By Mary Tait, Senior Investment Manager for IOMA Fund and Investment Management
In November last year, the Manx papers published a light-hearted remonstration of the BBC for mistaking the Isle of Man for the Isle of Wight in a morning news broadcast.
The local papers were quick to point out that the Isle of Wight was part of a “little island to the east of the Manx coast, which has national debts estimated at ?2.2 trillion”.
Another major differential is that the “little island” in question is currently recording anaemic growth of 0.1% per annum and remains fiscally paralysed in the face of a forthcoming general election.
Meanwhile, the Isle of Man continues to grow at an annual rate of 4% and has a Treasury Minister who is undertaking some solutions to the revision of the Island’s VAT sharing arrangements with the UK, defined as a reduction in revenue of ?85m in 2010-11 and ?140m per annum from 2011-12 onwards.
While the UK’s banking crisis has cost it more than a quarter of national gross domestic product, the Island’s VAT shortfall is estimated to cost in the region of 4-5% of GDP this year, rising to around 7% thereafter.
These comparisons are meant to sugar the medicine dispensed by our Treasury, most particularly for middle-wage earners, where budget changes will return the higher income tax rate to 20% and reduce mortgage interest relief by ?5,000 per annum to a maximum of ?10,000 on mortgages above ?150,000 (previously ?200,000).
As the Manx Electricity Authority will now have to shoulder the burden of its own debt financing, this will ultimately pass to the householder via an expected 7% rise in average household electricity bills, while road tax on vehicles above 1,000cc are set to rise by 10%. For high net worth individuals, the income tax cap introduced by the government in 2006 is set to rise by a seemingly 'inflation-adjusted' 15%.
So, unless you are mortgage free, self-sustaining and drive a Fiat Cinquecento, you are going to feel a sting or two from this budget.
As is often the case, it is those things left unsaid which prompt the most questions. In his budget speech, Mr. Bell referred in relatively non-specific terms to the Island’s 'zero-ten' business tax and the consultation paper due shortly. This remains a significant concern for local businesses, despite assurances that the government is unwilling to forego the Island’s 'autonomy' in income tax matters.
Furthermore, Mr Bell quantifies the Chief Minister’s request that local government departments reduce their salary costs by 10% at ?31.64m. While around 100 posts have been saved through 'natural attrition', this only amounts to ?3.6m in wage and salary cost savings, indicating there is some way to go to meet the five-year goal.
In contrast, the budget committed more specifically to spending one third of the government’s Reserve Fund over the next five years.
In presenting his budget, Mr Bell has chosen to grasp the nettle rather gently in places, challenging earners to foot the additional ?10m income tax bill in the first year but commenting that beyond fiscal year 2011-12 no further changes are 'currently' required. We should perhaps be concerned by the relatively sparse detail on longer-term plans for public sector salary cuts which shows a degree of non-committal beyond next year’s general election.
Perhaps Mr Bell should have heeded nature’s rule that a tender hold of the nettle is more likely to sting than a bolder grasp.
