I’ve long predicted that Jersey would go bust sometime this decade as a result of a massive black hole in its budget. The Crown Dependency adopted the zero ten corporate tax regime (now deemed non-acceptable to Europe), massively cut its estimate of income tax to be collected, said it could make up the difference from a 3% GST (VAT) and a heroic assumption on continuing economic growth from the finance sector and, I said, would fail spectacularly to balance its books. I was, of course, completely dismissed. They were absolutely confident of the future.
One of us had to be wrong. The bad news for Jersey is it looks horribly like they were. In May 2009 they realised the black hole I forecast was real. In February this year talk of raising GST dramatically emerged. Now we know why. Two reports from the Jersey Evening Post yesterday tell us. The first says:
JERSEY bank deposits were down by 20 per cent while the value of funds under administration fell by 30 per cent in 2009.
The latest figures released by Jersey Finance show the impact of the economic downturn on the finance industry.
Let me be fair and add what they claim to be the good news:
However, there was some room for cautious optimism with the values of specialist funds growing as compared to the previous quarter. These include hedge, private equity and real estate funds.
Meanwhile, the value of funds under investment management increased from £18.4 billion to £19.7 billion — a rise of 4.4 per cent — during 2009.
And let’s also offer the excuses;
Jersey Finance chief executive Geoff Cook said that the decrease of almost 20 per cent for Jersey’s banking deposits during 2009 was hardly surprising given the very low level of interest rates throughout the year.
Before considering the impact, note the second article:
UNEMPLOYMENT figures in Jersey have soared to their highest level for 30 years.
According to official statistics released this morning, 1,200 people were registered as unemployed at the end of January — the highest number since 1980. Since the recession began in 2008, the number of people out of work has climbed steadily by 360 a year.
Of course in absolute terms the rate of unemployment is low — which is because those made redundant from Jersey who are resident on condition of their employment simply leave when they lose their jobs. What is significant is the trend.
In the case of deposits what is being seen is not so much as a trend as a rout. The source data is here in the December 2009 report. In December 2009 there was £165bn on deposit in Jersey, down form £206 bn a year before and £212 bn a year before that. Funds under management were down to £166 bn from £241 bn a year before.
Geoff Cook of jersey Finance says cash is down due to low interest rates: that’s absurd; they’re down all over the world. Jersey would not see cash deposits fall for that reason.
And to make such an appeal to external factors in the case of funds is impossible. There have been marked correlations in the past between movements in the value of funds in Jersey and stock market movements in the past, unsurprisingly. In 2009 the FTSE 100 rose by 18.6% after a fall of 28.14% in 2008. In 2008 funds under management in Jersey fell from £246 bn to 241 bn. There must have been a big net inflow of funds in consequence. But in 2009 that £241 bn should have increased, logically, to £285 bn, without assuming dividends were reinvested. Instead they feel to £166 bn. That’s not a fall of 30%. That’s a fall of 42%.
Total funds leaving Jersey in 2009 amounted to £160 bn on this basis.
What possible explanation could there be for funds leaving in such enormous quantity — and remember there’s no threat from the European Union Savings Tax Directive to most of these funds so this is not a sufficient explanation.
I can only offer one explanation. It’s a simple and logical one. In many of the prime markets for Jersey there have been tax amnesties. Italy is one, and its biggest market of all (the UK) is another. With regard to the UK the ‘amnesty’ for Jersey funds was not that attractive. That for Liechtenstein funds was much more attractive. We know Lichtenstein has seen an inflow of funds.
What does this imply? Simply this: that the money that has already left Jersey is part of the very large stock of funds previously held there that there were illicit in some form or other, whether with regard to the capital balance, the income earned or with regard to the nature of their origin. And now they have fled — either back to Italy, or the UK, or to Liechtenstein on their way to the UK. Alternatively they have fled — as many have said such funds would — to Singapore, Dubai or the even more ‘exotic’ locations such as Panama where they hope to remain hidden from view for while longer.
What alternative explanation is there? I’m struggling to explain this is anything but the outflow of illicit funds. And if this hypothesis (and I stress, it is only that) is true, then all these previous protestations that there were no illicit funds in Jersey, it had never welcomed any and all its systems were tight enough to ensure none remained look as hollow as I, and many others around the world, always assumed them to be.
Let me return to my original hypothesis though — that this signals the beginning of the end for Jersey. This is not a minor crisis for its financial services industry. It is apparent that that industry is now collapsing. Far from fuelling growth it is suffering massive, even catastrophic loss in its volume of trade which makes any problem besetting Toyota look trivial by comparison. And yet this is the industry that was to fuel Jersey’s growth; the industry that was to fill its tax gap that was to provide for the future well being of those who lived there. Now, instead, it looks like that industry itself is failing.
This is disastrous for Jersey (even if the rest of us have to celebrate its potential demise as a secrecy jurisdiction). The financial services industry is 50% of Jersey’s GDP, which is now bound to be in freefall. The inevitable failure of the island’s finances is bound to be approaching as a result.
Like the Isle of Man which has recently suffered its own shock to its government’s revenue, Jersey is an island used to OECD levels of government spending. This will clearly not be possible if the financial services industry collapses. Despite that the need for healthcare, education, pensions, and other essential public services will not go away as a result of this change. Jersey will not, I think, be able to meet this challenge. In that case the end game for the island as a quasi-independent jurisdiction looks to be coming to an end. States can only survive when they are financially viable: the chance that Jersey is not is very high (and raising GST on local residents is not in any way a viable option when the real cost of living is already so high).
Jersey looked to financial services to be its salvation. But its business model, as many admit in their quieter moments, was based on illicit funds. The claim has been made that these have been eradicated as this century progressed. I always doubted that, until now. But if this is those funds leaving (and no doubt there will be more to follow) the claim that the act had been cleaned up was decidedly hollow.
There trouble is that now there is no plan B. Full independence is folly in the face of financial disaster. Luring new industry in now is not possible — the damage is too far progressed for the current structure of the island’s economy to sustain other activity. The options left are limited: it seems to only be an appeal to the UK or the EU for integration. Nothing else seems plausible as the island begins to sink rapidly below the zones of financial viability.
I’m sorry in a sense to be proved right. I just wish Jersey had taken action sooner. Then it might not be in this mess. As it is things look like they’re going to get very grim indeed, very soon.
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
Buy me a coffee!
Cash deposit levels have fallen largely because of the paltry interest rate returns, combined with a growing confidence in equity markets (albeit perhaps misguided).
Many fund groups have been shifting their funds into jurisdictions such as Ireland and Luxembourg which offer UCITS-compliant funds and are not exposed to the EU’s Alternative Investment Fund proposals.
Very few funds in Jersey are based on UK equities. Most are hedge funds, real estate funds and private equity funds.
Of the 1,200 people unemployed in Jersey, very few have come from the finance sector.
I don’t think that your hypothesis is an accurate reflection of the facts.
Rupert
42% fall is a 42% fall.
And moving to UCITS funds implies the underlying assets are tax evaded seeking to be in a non-disclosed environment
I think the hypothesis stands until you do a lot better than that
Richard
Most of the drop in the value of funds is related to the large proportion of Jersey funds that invest in real property, particularly UK commercial property and Eastern European resiential/development property. Also, a number of funds invest in other funds that make similar investments.
The value of funds is itself a bit of a red herring as people servicing large funds will do so on the basis of a fixed fee rather than a % of AUM. But if you look at the value of actual Jersey funds that invest in eastern european property it isn’t uncommon to find them trading at 20% of their peak price. Leverage and a slump in property values are to blame.
Life is more difficult than it was 5 years ago and a lot of government action between 1985 and 2000 now looks hubristic in the extreme. But are there any countries in the world where the same couldn’t be said?
MF
But will the sector survive the underlying failure of the assets in which it invests is your argument is true?
Doesn’t the failure of the funds indicate the failure of the sound judgement of the sector anyway? And will investors return in that case?
However looked at this is a disaster
Richard
This figure of 1,200 is merely the count of people who have registered as unemployed.
Read back through the local news during the last 12 months, and it soon becomes obvious that the finance sector has been reducing the number of staff employed in total.
Walk round the town, and there are office blocks sitting empty, there’s even one large office on La Route du Fort, which has never been occupied since the day it was built, many years ago.
This is not a sight we would have seen in St. Helier 20 years ago, when some banks would have pitched tents in the park if that was the only option!
Richard, you mention zero-10 again in this piece, and have discussed it in older posts. I believe that the EU’s problem with 0/10 is not the concept itself, but that Jersey et al have tried to make a difference between companies with local resident shareholders – i.e trying to force them to extract the profits so that they are taxed as personal income rather than leaving them in a zero rated company.
I’ve a question that maybe you have a view on. If Jersey or IOM etc were to reform their tax systems so that companies were taxed on a purely territorial basis would that pass the EU code of conduct in your view? By that I mean that you ignore where the shareholders or beneficiaries are based and look only at where the company derives its income. If it has a local source, it’s taxable, if it’s foreign source, it’s not. Many jurisdictions in Asia (Malasia, Thailand for example) and elsewhere have this type of regime, and they weren’t originally treated as harmful by my recollection.
Freeborn
That would work
But it would require the Jersey tax authorities to know the source of income and to then enquire about whether that source was taxed there, or not
Look at the construction of Jersey law and you’ll see that’s a question to which they wish to turn a blind eye
Richard
Question:
How does a fall in the value of bank deposits and funds lead to or increase a current account deficit on the part of the Jersey Government?
Are they taxing deposits or funds at some level?
Colman
Colman
It happens because they lose revenue from the people employed in the sector and the companies that pay tax in it
They’re not taxing the funds
Richard
Richard
The UCITS point relates to the ability to market funds better to the EU retail sector. Many major hedge fund groups are going down that route as their current offshore funds are limited in how they can market to the EU public if they are not UCITS-compliant.
Dan
There is no question that the finance sector has contracted, but there has been a major global recession going on, just in case the news had passed you by ! Many offshore financial services groups have understandably rationalised what they do and where they do it, including outsourcing to low-cost jurisdictions such as Mauritius and Malta. This has cut out duplication and overlap, i.e. where an organisation has offices in both Channel Islands and in the Isle of Man.
Empty offices are a sign of property developers not reading the signs of the recession, i.e. believing that growth would carry on endlessly.
There is unquestionably a downsizing of the offshore finance industry, but not materially more than one would expect in a sustained recession. How much of it is down to a loss of confidence in Jersey ? Some, no doubt, but not a lot. I’d have far more confidence in the accuracy of your hypothesis if there wasn’t a recession going on !
A gloomy outlook of Jersey by Richard as per usual. It is just a good job that we take such outside views with a pinch of salt. Jersey is not going to go bust. The Island has no borrowings for starters and the Treasury Minister is addressing any future problems now.
it is widely accepted that our Chief Minister and many of his supporters are stupid, if not corrupt and my beautiful island home is starting to suffer the effects of many years of hubris and arrogance.
Our polticians all have very narrow agenda and will always dismiss informed opinion if it does not accord with their own.
Many of the views expressed by Tax for justice Atac et al have been rubbished by our Chief Minister – but are increasingly being vindicated. 🙁
What is of further concern is that the entrepreneurial heart of Jersey is not as strong as it once was. During the past 15 years the growth of the corporate world in the Island has had a dampening down effect on the amall business sector of the Island’s economy. Jersey is currently over influenced by International Corporations who are in effect managed from far away locations and huge numbers redundancies from most of the banks are inevitable this year. Small business are now subject to draconian EU employment law, as is the UK, which is acting as a further disincentive for small business expansion.
I have recently come out of the finance industry in Jersey to concentrate on my own business. From my own experiences I do not agree with much of Richard’s statements, my area was more blue chip and therefore a lot of the tax protectionist policies being used were helping to establish and maintain jobs in expanding economies around the world, including the far east and north africa .
However I became increasingly disillusioned with the practices of the company that I worked for. We were expected to log a certain amount of time to client matters, however with the downturn in the financial world and IPO’s, Mergers and Acquisitions not happening our work loads decreased substantially.
Despite this we were still expected to book the same amount of time to the clients and charge them, basically for none existent work. Last year the company increased its fees well above local RPI. When we asked what we were to tell the client, we were told to say that we are value for money. When pay review time came around, we were told that due to the economic turn down we were not going to get a rise, not even RPI. I came to the conclusion in the end that I was working a lie, to make a select number of people at the top very rich. I got out and even though life will be a struggle for sometime to come, I am much happier and actually getting satisfaction.
Oh and I’d be interested to know what experience Peter has of entrepreneurial aspect of Jersey as I believe he lives and has a business interests in the North of England, not jersey.