Increases to tax and utilities as CM seeks to rebalance books with tough budget

Chief Minister Fabian Picardo announced increases to taxes and utilities on Tuesday as he delivered a tough budget aimed at tackling a £55m deficit in public finances in 2020/21 and Covid-19 borrowing that this year alone was double the forecast amount at £135m.

As net borrowing rose to a forecast £652.9m, Mr Picardo said the measures sought to raise government revenue while avoiding austerity and hardship, adding the increases in key areas were far lower than similar steps being taken by other countries.

Some of the increases will be in place for only 24 months and measures will put in place to protect those who cannot afford to pay higher fees for essentials such as water and electricity, including a means tested utilities credit.

For most people in Gibraltar, he said, the increases would represent “an imperceptible amount”.

He was clear the measures would be unpopular, but insisted they were necessary and the right thing to do at this time after two years during which public finances were battered by Covid-19, and against the backdrop of global uncertainty as a result of the war in Ukraine.

There were no giveaways “because there is nothing to give away”, the Chief Minister said.

“Some of these things are difficult and they’re certainly not popular,” he added.

“But these are the responsible and prudent measures we have to take [and] they are measures that will help us in the long term.”

The key measures announced included:

• For the next two years, all tax rates in the Allowance Based System and the Gross Income Based System will increase by 2%. That means anyone earning over £25,000 on the GIBS system will be taxed at 27% instead of 25%. Below that level, the average rate will be 19% instead of 17%, though the lowest earners will not pay tax if they are below the threshold as is currently the case.

• Water and electricity will increase by 8% and will be fixed for at least the next 12 months, representing an increase to the average monthly bill of £4.37. Beyond that, electricity and water tariffs will increase annually on April 1 by the cost of living percentage.

• As of July 1, all fees charged by any government department including licence fees and forms will increase in line with inflation, currently estimated at 8%.

• The minimum wage will also increase by 8%. That means an extra 60p to £8.10 per hour, or £16,855.75 annually for a 39-hour week, an increase of £1,221.48.

• The state pension and disability benefits will increase by 8%, while government occupational pensions will rise by 2%, as has been the case for the past 20 years.

• Every company will pay a Covid recovery charge of £25 per week for the next two years, levied as part of the annual return collected by Companies House. The fee will be passed on to the government with no deductions.

• As from August, visitors will have to pay a £3 sustainable tourism tax per night for a stay in Gibraltar. All revenue from this hotel levy will be paid into the Climate Action Fund and invested into projects such as sustainable mobility and preserving biodiversity. As from April next year, cruise passengers will also be charged £1 as an environmental levy.

• Waivers on import commercial duties and flat rates on personal imports introduced during the Covid-19 pandemic will be revoked as from June 29.

• Changes to petrol pump fuel tariffs introduced earlier this year in response to rising fuel prices will be extended to the end of September and kept under review.

• Rules for Category 2 residents will change to require payment of tax in advance, thus addressing situations where some individuals have left Gibraltar with outstanding bills that are hard to chase. Tax rates for Category 2 individuals will also increase by £5000.

• There will be a tax on full savings income including pensions, interest, dividends and other passive income for individuals who "non Gibraltar national" but are resident in Gibraltar and are not in employment or in possession of a CAT2 or HEPPS certificate.

• The personal tax rate beyond £105,000 will be a flat rate of 25%, addressing an anomaly in the GIBS system that meant people earning more than £500,000 paid 18% beyond that level, and 5% over £700,000. This, Mr Picardo said, was a GSD-introduced measure that was “not socially just” and meant someone declaring £1m paid tax at 17.6%, while someone earning £30,000 paid an effective tax rate of 18.3%.

• There will be no windfall tax but the government will take steps to ensure companies do not use “creative tricks” to reduce their tax bills. An amnesty was announced up to December 31, 2022, during which companies that have underdeclared or been “over creative” with deductions can voluntarily review their returns. At the same time, tax officials supported by a secondment from the UK Treasury will review situations where they believe businesses have underdeclared, and will chase payment as well as impose penalties and interest.

In delivering the budget, Mr Picardo spoke of “prudence and responsibility” at a time when Gibraltar’s public finances were decimated.

Anticipating criticism from the Opposition about his handling of public finances, he said his government had spent money on schools, parks, affordable housing, a university, boosting the teaching and nursing complement, and sporting facilities, among other such initiatives.

“That is not lavish spending,” he said.

But Covid-19 had placed a huge strain on Gibraltar, which had supported businesses so they could mothball their staff and activities in order to resume as soon as restrictions began to be lifted.

Mr Picardo said the economic data suggested that strategy had worked, with the preliminary estimate for GDP in 2020/21 calculated at £2.41 billion, just £25m below last year’s forecast.

The GDP forecast for 2021/22 is for £2.59m, surpassing the pre-pandemic level.

Mr Picardo said too that employment levels had remained steady at around 30,403 jobs in October 2021, while unemployment was negligible.

Indicators such as these suggested Gibraltar’s economy was back on track and doing “remarkably well”, Mr Picardo said.

But the issue now was to address the deficit and unexpected borrowing that had been necessary in order to support businesses during lockdowns and pay for healthcare as part of Gibraltar’s response to the virus over the past two years.

“This GDP bounce back reflects that economic activity is coming back and shows that our economy is strong,” the Chief Minister said.

“It’s our public finances that will now need to be nurtured back to health.”
Budget data published on Tuesday shows the government forecasts net public debt as of March 31, 2022, at £652.9m, up from actual net debt a year earlier of £555.9m.

“The debt is going up because we are plugging the deficit with borrowing,” Mr Picardo said.

“What has driven us to deficit is the three-fold aspect of the deployment of public money to pay those forced out of work by the closure of businesses; the closing of our economy and other economies, that deprived us of revenue at the same time, to a position from which recovery will take some time; and the additional myriad expenses of Covid.”

Mr Picardo said money had been spent to plug the gap in government revenue, a gap that was still evident and was shown in the deficit.

The impact of Covid-19, he added, had been exacerbated by the global disruption caused by the war in Ukraine and, for Gibraltar, by continued uncertainty over the Brexit negotiations.

“We are not in this situation because we built a school, built a primary care centre or built new, affordable homes,” he said.

“And the measures we will take today, tough and painful though some may be, have a clear purpose and signify a clear direction out of these difficulties.”

“Getting back on track. Getting back to growth. Getting back to surpluses.”

“Balancing the books, which is what our right-thinking citizens want us to do.”

EDITOR'S NOTE: This article has been updated to clarify one of the budget measures relating to a measure to apply tax on full savings income including pensions, interest, dividends and other passive income for individuals who are resident in Gibraltar and are not in employment or in possession of a CAT2 or HEPPS certificate. The measure applies only to "non Gibraltar nationals".