Wednesday 26 March 2014
The following statement, providing an update on the States' Financial Position, was delivered by the Treasury and Resources Minister, Deputy Gavin St Pier, to the States of Deliberation on Wednesday 26 March 2014.
Mr Bailiff, thank you for the opportunity to make a statement updating the Assembly on the overall financial position for 2013.
As Members of the States well know, there is currently an annual requirement to draw down from the Tax Strategy portion of the Contingency Reserve in order to fund our on-going deficit. This arose as a result of the move to zero-ten in 2008. The budget for 2013 anticipated a requirement to draw down a total of £17m in order to cover the net deficit position. You may recall that in my last statement regarding the financial position in September 2013, I notified the Assembly that due to tax receipts being lower than originally anticipated, it was our expectation that the call on reserves would have to increase by £10m in 2013 to a total of £27m. The 2014 Budget Report gave more detail to this figure and the reasons behind it. Our estimate at that time, in October 2013, based on receipts and expenditure in the year to date, and forecasts by Departments, was that a £12m shortfall in tax receipts would be partially offset by marginally lower overall revenue expenditure.
Now that the preliminary year end results are available (which, to be clear, are still subject to final minor adjustments and audit) I am pleased to be able to advise that the overall drawdown from the Contingency Reserve should not now be greater than £25m, an improvement of £2m on our most recent forecast.
Before I talk through some of the key elements of the 2013 position, it is worth dwelling for a moment on the Contingency Reserve. In 2006, when the States made a decision to use up to half of the Reserve to fund the deficit resulting from the implementation of the zero-ten corporate tax strategy, it had a total balance of £204m. At that time, the fund was invested in 'suitable fixed income securities' and was making cash-like returns for the States. In 2007, the Treasury and Resources Department - led by Deputy Trott at the time - decided to change the investment approach and sought permission from the States to amend the investment rules in order to permit the addition of equities and other investment classes to the portfolio. This was in order to diversify the position and take advantage of the better long term returns offered by such investments. This change in approach has seen significantly improved investment returns over the period since implementation in 2008. These have helped extend the life of the reserve and have meant that, despite drawdowns of £86m since 2009, and the deficit persisting longer than was originally anticipated, the balance on the overall reserve at the end of 2013 was very similar to that starting point in 2006.
However, since annual withdrawals are currently required and due to the 'rainy day' nature of the remainder of the reserve, the present investment rules require that a minimum of 50% of the Reserve is realisable at or near current market value within seven days. This short term investment horizon comes at a financial cost. If we were able to introduce a longer term investment strategy, then returns could indeed be improved further and in turn we could make the Reserve work even harder for us. The Treasury and Resources Department intends to make recommendations to the Assembly regarding the future use and investment of the Contingency Reserve in the 2015 Budget Report.
Now, turning back to the key elements of the 2013 position.
Overall, our general revenue income for the year totalled £361m, which is £10m lower than originally budgeted. This shortfall was in large part due to collections arising from the extension of the 10% income tax band to insurance and fiduciary businesses, being lower than anticipated in its first year. I should say that this does not change our longer term forecasts for this revenue stream, as it is anticipated to be largely a timing issue.
There are two other revenue shortfalls that are worthy of comment. Firstly, individual income tax, which accounts for some 80% of the overall income tax receipts and incorporates all those who pay through ETI, fell short of budget by some 2.5%, or £6m, and showed no overall growth on the 2012 position. For the avoidance of doubt and as set out in my statement last month on the Income Tax Office, I can provide reassurance that this shortfall is not a result of the backlog of work in that office. The combination of the ETI scheme, interim assessments and late payment surcharges protects the collection of the majority of revenues. The shortfall underlines how the gradually declining number of people in employment and subject to ETI seen over recent years, leads to variances on this vital revenue stream which can have a significant impact on our year end outcome. Over the 5 years to 2013, employment in the finance sector has declined by 432 employees, including 2.1% or 138 people in 2013 alone; in addition, of course, only yesterday we learnt that real median earnings (after inflation) had fallen by 1.4% in 2013, which would not have been assumed in our budgets and forecasts. This only the second time since 2005 that there has been a real terms fall in earnings.
Secondly, document duty receipts ended the year almost £2.5m down against the original budget. This is an improvement of over £1m on the revised estimate contained in the Budget Report, which shows that there was some pick-up in sales over the final few months of the year.
In terms of expenditure, the end of year outturn was £346m against an authorised budget of over £349m. This compares to forecasts of year end outturn published as part of the Budget of £349m.
This overall £3m underspend conceals a number of overspends and underspends that I wish to bring to the attention of States Members.
Firstly, it should be noted that the year-end outcome is after allowing for the in-year exceptional costs in relation to the voluntary severance exercise of £4m, meaning that the underlying expenditure position would otherwise have been £342m. This one off cost will result in ongoing annual revenue savings of over £1.5m from 2014 onwards.
The majority of Departments and Committees underspent their authorised budget in 2013, after successfully delivering against their FTP targets. These collective underspends have offset overspends in two Departments.
First of all, the Housing Department has marginally overspent by £40,000 against its authorised budget due to reduced occupancy in its residential homes ahead of the transfer to extra care; and a decrease in Housing Control income as a result of a change in the profile of chargeable applications.
More significant is the year end outturn of the Health and Social Services Department. The Minister will shortly be making a statement which will cover this in more detail, but I should report that the Department overspent its final authorised budget by £300,000. However, Sir, it is important to note that this is after budget increases authorised by my Department during the year under its delegated authority. As outlined in the 2014 Budget Report, a budget increase in respect of off island placements totalling £700,000 was authorised earlier in 2013. This was followed by a further adjustment of £1.3m at the year-end, together with adjustments for voluntary severance - referred to earlier - and the normal in year adjustments for pay awards. In total then, the budget increases given to the Health and Social Services Department amounted to £3.7m and actual spend totalled £4m more than the original budget. Both Departments continues to work closely in order to monitor the financial position. This includes monthly Ministerial meetings with an agenda focused on progress with the Financial Recovery Actions, which are designed to enable spend within cash limit by the end of 2014. Deputy Dorey will no doubt explain shortly that significant risks remain in 2014 to achieving a balanced budget. This is particularly due to the timing of many of the benefits from projects delivered to reduce spend.
It is too early in the year to have any meaningful picture of the likely overall 2014 outturn. However, I would like to reiterate the challenges faced by the large Departments in delivering their FTP targets and hence achieving a balanced budget. This is particularly the case for the Education Department and I am also holding monthly meetings with the Minister of that Department, in order to closely monitor their financial position.
There is a risk, already acknowledged in the 2014 Budget Report, that these Departments will not be able to deliver all of their FTP benefits by the end of the year. An additional allowance has been made in the 2014 Budget Reserve in order to mitigate the risk this poses -and ensure the benefits from transformational projects, which may take slightly longer to deliver, are not jeopardised by a dash to deliver the cash by 31 December 2014.
Sir, I would like to take this opportunity to reiterate that life cannot 'go back to normal' at the end of this year once the five year life of the FTP has come to an end. It is clear that there are many projects and initiatives already underway which will see savings delivered in 2015 and beyond. We are also all aware of several significant spending pressures which are mounting (including in respect of health and long term care.) There will therefore be an ongoing need for continuous improvement and efficiency in the future, to ensure that these unavoidable pressures can be mitigated where possible and sustainably funded.
I would just like to take this opportunity give a brief update on progress with the development of the States Capital Investment Portfolio. Since the Capital Prioritisation report was debated in September last year, my Department has been working with all other Departments on the 19 pipeline projects to develop business cases and firm up costings. This is now progressing well; but the initial round of business case development by Departments and gateway reviews, has taken somewhat longer than anticipated. This has led to a short delay in the timeframes for my Department to define the portfolio and develop recommendations for this Assembly. It had been our intention to bring a further report for consideration before the end of the second quarter of this year. I regret that it will now be necessary to delay consideration of this matter until the July meeting of the States. Our priority is to ensure that the States Report we table for Members' consideration has been well prepared and fully considered and has not been rushed merely to meet a self-imposed deadline. I should stress that this should not delay the progress of any of the pipeline projects. Specifically, the team has worked closely with the Education and Public Services teams to ensure that such a delay will not impact on their planned timelines for the La Mare de Carteret Schools and Belle Greve Outfall projects respectively. In the meantime, my Board has requested that an update is prepared for circulation to all Members, hopefully before the end of April, to outline the progress made to date and the next steps required. This will also be made publicly available.
In closing Sir, I would like to briefly come back to the 2013 position. The overall deficit for the year is likely to be some £25m, or 7% of the general revenue budget, which is a slight deterioration on the 2012 deficit of £23m. As I set out earlier, this deterioration from 2012 and from the budget, has resulted from lower revenues rather than higher government spending. It is a real demonstration of the impact on public finances of lower income and profits in the economy. This underlines the need for the States to continue to focus on expenditure restraint, but also, of course, the importance of ensuring that the tax base is as resilient as possible to such economic pressures in the future.
It is my intention to continue to keep Members regularly updated about our financial position. I therefore anticipate making further Statements to the Assembly in May and September in relation to our performance during this year.