Trouble in paradise as financial squeeze hits the expatriate lifestyle in Jersey

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For the financier who has everything, the jewellery stores on St Helier's high street yesterday offered a seven-inch, solid silver model Porsche for £985, or a set of platinum mussel eaters for £730. At least one restaurant had run out of parfait de foie gras by lunchtime, and estate agents bristled with £1m sea-view mansions and executive flats.

For the financier who has everything, the jewellery stores on St Helier's high street yesterday offered a seven-inch, solid silver model Porsche for £985, or a set of platinum mussel eaters for £730. At least one restaurant had run out of parfait de foie gras by lunchtime, and estate agents bristled with £1m sea-view mansions and executive flats.

Outwardly at least, life on Jersey and the immaculate streets of its capital was as affluent and relaxed as it has been for the best part of three decades, thanks to its status as an off-shore financial nerve centre. The island manages, invests and globally distributes enough money to make each and every one of its 87,000 inhabitants millionaires three times over.

As one restaurant manager put it: "Times are good. The banks bring money and some of it trickles down to the rest of us. That's the Jersey way now."

But amid the conspicuous consumption and the buzz of high finance, there was a different noise emerging from Jersey this week - that of protest. Away from the multitude of banks, trust funds and paralegal offices that oversee Jersey's £256bn banking deposits and investments, this quietly proud island is grappling with the most profound shake-up in its economic life for a generation.

It is a state of turmoil which this week brought more than 1,000 protesters on to the streets in a community where activism is so alien it does not have any political parties. It has led to predictions of a social and economic meltdown. And it is all about one small word: tax.

On Thursday the island's parliament, the States of Jersey, passed legislation to protect its standing as a leading tax haven by cutting corporation tax from 20 per cent to zero, with a 10 per cent rate for financial services companies.

The move brings Jersey into line with the attractive rates offered by its competitors in the ruthlessly competitive world of international offshore money management, from the Cayman Islands to Singapore and neighbouring Guernsey.

But it comes at a cost. The predicted loss of tax income blows a hole of up to £100m in the Channel Island's budget - equivalent to its entire annual spending on its generous benefits system. In order to make up the shortfall, Jersey's rulers are bringing in an austerity package which will see the loss of 500 public-sector jobs over five years, probable cuts in non-essential services and the introduction, for the first time in the island's history, of VAT, to run at 5 per cent.

Jersey's ruling politicians argue it is a painful but vital measure to stop investors moving elsewhere, and maintain the island's high standard of living. But for its detractors, the package is painful evidence that the island has grown too reliant on its corporate guests, and that it is the less well-off who are picking up the bill to maintain global business profits.

Nick Corbel, the bluff Jerseyman who is head of the local branch of the Transport and General Workers' Union, organised Tuesday's noisy demonstration outside the offices of the States. Winding through the graffiti-free streets of St Helier, the protest was an unusual outburst in a community where many prefer not to speak out.

Mr Corbel said: "The States is run like a large company, for the benefit of large companies. You won't see too many bankers clutching their P45s. Our concern is that increasingly on Jersey we have a society of haves and have-nots. I'm proud to be from Jersey but it saddens me what has happened. This has become a greedy little rock."

It is a charge which is greeted with exasperation by Senator Frank Walker, Jersey's de facto political leader. The wealthy businessman turned politician, who has been closely involved with drawing up the new fiscal strategy, is unapologetic in his defence of the financial services' role.

From his tower block office overlooking the rows of brass nameplates, Senator Walker said: "I would not like to imagine where we would be without the financial sector. The income the island derives from it has given us excellent public services and little or no unemployment for decades. We have to protect that position by making ourselves highly competitive, and I make no apology for maintaining our status at the forefront of the industry. Without it our way of life would be threatened."

Indeed, there can be little doubt that Jersey and the big money it oversees have made enthusiastic bedfellows. The financial services sector employs 12,000 people, a quarter of the workforce, and accounts for two-thirds of the island's gross domestic product. Last year it made a profit of £1.05bn and contributed about £250m in direct and indirect taxes to the coffers of the States - a quarter of the annual budget. In comparison, Jersey's once-dominant industries of agriculture and tourism contributed £8m between them.

But it is the very depth of the island's dependency on its tax-efficiency that is raising concern. Critics fear that the island's wealth could disintegrate as the European Union, the British Government and other international bodies exert pressure on tax havens to tighten their regulatory structures and remove iniquities in their tax rates.

Jersey suffered a rude shock four years ago when it was accused, alongside 34 other havens such as Monaco and the British Virgin Islands, of harming world trade and investment by giving shelter to tax dodgers. The report by the Organisation for Economic Co-operation and Development (OECD) said the havens were distorting competition by attracting money from companies and individuals who do not want to pay higher tax rates elsewhere.

Jersey, which complained that it should not have been named by the OECD, insisted it has since been given a clean bill of financial health by institutions from the Treasury to the United Nations. Rather than deprive the Exchequer of billions, it invests heavily through the City and generates revenue, it said.

But others say the island has locked itself into a downward spiral by competing to offer the hyper-wealthy ever lower tax bills. John Christensen was Jersey's economic adviser for 11 years until 1998, when he resigned in protest at the tax haven strategy and set up a pressure group to campaign against tax avoidance. "Jersey is engaged in a kind of race to the bottom," he said. "Traditional industries have been decimated. The island will become totally dependent on securing a share of a shrinking market. Prices will continue to rise until eventually it will become so expensive it will become a ghetto for the very wealthy."

It is a Domesday vision that has its adherents among the ordinary folk of Jersey, who have seen average house prices rise to £320,000. Aubin Le Pennec, 39, a public gardener for the past 18 years, shook his head in dismay as he contemplated the future for his toddler son: "Either he joins the lawyers and accountants or he leaves because he could never afford to live here. All they need now is people to do the gardens and clean the swimming pools. Jersey seems to be a rich man's club and if you haven't got a Rolls-Royce, you can't come in."

Some 64 per cent of single-parent families on the island are below the "relative poverty" line with an income of £4,150 a year or less. In contrast are the "11Ks", those named after the island's £6m-plus tax bracket who negotiate their own tax settlements.

"Ted" is one of them. The retired property developer, who did not want his name disclosed, said: "At the very least I pay a quarter in tax terms of what the guy who collects my bins does. I play golf all day while he probably can't even afford to pay for the house he lives in. I'm not going to pretend that's fair, but living in Jersey is like that - if you've got the money, at the moment you get the cream."