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Budget speech made by the President of the Policy and Resources Committee

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Tuesday 06 November 2018

Budget speech 2019

Mr Bailiff, in accordance with Rule 17, I declare an interest in proposition 24. In accordance with the Rules, of course, I recused myself from my Committee's discussion and decision. I will be voting for the proposition.

It is an honour to present the States of Guernsey Budget for 2019 on behalf of the Policy & Resources Committee. I'd like to begin by thanking all across the States involved in preparing this Budget, particularly of course the States Treasurer and Assistant States Treasurer. And my thanks too to my fellow Committee members, not only for this Budget but their camaraderie and commitment over the last year.

I want to spend a few minutes looking at the current economic climate against which the Budget has been prepared. Since publication of the Budget Report, there have been a number of releases of economic data which are worthy of mention.

Net immigration for 2017 was more than 200 people, which just compensates for the aging of our working age population. If this level of migration could be sustained, our future policy challenges would be more manageable. Whilst only one year, taken in combination with our positive GDP figures and employment numbers, this is encouraging and a positive sign for the strength of our economy. In respect of employment, the signs are again largely positive - our participation rate - the percentage of people in our population working - continues to grow. The rate of increase may be slowing, but this is somewhat inevitable since we already have higher than average participation rates. Employment in the construction sector is finally showing some consistent signs of recovery; we have real earnings' growth. Finally, although not due for formal release until later this week, the latest residential property data, will show a significant increase in the number of local market transactions during the third quarter of 2018. This quarter has been the busiest quarter for local market property sales since 2011 and, for only the second time since before the financial crisis, more than 250 local market houses have been transacted in a quarter. There were 21 transactions of £1million or more, including 12 of the 17 open market properties sold in the third quarter.

Before we look forward to 2019, I want to look back for a moment. 2017 was a very good fiscal year. I remind members that there was growth in many sources of revenue income - personal income tax, corporate income tax, document duty receipts and investment returns; there was collective underspending of budgets and a real-terms' reduction in expenditure compared to 2016. Of course, there were a number of one-off receipts and exceptionally good investment returns that contributed to this positive position - and these are unlikely to be repeated - and certainly we cannot budget for them to be repeated. So far in 2018, overall we are slightly ahead of budget but we will not repeat the 2017 outturn. However, the 2017 success means that there is £23.3million available for appropriation. This Budget recommends how that surplus is appropriated. The largest tranche - £12.9million is being recommended for transfer to the Core Investment Reserve - increasing its value to 41% of the 2019 revenue budget - another step - albeit relatively small - but an important step nonetheless, towards the Medium Term Financial Plan target of 100% - or, in other words, one year's spending. This step adds further resilience to our overall financial strength - and contributes to ensuring sustainable public finances. I very much hope that it will be possible to recommend more transfers in the coming years.

We are also recommending funding for replenishing the Future Guernsey Economic Fund. It is so vital that this is successful as the continued strength of our economy is a critical foundation to supporting our quality of life and community. We are recommending establishing a Brexit Transition Fund - needed to support urgent and necessary measures to manage Brexit in a controlled and timely manner and mitigate risks that may arise. It is frustrating but obviously unavoidable that we have had this cost and disruption imposed upon our community. But I am really pleased that there is the opportunity to establish two new and exciting funds that seek to deliver Policy & Resource Plan objectives in a progressive and innovative way.

Firstly, the Overseas Aid & Development Impact Investment Fund is an opportunity to make investments that could make a different, more lasting impact in the world's least developed countries and with sustainable objectives in mind. This £1million fund will complement and be in addition to the nearly £3million budget for grants by the Overseas Aid & Development Commission.

Secondly, the Participatory Budgeting Fund, also with £1million, is being established, having been flagged in last year's budget. This will enable the community, rather than government, to decide on projects that they assess will address the greatest community need. For this initiative to succeed, it is vital that it is run by the community for the community; and therefore we intend to partner with a third-sector organisation to undertake the process of seeking, receiving, assessing and prioritising ideas from the community.

The role for government in this matter is limited to making the funding available; setting the framework within which the scheme will operate; and ensuring that we are able to learn from this pilot, before deciding whether to continue or expand it in the future. We intend to lay an amendment to place beyond doubt that in designing the framework in which the fund will operate, we will consult with all relevant committees but specifically the Committees forEducation, Sport & Culture, Health & Social Care and Home Affairs.

Turning now to the Budget for 2019. The duties and powers of the Policy & Resources Committee as set out within its mandate include "To advise the States and to develop and implement policies and programmes relating to:........fiscal policy, economic affairs and the financial and other resources of the States, which includes.......setting the framework for the planning, approval and control of public expenditure; and preparing the States' budget and submitting it to the States annually"

In carrying out these duties and exercising these powers in respect of preparation of the 2019 Budget Report, the Committee had very firmly at the forefront of its thinking that the proposals it makes must deliver on the various strategies, plans and programmes which have been approved by the States.

Firstly, the Fiscal Policy Framework, which sets the parameters, agreed by this Assembly, within which the States should act. Through this framework we provide a commitment to stability and transparency that offers reassurance to our community and business that Guernsey will retain a prudent fiscal policy aiming for long-run permanent balance.

It incorporates clear limitations on acceptable temporary deficits; a maximum permissible size of the public sector and a commitment to limiting public sector growth; it contains a commitment to sustainable investment in public infrastructure; and limited and clearly defined government borrowing.

I am, of course, delighted to be presenting, for the second successive year, a fully balanced budget delivered within the boundaries set by the Fiscal Policy Framework. This is undoubtedly the reward for the difficult but firm discipline that has been exercised over the last decade in controlling expenditure and increasing income, so returning stability to the island's public finances.

The return to a budget surplus position has enabled the allocation, of a modest amount of additional funding to Committees in order to meet growing service demands and developments.

Excluding the Income Support Scheme, these allocations total £6.1million - which is nearly £3million more than that envisaged within the Medium Term Financial Plan, including £2million to the Committee for Health & Social Care; and nearly £900,000 to the Committee for Home Affairs, in order to meet international obligations under the EU General Data Protection Regulation provisions.

At this stage, it is important for me to be clear that the additional funding allocated to Committees has, under the Fiscal Policy Framework, onlybeen possible as we have a budgeted surplus. Should the budget be amended in such a way that results in the elimination of that surplus and a budgeted deficit position, it will be necessary, if the States is to comply with the Fiscal Policy Framework, for measures to be implemented that will at least return us to a balanced budget - either we will need to propose income raising measures or reduce expenditure budgets. We will move those consequential amendments later in debate, if required.

Whilst we have been able to recommend a full transfer to the Capital Reserve in accordance with the Framework target policy, I take this opportunity to reiterate concern that, over recent years, there has been limited visible delivery on the portfolio of capital programmes and projects. We must invest in our island infrastructure; and our public services must have the buildings and equipment they need. Further, it is vital that we do not merely maintain and replace existing assets, but that we invest to enable transformation in the delivery of our services and, increasingly importantly, to facilitate and drive growth in our economy.

The Policy & Resources Committee reiterates its commitment to facilitate acceleration of the delivery of capital projects where it is reasonable and practicable to do so; and, in response to feedback from committees, we will now be establishing a small team of capital business partners to support committees' acceleration of delivery of the current portfolio - and to commence detailed planning for the next portfolio period.

Turning now to the Policy & Resource Plan: this Assembly's strategic policy document that determines which policy work should be given priority by government - and how such work will be resourced. As part of last year's Budget, the States agreed the prioritisation of twenty three specific policies designed to deliver the outcomes detailed in the Policy & Resource Plan. This budget incorporates provisions within revenue Cash Limits for progressing delivery of specific elements of the Policy & Resource Plan. The most significant additional expenditure item is the final tranche of funding for the Income Support scheme, which was introduced in July 2018. This scheme costs some £4.25million more than the Supplementary Benefit and rent Rebate Schemes it replaced, which constitutes a significant commitment in improving the welfare system and will undoubtedly benefit many low-income households.

There are, of course, limited resources available and therefore it is vitally important that resources are focussed on delivering on our agreed policy priorities and not diverted onto other matters.

It has become increasingly apparent that there is insufficient resource within the States to deliver the priorities in the Policy & Resource Plan. Therefore, this Budget is providing funding for a small pool of additional policy officers to be recruited and deployed across all committees in order to facilitate development and delivery of prioritised policies.

There is undoubtedly currently pressure being experienced by the Law Officers of the Crown in being able to discharge their functions across the Bailiwick and maintain the delivery of a wide range of legal services. There has been a significant increase in the volume and complexity of their workload which is adversely impacting on response times, leading to challenges in the delivery of operational services. It is recognised that these issues need to be addressed through a combination of transformation to create a modern and more efficient service and the provision of additional resources. The Policy & Resources Committee has approved funding from the Transformation and Transition Fund to develop a transformation programme and is also recommending a significant Cash Limit increase of £460,000, as the first tranche of an additional funding requirement of nearly £1million.

The additional resources recruited will also ensure there is capacity within the service to implement the transformation programme. Whilst the Committee is unable at this stage to offer a firm commitment regarding future Cash Limits, it is fully expecting that the 2020 Budget will include a recommendation for a further Cash Limit increase. The Law Officers and the Committee are working collaboratively to initiate and oversee the transformation and, recognising their success in other areas of the States, have agreed to establish a joint Transformation Oversight Group.

The Medium Term Financial Plan is the States' approved strategy designed to ensure the finances of the States can support delivery of the outcomes set out in the Policy & Resource Plan, whilst ensuring the States achieves and maintains a balanced budget, before moving into a sustainable surplus.

This will also enable further rebuilding of the Core Investment Reserve, which was drawn-down to fund eight successive years of budget deficits.

In accordance with the position outlined in the Medium Term Financial Plan, this budget includes modest increases in taxation, which are anticipated to raise £3.5million of additional revenue. As directed by the States, these revenue raising measures are predominantly targeted at those individuals and entities considered most able to bear the burden. This year that includes a higher rate TRP band for accountancy and Non-Regulated Financial services businesses. We are proposing a further significant step in making our personal income tax system more progressive, raising over £1.5million more from those in our community considered most able to pay, through the implementation of the third phase of the withdrawal of personal allowances for higher earners and increases in the Income Tax caps. Those earning incomes of over £100,000 will progressively have their entitlement to personal tax allowances withdrawn - resulting in a tax system for those in this category, where 'twenty per cent means twenty per cent'.This has enabled another real-terms' increase in the personal income tax allowance, which will most help those on lower and middle incomes. 2019 is the third consecutive year in which a £500 increase in personal income tax allowances is recommended.

Over this period, some £4.6million will have been redistributed through this process of withdrawing allowances from those most able to pay in order to provide a tax cut for everybody else. The combination of these initiatives has significantly improved the progressive nature of the personal income tax system. It must be acknowledged that our personal income tax allowances - even after a further £500 uplift, remain behind both the UK and Jersey - especially given the UK Chancellor's decision last week to increase the UK's to £12,500 from the 5 April next year. Such comparisons are easy but false. We must remember that our government taxes the community at about 19% of GDP; the UK is double that at 38%.

Our room for populist budget 'give aways' is much more limited. It is also much easier for those jurisdictions which have more diverse revenue bases than we do - and in the UK's case, a willingness to fund such largesse with more government borrowing, currently totalling £1.8 trillion. Having said all of that, maintaining our tax competitiveness for low and middle income earners will remain a challenge in the coming years.

In relation to TRP, it is worth pointing out that the States decided in 2015 through the Personal Tax, Pensions & Benefits review to double the contribution in real terms from this source over 10 years by means of a 7.5% real-terms' increase each year. Similarly, the States decided to phase out the age-related tax allowance supplement by freezing it until the personal allowance had caught up. If the States - as is its prerogative - chooses to deviate from those previous decisions, it must do so in full knowledge that it makes maintaining tax competitiveness by, for example raising our personal tax allowances, that much harder, if not impossible.

Whilst speaking of TRP, it is worth putting on record that if proposition 30 is approved, it is the Policy & Resources Committee's intent to include in the 2020 Budget Report this time next year, an appropriate impact analysis in respect of introducing graduated TRP for the 30% of properties which have more than 200 TRP units. This will enable the States to have an informed view before considering the requisite Ordinance to put this into effect in 2020.

It is also worth explaining that the annual real terms' increases of 7.5% are part of the assumed base line in the Medium Term Financial Plan; on the other hand, the proposals for a graduated TRP would be one of the measures contributing to raising the £3.5m a year of additional revenues envisaged in the MTFP. If the States adopt amendment 3, when laid, they must do so knowing that it puts a hole through the Medium Term Financial Plan.

Whilst the income increases play a significant part in improving the States' financial position, the Medium Term Financial Plan provided that expenditure savings of double their value would be delivered. The delivery of expenditure reductions is fundamental to the sustainability of the States' financial position - and as a source of funding for coping with increased demographically driven service demand, implementing new service developments - such as an equality and rights organisation - and making changes that deliver on committees' policy objectives.

The in-year savings forecast to be delivered in 2019 of £4.6million does fall short, by £1.5million, of that estimated for 2019 in the Medium Term Financial Plan.

However, this is a timing delay - the overall savings for the period of the Medium Term Financial Plan, we believe, remain in line with target - at £26million a year on an ongoing basis by 2021.

A key component of delivering these savings is the success of the Organisational and Service Design programme. There is nothing 'new' or 'unexpected' about the proposed changes recently announced. The Framework for Public Service Reform was released and endorsed by the States in 2015. That said that it aimed to deliver "an organisation designed around meeting community needs, rather than expecting customers and users to adapt to the public service's internal procedures and structures." The Medium Term Financial Plan approved in June 2017, included some £7.5million of savings to be delivered through service design which, I quote, "at its core, is about the customer focused review and re-design of services, with the aim of creating an effortless user or customer experience." It went on to say that "when cost savings are made through changing services, a significant proportion are likely to come from reducing pay costs. In some cases, particularly where services have been digitised, these savings will come from the need for fewer staff in those areas which have been the subject of change and improvement."

This is what the Chief Executive is now seeking to do and asking for financial support to implement.

The re-design of the civil service and the digitisation of core services is an essential element in the overall reform of public services. Not only is it necessary in order to contribute to the objectives set out and agreed in 2015, but it is also critical in delivering the savings we must deliver- and which we have committed to our community to deliver. These savings are also critical in the very sustainability of our transformation efforts. Without the delivery of savings over the next two years, the Transformation and Transition Fund will be depleted ahead of the fruition of HSC's Partnership of Purpose or the implementation of education reforms through one college on two sites. We need to save in order to be able to invest in those and other transformation projects.

The Committee is proposing that a "substance" requirement is introduced into the Guernsey Income Tax Law for companies tax resident in Guernsey undertaking specific "geographically mobile" activities.

I am confident that these proposals will dispel the concerns the EU's Code of Conduct Group for Business Taxation. They raised these concerns during a review of the tax cooperation of third countries. Guernsey made a high level commitment in November 2017 to address these, and this lead to a positive review by ECOFIN, the EU Council of Finance Ministers, in the first quarter of 2019. 

The Code Group found that Guernsey was cooperative in terms of tax transparency, fair taxation and anti-Base Erosion and Profit Shifting compliance.  However, the review brought forward a wholly new concept of 'economic substance.'  The upside to this new requirement is that it will put beyond any doubt that we are an economy that relies on real economic activity and where businesses have a substantial presence within our jurisdiction.  As Deputy Trott has described it characteristically clearly: we have real people, making real decisions in real time.

The design of these proposals has followed months of hard work during this year, working closely with the other Crown Dependencies and with complex negotiations with the EU's Commission. 

We have sought to liaise and consult with industry - and we are grateful for their advice to ensure that the proposed legislation can work in practice, as well as meet the requirements of the EU.

These are important proposals with a need for the legislation to be enacted by 31 December 2018 to ensure that Guernsey meets its commitment. The relevant Ordinance is due to be considered at the 28 November States' meeting, following which the Committee will make the necessary regulations.

Recognising the need to provide as much information to industry and practitioners about these changes coming into effect in only a matter of weeks on 1 January 2019, the draft legislation and a joint Crown Dependency note on key aspects of the proposals will be published on the States' website this week. Officers will continue to work with their colleagues in the other Crown Dependencies in order to produce further, more comprehensive, guidance as soon as possible. I hope that these drafts will provide further certainty for business to help them adjust where necessary.

I noted the recent UK budget being billed as 'the end of austerity,' I considered whether this description could also apply to the Guernsey budget - recognising of course that Guernsey's version of austerity was always somewhat different to that of the UK - we have operated a number of years of planned, modest and managed deficits, funded from our accumulated reserves.

In some ways - yes, Guernsey has ended austerity. We are in surplus, tax cuts are being recommended through real-terms' increases in personal income tax allowances, expenditure budgets are growing to fund increased demand and service developments; and we are rebuilding our reserves. However, our surplus is small; and it is vitally important that complacency does not set in and we lose sight of the impact of the unavoidable demographic changes and the attendant increase in the dependency ratio; we must implement transformation in the way we deliver our services; and we must invest adequately and smartly in our capital infrastructure to ensure that we are best placed to respond to these challenges.

Looking back over the Budget Reports presented by this Policy & Resources Committee, they have incrementally developed into our current, enviable, financial position - the 2017 Budget had a theme of being responsible, fair, realistic and progressive; the 2018 Budget sought to balance the need to invest in our community's future and health in particular, with the discipline required to maintain financial stability; and this, the 2019 Budget Report builds on these very solid foundations. It's a budget which reflects the renewed strength in our economy and public finances; it is the reward for planning and fiscal discipline which has enabled focused investment in priority service areas and initiatives; and it is one we can all be proud of.

Whilst the Budget is compiled and submitted by the Policy & Resources Committee, as is its mandated responsibility, it is the budget for Guernsey and is rightly titled as such "The States of Guernsey Annual Budget for 2019". A budget is defined as a plan for a period of time expressed in financial terms - we all need to take collective ownership of the approved Budget, embrace it as our financial plan for 2019; recognise that it is designed to deliver on the direction set by this Assembly and undertake our Committee work in accordance with its financial terms.

Sir, we believe that the Budget Report being considered today is fair and balanced; fiscally responsible; and good for Guernsey and we wholeheartedly commend it to the States.

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