7th June 2021
I have been living on the island for 6 years now, and I absolutely love the place. I hope that it is fair to say that all my pro bono work and charitable initiatives speak louder than words to illustrate how much I care about the greater good of Guernsey.
As a father, a citizen, but also a professional (my expertise is investment management, capital markets and debt restructuring), there is one subject that worries me for the future of Bailiwick, it is our projected public deficit.
On Friday the 23rd of April, the States of Guernsey published this below communication.
The next 5 years projections look catastrophic, raising and culminating at GBP 56.2 million of General Revenue deficit in 2025, and this is not taking into account the growing deficit of the social security, forecasted at GBP 30 million for 2025, or any further bad surprises coming from the States of Guernsey Trading Assets. Those projections also don’t factor the demographic impact that Guernsey’s aging population may have on the public purse. This later factor is often referred to as a “Time Bomb”, as basically the States of Guernsey are on the hook to pay the pensions of an increasing proportion of retired islanders. By the way, do we really have a “Time Bomb” in Guernsey ? I would not call it like that. Indeed, as it is the case for each of us working in the private sector, the pension that I am theoretically expected to get from the States of Guernsey is very modest, and I don’t really see how Guernsey would go broke about this. What we definitely have, is something that I would call a “Civil Servants Time Bomb”.
Over the last few years, I have engaged widely and extensively with numerous States departments, so I feel that I speak from a first hand and informed basis, and the sad truth is that there is a plethora of inefficient and very expensive mid to senior level civil servants that are simply not good enough to stay around. They need to go. It is more than time for the government to start a significant cost cutting exercise because many civil servants don’t offer enough value for the taxpayers. Their salaries in many instances are higher than what they would get in the private sector, and they create a great amount of red tape and inertia. Over the last political tenure, pre-Covid, the Chief Minister and the States CEO regularly had to justify themselves on their inability to deliver on their own promises to run the States with increased efficiency and reach their cost saving targets. Very little was achieved on that front to be honest and it is not something that can be explained or excused by Covid as I am talking of the very lenient budgetary track record of the last States, pre Covid. Of course Covid was unexpected, and of course it caused a deficit nightmare, but from a public deficit standpoint, Covid is a temporary disruption, of cyclical nature, while the issues around the excessive civil servants payrolls are structural, still growing and potentially involving bigger quantum than the damages that Covid has inflicted on the States balance sheet.
In my professional environment, I have seen time and time again, over the last 25 years, countries or corporations lacking fiscal or financial discipline and ending up paying a huge price for that. We are lucky that Guernsey’s finances are in much better shape than most countries in the world, but this is no reason to be complacent about it. That is the mistake that Belgium, my country, made in the midst of the 1970’s. I was a child at the time but those few defining years had such a traumatic impact on the well being of the country that we all know about it. Belgium was economically as strong as Guernsey, arguably more diversified, with little national debt and almost no budget deficit. The socialists came to power, pushing a political narrative of “get more and do less”. They went “open bar” on all sorts of unaffordable social policies and ran huge budget deficits for 6 or 7 years. In 1982 when finally the conservatives came back to power, they found a country that was virtually bankrupt. The first law that parliament had to vote on was to prevent any household to be taxed at more than 100% of their income. They also had to significantly cut public services. Wealth had fled, national debt had exploded, employment costs and inflation rocketed and it took about 30 years of tight budget management for the country to come out of it. My parents’ generation, as a working class, got sacrificed as they had to pay a lot of taxes and social contributions all the working life, just to finally see their pension expectations vanish in thin air. I left my country at the age of 25, because it was not possible to make a living there (more than 75% of my salary as a young professional was confiscated in various taxes and social contributions to repay the abyssal public debt).
Ok, I get it. It has never happened in Guernsey and there is a lot of common sense on the island. That is true. But trust me, it doesn’t take much to go off rail and I hope that sharing my personal and professional views will be helpful. I am no fearmonger and I have no commercial or political angle, I only care about the common good. It is not because Guernsey has been prosperous in the past that it will continue to do so in the future and in my view, it is our collective responsibility as representatives of the business or civil community to hold the politicians accountable on budget discipline and voice it very clearly, so that they can feel supported and push back the more budgetary complacent narrative that has developed over the last few years. If the politicians are too risk averse or lack key competences to make significant forward thinking decisions for the future of this island, at the very least they should keep the budget balanced and make sure that the national debt is under control. Historically Guernsey has always been very good at that and we need to continue. We should resist the temptation to adopt the lower fiscal standards of many of our trading partners, whose strategies consist of printing as much new money as possible, borrowing as much as possible and praying for the best on the basis that everybody is doing the same. One day the music will stop. Guernsey has no central bank, and the capital markets won’t be prepared to give us a blank cheque if we lose our discipline. We are on our own, so we need to run our own strategy. The island understood that reality hundreds of years ago, we need to remain aware of it. Guernsey public authorities are currently running the island at a cost of 26% of our GDP. France’s public sector for example consumes more than 60% of their GDP. That is fantastic and highly commendable, as it gives us a great competitive advantage. Our economy is more agile and this is undoubtedly why each generation or so, Guernsey has been able to reinvent itself so successfully (granite, tomato, tourism, finance..). Let’s keep it this way, we need to “earn” our future. Keeping a balanced budget is also in my view the first democratic act that any government can make as it helps to keep political extremism at bay.
Coming back to the “Civil Servants Time Bomb”, let’s take a look at the official pay scale of the States of Guernsey (https://www.gov.gg/CHttpHandler.ashx?id=136248&p=0).
I have no problem with the idea of public or private organisations paying very high salaries to deserving and highly qualified employees (and for the sake of clarity, we also have plenty of those working for the States), but please check out the mid to senior level pay scale, say from Senior Officer level 6 and up. They are all cruising at a minimum of circa 100 grand a pop, it is embarrassing. No wonder that the States are running plenty of “long term” projects with no deadlines and no ends. Time is on their side !! We all know a number of mid to senior level civil servants, nice guys, but the bottom line is that many of them are simply not good enough to justify their pay check and without a doubt they would not be able to find a job with similar compensation in the private sector. I am at loss to name another country in the world that is so generous with its mid to senior level civil servants, while actually being not so generous at all with the more junior part of its staff. It doesn’t reflect well on us as a jurisdiction as it very much looks like a “club deal” arrangement.
Of course, unlike the private sector, the pensions of the public servants are directly calculated as a function of their final salary and that brings us back to what I called earlier a “civil servants time bomb”. Their huge payroll cost for the States is creating significant future, unbudgeted and unfunded pension liabilities, and that time bomb is certain to “explode” at one stage if nothing is done about it. That is the real demographic risk for the island and for the taxpayers. We don’t have a “time bomb” but we have a “civil servants time bomb”. It is the elephant in the room and the figures involved could be much bigger than the cost of Covid. At least, it is a future problem, so it is tempting for our politicians to ignore it and focus on something else.
Unfortunately, the overinflated cost of those civil servants is also severely impacting our public finances, and that is right now. As a citizen, unequivocally, I want the States to ambitiously invest in education, infrastructure, transport and connectivity, just to name a few “key enablers” for the future generations. Those are “good investments”, but money will be scarce and it will be tempting for the States to cut down on those “good investments” in order to avoid making the difficult and unpopular decisions to cut the “deadwood”.
Let’s take for example the topic of the recently much debated “equalisation of pay” whose implementation will come up soon on the States agenda. We currently have a large number of inefficient and overpaid male mid to senior level civil servants, who quite frankly, have been hiding in the system for years. It is stating the obvious that everyone is in favour of a fair, equal and transparent pay scale, regardless of gender or any other personal criterias, so absolutely we should all support the “equalisation of pay”. But we don’t want all the salaries to be “equalised up” to catch up with the “fat cats”. You want the fat cats to go first so that the benchmark for “equalisation” can be much lower. We are talking about tens of millions here. That is a lot of money that could be invested in the “good investments” for Guernsey.
There is a lot of goodwill on the island, and a lot of people with impressive professional backgrounds, skills and experience. Under the previous political tenure, on my initiative, Chamber had suggested to the political leadership to put together an independent advisory group constituted of locally based professionals, who have Guernsey’s best interest at heart (and not trying to make a buck) and would have offered, on a pro bono basis, independent and non conflicted professional advise to the States on debt and budget management. I would suggest that there is value in revisiting this scenario.