2008 Budget

A budget for business will build a better Gibraltar for all

The Government’s budget announcement this week will highlight Gibraltar’s continued economic growth, near full employment and increase in Government spending on numerous capital projects.

That the Government is able to continue to invest in so many new projects – the airport, affordable housing, a new power generation plant, a new prison, several new car parks, the airport link road to name but a few – is welcome but it should not be overlooked that it is the taxpayer, both individual and corporate that is funding the majority of this expenditure.  It is largely thanks to the taxpayer that these and other projects can be undertaken at all.

The main creators of wealth in Gibraltar in the last 20 years have been in the private sector.  The tax and social insurance contributions of public sector workers should also be recognised as they account for around one fifth of all workers in Gibraltar according to Government figures.  Nevertheless, the growth in new businesses and in employment and thus in tax receipts for Government have come largely from the private sector.

From the most recent figures available (2006/07) income tax – both individual and corporate – amounted to £121m or 57 per cent of the Government’s income, by far the largest single source of Government revenue.

A greater concern though is the trend which shows that over the last six years income taxes have accounted for an increasing proportion of the Government’s expenditure: in 2001/02 income taxes represented 54 per cent of the Government’s total expenditure; by 2006/07 that percentage had grown to nearly 65 per cent of the Government’s total expenditure.

In short, the Government is becoming increasingly dependent on private sector taxes to fund its expanded expenditure.  These additional costs on business act as a significant burden to commerce and prevent many local firms from investing in their own companies to create further wealth.

Many of Gibraltar’s companies across several sectors continue to perform well. These tend to be those companies whose clients are based outside Gibraltar.  Others though, particularly those who depend solely on local customers, are seeing reduced margins caused by rising business costs on the one hand and falls in local trade on the other.  Competition from traders in Spain has been more subdued in recent months because of the strong euro.  Nevertheless, trading for many of these small local businesses remains tough and the future for some is bleak at best given the deteriorating economic outlook.

What can be done?

Simple practical things are a good place to start.

The Government could show genuine concern by reducing rates for those traders in the retail and wholesale sectors, particularly those with smaller premises.

After last year’s budget the Chamber urged the Government to simplify import duty procedures and tariff structures.  These two measures would help traders both in terms of reducing another cost item and also in reducing the time required to liaise with customs to clear goods across the frontier.

The Chamber has been urging the Government to close the public sector pension scheme to new entrants. In the last six years the cost of pensions overall has grown by more than 60 per cent from £11.6m in 2001/02 to £19.3m in 2006/07.  As there is no investment pot to draw from this is paid for out of current tax receipts.

Many of our members have told us that they want to make pension contributions for their staff but the current high cost bases that they have would make this impossible at present.  If steps were made to curb the cost of public sector pension provision by closing it to new entrants, the tax burden would be reduced somewhat.  More private sector companies might then be able to afford pensions for their staff.  Everyone would benefit and existing public sector employees would not be any worse off as they would have their existing pension rights preserved.

In the last six years Government receipts have been boosted hugely from the increase in the number of people employed, now at an all-time record.

In this week’s budget our members look forward to the Government renewing its commitment to progressive cuts in corporate and personal taxation. The Government has recently renewed its commitment to reduce corporation tax to between 10-12 per cent.  Our members look forward to the introduction of this lower rate sooner rather than later, particularly in light of the forecast economic slowdown.  This would also make it more attractive for new companies to relocate to Gibraltar.

Last year the Government introduced the gross income based systemfor individual taxpayers.  We do not know what the level of take-up has been for this, nor the effect on Government tax receipts. Either way income taxes remain high in Gibraltar and thresholds for the top rates of tax are low and should be raised.  Under the allowance-based system it seems punitive that anyone currently earning the average wage of £20,470 per annum pays the top rate of income tax at 40 per cent.  By contrast individuals in the UK do not pay the top rate of tax until they earn more than £34,600 per annum.

Our members would also welcome moves by the Government to reduce bureaucracy.  In particular, making as many of the forms needed for licences, job applications and so forth available online instead of having to visit Government offices in person.  In the private sector, time is money and these visits to various government departments are an added cost burden to our members who often have to wait in long queues.  In time, if employers were able to submit completed forms online this would be very welcome, but first things first.

Let investment continue to flow

There can be no greater sign of confidence in Gibraltar’s future than rising foreign investment coming to the Rock. This confidence, and the investment which comes with it, continues to gather momentum. Many parts of the business community are doing their best to encourage this momentum.  We hope that the Government will do so too.  In this light we urge the Government to continue to make all departments strive for greater efficiencies.  Part 3.4 of the Principal Auditor’s report in the 2005/06 Government Accounts would be a good place to start.

Our members just want to run their businesses, look for new opportunities and  make money.  The formula is a simple one: the more money they make, the more they grow, the more people they employ and the more tax and social insurance they pay.

If the Government can allow more of our members to do more of this then the Government will benefit from higher tax receipts and Gibraltar will benefit overall. Private sector businesses will continue to play their part in the economic development of Gibraltar just as they have done for the last 20 years. Individuals and companies will also continue to be the main contributors to Government coffers.  We urge the Government to play its part this week in its budget announcement and allow private enterprise to continue to flourish.