Wednesday 18 July 2018
Last September, I updated the Assembly on the overall financial position to the end of July. I was able to give exceptionally positive news, with a surplus emerging being an £11m improvement against the 2017 budget. This year, I am updating on the position to the end of June and, while there is some good news to report, I have to also include some measured doses of caution.
Given that income tax is by far the largest source of revenues, I had hoped to give an update on those figures for the second quarter. Unfortunately, due to the timing of this meeting and the deadline for submission of ETI payments, I am having to base the forecasts on the information available at the end of May.
The first quarter was a strong quarter for ETI receipts with year-on-year growth of 3.4%, which is 1% ahead of our budget. If - and I stress if - this trend continues, the outturn will be ahead of budget by between £3m and £4m.
There are still two weeks to go until first half payments are due with respect to all other income taxes - and I will therefore take a cautious view and refrain from making any forecasts at this stage.
In terms of the other sources of income:
- Customs duties remain on track to deliver the budgeted revenues, with shortfalls on tobacco being offset by slightly higher than forecast receipts from fuel duties;
- Document duty receipts and forecasts remain in line with budget. The first half of the year has seen a reduction in both the volume and value of local market transactions as compared with 2017.
At the six month point, the number of transactions is 12% down on the same point last year, with duty similarly down. However, the number of open market transactions has picked up significantly, with a corresponding increase in revenues meaning that overall, the document duty collected remains on track;
- There is a small shortfall on housing rents in the first half of the year, with both voids and rebates higher than anticipated. Although this is a small variance, I raise it as a note of caution, as we understand that, as a result of the recently implemented changes to Income Support, the number of voids has increased further, meaning that the rental income stream is likely to fall short by the end of the year;
- The final income stream worthy of mention is investment income. Both 2016 and 2017 were exceptional years for this income, but 2018 has been much more volatile to date and the overall return in the first half of the year is slightly negative. Building this caution into the forecasts means that there could be a shortfall of some £2m by the end of the year.
The picture on the expenditure side of the equation when I updated the Assembly in September last year, was an underspend against the budget of some £5m. The position is much tighter this year - as indeed it should be given that we have kept the pressure up for a number of years. At the end of June, there was a collective underspend of just under £1.5m - but with the forecast to the end of the year estimating an overall overspend approaching £2m.
This worsening position is being driven by three Principal Committees now forecasting that they will spend more than budgeted this year.
The first is the Committee for Economic Development. While there is a small underspend on the underlying position, further expenditure is being incurred this year by the Office of the Public Trustee in relation to one specific case, which may prove to be irrecoverable. The Office of the Public Trustee must, of course, act as an arm's length body, so while this is not strictly speaking an overspend by the Committee, as the Office of the Public Trustee is funded through the Committee for Economic Development's budget, this means that, overall, an overspend of £500,000 is currently being forecast. The Policy & Resources Committee notes the work of the Committee, officers and the recently appointed Public Trustee to manage and contain costs incurred.
The second is the Committee for Home Affairs which has yet to deliver against its budget reduction for 2018, leading to a forecast overspend of over £400,000. I am pleased to be able to report that an Oversight Group has recently been established with the President and Vice President of that Committee meeting with myself and Deputy Trott on a fortnightly basis (at least in the first instance) to seek to address this position.
The Committee forHome Affairs wishes to embark on a programme of transformation, which will lead to public services better equipped and fit for the future, while delivering lasting and real savings. The Policy & Resources Committee wholeheartedly supports this sustainable approach.
At the same time as developing these longer term plans, the Oversight Group will also concentrate on the delivery of tactical savings, such as those identified through the costing, benchmarking and prioritisation work, facilitated by PwC last year, to try and ensure that annual budgets can be met.
The final area of concern regarding expenditure - and this is no surprise - is the Committee forEducation, Sport & Culture which is forecasting, as anticipated in the 2018 Budget Report, a significant overspend against its cash allocation by the end of the year. This has arisen largely due to the lack of delivery of savings in either 2017 or 2018 against the budget reductions directed by the Assembly. This is as expected but there is some good news. At the time of the Budget, it was anticipated that the overspend would be some £3.9m. This has now reduced to £3.4m, thanks to the implementation of several savings initiatives, including the restructuring of the Office to the Committee.
I will repeat what I said in my last statement on this subject - these targets will never be met by tactical or one-off measures. They can only be delivered by wholesale transformation in the delivery of services.
I am pleased to advise the Assembly that the Committee forEducation, Sport & Culture is working hard to put together a plan, with a clear line of sight to deliver these savings over the medium term - and I am confident that this will be finalised shortly. Its development continues to be challenged, monitored and supported through the established Oversight Group.
In summarising the overall position, Sir, I would say that continued strength in the local economy is delivering the revenues we planned for this year, although volatility in world markets is providing a drag on this through disappointing investment returns. With regards to expenditure, the restraint on public sector expenditure remains successful overall but some pressures are beginning to show.
The pressures have arisen through the delivery of savings being seen as an exercise in its own right. Experience both in Guernsey over recent years and countless other public sector environments, shows that sustainable public services will only be delivered through the wholesale transformation of services and through being bold rather than 'tinkering' at the edges.
This means it is important to retain our unwavering commitment to Public Service Reform and all that entails. It is only through the pursuit of this reform that the savings we identified as possible in the Medium Term Financial Plan, will be delivered. Members will recall that the majority of identified savings will come through an overhaul of our approach to the procurement of goods and services (and doing so on a States-wide basis) and through what has been termed 'service design'. That is, the redesign of public services, with technology at their core, which can transform and improve the experience for all of us as public service customers, whilst also reducing the cost. This requires a fundamental organisational redesign of the public service - for example, as the Assembly recently agreed in respect of the creation of the Revenue Service for the collection of income tax and social security contributions - alongside, of course, modernised and revised staff Terms and Conditions. The Chief Executive is leading on this significant agenda and will require our political support if this is to be successful to support the delivery of the sustainable public services we aspire to.
I have said this before, but the need to deliver cost effective and efficient public services will not and should not change as a result of any improvement in the economic and fiscal cycle. It is incumbent on us all to challenge the status quo and ensure that opportunities to change the way public services are delivered, are fully explored and implemented. It is only by doing this, that we will begin to meet the challenges that the aging demographic will have on our longer term revenues and the shape of our public services.
In addition to the five themes for the delivery of savings identified in the Medium Term Financial Plan, I think we should consider adding one more - working more closely with Jersey.
The inter-island meeting on 25 June demonstrated a clear commitment to work together on making public services more efficient and effective. In her statement on 27 June, the President of the Committee forHealth & Social Care, referenced the agreement to introduce a shadow Channel Islands Health Authority to promote joint working in health and care, to support the improvements in the provision of those services in both communities.
There will also be the establishment of a formal partnership for public sector procurement, including contract and supplier management, to improve value for money and reduce costs across the Channel Islands. In addition, we have agreed to set up a joint digital transformation board in order to work together on the delivery of technology, to speed up - if possible - online services for islanders, which I mentioned earlier.
To ensure that we unlock the financial benefits from this work, we will now consider whether the time is right to set specific targets for savings from joint island working in the Medium Term Financial Plan and Jersey's equivalent. This will be the subject of discussion as part of our work on the 2019 Budget.
The Policy & Resources Committee's focus is now firmly on the Budget for next year and - in particular - delivering it in line with the Medium Term Financial Plan. All other things being equal, if we choose to follow prior practice, the increase required in excise duty on alcohol would add around 2p to a pint of beer. Fuel consumption continues to drop year-on-year in line with previous forecasts, highlighting once again that the current system for taxing motoring entirely through fuel use is wholly unsustainable. The States have directed that this be reviewed and this review has begun, working with the Committee for theEnvironment & Infrastructure. However, it will not have progressed sufficiently far for any alternatives to be recommended in the Budget Report to take effect in 2019. In the absence of this, if we simply choose to recommend maintaining the real value of motor fuel in our tax system, we estimate that this would translate into an increase in duty of 3.2p per litre.
The extant States' policy on tobacco directs us to increase duty by 5% in real-terms. This would add about 35p to a packet of cigarettes. The States is also of course already committed to a 7.5% real terms' increase in domestic TRP.
However, it should also come as no surprise to anybody in this Assembly, or in our community, that in addition to those normal changes we will also need to raise £3m additional revenues next year to adhere to the Medium Term Financial Plan. As I set out in my recent speech in opening the debate on the Accounts, we provide a wide range of services to our community, the overall standard of which undoubtedly compares favourably with developed jurisdictions across the world - and we do so at a level of aggregate taxation which is substantially lower than the OECD average.
Raising revenues is a key component in the delivery of a sustainable financial position in the medium term, but so too is the continued restraint on the size of the public sector and delivering the transformation in services to ensure they are fit for the future.
Sir, in summary, this States has developed and approved for the first time a Medium Term Financial Plan to guide us in this term - and I am pleased to say that, broadly, at this point we appear on track to deliver against it. Steady as she goes.