Wednesday 24 September 2014
The following statement, providing an update on 2014 Financial Position, was delivered by the Treasury and Resources Minister, Deputy Gavin St Pier, to the States of Deliberation on Wednesday 24 September 2014.
Mr Deputy Bailiff,
Thank you for the opportunity to make a statement up-dating the Assembly on progress with delivery of the Financial Transformation Programme, the overall financial position at the end of the second quarter, and the forecast to the end of the year. Like the curate's egg, it is good in parts: FTP has delivered, but there is more to do; expenditure overall is largely under control, but with some particular challenges; and revenues remain under pressure. This is a similar story to the one told in my Statement in May dealing with the first quarter. All of this informs my Department's thinking on the 2015 Budget Report - of which I will say more in a moment.
The FTP has helped transform a spending States into a more cost-conscious States; and wider transformation must now continue beyond the end of 2014 - and the Chief Minister has spoken about that in his Statement this morning.
The FTP is targeted to deliver at least £31m annual recurring revenue savings by the end of 2014. The programme has now signed off in excess of £28m, just £3m short of the minimum target. In getting to this point, the States has so far spent £54m less than it would otherwise have done. That £54m has remained in the Contingency Reserve - Tax Strategy, and has significantly extended the life of that reserve and our ability to make investment returns on it.
As I highlighted in my last statement on the matter in May, the Policy Council now considers it unlikely that the full £31m will have been signed off and delivered before the end of the year, although every effort must continue to be made towards doing so. There are many projects and initiatives already underway which will see savings delivered in 2015 and beyond. It is vital that these benefits, which have been identified and planned, continue to be developed and implemented beyond the end of this year. Estimates show that the total recurring revenue expenditure reduction as a result of projects developed as part of the FTP could now amount to £35m, exceeding the original target by over 12%. However, it is also clear that these benefits will take longer to deliver than originally intended. We will take this into account in our budget planning for next year and beyond.
Both the Health and Social Services and Education Departments will have a balance remaining against their targets at the end of the year. Both Departments understand that they must and they will continue to work towards their targets in and after 2015. My Department has been working with them to factor this delivery into the 2015 Budget Report. We will also not lose sight of any other Department or Committee which has not met its FTP targets by the end of this year and they will have to deliver these after 2014 instead. There remain no easy options on this.
Sir, six months into the financial year, the revenue position was, like the first quarter, showing a continuing shortfall against our budgeted targets. This was in large part due to an estimated real terms growth in ETI receipts assumed in the budget, which has simply not materialised in the year to date. Further analysis of the receipts by economic sector suggests that, although there are increases in some areas (for example, construction) and decreases in others (like hostelry), there is no overall trend. Members will, I am sure, have noted in the most recent quarterly Labour Market Bulletin published by Policy Council on 17th September 2014, the 1% annual decline in the numbers of employed compared to the prior year. This will have played a part too. So, although ETI receipts importantly continue to be maintained in real terms, limited growth in incomes and the on-going falling numbers of people in employment, is a constant headwind to achieving our budgeted revenue.
Other income tax receipts are largely in line with budgetary expectations with some areas, such as tax received from banks, growing faster than our previous estimates.
Customs duties, company fees and document duty have all yielded in line with budget in the first half of the year and are - other than document duty, which remains sluggish - showing some growth over the same period in 2013. I shall return to document duty.
Taking the experience in the first six months, along with information held on the income tax system (regarding payments due by the end of the year) would suggest that we are likely to end the year with revenue income up some 5% on 2013, although still short of our budget estimates by some 1% - 1.5%, or between £4m and £6m. This will, unless there is a greater restraint on expenditure before the end of the year, also result in an additional draw down from the Contingency Reserve above that authorised as part of the 2014 Budget Report.
On the positive side, net expenditure by Departments and Committees in the first half of the year was more or less in line with the budgeted position. However, this overall result masks far more volatility at Departmental level. Here, some favourable variances across several Departments and unrequired provisions in the Budget Reserve are compensating for adverse variances in others.
In particular, the Education Department continues to struggle to cope within its allocated budget in 2014. This is not news, is no surprise and is due to the agreed timing in the delivery of many of its signed off FTP benefits falling after the end of 2014. This places additional pressure on the Department's cash position in year, which is having to be managed, to some extent, through one-off measures.
The Health and Social Services Department's position following the first six months of the year was a negative variance of some £2.25m, or 4%. This position has been relatively stable since my last statement to this Assembly on the first quarter's position.
The variance is largely the result of not yet having delivered a substantial portion of the Department's FTP target for the year - and partly due to pressures on the underlying 'business as usual' position.
As I reported in May, significant and targeted resource has been provided to the Department from the FTP team in order to try and maximise the delivery of savings in the year. However, despite this, it now looks likely that HSSD will be some £3.7m short of its overall target by the end of the year and the team must now focus on ensuring there are robust plans for delivery of these savings over a longer period.
The two Departments continue to work closely in order to monitor the financial position, including on-going monthly Ministerial meetings. The agenda covers the progress with delivery of HSSD's Financial Recovery Actions, which incorporate FTP performance. In addition, over recent months, significant attention has been paid to the 2015 budget for the Department - and ensuring it is as appropriate and realistic as possible within our fiscal constraints.
During my meetings with the HSSD Minister, it has become apparent that the Department is likely to overspend its authorised budget in 2014 by at least £5m. The HSSD Minister will say more about this in his Statement. This is clearly disappointing given the commitment given to achieving a balanced budget before the end of 2014. However, my Department is advised that there are many demands and pressures in the health and social care sectors and that these have proved difficult to control, alongside making real and sustainable reductions in the Department's baseline spending.
This forecast overspend means that it is likely that Departments and Committees will, in aggregate, overspend authorised budgets by some £7m or about 2%. This can be managed using the Budget Reserve without breaching our 'no real terms' increase in spending policy contained in the Fiscal Framework. This position was, to some extent, anticipated by my Department in the 2014 Budget when the size of the Budget Reserve was substantially increased in order to manage the situation when Departments had identified and initiated projects through the FTP, but where a full year's benefits was not delivered until 2015 or later. This is certainly the case for the Education Department, which has savings continuing to be delivered until 2018.
After taking this Budget Reserve into account and as a result of the shortfall on the revenue position already mentioned, it looks likely that we will end 2014 with a financial position marginally worse than budgeted. The latest forecasts put the overall position £2 - 3m down on original estimates which is within 1%. It would be disappointing to have to draw down more than planned from the Contingency Reserve again in 2014. I therefore urge all Departments and Committees to pay particular attention to spending for which they are responsible in the final three months of the year. Prudent fiscal management in the remaining period could result in an overall position in line with original estimates, which would see us end the year with approximately £54m in the Contingency Reserve - Tax Strategy.
Before closing Sir, I would like to briefly explain how our 2014 position impacts on our 2015 Budget planning. The Treasury and Resources Department believes that after six years of deficit, it is now time to balance the budget. The States has been running an overall deficit since 2008 which has been extended as a result of the unprecedented external economic environment. However, as our key trading partners' economies recover and as consumer and business confidence returns, it should now be our priority to deliver the balanced budget taxpayers expect.
It is critical that, in getting to that position, a focus on expenditure remains. The 'no real terms' increase in spending constraint in our Fiscal Framework remains as important as ever in providing discipline to our budgetary process. This budgeting round has seen requests by Departments for increases to cash limits above those initially allocated by my Department, rise - and in some cases, rise significantly. Given our fiscal envelope which prevents overall revenue expenditure increasing in real terms, these pressures have been exceptionally difficult to manage and not all requests are affordable. My Department considers it important to live within our means, while recognising and accommodating where possible the pressures under which many Departments are operating.
HSSD's needs present us - by which I mean, the States as a whole, not just T&R - with a massive challenge. It spends one-third of our General Revenue budget. The demands on health services across the world seem insatiable. This has contributed to persistent and recurrent overspends and much of the predicted overspend. This is unsatisfactory from a fiscal management perspective; and must be frustrating and demoralising for staff, management and the political board. However, investigations have started on the feasibility of benchmarking HSSD's spending with similar jurisdictions to better understand what the baseline ought to be, without which it is difficult to determine whether the services is over or under-funded. In order to raise the revenue we need to fund the services government provides to the public, we must also do all that we can to ensure that we have the right conditions in which businesses can form and flourish. But my Department is also aware, as it finalises its Budget recommendations to bring to this Assembly next month, that we need to ensure that we have appropriate funding in place and governance over it, to ensure that the States are in a position to support appropriate economic development initiatives that are capable of growing our economy and consequently our tax receipts.
I spoke earlier of our sluggish document duty receipts this year. These are the product of a property market with fewer transactions than in the recent past. It would seem that the document duty holiday introduced in last year's Budget has, at best, had only marginal impact. Most of the fiscal incentives we could deploy as the Housing Minister and Department will say, I am sure, risk stimulating increased demand and so prices; whilst a more important challenge remains the need to increase supply. However, we will continue to explore with Housing what, if anything, government could do to assist.
Sir, given our tighter fiscal position, you will have heard me say in the past that we must "sweat our assets." This is a phrase which is often used and most people will agree with, but what does it mean? Firstly, when it comes to the investments in our reserves, we must be very clear about what we are holding them for and for how long. This will help us in ensuring that the most appropriate investment policy is applied. With that in mind, we will be including proposals in the Budget in relation to our reserves and in particular the Contingency Reserve. Members will have heard me characterise this not as our 'rainy day' fund - which risks disagreement over whether or not it is raining and requires a relatively short term investment policy in case it starts raining - but instead as a very long term 'permanent reserve' or 'core investment fund', the excess returns, over and above the returns required to maintain the fund's real value, should quite rightly be available for re-investment in our island's infrastructure.
"Sweating our assets" in relation to our trading assets - the commercialised ones such as Guernsey Electricity and Guernsey Post - as well as Guernsey Water, the Ports, States Works and Guernsey Dairy - means that we need to clearly articulate the return which we expect to receive on the capital we have invested in those entreprises on behalf of taxpayers. That requires us to review and determine the most appropriate capital structures for each of those businesses; and that in turn will impact on our thinking in relation to the issue of a States of Guernsey bond as we seek to take advantage of record low interest rates to re-finance at lower cost our existing substantial stock of public sector-related borrowings, many of which are guaranteed by the States. We will be therefore through the Budget Report be seeking from the Assembly the maximum flexibility within our Fiscal Framework to enable us, if we can, to exploit the increasingly narrow window of opportunity available in the marketplace before interest rates start their inevitable upward rise.
In closing Sir, I once again stress the need for the States to continue to focus on expenditure restraint and urge all Members - as I know many do - to continue to challenge spending decisions presented to the Departments and Committees on which they sit.
I will continue to keep Members updated about our financial position through regular Statements in this Assembly.
ENDS
