Gibraltar’s Economic Problems and the UK’s Role in Solving Them

Dr. Chris Grocott, Lecturer in Management and Economic History at the School, demonstrates how the recent political disputes between the UK, Spain and the people of Gibraltar are connected to on-going economic tensions which both unite and divide them

In late November, a Spanish ocean survey vessel entered Gibraltar territorial waters and navigated them for twenty hours, despite persistent orders from a British Royal Navy patrol vessel to leave. A few days later, Britain accused Spain of a gross breach of political protocol when a diplomatic bag, the confidentiality of which is designated sacrosanct by the 1961 Vienna Convention, was opened during transit from Gibraltar to Spain. Both specific disputes take place against the back-drop of a more general and more stringent checking regime at the Gibraltar-Spain frontier, inaugurated in late July by the Spanish government, and all but sanctioned within a subsequent EU report. This ongoing sovereignty dispute involving Britain, Spain, and the people of Gibraltar has dominated the news in Gibraltar and made headlines in both Spain and Britain.

Not only are the politics of the Gibraltar ‘problem’ at stake here: so too is its economy. Spain has argued that its frontier checks are proportionate because they are part of an on-going attempt to reduce smuggling from relatively low-tax Gibraltar into relatively high-tax Spain. Add to this the accusations from sections of the UK press, particularly The Mirror and The Guardian, that Gibraltar’s economy is supported by shadowy British tax exiles, and we discover a situation within which the people and Government of Gibraltar would be forgiven for feeling a little beleaguered, if not threatened. Gibraltar’s economy is heavily dependent upon three main sectors: financial services; the off-shore gaming industry; and shipping and tourism. This broader diplomatic crisis potentially represents a fundamental threat to each of these.

Gibraltar’s financial service sector is comprised mainly of insurance, investment, and trust and company management services. Its tax system makes it cheaper for UK companies to be domiciled in Gibraltar than at home. Corporation tax is set at 10% (compared to 20-23% in the UK) and there is no tax for insurers of investment income. As a result, around 16% of the UK’s motor insurance market, for example, is dealt with by firms located in Gibraltar. Ladbrokes, Victor Chandler and EU Lotto Ltd. (the company that runs the Euro Millions lottery) are also based in Gibraltar, alongside 25 other gaming companies, for similar reasons. The rate of tax paid on online gaming profits for Gibraltar-based companies is currently 1%, with a maximum liability of £425,000. Furthermore, with no VAT charged on advertising, 60% of the UK’s bets are actually placed with Gibraltar-based firms. The tourism and shipping sector, for its part, accounts for roughly 30% of Gibraltar’s GDP (itself around £1.2 billion), and the retail sector accounts for around one fifth of Gibraltar’s privately employed workforce. Gibraltar’s position at the opening of the Mediterranean has meant that it has been a historically important port and while this role was diminished by the end of empire, it is still visited by around 200 cruise ships every year and around 10,000 ships seeking supplies.

These three economic sectors are becoming increasingly conspicuous sites upon the diplomatic terrain. In the financial services sector, the UK government blames underwhelming corporate tax receipts upon off-shore financial arrangements, rather than its own policies. In so doing, it has highlighted a prominent sector of Gibraltar’s economy by way of shrouding it in suspicion. A more covert line of attack is to be found in the online gambling sector, where the UK government intends to impose a tax of 15% on online bets, calculated not on the basis of the domicile of the bookmaker but on the basis of the location of the gambler. The sector’s VAT waiver remains a potential basis for comparative advantage, of course, though it is hardly its most attractive one. If this new residency-based tax policy does come to pass, it is estimated that 1,300 jobs (5% of the total workforce) will be lost. The ongoing territorial disruption also promises to dissuade many from visiting Gibraltar for fear of lengthy queues, while also disrupting the passage of employees into Gibraltar – some 10,000 of them, according to some figures.

Set against the above, the future of Gibraltar’s economy may look uncertain, if not worrying. Nevertheless, there are reasons for optimism. Gibraltar’s membership of the European Union (via the UK) means that it complies with all EU regulations on the conduct of business and on accountability. Whilst critics will point to the general issue of tax avoidance, Gibraltar has tax information agreements established with all of the EU member states and has just signed the OECD Convention on Mutual Administrative Assistance in Tax Matters. This perhaps gives Gibraltar a reputational edge over a number of other UK overseas territories and other territories considered to be tax havens. Furthermore, the UK government’s condemnation of tax evasion and lack of tax matters transparency currently singles out territories other than Gibraltar. This might be, for example, because the licence details of all of Gibraltar’s online gaming companies are readily available online whereas, by contrast, the details of many other small economy’s licenses are notoriously hard to find. This may well also work to Gibraltar’s advantage.  Finally, in relation to shipping and tourism plans to establish a floating luxury hotel in Gibraltar’s harbour promises to make it less dependent upon day-trippers from across the frontier. Expanded marina facilities have also seen an increase in yacht registrations.  Add to all of this the fact of significant GDP growth in the past few years and an unemployment rate of around 3% and we can say, despite much of what has been said above, that the economy of Gibraltar nevertheless, if somewhat remarkably, looks to be based upon reasonably solid ground.  But such ground is contingent on the on-going support of the UK government.

Historically, Gibraltar’s relationship with Spain has been cordial and beneficial, both economically and socially. Whenever it has been disrupted, however, it has been the Madrid government that has been the cause of the disruption – not least of all between 1969 and 1985 when the land frontier was closed and direct communication between Gibraltar and Spain was cut-off (as Gareth Stockey and I analyse in our book Gibraltar: A Modern History). There is little – perhaps nothing – that the Government of Gibraltar can do to positively influence policy in Madrid. As a result, it is Gibraltar’s relationship with the UK, much more than its relationship with Spain, which will determine the success, or otherwise, of its economy. Crucial to any analysis of the politics of the relationship between the UK, Spain and the people of Gibraltar, therefore, will be a consideration of the extent to which the UK supports or punishes the three sectors which are presently the most determinative of Gibraltar’s economic position.

Reference:

Grocott, Chris & Stockey, Gareth (2012) Gibraltar: A Modern History.  (University of Wales Press: Cardiff).