Isle of Man Budget 2015 - comment

Monday 02 February 2015

By Phillip Dearden, Director - Tax, Equiom Solutions

The highlight of the 2015 Budget is the revenue surplus forecast for 2015/16. Given that the various VAT adjustments were thought to have reduced revenue by over £150 million, this is a significant result.

The government has managed to balance its revenue account by holding expenditure roughly steady and allowing income to increase as a result of inflation, real organic growth and a VAT increase.

Unfortunately, this period of capping expenditure is not over. No company or country can continue on the basis of spending 100% of revenue earned - some replenishment of capital is needed. In any circumstances, some surplus would be needed to replenish Capital Assets; in the particular case of the Isle of Man there is also a need to fund the outstanding Public Sector pension commitment and also to fund repayments of the Manx Electricity Authority (MEA) loan – which are being made out of the Capital Account.

In political circles much is being made of the need to replenish reserves. In fact, cash-flow is the key requirement. The Government needs cash to fund capital expenditure, loan repayments and any annual deficit between pension contributions and pension payments. In the last three years, the Government has had a net cash outflow of over £300 million. The Treasury Minister has acknowledged that the difficulties are not over and now seeks to adopt a new long term plan that will get Government finances back into long term equilibrium. It is not possible to quantify the scale of the problems facing the Government without access to detailed cash-flow projections, but any solution is likely to require further efficiencies on the part of government in order to provide sufficient cash-flow.

In addition to increasing efficiencies, there are radical options which could be considered, which might include the following:

  • It has long been recognised that central Douglas needs improvement. A new plan has been promulgated but unless a significant investor gets involved, these plans may not progress. The government could use some of its investment funds to invest in local infrastructure i.e. as lead tenant/investor on some, or all, of the bus station site. This would be done as a commercial project with a view to obtaining a commercial return, but with the dual added benefits of re-energising the local construction industry and re-generating our capital.
  • Significant monies have been expended in repaying the MEA loan; over £100 million in the last five years. One idea of the previous MEA administration - that appears not to have been widely approved of by the current regime - is that a business such as the MEA needs a certain amount of permanent capital, which could be obtained by issuing loan notes or preference shares that either never need to be redeemed or could be redeemed over a long term period, to tie in with new capital requirements as machinery needs to be replaced. This would relieve a significant burden on the capital account.

In summary, balancing the revenue account is a significant achievement which demands recognition. However, the job of achieving a stable equilibrium for government finances is not yet complete and will require both further efficiencies and imaginative solutions.