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Treasury Minister Alf Cannan delivered his 2018 budget yesterday, which was approved by Tynwald by 20 votes to 4 after a six-hour debate.

Revenue for the year is projected to exceed the 2017-18 budget by £24 million (2.3%), giving the Treasury a welcome boost and enabling the Minister to both increase funding for public services by £13.8mn and to increase Child Benefit by 3.3%, while at the same time increasing the personal income tax allowance by £750, to £13,250.

There is little change in strategy with the Treasury aiming to restrain the expenditure increases to roughly 1.25% per annum below revenue growth over the medium term in order to reduce the structural deficit, which has stayed relatively unchanged at 8.9%, but is forecast to fall to just 2.2% of operating income by 2022-23.

With modest increases in tax allowances, the Government’s revenue growth is entirely dependent on the growth rate of the Manx economy, and in particular, the total level of employment and consumption. Unfortunately, the Treasury do not publish GDP forecasts. Indeed, the latest release in October covered the period 2015-16 and showed the first annual fall in national income for 32 years, with GDP down by 1.5% and, more worryingly, GNP down by a massive 4.0%.

Given the improved revenue forecasts for the year, we can assume that the economic backdrop has improved somewhat over the last two years and the growth in employment is particularly notable. However, Government revenue is projected to increase by only 1.5% in 2018-19, before accelerating to 2.4% in 2019-20, 3.3% in 2020-21, and finally to 2.5% in 2021-22. This suggests that the Treasury is not expecting the Manx economy to return to its longer-term trend growth rates of 4-5% any time soon.

Lacklustre growth would be particularly concerning if the recent pick-up in inflation is sustained for any length of time. Inflation in 2017 reached 4.1%, although this eased modestly in January to 3.8%. Against this backdrop, modest increases in public sector spending (circa 2% for Health and Social Care) will not feel like increases, and public sector pay increases of 1% this year, and 2% thereafter, will increasingly feel like real terms cuts that may quickly become politically unacceptable.

Therein is the tight rope that the Minister must walk. Total Government spending is projected to be £12,667 for every man, woman and child on the Isle of Man. This is an extraordinary figure, equivalent to £50,668 for the average family of four. Perhaps even more remarkably, 30% of this total is spent on the state pension and public sector pensions. This is roughly equivalent to the total amount spent on Health and Education combined. It is difficult to imagine that expenditure at these levels is sustainable without the high levels of growth we have become used to, but which now appear elusive. In this context, a significant proportion of the revenue boost reflects increased receipts from National Insurance contributions; should high levels of employment continue, this will raise revenue and support the budgeted expenditure.

In response, the Treasury has sensibly boosted its capital spending programme significantly; more than doubling the budgeted spend in 2018-19 to £117 million- with £428 million budgeted over the next five years. This is a significant increase, and would provide a welcome boost to the economy if the programme can be delivered successfully. However, the Treasury’s own analysis suggests that the actual figure is likely to be around £62 million this year, rising modestly thereafter to reach circa £320 million over the five years.

In summary, the Treasury Minister has succeeded in delivering a budget that has been broadly welcomed by MHKs whilst remaining prudent and on track to reduce the structural deficit over five years. The real challenge is how to boost growth upon which the current strategy depends. Increasing capital spending will help, as will growth initiatives such as the Enterprise Development Fund, yet the Treasury must hope that the general improvement in global growth will boost growth rates in the Isle of Man to ease the pressure on Government finances.

Key features of the 2018-19 Isle of Man Budget include:                      

  • Personal income tax allowance increased by £750 to £13,250
  • Child Benefit to rise by 3.3%
  • £13.8 million additional departmental funding
  • £117 million capital spending rising to £428 million over five years
  • Continuation of 1% cap on the budget for Government staff pay awards for 2018/19, rising to 2% from 2019/20 allocated on the basis of need
  • The introduction of new pension freedoms
  • Pension triviality limit increased to £100,000
  • Basic state pension to rise by 3%
  • A range of other benefits to increase by 3.3%
  • A top up of £1 million for the Brexit Fund, for the continued negotiations arising from the UK’s departure from the EU
  • The benefit in kind incentive to encourage cycling to work to be extended to include electric bikes