Cash & Investment Management

Isle of Man Budget 2017

Tuesday 21st March 2017

At-a-glance

  • 5% GDP growth in real terms (35th year of positive growth).
  • 1.3% unemployment rate (38% lower than the rate recorded in December 2015).
  • 5-year £388m capital investment programme to invest in the island’s infrastructure (£88m budget for 2017/18).
  • £11m additional funding for Heath Service.
  • Commitment to making an additional £25m of savings by 2021/22.
  • Establishment of a £1m Brexit-related fund (with further funding anticipated).
  • Personal income tax allowance increased by £2,000 (from £10,500 to £12,500).
  • Tax cap incrementally raised to £200,000 over the course of the parliament (150k in 2018/19, 165k in 2019/20 and 200k in 2020/21).
  • Maximum permitted deduction for nursing expenses increased from £9,300 to £12,500.
  • Maximum deduction for interest paid on loans or mortgages reduced from £7,500 to £5,000.
  • Child benefit raised 2% (first increase in 7 years).
  • Basic state pension to rise by 2.5%.

 

Despite some headline-grabbing measures to support working people and families, this budget appears to be a continuation of the fiscal rebalancing process necessary to return the island’s finances back to a level footing. Mr Cannan should be commended for his efforts to implement a more transparent budgetary process, with further steps made to reform departmental funding. Moreover, the introduction of a five year £388m capital programme is a welcome attempt to break from previous budgets dominated by a need to focus on cost savings.

Overall, economic fundamentals remain robust with a headline growth rate of 5% in real terms and an unemployment rate of 1.3% as at the end of 2016 – a figure that equates to a 38% reduction over two years. A tighter labour market appears to be gradually feeding through into wage growth, with a 2.2% rise in earnings reported for 2016. With more recorded taxpayers, both Income Tax and National Insurance receipts rose from the previous year.

There has been some minor criticism that the budget does not go far enough to redress legacy issues, the theory being that the first budget of a new administration represents a golden opportunity to make tough and possibly unpopular choices. Also, there was little detail on how departments would instigate further cost cuts including £25m of unallocated savings that need to be found by 2020/2021. Given that departments have been asked to make savings for some years now, one would assume that incremental cost efficiencies are becoming increasingly challenging to find.

The looming public liability creating by the depletion of the Public Sector Pensions Reserve Fund is something that must be managed carefully in order to shield taxpayers. The reserve fund is estimated to be depleted at the end of the current parliament, at which point the ongoing liabilities will drop into the requirements for day-to-day spending (creating a £58m revenue liability). Measures have been taken to achieve a more equitable solution between the public and private sectors, including capping the commitment to fund public sector pensions at 15% of the total salary bill and requiring public sector workers to make higher contributions as well as working longer.

Whilst the announcement of a £1m Brexit fund suggests proactive planning, the Isle of Man’s relationship with the EU is dependent on the arrangements negotiated by the UK and thus the island is at the mercy of external forces in this regard. At present, there may be ramifications for industries such as aircraft, shipping and yacht management plus other sectors that are exposed to potential changes in access to the European markets. A recent report from the Council of Ministers concluded that they could not foresee any opportunities arising from Brexit, therefore, this fund is aimed solely at addressing any issues that may arise.

With regards to VAT, once the UK exits the EU, it will no longer be bound by EU VAT directives and could implement changes. The current administration will be following these negotiations carefully, however, for the sake of continuity, we do not expect any significant changes to occur in the short term.

The incremental increases in the tax cap over the parliament were made in the interests of fairness according to Mr Cannan and still compare favourably with other jurisdictions. Whilst the number of tax cappers appears to be falling (based on slightly old data), the Government claims to be focussing on wealthy individuals who will contribute significantly to the economy. They need to continue this approach by attracting job-creating entrepreneurs to the island.

There was only a brief mention for the £50m Enterprise Investment Scheme (EIS) set up to provide IOM-based businesses wishing to grow with access to capital. The fund was launched in June 2016 and there appears to be little information available as to its impact so far. Also absent from the budget, to the disappointment of some, were plans for a ‘pension bond’ issue designed to attract Manx savers whilst also providing relatively cheap financing for the government.

Finally, the business community, amongst others, will be pleased to see a commitment to improving vital sea and air links, with the acquisition of land in Liverpool for docking facilities and runway and landing system improvements at Ronaldsway.