Budget Observations

I have been accused recently of criticising the Chief Minister ("CM") over form rather than substance on the subject of the budget and his speech. I make no apology for doing so. I believe that form, especially form and behaviour that has the characteristics that I have highlighted, is of extreme importance. It is different aspects of the behaviour of our politicians that gives an insight into their character such as enables the electorate to make a choice as to what type of individuals they wish to elect into Parliament and to potentially be a chief minister.

I felt it more important to prioritise that debate whilst it was fresh in people's mind rather than deal with substantive aspects of the budget about which we are reminded throughout the year because of the recurrent nature of budget details, as money is raised and spent. It is also a question of demands on my time. I have now had the time to dedicate to substantive issues on the recent budget.

Clearly the GSD government have had a budget strategy for many years that has delivered tax cuts and increased public expenditure, capital aspects of which have been funded in part by borrowings. This strategy has been highly beneficial to date but could have been improved if the Opposition had been more focused in its criticisms. Tax reductions are always welcome but they can only be welcome by those who are earning taxable income.

It is the responsibility of governments also to protect and help the less fortunate minorities that do not benefit from tax cuts because for whatever reasons, they cannot earn taxable income. I believe that there is massive room to look into how our social cases are financed. A root and branch reform of those could deliver more and better help at a lower cost and avoid abuses that exist today. They are the partly forgotten few in most budgets because helping them does not significantly improve the votes any party receives.

Has it been a good budget? Undoubtedly it has good aspects but that does not mean it is rendered free of criticisms. The opposite is also true, that because aspects can be criticised, it does not mean it is a bad budget. It means that either it can be improved on or that someone else would have done things differently.

One aspect that I always find odd is that there is a tendency to confuse the budget (government revenues and expenditure) with the economy. They are two very different things. Undoubtedly the budget impacts on the economy, to the extent that tax measures and government expenditure stimulate or stifle the economy. The opposite is also true, without a buoyant private economy there will be nothing to tax because profits and employment dry up. It is an aspect that is so frequently forgotten by governments, namely that the private sector and its success is what renders a government successful in the economy.

It is worth analysing the boasts of the GSD Government bearing the private sector in mind. Economic growth is driven by private sector entrepreneurship. The CM made the statement that "... the government is proud of its economic record". I beg to differ. It is the private sector that should be proud of Gibraltar's economic record not any government. Governments influence the ability of the private sector to deliver economic growth and create the environment within which it can do so. In this context it is always good to remember that a government's room to manoeuvre is limited by the parameters needed by the private sector to function, without a functioning private sector there is no economy from which tax revenues can be raised.

Gibraltar's economic success is down to several well known components of the private economy. The construction industry, which is now hugely dependent on public expenditure, how long can this continue for? The gambling sector, what any government can do has been done, all that is required is continued licensing of only the best players and impeccable supervision. The finance centre, about which the CM has admitted that Gibraltar's transition is now complete but which undoubtedly can be expanded with government sposored promotion.  The CM has helpfully announced in the budget that the Government will increase expenditure on attracting finance centre business. The tourist, retail and wholesale and the bar and restaurant sectors, which I group together because, in my view, they are each interdependent. In this sector what is required is constant fine tuning, subject to the frontier remaining open, fine tuning that all administrations have historically undertaken and committed to. Lastly the fuel and bunkering sector, which again save for some occasional fine tuning, trundles along very nicely thank you very much and is supported by all politicians of whatever leaning.

It is not my intention to trivialise the importance of government's involvement in creating the correct environment in which the private sector can continue to grow our economy. This is especially important in matters of licensing by which government can stifle growth, for example, in the highly regulated finance industry. My point is that once it is done, it is done and any administration can continue or improve it. What we have to watch out for is that no replacement government spoils the environment by its actions or inaction. I do not see that this is actually within the realms of possibility, now. It happened once and the lesson has clearly been learnt.

The conclusion of this argument is that what one has to look at and analyse in assessing any government's performance is not revenue (whilst a government is not spoiling the economic environment) but rather what it is spending our public moneys on. It is easy to spend money badly and/or well when it is rolling in. I believe that  serious mistakes have been made by this administration on this side of the equation.

One mistake is not prioritising the right projects and prioritising the wrong projects. Another has been the various rescues of private sector affordable housing projects. I will not dwell on the cost that has resulted to the people of Gibraltar from the Government's intervention in these projects. These have already been publicised by opposition politicians and are well known to voters. If these mistakes were not to have been made, more money would have been available to be spent on other more worthwhile heads of expenditure, policies or allow for bigger tax cuts.

One such wrong prioritisation is the huge expenditure on the Air Terminal whilst ignoring Gibraltar's energy needs. Gibraltar is resorting to skid generators to meet its energy needs today. I do not know but this cannot be a cheap option for Gibraltar, both in terms of provision of equipment and in the ongoing cost of running that equipment. Provision of electricity in this way also cannot be very environmentally friendly. The excuse that environmental and planning issues have delayed the provision of the new generating station sound hollow to me. Gibraltar has known for nigh on 20 years that it needs a new power station. 20 years is more than enough time to have resolved all and any problems and to have delivered a fully working electricity generating station to meet Gibraltar's power needs.

The private sector cannot function without power. If the private sector cannot function, a government would not receive any revenue. Both can function without a state of the art Air Terminal. Which is more important to have done first? Keeping these arguments at the forefront of one's mind, does the justification by the GSD Government of their decision to prioritise the construction of the  new Air Terminal over and above a power station not begin to sound a little hollow? Will it really be a statement of Gibraltar's stature and international standing, as the CM has said? Or was it just the expensive keeping of a promise to Spain arising from the trilateral talks paid for by us?

My concern on this front is heightened when I take into account the figures that we now have as to the level of net public debt. The figures used are taken from the CM's budget speech. The net public debt stands at £216,700.000 (without taking into account any off-balance sheet borrowings structured through wholly owned government companies). The maximum amount that the Government is permitted by law to borrow, according to the CM,  is presently £305,000,000 of net public debt. This leaves a balance available to Government of £88,300,000, were it to decide to take the net public debt to its limit.

Well, my question is a simple one. Government has ongoing projects that it needs to finance, it also has to finance the construction of a power station, which I understand (from public sources) will cost in excess of £100,000,000. Where is this money going to come from without either increasing borrowings or (if there is limited or small growth in GDP) exceeding legal borrowing limits? There may well be an answer. The answer  may be to stagger the repayment of existing loans in tandem with drawdowns on any new loans. I would like to know whether this is the answer. It would also be good t know by how much the public debt may increase from time to time. Additionally, whether other projects will be put to one side or delayed as a result of the priority given to the Air Terminal.

The CM and the GSD has criticised the Leader of the Opposition for using per capita statistics to illustrate that the public debt is high. Unmitigated attacking of opposing views is a form of spin much liked by the CM, used by him defensively to deflect attention, when he is on his back feet. He has said that this statistic is not a proper measure of public debt. He has said that the impression has been given that each of us owe this amount and that people are frightened by this belief.

To say that it is not a measure of public debt is wrong, it is a measure that is used elsewhere. Anyone can Google "UK public debt per capita"; such a search will immediately produce many results. One of which is a clock that gives the increasing amount virtually by the minute. Undoubtedly, the per capita amount of public debt in Gibraltar is high when compared to other jurisdictions. The Leader of the Opposition is not an "economic illiterate" for having highlighted these statistics.

It is correct that each one of us does not owe this amount personally or directly. However we do owe it as a community. It can only be paid out of government revenues or renewed borrowings, subject to credit worthiness and availability in the credit market, which even the CM has admitted is tight. Government revenues are essentially direct taxation, which each one of us do pay, or indirect taxation which we and tourists pay. The Government can increase both and would have to do so if, instead of being in surplus, the budget goes into deficit, so in that sense each of us do owe and pay the public debt. Admittedly taxation is paid progressively so the wealthier would pay a greater share than the less wealthy.

Any answer given by the Government as to where the money will come from in future should make clear what, if any, reserves, Gibraltar has. The answer should also include the projections for reserves from time to time as expenditure that is already committed to is paid and required capital expenditure is incurred in the futrue, especillay on the new power station. There is a section in the CM's budget speech with the title "Government Debt and Reserves". There is no mention, however, of the subject of reserves in the speech.  The balance between the gross debt and the net debt is explained on the basis that this is money borrowed and kept in cash form by Government to give pensioners increased returns on their debentures. This being the case can it also be counted as reserves or as being available to meet future capital expenditure that Government is committed to meet? I would have thought not.

It may be that I am an "economic illiterate" also (after all I am a lawyer, just like the Leader of the Opposition but there again so is the CM) but those who are in power, those who have the obligation and responsibility to manage public funds (and so are hopefully "economically literate" or are surrounded by advisers who are) have a duty to explain to the electorate whether indeed there are reserves . In the end it is voters who provide the funds that the Government expends . It should apply the highest standards of a fiduciary nature when incurring that expenditure, supposedly in an open and transparent manner. Therefore it is to the electorate that the Government owes explanations. The electorate do not need to hear the vitriolic criticisms of the Leader of the Opposition that it has heard, in a reply to the Opposition by the CM in a reply that lacked sufficient explanations, irrespective of whether or not the performance of the Leader of the Opposition was lacklustre.

I now turn to the subject of our elderly and the ill. I am sure we all fully support the Government's initiatives to help the elderly, cancer sufferers and the mentally ill. It is salutary to see the provision of additional facilities for old people with moderate independence, a new centre for cancer relief and a hospice, a new mental health hospital, a home for people with seriously debilitating illnesses and a residential home for sufferers of Alzheimer's and dementia.

What is lacking in justification and discriminatory are the taxation benefits that have been provided to pensioners. It cannot be objectionable for a government to ensure that pensioners have what they need to ensure a comfortable lifestyle but they are being advantaged by this Government beyond what is reasonable. They have masses of tax relief, yet receive all the benefits of the State and more than all who have not reached pensionable age. Taxpayers subsidise the cost of increased interest returns paid to pensioners on their investments in government debentures, yet those pensioners, who can afford to and should pay tax, do not do so. Thus they do not contribute to the funding of these advantages. There are more and more pensioners and projections show that we will all live longer, how long can this be kept up? It is a vote catching exercise at the expense of younger hardworking taxpayers.

A government has to be responsible in the manner it gives tax benefits. Tax benefits should be across the board and equal for and fair to all. Advantaging a particular group is discriminatory and unfair and, if that group is pensioners, it will become over time too costly to sustain. The problem  is that once an electoral group has been advantaged, the political cost in votes makes it nigh on impossible to reverse the situation. This will only change when and if those working who are paying tax, thereby subsidising the excessive benefits enjoyed by pensioners, make it very clear that they will not tolerate such unfairness any longer. The unfairness is further exacerbated when one considers that many are better off retired than when they were working and paying tax. There is undoubtedly something wrong with that, something that, at some stage, the voters who are working and paying tax will  not condone further.

The use of tax money is an important subject, so is it right for a government to "invest" tax money in office developments? The first question is, will government be breaching its public covenant with the people by spending money compulsorily confiscated from taxpayers on what is not a communal purpose?  I would have thought they are but the debate does not stop there.

The CM has justified such an investment on various grounds. He says that the lack of office space will undermine our ability to attract business. Further that the lack of available bank finance or private finance should not stifle the creation of jobs and economic growth. These are valid arguments, save that, if indeed the demand exists it should be possible to find the investors to undertake the project, but these arguments miss the point. The criticism levied by opposing politicians to this policy also miss the point. The criticisms have, in the main, been personalised and been centred on not favouring a particular developer and development. This type of personalised criticism is not unusual in Gibraltar. I do not believe, however, that this personlaised line of argument is to take the debate to the right place.

This debate, in my view, should centre more on whether a government should be interfering and so distorting Gibraltar's traditional free economy. We do not live in a Communist state nor is the GSD a party with communist ideology. Special and careful consideration must be given before a government distorts free market forces. In this regard I agree with the Chamber of Commerce's criticism. There are many questions that come to mind arising from this Government's intention to involve itself in the financing of an office development.

Is it  not an interference with the legitimate interests and financial obligations of those who have already invested in offices without government assistance? What effect would the government investment have on them?  Why should they have not been favoured in this way in the past? What effect will this availability of extra office space have on existing rental levels? How will the developer who and development which is to be favoured be chosen? Will the process be open and transparent? Who will negotiate the terms of Government's investment and involvement? Will they be purely arms length commercial terms? Will banks, which have financed other developments, not be frightened off by government competing with them in the field of finance? Will potential future investors in property developments be put off by the fear of competition from Government? How will the Government's involvement be structured to avoid all these potential repercussions?  I fear that this policy has not been carefully thought through and analysed. The repercussions may be far reaching.

These are my thoughts on the recent budget. Is it a good budget? On the whole yes, it has good parts but it has many unexplained aspects and much about it that can be criticised. It seems that the debate in and out of Parliament has been superficial. The Opposition's analysis has not delved deep enough. Its criticisms have been light where they needed to be stronger and strong when they needed to be lighter. The CM took advantage of that failing. The result is that the CM has got away with it, again. Opposing politicians should not allow him such leeway. Gibraltar would be a better place if opposition politicians, in and out of Parliament, were to be more discriminatory and incisive with their criticisms of Government.