveats attached to that, one of the main ones being the assumption that the economy continues to grow and that increases in the population can be serviced by the Government without needing to increase Department budgets.  Linked to this, the challenges of an ageing population are highlighted as a significant long term pressure.  A significant increase in working population is required to deliver the economic growth we need (and to fund Government services).

It is clear that there needs to be a focus on the attraction and development of business which delivers real revenues to the Treasury, but also goes some way to rebalancing the demographic issues we have on the Island.  Increasing the tax-free relocation package employers can offer new employees to attract key workers to the Island from £10,000 to £20,000 is useful but needs to be built into an overall strategy to grow the economy through diversification, attracting key businesses and individuals to the Island and supplying adequate and relevant training to those living here.

So, the main message coming out of the Budget speech is that we need to grow the economy and the population over the next six years.  Neither of these will be easy to deliver, but it is positive that Tynwald has adopted a budget and a strategy with these as central objectives.

In addition, one other striking fact coming out of the Budget is that the Public Sector Pension Reserve will be exhausted by 2020/21, from which time deficits will have to be funded from general revenues.  Mr Teare refers to the need for an affordable solution to this problem, but there is no timetable for action to deal with it, presumably this will become the responsibility of the incoming administration after the General Election.

We still appear to be a long way from a properly balanced budget.