Jersey Fiscal Policy Panel publishes Annual Report

Dame Kate Barker (pictured), the Panel’s Chair, said: “Whilst the global macroeconomic outlook has worsened, Jersey’s economy is in a good position to weather global shocks.”

The Panel’s forecasts for economic growth remain broadly similar to those produced in July 2022. This year the economy is forecast to grow by 2.5%; a slight downwards revision to the FPP’s July forecast.

The economy has recovered well from the Covid-19 pandemic with the number of jobs back to pre-Covid levels, vacancy rates high and unemployment low. However, there is now no spare capacity in the economy and lack of spare capacity will be a constraint over the Government Plan period. Inflation has risen since July, and the Panel forecasts RPI will peak towards the end of this year at 12% before falling back.

Dame Barker, said: “Jersey is in an unusual situation. The economy is strong and interest rates rises will drive higher profits in the financial sector which will, with a lag, result in higher tax revenues. At the same time, high inflation and rising interests are likely to create more immediate pressures for some households.

“The FPP advises the Government to use much of the resulting surpluses to rebuild the Stabilisation Fund and Strategic Reserve. Both are depleted and the Strategic Reserve is significantly below the level recommended to meet a major crisis.

“Additional spending and tax cuts are not prudent given the stage of the economic cycle. They pose a concern to the future sustainability of Government  finances and are likely to add to inflationary pressures. They will also limit the ability of the Government to provide targeted support or fiscal stimulus quickly should the economic outlook deteriorate.

“There are a number of longer-term issues that need early consideration. In particular the cost of housing is a risk to economic growth and should be addressed as a priority consistent with the Government’s strategic aims.”

The Panel’s full set of recommendations are:

1. Fiscal Strategy. The economy has grown strongly but global conditions are clearly worsening. The fiscal strategy needs to steer a careful course between avoiding a sharp downturn and not overheating the economy. Such a course is not easy to judge but the current strong fiscal position provides an opportunity for the Government to rebuild reserves and to provide targeted support for those most affected by the changing economic conditions. Capital projects should go ahead as planned. Government should ensure that other spend undergoes economic impact appraisal and that it is  appropriately scheduled to minimise the risk of overheating the economy.
2. Fiscal spending. The economy remains strong with little spare capacity and unemployment at historically low levels. The Medium-Term Report argued that this was not the time for significant across the board additional spending or tax cuts. This remains the case. It would be prudent to reduce “growth”  expenditure in the early years of the Plan to strengthen reserves which may be required in future years.
3. Inflation. Alongside the overall picture, some households will be more adversely affected from high and rising inflation and from rising interest rates. Government should prepare to react quickly again to provide additional targeted support should it be needed and to offset any short-term risk to consumption.
4. Funds. Looking further ahead, long-term risks remain and Government should increase the balances of both the Stabilisation Fund and the Strategic Reserve. The Panel re-iterates its recommendation from the summer: with the Covid debt being paid off this year, it would be prudent to allocate surpluses and receipts from Prior Year Basis liabilities to increase the Funds’ balances.
5. Objectives of Funds. The Government should ensure objectives for the Funds are clear and should adjust policies in line with objectives. This will be particularly relevant after the actuarial review of the Social Security Funds.
6. Housing. The cost of housing remains a risk to economic growth. This should be addressed as a priority and consistent with the Government’s strategic aims. Interventions which boost short-term housing demand and support prices artificially are not desirable.
7. Capital programmes. The Government Plan addresses the historic tendency to submit overly-ambitious timetables for capital projects. Care should be taken to ensure that major capital projects do not overlap, and consideration should be given to identifying smaller projects which could be paused or implemented quickly to support the economy.
8. Value for Money. The Government Plan includes Value for Money targets for 2023 and 2024 that look are realistic and achievable. However unspecified measures have been included for future years. Speculative measures should not be included in the Government Plan. They may lead to pressures in later years if they are subsequently not found.
9. Net zero. The Climate Emergency Fund will not be sufficient to finance the transition to net zero which will require the careful use of both taxes and expenditure to create the right economic incentives. The government should consider the strategy for financing these challenges.