The Budget this year provided for a limited rise in government spending compared to last year.

The biggest increase in Consolidated Fund charges is the cost of servicing the public debt which has risen in two years from £5 million to £15 million.

The total debt at almost £450 million in 2010/11 is up from £61 million in 1996/97.

This is the gross debt, without deducting the unspent cash that the Government has in the kitty at any given time, which is the way the debt was calculated until the law was changed in 2009.

 

Until 2008 the position of the Government was that expressing the gross debt as a share of the GDP was the prudential way to measure our state of indebtedness.

In opposition the view of the GSD was that a gross debt of £100 million was a millstone around the necks of future generations of Gibraltarians.

The public debt of Gibraltar, unlike that of other countries, is not the result of the world financial crisis. In other countries it has resulted from the need to bail out failing financial institutions. Here it is being used to pay for a construction programme which this year alone, is budgeted at £150 million.

Spending such huge amounts of borrowed money in one financial year means that Government’s spending, is itself the source of a big part of the growth in the economy, instead of inward investment by the private sector.

It can produce a false picture of the reliability of future receipts from the activity of the construction industry.

In the past when capital spending was 20% of this figure the low level was defended on the grounds that too many building projects at the same time would result in higher prices being charged and lower quality of workmanship being delivered.

Like the example on the correct measurement of the debt, the explanation changes to suit what the Government wants to “sell” to the Public at any given point in time.

If we move on from the public construction programme, of which the most expensive item is the Air terminal and associated road works, the activity in the rest of the economy is dominated by the level of employment in internet gambling companies and the retail sector.

The retail sector activity is reflected in two indicators. A slight increase in non-Gibraltarian employment levels which will produce some increase in PAYE and a huge increase in the receipts from Import Duty now estimated to bring in £72 million pounds. This is the result of annual increases in the rate of Import Duties, primarily on tobacco and petrol, with no effect on the volume of sales, which if anything has gone up.

The gaming companies show a bigger rise in jobs, again for non-Gibraltarians and therefore an increase in PAYE to the Government.

At this point, this year’s budget, stops being like any other year.

This year was heralded as the year of the transformation of our economy.

We are now no longer a Tax Haven, no longer Offshore and we are now an on-shore main stream Finance Centre.

The Finance sector has actually shrunk in numbers employed in 2009 compared to 2008.

The economy is current predominantly dependent on sales of cigarette and petrol, internet gambling and public construction projects, funded by borrowing.

These produce the bulk of the employment levels of the Private Sector and main source of Government revenues.

The big change this year was supposed to be the conversion into fully taxed companies paying 10% on their profits from the 1st January 2011 of previously Exempt Companies paying zero tax on profits and a flat rate fee, which produced around £2 million,.

The need for this change to comply with an EU decision, which requires Exempt Companies to be phased out, has been known for years.

The Government’s plan response was supposed to be a system which would be revenue neutral. The local small businesses would finish up paying less and the offshore sector would finish up paying more. So how come we seem to have finished up the other way round?

That is the big unanswered question in this year’s budget!

The Government originally spent a huge amount of money devising a zero tax scheme for company profits with a tax on employment and an increase in rates. It then abandoned this in the face of EU opposition to the scheme and replaced this with a uniform tax rate of 10%.

This year local businesses have finished up with a scheme that appears to have a tax on profits, an increase in employment costs and an increase in rates. But what about the revenue from the former Exempt Companies?

Where is that shown and how much is it?

The Government’s sole explanation and justification of the budget increases is that the move in January to 10% from 20% will reduce the tax take on company profits by £10 million or possibly even more. When asked to explain how this was calculated and if this was the net loss after taking into account the increased revenue from the 10% of the new on-shore companies of which some 20 with 2,000 employees are in the gaming sector, there was no answer.

No one knows how the £10million loss has been calculated.

The off -setting of the £10 million estimated loss is what the Government says it cannot “take on the chin” and has to recover by raising alternative charges that have to be met by the local businesses to provide for the shortfall.

The argument that many local companies may not be able to bear their share of making up this £10 million loss of income, was brushed aside in the budget on the basis that the local companies were forever, constantly tittering on the edge of going into the red. A joke widely applauded on the Government benches, which seems to suggest that this picture is false; that fat profits are being made and not declared.

Moreover, the Government then went on to make clear that if the state of part of the private sector really is that they are tittering on the edge, then helping them to survive was not the role of Government. Businesses that could not make profits by the rules of the market should either switch their trade or shut shop, we were told.

In the same breath the Government announced that the tender system for construction work was to be suspended, to give work to local construction companies that cannot compete in spite of a constructing boom created by £150 million Government spending.

So those tittering in the construction sector will be saved, but not others.

The Tax system, the law on illegal employment and the statutory minimum wage are now going to be enforced in earnest and not in the benign manner of the last 14 years.

Applying the law benignly, meaning turning a blind eye to people getting away with breaking it, seems a strange thing for a Government to own up to, especially after claiming some years ago that they had successfully eliminated the illegalities, particularly in the employment field.

A budget that follows another year that has ended with a £30 million surplus and is estimated to achieve £13 million in the current year, after a £10 million drop in company tax, does not sit well with the message of a need for a huge tax collection effort to raise money, being required to balance the books, especially when suddenly many more, big businesses, are due to start paying, for the first time on the 1st January.

If the Government fails to explain why it needs to do all these thing and puts up a smoke screen, could it be that the economy is not as healthy or as sound as we are being led to believe?