Wednesday 06 September 2017
Update on the financial position - July 2017
Mr Bailiff,
Thank you for giving me the opportunity to update the Assembly on the States' financial position.
This is the third consecutive statement in which I am able to deliver good news on the States' finances. In March, I reported that the States had returned to overall surplus in 2016, for the first time since 2008; then, after the first quarter of this year, I reported that there was a positive variance to the budgeted position of some £4m. Now, after the seven months up to the end of July, the position is looking healthier still, with a year to date surplus of over £13m. This is an improvement on budget of over £11m.
Our improved position is supported by trends in recently published statistics - such as modest increases in population numbers and those economically active; increases in the numbers employed and self-employed and advertised vacancies; and a significant increase in the number of local market property transactions. These are all indicative of a stronger economy.
However, as members will have heard me say before, the key lead indicator for revenue and economic performance remains receipts of ETI and the position is encouraging. On a 'like-for-like' basis, ETI receipts in the first seven months show a 4.2% year-on-year increase - a real terms' increase of 1.4% against the latest inflation figures, which suggests the real-terms' decrease in median earnings in the first quarter might reverse. The strong returns in both the first and second quarter strengthens our confidence that this growth in employment-related income tax will continue throughout the year. If this were the case, then we will end the year with this income source some £5m, or more than 2.5%, ahead of the budgeted estimate.
The revenues in other categories of income tax are also looking stronger overall; although there are sluggish receipts from the 'other individuals' category which is currently lagging budget. This category is inherently volatile and consequently difficult to forecast. However, this has been more than compensated by robust receipts from banks, income tax on distributions, other companies and some exceptional income arising from settlements with taxpayers.
All in all, income tax receipts are £7.1m ahead of expectations at this point in the year which, based on the information currently available, is forecast to rise to £12m by the end of the year. This represents a 4% improvement on the budgeted position and will feed through into the budget setting for 2018.
All other taxes, duties and general revenue income are collectively behind budget by £0.5m at the end of July and are currently forecast to end the year down by £0.8m. Having said that, to put it in context, the majority of the income streams included are within 1% of their budgeted position.
However document duty receipts are down some £1m against the year to date budget, at £7.4m, which represents afall of 3% on the same period in 2016. Although the number of local market transactions are 5% up on 2016, the duty collected is significantly lower due to the lower value of the properties being conveyed. Following the changes in last year's Budget to the structure of Document Duty with effect from 1st January this year, detailed analysis is being undertaken in order to inform the budget for 2018.
The Policy & Resources Committee has been seeking to ensure that the States are collecting all of the document duty that is properly due. To that end, the legislation recently approved by members to address the avoidance of document duty through share transfer, should come into force in the next couple of months. In addition, it has become evident that the current practice of allowing 5% of the value of a conveyancing transaction as an estimate of personalty, and therefore only collecting document duty on 95% of the value, is no longer appropriate in most cases, given the increase in property prices over recent years.
Therefore, ahead of the 2018 Budget, discussions are underway with the Guernsey Bar with a view to a change of practice which would generally lower this percentage (where appropriate.) For example, if it were lowered to 1% it would raise in excess of £500,000 additional document duty in future years.
One of the positive contributors to our general revenue income is better investment returns than budgeted. Continued strong investment markets, especially in equities, have resulted in solid returns so far this year for both the medium and long term investment portfolios, with returns this year to the end of July being approximately 4% and 6.6% respectively. Subsequent to my last update, it has been decided that the two portfolios will be merged in the coming months. Given longer term focus, this would enable better management of risk and return across the entire portfolio, should lead to an overall improvement in return and simplify administration.
Given these positive returns, the proceeds of the States of Guernsey bond issue which are yet to be on-lent, and are currently invested within the two portfolios, have registered a return of approximately £6m in excess of the interest payable on the bond.
I look forward to the forthcoming presentation to Members - together with the President of the Committee for Employment & Social Security - on the subject of investments which will give an opportunity to detail the existing governance arrangements and future plans.
Turning to expenditure. An underspend in the first quarter in the order of £2.5m, has since risen to £5m. The majority of this is due to a year-to-date underspend of £3.6m by the Committee for Health & Social Care, which is expected to increase to an underspend by the end of the year of £4.6m. At the moment, the forecast position at year end implies that rates of expenditure will increase considerably in the last five months of the year, well above the year to date run rate. There are pressures and risks around recruitment and off-island spend which may lead to this. However, if this is not the case, then the underspend could be larger.
This underspend is before adjusting for the £2m in-year budget reduction, to which the States agreed during the Policy & Resource Plan debate in June - the effect of which is to bring the forecast reported underspend down to £2.6m. Whilst it should be remembered that the Committee for Health & Social Care have been given significant additional resources by the States - and not been subject to quite the same targets as other Committees - I would like to take this opportunity to thank the Committee for Health & Social Care and all their staff for their significant efforts in delivering so-called 'system grip' - and consequently this year's anticipated underspend against budget, as well as contributing to the savings challenge this year by way of the £2m budget reduction, equivalent to 1.7% of their budget.
As set out in my last statement, the Committee for Health & Social Care wishes to use some of the savings being made in other areas with pressing need - which is no doubt required as the underlying pressures on their services remain unchanged. However, as I have noted, significant additional funding was given to the Committee for Health & Social Care by the States on the basis that it was temporary.
It is therefore important to balance re-investment with the need to deliver savings. But I am confident that agreement will be reached on the budget for 2018, which will deliver the right balance between savings and 're-investment' - and ensure due recognition is given to the risks and pressures being faced by these services which are so important to our community.
Although the majority of Committees are showing underspends in the year to date, despite the 3% savings targets, the Committee for Education, Sport & Culture has not yet been able to identify savings capable of meeting this year's target - and is therefore overspending in the year to the end of July by just under £1m. This overspend is expected to increase to some £2m by the end of the year, which roughly equates to the value of its unmet savings target. I am aware that the President of that Committee will be making a statement giving more detail on the position.
It is clear that there are particular challenges in delivering savings from the education element of the budget in particular.
The PWC report published earlier in the year, identified a number of opportunities for savings through changing the way services are delivered. These opportunities were identified after extensive dialogue with - and input from - the staff in Education, Sport & Culture and therefore there is every reason to believe that they should be deliverable. However, they will take some time to plan and deliver, resulting in an overspend in the meantime - unless it's possible to find one-off reductions to close the gap. Dialogue is therefore ongoing between our two Committees regarding the appropriate level of budget for 2018, plans for the delivery of savings and what, if any, support might be required to ensure those savings are achieved.
Another matter of significant concern which has come to my attention since the finalisation of the July numbers, is that the States of Alderney have committed to expenditure in the region of £450,000 in excess of their authorised budget. This was first brought to my attention by a letter of 22nd August from the Chairman of Alderney's Policy & Finance Committee - and with whom I spoke over this last weekend. Up until that point, the forecasts had been in line with budget.
I have agreed with the Chairman of the Policy & Finance Committee that his letter should be published later today, together with Policy & Resources' response. From that conversation too, I understand that work has been undertaken this year in Alderney to ensure greater control on the authorisation of spending there, but obviously the Policy & Resources Committee is very anxious to properly understand how this level of over-commitment could have occurred and how it can be avoided in the future. Discussion is therefore ongoing on these issues. With regard to how any overspend can be managed this year, Policy & Resources considered this at its meeting yesterday, because if it is around £450,000 at the end of the year, it would amount to 25% of Alderney's cash limit. In short, Policy & Resources do not feel it is appropriate to use the Budget Reserve to fund the projected overspends. We are therefore currently proposing to include within the Budget Report recommendations that they should instead be funded from the Alderney Gambling Commission surpluses - in simple terms, if this Assembly accepts this recommendation, it will require Alderney to re-prioritise its future capital spend.
In the context of the overall financial relationship between the two islands, I am sure that all members, including the Alderney Representatives will agree, this is unacceptable and must not be repeated.
Sir, Members of the Assembly will recall that, in order to balance the 2017 budget, it was necessary to reduce the value of the appropriation to the Capital Reserve as a temporary measure. This reduction was partially offset by a target for return of capital from the States Trading Supervisory Board's trading assets of £5m. It is now being reported that this target is likely to be missed this year and the latest estimate is for a return of £3m. While this is disappointing, it should be remembered - as was emphasised at the time of the Budget - that the £5m was a best estimate at that time. Given the work undertaken this year to better understand the capital structures and needs of the trading businesses, I have no reason to believe that it is anything other than a timing issue and that the shortfall can be made up in future years.
To summarise the 2017 financial position so far: the positive revenues at the end of 2016 have continued into the first seven months of 2017, driving a forecast surplus on revenue income of £11m this year. This is enhanced by an overall forecast underspend against authorised budgets for Committees of approximately £2m. This would result in an overall surplus for the year of some £13m against a break-even budget. If this is achieved, 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 next month.
With regard to the Budget Report, the strong revenue income position this year is extremely welcome and will certainly feed through into a higher baseline position for next year. However, there also remain trends working in the opposite direction - such as falling volumes of fuel consumed - as well as downside risks and unknown quantities, such as BREXIT. So we will continue to be prudent in the economic assumptions we use for budgeting purposes.
Members should be under no illusion that the forthcoming budget will be of the 'vanilla' - or 'boring' - variety. Or that recent improvements will necessarily mean that a surplus position will result next year. The Medium Term Financial Plan approved by the Assembly in June to secure our medium term fiscal sustainability, requires reductions in the cost of public services and revenue raising - both of which we must now deliver. In addition, the cost pressures which we will need to accommodate are material. For example, the cost of implementing SWBIC's welfare reform has increased over our former estimates - and it is currently estimated will now require additional ongoing funding of almost £4m each year, as against the estimate of £3.2m included in the Medium Term Financial Plan. We will also need to deal with significant external pressures, such as Brexit and GDPR, which will result in increased costs to the States - some of which may be one-off and some of which may be annually recurring.
So, despite the further strengthening of our economy and our public finances which I am delighted to be able to report today, we must steel ourselves for a challenging budget and be prepared to make some difficult, even unpopular, decisions in order to restore the States' finances to the robust and sustainable position, that will support the delivery of our objectives through the Policy & Resource Plan - and beyond.
