International credit ratings agency Moody’s has forecasted a 3% growth in the island’s economy in 2025, up from 1.5% last year.
Moody’s annual health check of the island’s economic standing assessed our economic growth to be ‘stronger than in most of Europe’.
The report, published today, said the island benefits from having a “wealthy and relatively diversified economy for its very small size”.
It also praised the strong institutions, pragmatic policymaking, a prudent fiscal policy, as well as our low debt and substantial reserves.
However, it has also warned that the island is at risk from “economic volatility that arises from a small economic base” and the global pressure to revise its tax system.
A post Truss world
A significant reason for Moody’s stable outlook is the restoration of UK policy predictability over the last 18 months which “limits downside risks to the IoM’s credit profile”.
Moody’s said the credit rating could be upgraded if there was an “upward pressure on the UK’s credit profile, including if there were indications that the erosion in the UK’s economic and institutional strength since Brexit is reversing”.
Although, it added that if the island can provide a “stronger shock absorption capacity than we expect” then it could be upgraded on our own merits.
Moody’s added: “However, it is possible that the trajectory of the IoM and UK ratings could begin to diverge if the IoM’s intrinsic credit strengths remained intact despite stress in the UK credit profile or the negative spillovers to the IoM proved to be less significant than expected. Downward pressure on the rating would also arise if we expected a material deterioration in the IoM’s own economic or fiscal position.”
Pensions
Following the exhaustion of the Public Service Employees’ Pension reserve in 2022-23, Moody’s has restated the cost to the annual revenue budget will amount to £42 million in 2024-25 “with a similar amount in each year of the five year plan”.
Jobs
The report also noted several issues facing the island’s economy, namely outward migration contributing to demographic changes and skill shortages.
This is reflected by the 0.6% unemployment rate in April 2024 and the number of job vacancies remaining high at around 1,130 as of February 2024 which compares with around 270 people seeking a job.
The report said that this represented the “most significant credit challenge facing the Isle of Man’s economy”.
However, Moody’s said: “While this has become more challenging in the wake of the pandemic and Brexit, ongoing government programs will support population and labour force growth.”
Other key figures include expected inflation levels of around 2% to be the norm in the coming years, positive tourism figures and the impact of inflation on government finances.
Moody’s report outlines that government finances are continually to “gradually improve” and noted the lower than expected raid on the reserves needed to meet last year’s deficit, which it largely contributed to the larger than expected staffing costs.
A significant challenge to the government running a balanced budget is the ever growing healthcare funding, which the Treasury has tried to sort this year with the 10% rise in the highest rate of income tax to 22%.
A new NHS levy is due to replace the increase in next year’s Budget, but what this will cost or what level it will be has not been detailed.
Treasury Dr Alex Allison has welcomed the report and said it shows the island is “on the right path”.
You can read the full report here.
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