November 14, 2012 11:09 pm

Manx society faces reduced state role

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Isle of Man flag©Alamy

Headwinds: the island is facing its toughest test since the 1880s

At first glance little seems to have changed on the Isle of Man. It has just posted its 28th year of economic growth, the bars of Douglas teem with suited bankers and lawyers and horses still pull trams along its seafront during the summer season.

Yet it is facing its toughest test since its offshore financial sector was established in the 1980s in response to a deep recession.

Its model of European welfare combined with low taxes is being re-examined as revenues fall and the global slowdown hits its banking sector.

Once unheard of, industrial strife is growing: state-employed bus drivers have been dismissed for refusing to accept the loss of paid lunchbreaks, while civil servants grumble about redundancies and curbs on their pensions.

Allan Bell, the experienced former treasury minister who now heads the government as chief minister, has drawn up an “agenda for change” setting out a smaller state and fewer benefits while maintaining the “cohesion of Manx society”.

He says the economic change – chiefly driven by the UK revising an agreement in 2009 on how to share value-added tax revenue, which slashed government finances by about a third – represents an “opportunity and a challenge”.

“The Isle of Man is starting from a position of strength. We have avoided recession and unemployment is still low,” he says. Gross domestic product per head is higher than in the UK.

But with the UK economy sluggish, the euro crisis spreading uncertainty, and regulatory pressure increasing, “we have to be swifter in identifying new niche opportunities for the future to enable us to continue the growth we have enjoyed now for 28 years”.

As a self-governing dependency of the British Crown, the 81,000 strong island has not hesitated to adjust its laws to attract business.

It is an important operator in the space industry, with one in four satellites launched last year being owned on the island. It retains a strong manufacturing industry, especially in aerospace, nurtured by government support.

It has also created successful ship and aircraft registries, which bring business to the island’s professional communities by arranging mortgages and companies to own the assets.

The attraction of an online gaming cluster has blessed it with impressive IT infrastructure. It invested in the good times in plentiful power and road infrastructure, which could be augmented by offshore wind farms in the Irish Sea.

Nevertheless, Standard & Poor’s, the rating agency, downgraded its AAA credit rating a notch in November 2011, citing external factors. It retains a AAA rating from Moody’s.

Mr Bell says: “We have to recognise government cannot provide everything in the way it has in the past and, if we are going to maintain a competitive tax structure ... there have to be limits. Tax increases would be totally counterproductive.”

That requires means testing child benefit and squeezing some savings reliefs to bring the budget into balance by 2015-16.

Nevertheless, the island has a stronger revenue base than many offshore jurisdictions because of its 20 per cent VAT rate shared with the UK. It also attracts companies that can register for VAT there and trade in the European Union.

The top rate of income tax is 20 per cent and there is no inheritance tax, stamp duty or capital gains. Banks are the only businesses subject to tax, at 10 per cent.

Mr Bell says that, while the island would continue to comply with relevant international tax and money laundering agreements, there was “an air of hypocrisy” about some British rhetoric.

The UK government has attacked the behaviour of offshore centres while encouraging French investors to flee high taxes there and crowing about reductions in corporate tax luring back multinationals.

However, he says the relationship with the UK had “calmed down a bit” since the revenue sharing changes.

“We need to protect the economy,” says Mr Bell. “We are anxious to see a level playing field. You look to Asia and see Singapore and Hong Kong and other emerging centres and question whether they are following the same standards. I still have to be convinced that the regulatory pressures are applied equally to competitors.”

As part of its diversification the island’s government in October took a 9.99 per cent stake in Pinewood Shepperton, the film studios, and gave Pinewood access to £25m of public money to invest in films. Filming would be done at the studios and on the island. Pinewood is owned by John Whittaker, the billionaire chairman of Peel Holdings, the property, media and logistics group, who lives on the island and discussed the deal directly with Mr Bell.

Peter Karran, a minister who was sacked for voting against the Pinewood deal, says he fears that government plans for outsourcing or “corporatising” services to cut costs could reinforce a too-cosy relationship between the government and business. “It is a system built on patronage,” he says. His Liberal Vannin party is calling for an inquiry into the Pinewood deal.

However, Mr Bell wants to make more use of the wealthy on the island. Teaming up with Peel Holdings in other areas would enable it to funnel overseas investment to northwest England and show that the island “is a genuine partner for good, not a tax haven on a sandspit in the Irish Sea”, he says.

Despite the commitment on tax, an increase from 18 to 20 per cent in 2010 has made business leaders nervous. Garth Kimber, chief executive of Xela Holdings, an online gaming company, says: “Maintaining zero corporate tax is vital. It has got to be a government strategy. They have made all the right noises but, until you see that [budget] gap closed, there is a degree of concern. I would like to feel 100 per cent certain. It is an island and not everybody wants to live on an island. If we want to bring quality employees over, they have got to see the benefits.”

There are also worries about access. Mr Bell admits that he has concerns over a proposed offshore wind farm in British waters that could interfere with the vital Steam Packet ferry service from Liverpool and Heysham.

“We can’t afford any disruption to the sea links. It is the lifeline for the island. For our business community and for manufacturing in particular,” he says.

Noel Hayes, chairman of Manx2.com, which charters regular flights to unscheduled destinations such as Gloucester and Belfast, says he is worried that its air links could be reduced.

Easyjet has begun services from Liverpool, using large 150-180 seat aircraft, while Flybe has the biggest network, using 80-seat aircraft. Easyjet is offering cheap new capacity he says but, with 700,000 passengers a year, bigger aircraft could mean fewer flights.

“The island can have economy or frequency,” he says.

He welcomed a review announced on the open skies policy, citing the example of Guernsey, which still controls access to its airport to ensure operators can make money and provide frequent flights.

Nevertheless, most businesses remain committed to the island. Bill Mummery, executive director of Celton Manx, an egaming company, quotes the latest marketing slogan: “‘The Isle of Man, where you can’. It does what it says on the tin.”

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