Feetham urges public to weigh service expectations against cost

Nigel Feetham, the Minister for Justice, Trade and Industry, is unabashedly proud of his tax policies and their impact on Gibraltar’s public finances in the last financial year.

Enforcement and compliance work to address the ‘tax gap’ – meaning the difference between what the tax authority believes is owed and what is actually collected - generated over £50m of additional corporate tax receipts in 2024/25, bringing the corporate tax total to £212m for the year.

Coupled to a further £262m in personal income tax, the total tax revenue collected in the 2024/25 financial year reached a record £474m.

But public finances continue to face budgetary constraints as the economy recovers from the pandemic period and Gibraltar prepares for a UK/EU treaty that will reshape this community’s relationship with neighbouring Spain and the wider EU.

In that context, Mr Feetham says, demands on the public purse must be properly understood by all in this community.

Mr Feetham was speaking to the Chronicle late July, before Unite the Union’s warning last week of industrial action across the public sector over the pay increase announced in the Budget, which many of its members have rejected.

He said the public sector pay increase was agreed within the budgetary constraints of what the Government was able to deliver.

There are some 6,000 employees in the public sector, most of them Gibraltar residents, and their salary bill totals nearly £20m per month, or about £240m annually.

“Before you spend any money on anything else, before the Government allocates any funding for anything else, namely the public services of Gibraltar, education and everything else, the Government needs to put aside roughly £240m,” Mr Feetham said.

That means almost the entirety of PAYE collected by the Government annually - £262m in the last financial year – goes towards payment of public sector salaries.

Factor in additional costs such as public sector and state pensions, which amount to some £93m a year, and that presents a challenge for any government.

“Before you spend and you allocate any funding for anything else in Gibraltar, you’ve got to come up with roughly £340m”, or nearly 40% of total Government revenues last year, Mr Feetham said.

“At some point, people need to take a decision of what services they want versus what amount of money they're prepared to pay for it,” he said.

“And paying for it either means that you borrow money in order to be able to provide the services, or you raise it through some form of taxation.”

“Because there are three budgetary levers that any government can apply.”

“You either raise tax revenues, which is what my tax strategy has done without raising the rate of personal taxation; you either cut public expenditure; or you borrow money.”

And while in the last financial year corporate tax revenues were sharply increased through enforcement action, this is unlikely to be repeated again in coming years.

There are numerous initiatives under way to increase economic activity in multiple sectors, but these will take time before they generate additional income for the Government.

In the interim, understanding that tension is vital if Gibraltar is to sustain the level of public services it has become accustomed to, while avoiding any increase in personal taxation.

“At some point, people need to decide what services they want versus what they are prepared to pay for it, because it's got to come out of something,” Mr Feetham reiterated.

“And you cannot be borrowing money indefinitely and you certainly cannot be borrowing money to pay recurrent expenditure.”

“So it can only come from raising tax revenues.”

“Raising tax revenues and the way that I've done it for my tax strategy, but if I hadn't been successful, I would have had to do what the UK government is doing, which is raising tax rates and what the US is doing, which is raising tax with a different formula [a reference to President Trump’s tariffs].”

‘SWEET SPOT’

Mr Feetham, who spent over three decades as a lawyer in the financial services sector before standing for election, is openly passionate about economic theory, a subject on which he has written three books.

Talking to him about tax and economics is akin to sudden immersion in the subject.

The tax strategy he devised involved very fine balancing to ensure Gibraltar was able to generate additional company tax revenue while remaining attractive to companies.

“The one thing that I asked myself, the question in the strategy I devised, was at what point is this going to be the breaking point for a company?” Mr Feetham said.

“At what point of whatever I do will it be the breaking point for somebody to then say, the benefit of being in Gibraltar just doesn't justify economically the tax which the minister is raising?”

The goal is to optimise tax revenue while ensuring sustainable economic stability and financial prosperity.

He cited the work of American economist Arthur Laffer, who used the work of earlier scholars going back to the 14th century to develop what is now known in economic theory as the Laffer curve.

The premise is relatively simple: If a tax rate is zero, tax revenues will also be zero. At the other end of the curve, if a tax rate is set at 100% of profits, tax revenues will also be zero because nothing will work.

The key is to find the point in the curve where tax revenues start declining.

And while the Government’s handling of public finances has been criticised by the Opposition over concerns about financial waste and abuse, the pressures on the public purse are not unique to the Rock.

Across the world, Mr Feetham said, governments are grappling with the same dilemma and are faced with limited options.

In many cases, that debate is leading to higher tax rates.

In Gibraltar, the opposite is true and, to date at least, personal tax rates have instead been lowered, with the onus placed on corporate taxes and ensuring big business contributes its “fair share” to the public purse.

In 2024/25, the strategy led to what Mr Feetham described as “the largest single-year transfer of wealth from big business to the public purse in Gibraltar’s history”.

But such revenues cannot be easily replicated.

“I have found the sweet spot but what I have said in Parliament is that there comes a point where I can't do more,” Mr Feetham said.

“In other words, there comes a point where if I tip it, then it produces the opposite effect, which then means that we've got to decide how we manage the expenditure, because otherwise, how do you do it?”

‘ELECTORAL CYCLE’

The next phase of the Government’s tax strategy focuses on implementation of legislative and policy measures that were introduced in recent months but have yet to deliver practical effect.

It identifies and targets loopholes to tighten safeguards against aggressive tax avoidance, ensuring government revenue is protected and optimised to sustain the delivery of public services and infrastructure, driving Gibraltar’s overall economic development.

One aspect is the new corporate 15% tax rate, which mirrors the OECD global minimum. The effect of this increase has not yet materialised in terms of tax revenue but could provide uplift as from the current financial year.

Another element is a change to legislation that allowed companies to carry losses forward. That legislation meant companies were not paying tax even if they became profitable because of the losses accumulated in preceding years.

The new legislation, similar to legislation used in the UK for banks after the economic crisis, means companies will have to pay tax on 50% of any profits, with the other half eating into accumulated losses.

There has also been targeting resourcing to boost inter-department cooperation and strengthen enforcement and compliance, particularly in light of Gibraltar’s commitment to maintaining the highest international standards on financial transparency and anti-money laundering.

Gibraltar, like every other country, faces increasing demands on public expenditure across key areas such as healthcare, education and infrastructure, much of it driven by an ageing population that lives longer.

Mr Feetham said the Government’s policies aim to foster a change in taxpayer behaviour that emphasises that businesses operating from Gibraltar and generating substantial profits here have a duty to contribute fairly to the public purse.

“I am not prepared as a matter of government policy for a company to be licensed and regulated in Gibraltar, but for the Government of Gibraltar to have none of the economic benefit of the company being based in Gibraltar,” he said.

But in times of global upheaval and both internal and external pressures, the challenge for governments is how to balance budgetary constraints with voter expectations.

“The problem is the electoral cycle, let’s be honest about it,” Mr Feetham acknowledged, repeating once again a message he was keen to underline lest it be lost.

“If you’re going to stand for election, you’ve got to make sure that you deliver more and not less, and that you decrease taxes, not increase them.”

“But I think people need to understand the economic realities and therefore I think that at some point, they have to take a decision of what services they want versus what they're prepared to pay for it.”

“That’s my simple message.”

“Our tax system is very simple. It's personal taxes and corporate taxes.”

“We don't have inheritance taxes, we don't have VAT, we don't tax pensions.”

“There's a lot of things that we don't tax.”