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Statement by the President of the Policy & Resources Committee - Financial Position

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Wednesday 04 September 2019

Thank you for allowing me to make another statement today updating the Assembly on the latest financial position for 2019 and looking ahead to 2020.

For the past couple of years, we have been able to give good news about our public finances. When reporting on the provisional results for 2018, I was able to summarise that it had been a year in which our public finances benefited from growth in our economy, with receipts from income tax, document duty and customs and excise duties all up. It was also another year in which expenditure was contained.

I have, however, also warned that the good results achieved in the recent past should not be taken for granted. I think many just assume that is the normal caution of the treasury. But it is, once again, a matter of weeks until the UK is timetabled to leave the EU. With no agreement as yet as to the form of that exit and growing political turmoil in the United Kingdom, there is a growing risk of substantial economic disruption, with a consequent knock-on impact on our public finances.

There are also expenditure pressures continuously arising and mounting for numerous reasons, including the real pressures which we have talked about for the best part of the last decade, including during the Personal Tax, Pensions & Benefits Review in 2015 and in preparing the current Medium Term Financial Plan. These pressures are now being felt as a result of our ageing population and the policy choices we make.

But before I get to the bad news, I will begin with some more good news. Our revenues are holding up well in 2019 and slightly exceeding our budget estimates.

ETI - the income tax collected through employers' payroll - has grown by over 4% in the first half of the year versus the same period in 2018.

This is as a result of strong growth of some 6% in Q1, falling to 2% in Q2. For the purposes of our forecast to the end of the year, we have assumed that Q1 was an outlier and therefore, along with other known changes, we are now expecting to exceed the budget for the year by approximately £800,000, or roughly 0.4%.

Income Tax collections for the first half of the year in respect of 'other individuals' and 'other companies' have been strong with both showing 10% year on year increases. Further analysis is required to properly understand the drivers for this, but the amounts showing as being due by the end of the year suggest that this trend will continue. This forecast would result in a favourable variance of approximately £7.5m. This is tempered somewhat by a reduction in the year-on-year returns for banks. All in all, we are forecasting a £5m improvement against our budget for all other income tax receipts.

Therefore, the overall forecast for income tax is growth on 2018 of just under 4% - and favourable to budget by some 1.5%.

2018 was also a strong year for document duty receipts and that trend is continuing in 2019. Receipts for the first half of the year were some 10% ahead of budget and 25% ahead of the same period last year. This is being driven by continued growth in the number of transactions, with numbers in the second quarter of 2019 the highest since 2012. Purchase price increases are also contributing to increased revenues with the average price now over 4% above the same period in 2018.

The last revenue stream that is worth mentioning is investment income. Members will recall that our investment portfolio experienced a 3.7% decreasein value during 2018. However, the first half of 2019 saw returns of over 8%. Our forecast to the end of the year is prudent and allows for some reversal of markets - and therefore in this rate of return. Nevertheless, we are currently forecasting that the investment income accruing to general revenue will exceed budget by some £3m in 2019.

Overall then, based on the first six months of the year, we are anticipating revenues exceeding the approved budget by almost £11m.

Now for the bad news. Unfortunately, the story on expenditure is not as good and I would like to draw Members' attention to three specific areas.

Firstly, although the majority of Committees are forecasting expenditure to be in line with, or below, budget, the notable exception is the Committee forHealth & Social Care. That Committee is experiencing pressures in multiple areas, leading to a forecast overspend in 2019 of £5m or some 4%. We understand that the majority of the cost pressures are in pay, with increasing use of agency staff being used to cover gaps, particularly in Community Adult Services. As 2019 progresses, confirmed recruitment to vacancies should reduce reliance on expensive agency staff, but this is placing considerable pressure on the budget.

The Committee is also reporting that there are non-pay pressures, particularly around high cost off-island expenditure, where there has been an increase in the volume of treatments being referred.

I know that the Committee for Health & Social Care shares our disappointment that despite considerable efforts to remain within budget the financial position has deteriorated so rapidly. However, the pressures being faced are real with hospital occupancy increasing, along with the average age of those being treated. This kind of pressure and volatility in costs demands an increased focus on financial controls and discipline and we continue to work closely with the Committee for Health & Social Care to monitor the situation closely and provide support where necessary.

Secondly, it is now clear that the savings budgeted for 2019 will not be realised in full. A total of £4.6m of savings were budgeted to be delivered in 2019. The forecast now indicates a shortfall on this target of £3.2m. There are two main reasons for this:

The delay in the move to the new organisational structure has also contributed to the savings shortfall in 2019.

Plans are currently being developed for 2020 savings which should start to see this work deliver against the ambitious targets previously endorsed by the States (and I will come back to this subject in a minute).

The third area of concern I wish to draw to Members' attention is the significant increase in the forecast losses for Aurigny Air Services in 2019. In the Annual Budget for 2019, the forecast losses for Aurigny were reported as £4.4m. As part of the 2020 budget setting process, the Policy & Resources Committee recently met with representatives of Aurigny and the States' Trading Supervisory Board and were informed that the forecast losses for 2019 have now risen to £7.6m; that is the losses have increased by over £3m, a rise of over 70%. This is clearly a troubling development as the airline's losses are borne by the taxpayer. And it is not sustainable. We are advised that numerous factors appear to be driving the deterioration. Most notable apparently is the impact of increased competition since the introduction of the quasi open skies policy last year.

The benefits to the travelling public and business of increased choice and lower fares are clear, but consideration must also be given to the material subsidy now being made from general taxation which, we must remember, diverts resources away from other critical public services. This cannot continue without debate and the endorsement of this Assembly. We will therefore be giving consideration to appropriate propositions to put to the States as part of the Budget Report to refresh the Strategic Review of Aurigny which took place in the early part of this States. The States' Trading Supervisory Board, the Committee for Economic Development and my Committee need to work together on this, so that the States can be allowed to make informed choices about the level of support which our community wishes to make to the airline to support our strategic needs and objectives.

Sir, before I summarise the outlook for 2019, I would like to take this opportunity to outline some of the matters being wrestled with by the Policy & Resources Committee in compiling a budget for 2020.

I am pleased to be able to say that (subject to any economic downturn, Brexit driven or otherwise) revenues are forecast to remain relatively buoyant, although (as previously reported) receipts from a specific settlement which totalled over £5m in 2019, will cease in 2020. We do not underestimate the challenge of raising further revenues from our economy, whilst also ensuring we remain competitive in tax terms, particularly for low and middle income earners. The Committee has considered the revenue raising measures which it will recommend in the Budget. Other than the routine increases to keep pace with inflation and in accordance with policies, none of the revenue raising options could be categorised as 'easy'; and none of them will be popular or welcomed by our community. Despite the electoral cycle, my Committee will not shirk from making those difficult decisions in presenting our recommendations to Members in the Budget Report.

In respect of those increases driven by policy, we will be recommending increases in the duty on both tobacco and fuel.

The States agreed the policy for fuel duty increases in July and we now know that this will result in a 2.2p increase. The Policy & Resources Committee will be recommending that half of this increase should take place upon budget publication with the remainder from 1 January 2020, in order to mitigate the change.

The real challenge in setting a budget for 2020 will be in dealing with the mounting expenditure pressures. The total value of Committee submissions above indicative cash limit is £33m, an increase of almost 8% - and that is before taking into account any increased expenditure on drugs and treatments as a result of any recommendations from the Committee for Health & Social Care following its review of the NICE TAs. We have been exploring (and will continue to explore) all options for maximising the amount of funding available to meet these requests. Committees will also be asked to review all their own revenue streams to ensure these remain set at appropriate levels.

One of the options being explored is around the level of the appropriation needed to the Capital Reserve.

We have to think carefully about how much money we are saving for capital projects if it's simply accumulating while we have very real revenue pressures. We also need to look at other ways of topping up the Capital Reserve. To that end and as I have said many times before, it is vital that we rationalise our property estate with any receipts from the disposal of surplus properties replenishing the Capital Reserve - and we need to up the pace of that process. I am therefore pleased to announce that before the end of this term, we will move the staff currently working in Swissville and Lukis House onto the Delancey site (subject to being granted suitable change of use permissions).

This move will not be a permanent and will not prejudice any longer term development of a community hub which we may debate later in this sitting in the context of Education, Sport & Culture's policy letter. In the meantime, we will also take urgent steps to improve the dire environment currently endured by the community services team working out of the Castel Hospital, until such time as a longer term community hub solution is agreed and developed. Swissville and Lukis House are no longer fit for purpose and these properties when unoccupied can be sold.

This will also enable the College of Further Education to consolidate on its preferred Les Ozouets site.

Following feedback, the Policy & Resources Committee has amended the approach to agreeing budgets this year and is seeking to hold far more dialogue with Committees before finalising its recommendations.

To that end, following a comprehensive and open engagement process including two earlier meetings with Committees on an individual basis, a productive session was held earlier this week with all Committee presidents to collectively work through the numerous bids and the limited funding available in an attempt to reach an agreed approach for next year's budget allocations.

However, with requests for funding so high it is inevitable that compromises will be required and that not all service developments will be able to proceed in 2020.

It is therefore vital that we continue to develop our approach to prioritising the work we undertake and the resources we apply to it.

The need to deliver cost effective and efficient public services with a smaller number of baseline posts is therefore more important than ever. 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. Partners such as Agilisys will be important in enabling the delivery of such change, but it must be owned by us politically and by the public service in implementation.

The successful delivery of Public Service Reform is a vital part of the equation in funding the service pressures which are now becoming apparent.

As I have said before, Islanders can be assured that the Policy & Resources Committee will not roll back on the need for restraint or slacken the pace of transformation in public services.

The need for these things may not be widely understood; and they may not be popular or glamorous, but they are absolutely essential elements of being able to afford the funding of future public services in the future, although they are unlikely to fully negate the need for new or increased taxes in 2020 and future years.

Sir, returning to 2019. To summarise, our income is looking strong and set to exceed our budget estimates by some £11m. However, the combined pressures on expenditure of an overspend by the Committee for Health & Social Care, a delay in the delivery of savings and the material worsening of the losses of Aurigny cancel this out. I am therefore expecting that the net position will be in line with budget.


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