Not the only budget to be delivered this month. (Photo: Getty)
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The other budget for a British domain

Britain isn’t the only place to have had a budget recently – the Gibraltarian budget is pretty much their version of the Queen’s Speech. Gibraltar Chronicle editor Brian Reyes reports.

On June 22, Gibraltar’s Chief Minister Fabian Picardo delivered his last budget statement ahead of this year’s General Election, pointing to a strong and resilient economy as he dismissed opposition criticism of his government’s handling of public finances.

The annual budget statement is a key fixture of the Gibraltar Parliament’s calendar, during which the government provides a snapshot of the Rock’s finances and sets out its economic and fiscal policies for the year ahead.

Mr Picardo presented positive figures across a range of economic indicators as he summed up four years of GSLP/Liberal government.

He said GDP had increased from £1.2bn in 2011/12 to a forecast of £1.64bn for 2014/15, with a further rise expected next year to reach £1.8bn.

Mr Picardo told Parliament that GDP per capita stood at £50,941, putting Gibraltar third in the global ranking after Luxembourg and Qatar.

Gibraltar now has a record 24,422 jobs in its economy, an increase of 16.4% since 2010, while the total number of Gibraltarians in full and part time employment stands at an all-time high of 10,991.

These were, the Chief Minister said, “…real jobs bringing real dignity to the lives of real people”, adding that the number of unemployed people stood at just 190.

Mr Picardo also signaled another increase in average annual earnings, which rose to £28,244 in 2014, representing a 19.8% increase over the life of the current administration. Inflation during that period was 13.5%.

“This is a Budget that has confirmed that what so many called a mission impossible when we embarked on it, has become a mission accomplished in economic terms,” he said.

The Chief Minister pointed to growth in both income tax and corporate tax receipts. Income tax increased from £122m in 2010/11 to £144m this year, up 18% despite reduced tax rates largely on the back of more people employed in the gaming and finance sectors.

Corporate tax receipts grew from £14.59m in 2010/11 to £61.53m this year, he told Parliament, adding that the government had also paid £28m in rebates over the four-year period.

The Chief Minister said these figures signaled the success of the government’s economic strategy.

“As Gibraltar has repositioned itself as an open and transparent financial services centre with a competitive rate of tax acceptable to the OECD, the International Monetary Fund and other objective international institutions, we are reaping the rewards of seeing real business done from here which accrue and derive their profit here and are taxed here,” he said.

As for the budget itself, there were no dramatic announcements. The Chief Minister outlined a range of measures designed to help local working families and businesses, including tax breaks for first-time home buyers and those at the lower end of the pay spectrum.

In line with the pattern set in the previous three years, personal tax rates were reduced, allowances increased, import duties tweaked and some tidbits thrown in for the business community.

Tucked into the measures was also the announcement of Gibraltar’s first tax amnesty, in respect of funds held abroad on which tax should have been paid in Gibraltar. On remittance to Gibraltar, individuals who avail themselves of the amnesty will be required to pay 5% of the total amount.  

The Chief Minister confirmed that there would be a General Election before the end of the year - in theory he could take it into 2016 - but insisted that this was “a responsible Budget”, not one littered with pre-electoral giveaways.

THEMES

Two themes emerged from the 2015 budget session that will play a central role in the months ahead as Gibraltar heads toward the election.

Public finances and power generation have been the subject of relentless political exchanges over the past year. The budget debate placed them firmly on centre stage.

On public finances, the Gibraltar Government talks of falling debt and controlled, transparent expenditure against the background of a healthy economy. The Chief Minister said gross public debt stood at £448m at the end of March this year, down £72m from the £520m debt level inherited from the GSD in 2011.

Estimated cash reserves at the end of the financial year were £72m and were expected to rise to £85m next year. That represented net debt of £375m, or 22.8% of GDP, Mr Picardo said.

“Our borrowing level continues to be low in relation to the size of our economy and, as a percentage of GDP is currently among the lowest of the countries in the European Union,” the Chief Minister told Parliament. 

Conversely, the GSD Opposition speaks of runaway spending using savers’ money channelled outside the scope of parliamentary scrutiny and oversight.

During his response to the Chief Minister’s budget announcement, Opposition leader Daniel Feetham said the Gibraltar Government was using “artificial devises” to circumvent legal borrowing limits and avoid parliamentary scrutiny.

In a stern attack on its handling of public finances, Mr Feetham accused the Gibraltar Government of “a complete lack of openness and transparency” on this issue.

At the core of his argument was the GSD’s view that the Gibraltar Government is using the Gibraltar Savings Bank “as a piggy bank” to fund public debt and expenditure.

Mr Feetham said the Gibraltar Savings Bank had invested some 70% of its assets - £700m - in government debt and companies, but that the Opposition was unable to properly analyse the spending.

“What we have witnessed over the last four years is the systematic destruction of parliamentary governance in Gibraltar and, in particular, the deliberate disablement of the ability of this parliament to scrutinise our public finances in any meaningful way, to the extent that this Government has made an absolute mockery of these annual debates,” Mr Feetham said.

He said that if the “off balance book” funding was factored in, then gross public debt stood at “an eye watering” £847.7m.

Disagreements over public finances will remain at the centre of political debate in the run-up to the election later this year,  but this was not the only thorny issue aired during the budget session.

There were feisty exchanges too on the government’s plans to build a new duel-fuel power station and associated infrastructure for liquefied natural gas.

The Gibraltar Government insists that its plans to introduce liquefied natural gas into Gibraltar are not only safe and environmentally friendly, but will potentially open up lucrative future business opportunities too.

But for the GSD, the issue is one of location. It says the consequences of an LNG accident are too serious to contemplate placing gas storage tanks close to built-up areas, irrespective of how that risk is mitigated.

Brian Reyes is the editor of the Gibraltar Chronicle.

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Gibraltar - impact of Brexit

Last week our editor took a general overview of some of the scenarios for Gibraltar if Britain were to leave the Euro. This week, as the atmosphere in the British Conservative Party becomes ever more toxic, Michael Castiel, partner at Hassans lawyers on the Rock, goes into more detail (this piece written before the Iain Duncan Smith resignation and subsequent arguments happened).

However unlikely it may prove, the prospect of Britain's withdrawal from the EU sends shivers through Gibraltar's financial services, gaming and tourism industries, which are at the core of Gibraltar’s economy. For, if Britain leaves the EU, Gibraltar goes too, and, should Brexit occur, it is Gibraltar’s relationship with the UK that as in the past, largely will shape Gibraltar's future.

Gibraltar joined the European Union in 1973 as part of the UK. While rights to freedom of services across borders of EU member states apply between Gibraltar and the rest of the EU, because Gibraltar is not a separate member state (and is in fact part of the UK Member State) those rights do not apply between Gibraltar and the UK. Instead a bilateral agreement, formalised almost two decades ago, gives Gibraltar's financial service companies the equivalent EU passporting rights into the UK. Accordingly and pursuant to such agreement, where EU rights in banking, insurance and other financial services are concerned, the UK treats Gibraltar as if it is a separate member state.

This reliance on the special relationship with the UK is recognised by both the Government and the Opposition in Gibraltar, and when the territory (which in this instance as part of the UK electorate) goes to the polls on 23 June, the vote to remain in the EU is likely to be overwhelming. This may have symbolic significance but realistically seems unlikely to influence the outcome. In actual terms, although some non-EU jurisdictions use Gibraltar and its EU passporting rights as a stepping stone into Europe, almost 80% of Gibraltar’s business dealings are with the UK.

But whether or not Britain maintains the 'special relationship' with Gibraltar, if Brexit becomes a reality, other factors will come into play, with the ever-present Spanish Government’s historic sovereignty claim over Gibraltar topping the list.

Recently Spain's caretaker Foreign Minister Jose Maria Margallo went on record that if the UK voted to leave the EU he would immediately 'raise with the UK the question of Gibraltar.' If this was to come about it could take one or more of several different forms, ranging from a complete closure of the border between Spain and Gibraltar, demanding that Gibraltar passport-holders obtain costly visas to visit or transit Spain, imposing more stringent border controls, or a frontier toll on motorists driving into or out of Gibraltar. The latter idea was in fact floated by the Spanish Government three years ago, but dropped when the EU Commission indicated that any such toll would contravene EU law.

Here, again, imponderables come into play, for much will depend on which political parties will form the next Spanish government. A Spanish government headed by the right wing PP party is likely to take a less accommodating attitude towards Gibraltar (the Foreign Minister having recently indicated that in case of Brexit the Spanish Government may opportunistically push once again for a joint sovereignty deal with the UK over Gibraltar) whereas a left of centre coalition will likely adopt a more pragmatic and cooperative relationship with Gibraltar in the event of EU exit.

The most significant changes to Gibraltar's post-Brexit operation as an international finance centre are likely to be in the sphere of tax, and while Gibraltar has always met its obligations in relation to the relevant EU rules and Directives, it has also been slightly uncomfortable with aspects of the EU's moves towards harmonisation of corporate taxes across member states.

Although it was formed as a free market alliance, since its inception fiscal matters have been at the root of the EU, but Gibraltar's 'special relationship' with Britain has allowed considerable latitude in relation to what taxes it imposes or those it doesn't. However, as is the case with other member states, Gibraltar has increasingly found in recent years its fiscal sovereignty eroded and its latitude on tax matters severely curtailed.

As in Britain, Gibraltar has benefitted from several EU Directives introduced to harmonise and support the freedom of establishment, particularly the Parent-Subsidiary Directive which prohibits withholding taxes on cross-border intra-group interest dividend and royalty payments made within the EU.

As a stepping stone for foreign direct investment, should Brexit come about EU subsidiaries could no longer rely on these Directives to allow tax-free dividend or interest payments to their holding companies based in Gibraltar. In the case of the UK, bilateral double tax treaties will no doubt mitigate the impact of the non-application of any tax related Directives. Gibraltar, however, is not currently a party to any bilateral double tax treaties. Accordingly, Gibraltar would either have to seek from the UK the extension of all or some of the UK’s bilateral tax treaties to Gibraltar (subject of course to the agreement by the relevant counterparties) or it would need to negotiate its own network of bilateral double tax treaties with a whole series of EU and non EU Member States. To say the least, neither of these options would be straightforward to implement at short notice and would need the wholehearted support of the British Government

Whilst Gibraltar’s economy is likely to be adversely affected should Brexit occur, there may be some potential benefits. An EU exit would result in fewer regulations and possibly may provide Gibraltar with greater exposure to emerging economies.

From a tax perspective, an EU exit would probably enable Gibraltar to introduce tax rules and incentives that are contrary to EU tax laws and would provide the Gibraltar Government more freedom to adopt competitive tax regimes that may be considered contrary to EU state aid rules. How possible or effective any such strategy would be is doubtful given the OECD driven anti-tax avoidance climate affecting all reputable jurisdictions whether within or outside the EU.

In this as well as other possible change much will hinge on any post-Brexit relationship with the UK - an issue which the Gibraltar Government addressed recently in a paper sent to Westminster's Foreign Affairs Committee. It stressed not only that 'EU membership has been an important factor in the development of Gibraltar’s economy' but also the importance of 'clarity as to the rights the British Government will protect and defend for Gibraltar in the context of its own negotiations.' 

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