Wednesday 27 February 2019
Update on the Provisional 2018 Year End Financial Position
This time last year, I reported that the provisional results showed that 2017 had been an extraordinary fiscal year; and an encouraging indicator of renewed strength in our economy.
The updates which I gave during 2018 - in July and in the Budget Report published in September - have also included good news overall, which more than offset any shortfalls on certain revenue lines or possible overspends.
We now have the provisional financial results for 2018. I am pleased to be able to give further positive news. I must of course stress that the numbers I will quote are provisional and still subject to final adjustments and audit.
- General revenue income grew to £438m, an increase of approximately £8m, or just under 2%, on the 2017 revenues. The result is also comfortably ahead of the budgeted position of £431m.
- Committees and Authorities have collectively underspent against their budgets by just under £2m.
- The States' Trading Supervisory Board has remitted £3.5m to General Revenue from States' Trading Assets and property sales.
- Transfers to the Capital Reserve totalled just under £57m.
I do not intend to breakdown the numbers in great detail, but would like to highlight certain specifics:
- Firstly, following on from the strong year for income tax receipts in 2017, 2018 has been another solid year.
ETI - the income tax collected through employers' payroll - has grown by approximately 1% on a like for like basis - in other words, after allowing for the increases to personal allowances and the changes to the withdrawal of allowances for higher earners. This is largely accounted for by an increase in the numbers employed in the economy, including those working beyond traditional retirement ages. This is a continuation of the trend of total employment increasing every quarter since the middle of 2015, which is very good news indeed.
Company income tax receipts rose from £70m in 2017 to about £71.5m in 2018, a 2% increase. Within this total, collections from banking profits increased by over 7.5% in 2018 to £28m.
Although the increases in income tax receipts have slowed from the bumper year which was 2017, I am pleased to note that real-terms growth in this vital income stream has been maintained.
- 2018 was an exceptionally strong year for document duty receipts. Although the total number of conveyances was broadly similar to 2017, the different make-up of the transactions led to income increasing by £4.8m to £17.5m. In particular, the number of transactions over £1m increased by 70% compared to 2017 - and the total number of open market conveyances rose by 140%.
- Receipts from customs duties also performed well in 2018, exceeding budget by £1.2m or nearly 3%. This was driven by a combination of factors including: favourable summer weather influencing alcohol sales; and fuel volumes which only reduced by 1.2% (rather than the 2% trend on which the budget was based) resulting in this revenue stream exceeding budget by £0.5m.
- However, not all revenues were positive in 2018. Our investment portfolio experienced a 3.7% decline in value over the year, against a backdrop - as members will know - where global stock markets showed substantial volatility. December was a particularly weak month, with an in-month fall in value of 2.4% - which is unfortunate when we need to take a snap-shot of value at 31st December for the purposes of preparing the accounts.
This volatility is obviously disappointing - but is also to be expected and is entirely normal on an investment portfolio which is invested for the long-term. For example, by contrast, this time last year I was able to report that we had seen gains on the long term investment reserve of 11%.
Our investments, despite the poor result in 2018, have still returned an average of 7% per annum over the last three years, which is in line with the set investment target. In addition, it is worth noting that we have seen a positive bounce back in markets in 2019 to date, with returns in the period to 21st February being around 4.3%, recouping the 2018 loss in value.
- This Assembly set a target for capital returns from States' Trading Assets as part of the Medium Term Financial Plan of £25m over the four year period. The target agreed as part of the 2018 budget was £5.5m and a total of £1.5m was received in 2018. However, I am pleased to report that the reason for the shortfall was simply the timing of the approval of loan agreements to enable returns from the Guernsey Dairy and Ports - and that £4m in relation to these returns will be received in 2019. These returns will be transferred to the capital reserve.
This timing shortfall in 2018 has led to a lower total transfer than was originally budgeted to the capital reserve. However, importantly, I can confirm that the transfer from general revenue was in line with budget at £53m; and an additional £1m of property receipts were generated in 2018 above the budgeted value. And, as I have already noted, the timing shortfall will be rectified in 2019.
The level of funding put aside in the Capital Reserve is therefore in line with the agreed policy and growing year on year. Actual expenditure on projects is however still lagging behind plans and aspirations, with only £48m spent in total during 2018. Of this total, £10m related to routine minor replacements; and £30m related to one project - the Waste Transfer Station - which was of course originally not going to be funded from the capital reserve at all.
Policy & Resources are monitoring the whole capital portfolio and I am pleased to say that we expect this year should see several more projects beginning to come to fruition. Imminent decisions will also be sought in regard to some major projects, for example, the modernisation of the Princess Elizabeth Hospital and the transformation of the Education estate over the coming months. As I have said before, it is vital that we bring forward the development of capital plans if we are to ensure that our public services have the infrastructure they need and our economy benefits from this investment.
- As I said in opening this statement, in terms of revenue expenditure the overall position was an underspend of just under £2m. This was in line with the forecast outturn published in the 2019 Budget Report. However, the positions of a number of Committees are worthy of mention.
- The Committee for Education, Sport & Culture submitted a 2018 budget of £3.9m in excess of cash limit Therefore, at the beginning of 2018, the likely level of overspend was £3.9m. The forecast outturn included in last autumn's Budget Report had seen this forecast overspend fall to £3.2m, due to the realisation of budget reductions in year of some £300,000, plus underspends on various budget headings. I am now able to report that the position at year end was that the overspend had fallen to just over £2m.
The Committee are to be congratulated for this improvement in the position. But I must also remind Members that there is still a £3.5m savings target outstanding moving into 2019.
It is therefore vital that focus remains on the plans already put in place and those being developed through the transformation programme to deliver against this target in 2019 and future years.
- The Committee for Home Affairs was forecasting an overspend in 2018 as a result of non-delivery of its savings target in year. At the time of the Budget Report, this overspend was estimated to be £400,000. Unfortunately, expenditure increased towards the very end of the financial year resulting in an overspend totalling just over £700,000. This additional expenditure came very late in the year and news of which was a surprise to both the Committee for Home Affairs and the Policy & Resources Committee. Both Committees are understandably disappointed with this outturn, especially given that the risk of an overspend beyond the undelivered savings had not been identified as a risk of an overspend had not been identified during the monthly meetings of our joint Oversight Board. Following initial investigation, we now understand that there are several reasons contributing to this position including non-recurrent costs in relation to Brexit - we now need to further investigate and better understand why this came as a late surprise to both Committees. This will almost certainly result in some changes in processes and procedures to mitigate the risks of it happening again.
Both Committees will also be working together to ensure that plans are put in place to deliver savings in 2019 and future years; to ensure that operational cost pressures can be better managed as they arise in the year; and to ensure the delivery of so far undelivered but agreed savings targets.
- Members will recall that the new Income Support scheme was successfully launched at the beginning of July. Although it is still very early to start drawing definitive conclusions as to the ongoing costs of the new scheme, there was a £0.9m underspend against the budget for 2018 as a result of approximately 300 fewer claimants than assumed. This represents the majority of the overall underspend of £1.1m for the Committee for Employment & Social Security. Further analysis will now be required to understand the likely impact on the expenditure for 2019 and future years.
Before I summarise the 2018 position, I must introduce a note of caution. With a matter of weeks until the UK is timetabled to leave the EU and with no agreement as yet as to the form of that exit, there is a substantial risk of economic disruption with a consequent knock-on impact on our public finances.
There are also expenditure pressures continuously arising, not least as a result of policy development. We seek to ensure that those cost pressures and developments requiring funding are incorporated into our budget when they are prioritised and help deliver on the outcomes set out in our Plan for Future Guernsey. But we must remember that we have finite resources. It is therefore vital that we continue to develop our approach to prioritising the work we undertake and the resources we apply to it.
That is why it is so important to plan for the medium to long term and the challenges we know lie ahead.
Fortunately, the results in 2018 are consistent with the trajectory set out in the Medium Term Financial Plan, which saw us returning to a balanced budget, before moving into a sustainable surplus. If we are to deliver a sustainable surplus then we must remain disciplined and continue to seek to deliver on the targets for revenues and expenditure we set.
We do not underestimate the challenge of raising further revenues from our economy. The Policy & Resources Committee has begun the task of researching the options, suffice to say that none of them would we categorise as 'easy'. In this regard, if we can satisfy ourselves that the trends in increased revenues seen in 2018 are systemic and not cyclical, then this may relieve (although not remove) the pressure on the requirement to raise new revenues in accordance with our agreed plan.
The need to deliver cost effective and efficient public services with a smaller number of posts will not and must not change as a result of an improved economic and fiscal position. 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.
For example, later this year one of the major initiatives underpinning Public Service Reform, is the programme reviewing the entirety of our supporting technology known as Future Digital Services or FDS. This will move from concept to delivery stage and this Assembly will be asked to make a decision to allow that to happen. This programme will require investment in order to deliver on its three pillars of: 1) transforming business as usual IT, so that it 'just works'; 2) enabling and accelerating Public Service Reform; and 3) supporting the wider economy. This will be vital if we are to deliver on the ambitions of initiatives such as our agreed Partnership of Purpose for health and care services and the transformation of education, as well as radically improving a range of services we offer to the community, such as the Revenue Service of driver and vehicle licensing.
The Future Digital Services technology enablers will also be a vital element of the programme of organisational and service design which is intended to improve the services received by the community, whilst reducing the number of posts required to provide those services.
Members will recall that significant financial savings - estimated to be at least £10m per annum - should be realised through improving processes; becoming leaner through re-structuring to remove duplication; and integrating and digitalising services.
Sir, returning to 2018, we have recorded a surplus for the year approaching £10m - about £8.5m above our original budget for the year. The Policy & Resources Committee will now need to understand the short and medium term consequences of this improvement. Critically, we will need to understand the recurring, cyclical and one-off nature of the revenues before building these results into the planning for the 2020 Budget.
Members will recall that the Assembly agreed that the surplus achieved in 2017 be used to top-up the Future Guernsey Economic Fund; to set aside funding to manage the Brexit 'transition'; to establish an overseas aid and development impact investment fund; to establish a pilot fund for participatory budgeting; and to rebuild our reserves.
Within the context of the priorities set in the Future Guernsey plan, we are now in the fortunate position of being able to consider how the additional revenues from 2018 might best be allocated and applied to deliver maximum benefit to the community and our economy.
In summary, 2018 was a year in which our public finances clearly benefitted from growth in our economy: income tax receipts up; document duty receipts up and customs and excise duties up. It was also another year in which we enjoyed good control of expenditure. This is a good base on which we can plan to deliver our agreed priorities.
Guernsey can be proud of the decisions which have been taken in recent years to improve our public finances and eliminate deficit spending. It has not been easy, comfortable or pain-free. But islanders can be assured that the Policy & Resources Committee is determined that any underlying improvement in our tax receipts are not used to soften the need for restraint or to slacken the pace of transformation in public services;
But, if possible, should be used to reduce the need for new or increased taxes in 2020 and future years, recognising as we do, the substantial pressure there has been on taxpayers for the last 10 years.
Deputy Gavin St Pier