Wednesday 17 May 2017
2017 First Quarter Financial Position Update on Public Service Reform
Thank you for giving me the opportunity to update the Assembly on the States' financial position - and on progress with public service reform.
In March, I reported good news that the States had returned to overall surplus in 2016, for the first time since 2008. Now, a quarter of the way through the 2017 financial year, I am once again able to report further good news. In the first quarter's financial results, there is a positive variance to the budgeted position of some £4m.
The key indicator for revenue and economic performance at this point in the year is ETI receipts - and the position is encouraging. Excluding the impact of budget measures, and therefore on a 'like-for-like' basis, ETI receipts in the first quarter show a 4.4% year-on-year increase, a real terms' increase of 1.5% against the latest inflation figures. This may be indicative of improved corporate profits, feeding through to a higher bonus round in the first quarter. If this trend were to continue throughout the year, it would lead to a positive variance against the approved budget of over £5m.
There is very little to go on so early in the year in terms of other income tax receipts, as instalments are not due until July. However, should the trends seen at the end of 2016 continue, then even allowing for some downside risk, we could see improvements against our budgeted position in the order of £2m.
Not all of the news is positive, however, and the receipts from document duty are down, versus expectations at this point in the year.
Forecasting document duty is inherently difficult, due to the small number of transactions and the disproportionate effect that a few, larger transactions can have. However, the trend is that conveyancing activity remains positive, but that average transaction values are down some 3%, which is denting our income. Should this trend continue throughout 2017, then a budget shortfall of some £2m is possible.
Turning to expenditure, I am extremely encouraged that, despite applying 3% savings target to all expenditure (other than Health & Social Care and formula-led) the first quarter results, show an underspend in the order of £2.5m. A particular area of note is the year-to-date underspend of £1.6m by the Committee for Health & Social Care. Although the current forecast for the end of year position is for their expenditure run rate to increase, such that the Committee's expected underspend is much lower, at £800,000, I am hopeful that it will be significantly higher. I say this, because analysis shows that the monthly rate of spend in the first three months of 2017, is similar to that for the last six months of 2016.
This indicates a stable position, which is the result of the considerable effort invested by the management team and the Committee from May last year, to get a grip and arrest previously spiralling costs.
I appreciate that Deputy Soulsby and the Committee will wish to use some of the savings being made, in other areas with pressing need, and it will be important to do so first, preferably, where that supports further improvements and savings. We must remember that not all of the significant additional funding given to the Committee forHealth & Social Care was intended to be a permanent increase in the base. Work is ongoing by officers to determine the right balance between 're-investment' and savings and I hope to be able to update further in my next statement.
Returning to the overall financial position, I am pleased to be able to report that sound progress is being made to deliver against the agreed savings targets. The majority of the overall target - £4.6m - has now been agreed and 'signed off'; and a further £1.4m has been identified and is in the process of being delivered.
However, there remains currently a gap of £700,000 in 2017, and £1.5m on an ongoing basis, and the entirety of this balance sits with the Committee forEducation, Sport & Culture. I know that the Committee are eager to close that gap, if possible, as quickly as they can. They know too that they have any support they need from the Policy & Resources Committee to do so.
We will of course continue with the strengthened challenge around recruitment introduced last year; we are also engaged in a procurement led exercise to work closely with our largest suppliers to secure lower prices for a whole range of goods and services.
To summarise the financial position: the positive revenues at the end of 2016 and the first quarter of 2017, are driving an overall forecast surplus position for the year of some £5m, against a break-even budget. If this continues it would allow the appropriation to the Capital Reserve that was reduced in order to balance the budget, to be partially reinstated.
We will be in a position to bring forward any such proposals as part of the 2018 Budget Report, to be published in October - and I intend to keep the Assembly informed of progress on a quarterly basis.
Sir, I am, of course, delighted to have been able to deliver two upbeat statements in consecutive quarters. But sadly, two swallows, alone, do not make a summer.
As Members will see when we publish the Medium Term Financial Plan next week, the pressures on both spending and our tax base are undiminished. In other words, it should come as no surprise that in planning ahead, we have not been able to magic away the systemic health and social care pressures from an aging demographic; or the need to deal with SWBIC's welfare reform; we still have the same capital and infrastructure requirements; we haven't found a way to avoid the costs associated with external pressures such as Brexit or GDPR - or our commitment to support Alderney's lifeline air routes; on the revenue side, we haven't been able to reverse the trend in falling fuel consumption; or ignore the international constraints on our corporate tax regime; and we haven't been able to reduce our reliance on the taxation of personal incomes from an aging workforce.
In short, we can neither cut our way, nor tax our way to fiscal sustainability. There is no simple, single solution. We have not found a silver bullet. So the brakes are not off. We must continue to exercise good discipline in all our spending decisions - whether capital or revenue spending; we must continue to ensure that our largest single expenditure - pay - is moderated; we must continue to reform our tax system, particularly to help those on low or modest incomes, whilst recognising the constraints of our tax base; and most importantly, we must continue and - where possible - accelerate our reform programme. And I will return to reform later.
In terms of the wider economy, the recent published statistics - such as, real growth in median earnings; increases in population numbers and those economically active; or the number of local market property transactions - are all indicative of a stronger economy. However, the downside risks remain real and largely unchanged. In particular, of course, the continuing uncertainty surrounding Brexit, while less significant in Guernsey than in the UK, could suppress business appetite to invest.
On the other hand, the fall in the value of sterling and rebound in oil prices has - as expected - increased inflation from its historic lows and this will put pressure on spending. So we must continue to be prudent in the economic assumptions we use for planning purposes.
The States' overall financial health continues to be well supported by its investment performance. In the first quarter, financial markets saw the strongest start to a year since 2012, despite a backdrop of political turbulence and uncertainty. The long term investment reserve received returns in the first quarter of 3.35%, meaning the performance over the last five years has now averaged 8.3% in each and every year. Likewise, the medium term investment reserves' quarter returns were 2.54%, taking the five year average to 3.9% per annum.
The Policy & Resources Committee continues to ensure that the investment strategy is kept under constant evaluation and has recently been undertaking a strategic review of asset allocation, with a view to protecting strong recent performance against markets moving down.
As a result, managers' mandates are being reviewed and updated; consideration is also being given to merging the two reserves in order to improve returns, whilst still enabling us to manage our cash flow requirements; and we are also considering the increased use of local investment managers and products, where this is merited. We're planning to host a presentation for States Members in due course, to set out in more detail the investment strategies of all our funds - and I hope Members will take the opportunity to attend.
In November 2015, the States authorised the provision of short-term borrowing facilities to the Aurigny Group, if required.
Last month, the Policy & Resources Committee received an update from the States' Trading Supervisory Board on the position of the Aurigny Group. This projected a 2017 loss of £6.3million. The 2017 Budget Report included an anticipated 2017 loss of £3.9million. This is in addition to the £2.3million accumulated loss position (before any adjustments for FRS102) at the end of 2016.
The key reasons for the deterioration in forecast results are: firstly, a decrease in passenger revenues, as a result of both flat market conditions and the adverse weather conditions experienced at the beginning of the year; secondly, additional maintenance costs in both the ATR and Dornier fleets; thirdly, higher than anticipated crew costs in the transition from the Trislander fleet; fourthly, additional compliance and handling costs; and finally exchange rate movements and increased fuel costs. The Policy & Resources Committee has supported the States' Trading Supervisory Board's intention not to make any substantial changes to the airline or its operations, ahead of the outcome of the strategic review - the report of the working party of which, the Policy & Resources Committee considered for the first time yesterday, following which we will be writing to the States' Trading Supervisory Board next week.
Therefore, the Policy & Resources Committee has agreed, that it will make available to the Aurigny Group a temporary overdraft facility in 2017 of £6million in order to meet its cash-flow requirements.
Sir, I want to return to reform. Public service reform is no longer something that is in the future. It is happening in the present. There are now numerous examples across the States of thinking differently about how services should and do meet the needs of our communities. Reform is about improving outcomes - making it easier for islanders to access and deal with public services.
There are also exciting pieces of work underway to plan for the future through redesign of the whole system. The Committee forHealth & Social Care is leading the redesign of health and social care services for the future; officers from social security contributions and income tax services, have been working closely together to design a new, integrated collection service - something that has been talked about conceptually for years and now, we are finally making it happen; and work continues to explore opportunities for greater interoperability, between blue light services through the HOST - or Home Operational Service Transformation programme.
The first phase - and I emphasise it is just the first phase - of our office rationalisation is now well underway, with dozens of people already having moved out of Sir Charles Frossard House to enable the building works to start. The social housing team moved to Edward T Wheadon House last week, and by the end of September, we will have vacated the education offices in Grange Road and the income tax office in Cornet Street - releasing immediate savings on running costs. Further property rationalisation can and will follow.
This is happening with a huge amount of effort and commitment from staff, who have worked hard over the last few months to make these moves possible. I would like to thank those teams that have or will be moved, for their positive approach to the changes - and for their patience and tolerance during the disruption and inconvenience that inevitably occurs during such moves.
We have also started to work differently through changing the way services are delivered. The Policy & Resources Committee has approved funding for a small number of pilot projects which have been designed to rapidly review and re-design services from a user's perspective.
The first two of these pilot projects, in the income tax office and the Hub, have now been completed. Both took under eight weeks from start to finish - and have demonstrated significant opportunities to improve the customer's experience, whilst also reducing the cost of operating services. This is demonstrating that it is possible to maintain or improve service standards, while reducing operating costs, by automating more of our internal processes. These are not notional savings, based on percentages achieved in similar services in the UK or elsewhere and 'guesstimated' for Guernsey. These are real, quantified improvements - and savings that are within our gift to deliver, without the need for significant investment.
Following these initial pilots, I'm pleased to report that a number of service areas have expressed an interest in this approach, and further opportunities for this type of re-design are now being explored.
It's important to recognise the implications for staff of the changes I'm talking about. When cost savings are made through changing our services, a significant proportion are likely to come from reducing our 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. Fortunately, the public service is well placed to deal with this given the age profile of staff - and the number of retirements likely in the next five years - as well as natural turnover. However, it would be naïve to think that all of this change can be simply managed through 'natural wastage'. The public service is going to need to be ready to deal with the displacement of staff.
And to facilitate this, we are looking at HR policies and procedures as well as HR capacity and skills to manage this; for example, there is a need for an organisational approach to re-deployment - rather than just looking within a particular area; there is a need to work closely with the private sector to understand where skills can be transferred; and a need for a programme of re-skilling.
Managing vacancies and optimising redeployment must always be the top priority, as it must be understood, redundancy comes at a significant cost - both financial to the taxpayer and personal to the individual concerned. Therefore, it is only once all other options are exhausted, that consideration will be given to a programme of redundancies, as a last resort.
The public service - both its civil service and political leadership - are serious about thinking differently, working differently and improving our public services - resulting in saving money and improving value for taxpayers. I urge Members of the States to continue their own, strong leadership and support for this work.
Sir, as we race towards the end of the school year, as a summary to mark this government's first year in office, I asked the Committee forEducation, Sport & Culture to write an end of year school report. And this is what they wrote:
"Guernsey arrived for her first term from her last school with a reputation for being difficult and stubborn. She got off to a bad start when it looked as if she was going to undershoot her 2016 Budget by some way. But she worked hard and got back on track, surprising us all with her diligence in producing an end of year surplus.
"Guernsey's economy is stronger than she has shown in the recent past, which bodes well for this year, but she cannot afford to be complacent. We are aware that Guernsey has many distractions away from school including, of course, her aging relatives. But she does seem to have finally grasped, that to be able to care for them when they get older, she cannot avoid the hard decisions now. We also expect her to become distracted in the next year or two, with her unreliable boyfriend, Brexit.
"Guernsey occasionally seems frustrated that she cannot have all the shiny toys her friends have.
Even though we remind Guernsey that her friends' parents often buy those on credit, which can be both painful and expensive - as her distant second cousins, Greece and Portugal found out recently - there still seem to be times when she does just seem to want it all. But now is not the time for Guernsey to lose her self-confidence. She has demonstrated that she really can transform herself. If Guernsey stays focussed, we have confidence that she really can produce some excellent results over the next few years. We look forward to seeing her next report in September."
Deputy Gavin St Pier