Wednesday 28 February 2018
Update on the provisional 2017 year end financial position
Mr Bailiff,
2017 was a good year. In fact, I would go further and say that 2017 was a very good fiscal year, which is a really encouraging indicator of renewed strength in our economy.
Over the last year, I am becoming accustomed to delivering good news and today I have many reasons to be cheerful. The headline numbers, and I should stress that these are provisional and still subject to final adjustments and audit, are:
- Our revenue income has grown to almost £430m, an increase of £23m, or 5½%, over the 2016 revenues. The result is also significantly ahead of the budgeted position of £403m.
- Committees have collectively underspent against their budgets by just over £5m. This is a 1.5% nominal reduction against the expenditure recorded in 2016.
- On top of this and the original budget for 2017, we have, as approved by this Assembly in November, re-instated the full transfer to the Capital Reserve to £42.9m.
In order to give Members of the Assembly a little more colour around these numbers, I would like to focus on a few areas that merit attention:
1. Firstly, it was an exceptionally strong year for income tax receipts.
ETI - the income tax collected through employers' payroll - has grown on a like-for-like basis by 4%. This continues the solid real-terms' growth experienced in 2016 and indicates strength in our economy. The change is largely accounted for by growth in earnings and an increase in the numbers employed in the economy. Total employment has increased every quarter since the second quarter of 2015 until the third quarter of 2017, the most stats recent available. Consequently, there were over 1,000 more people working in our economy in September 2017 than in March 2015. That is unequivocal evidence of growth in economy supporting those higher income tax receipts.
For company income taxes, overall receipts in 2017 were £70m, a 22% increase over 2016. Analysis has shown that, as actual assessments in respect of 2016 have been completed, additional tax has often needed to be paid. This indicates that 2017 was a 'catch up' year, where improved 2016 results were being collected, along with revised higher estimates for 2017. Once again, this gives us all reason to be cheerful as clear evidence that the economy has picked up.
Of particular interest is that the numbers also indicate strength in the retail sector as the new tax on large retail profits has generated nearly 100% more than originally anticipated. (£2.9m instead of £1.5m estimated.)
1. 2017 was also a strong year for document duty receipts with the total number of local market conveyances up 13% on 2016 and duty up £0.5m (after excluding a couple of exceptional transactions). Open market conveyances also increased by 7% with duty up by £0.4m. Overall, the budget for the year was exceeded by £2.2m. Again, this is clear evidence of confidence returning to the marketplace and our economy.
2. Our investments continued to perform well during 2017 in line with global markets. General revenue benefitted from investment returns of £4.4m - that's £3.5m in excess of the budget.
Overall the long term investment reserve saw an 11% return in 2017. This saw our reserves increase by £185m. The returns on the medium term investment reserve and the common investment reserve, while good, did not reach quite these levels. In fact, over the last five years, had all of our reserves - including those overseen by the Committee forEmployment & Social Security - been invested in line with the long term reserve, the medium term reserve and common investment fund would have grown by a further £150m - that's £150m on top of the growth actually experienced. We simply cannot ignore that opportunity cost. Therefore, in light of this experience, as I have previously indicated to the States, with effect from 1st January this year, Policy & Resources are now investing all funds over which we have oversight under a single investment strategy. I also intend to write to the President of the Committee forEmployment & Social Security suggesting our Committees explore ways that we might be able to consider our investment strategy across both Committees more holistically to achieve a higher return overall, whilst preserving the appropriate segregation of funds.
It is worth mentioning at this point that we have recently announced the commitment of £25m to the recently launched Guernsey Investment Fund. This is only a little over 1% of our total portfolio. Critically, this fund is independently managed; and its investment objective is to achieve a return for its investors, including ourselves. This is not soft or cheap money. A couple of years ago, we asked ourselves, 'if we can obtain the same return from investing using local investment managers rather than off island managers, then why wouldn't we?' So this investment is simply an extension of that philosophy. In other words, 'if we can obtain the same return by investing in local businesses rather than overseas businesses, then why wouldn't we?'
1. When I updated the Assembly in September on the financial position to the end of July, I reported that the States' Trading Supervisory Board was estimating a return of capital to general revenue in 2017 of £3m, a shortfall against its budgeted target.
I am pleased to now be able to report that the original target of £5m was actually achieved. This return will be transferred to the capital reserve to contribute to funding the current capital portfolio.
2. In terms of capital expenditure, despite having a capital portfolio with an estimated value of £236m, only £9m was spent from the capital reserve in 2017. The Policy & Resources Committee believes it will be vital to seek to accelerate the development of capital plans in 2018 in order to ensure that our public services have the infrastructure they need and our economy benefits from this investment.
3. In terms of revenue expenditure, I can now report that the Committee forHealth & Social Care underspent its budget in 2017 by approximately £2.5m afterhaving already returned £2m as a recurring saving to general revenue. This is excellent news and continues the trend of restraint seen in the second half of 2016. Although, as the President of the Committee forHealth & Social Care has previously warned, this trend is unsustainable in light of inexorable increases in demand without the transformation of services through the Partnership of Purpose on which the States has now embarked.
4. I should also update the States on the position in Alderney following my report of a forecast overspend in the region of £450,000 earlier in the year. I am pleased to say that, given delays in the FABlink project (including a delay in Land Use Plan expenditure), increased operating income from certain fees and contracts and a tighter control of costs in general, this overspend has reduced to under £100,000.
5. Unfortunately, not all of the news can be good and I have to report that the Committee forEducation, Sport & Culture has, as predicted, overspent its authorised budget by almost £2.2m. This overspend was driven by a combination of failure to meet savings targets and material overspends in certain areas, including salaries.
The savings target for the year was £2.4m and although some in-year short term measures addressed part of this in 2017, the majority remains outstanding and to be found in 2018 with a further target added for this year.
These targets will never be met by tactical or one-off measures. They can only be delivered by wholesale transformation in the delivery of services. Our two Committees have now established the Oversight Group in line with what was set out in the 2018 Budget Report. This group is charged with overseeing the development of a plan, with a clear line of sight to deliver these savings over the medium term period. I am confident that the two committees can develop such a plan. However, until that plan is both developed and implemented, an overspending position will persist and I know that the President of the Committee forEducation, Sport & Culture will be making a statement to the Assembly on 21st March on the financial position that Committee has inherited.
6. My final area of focus relates to the financial impact on the States of the activities of the Office of the Public Trustee which has resulted in the Committee forEconomic Development showing an overspend at year end of £400,000. This is due to provision having been made for £1m in respect of fees incurred by the Public Trustee which may prove to be unrecoverable.
This is an unfortunate position and one which we must ensure is not repeated. The opportunity to strengthen the governance and legislation in relation to the Office of the Public Trustee and its interaction with the States of Guernsey is one we must take. I have been advised that governance and process have already been strengthened, and further work is being undertaken in that respect. Fortunately, the underlying result for the Committee forEconomic Development without this charge would have been an underspend of £0.6m for the year, which has mitigated the impact a little.
Before I summarise the 2017 position, I'm afraid I do have to return to a slightly less optimistic outlook. I have no reason to believe that the revenues in 2018 will be anything but positive following recent trends. However, there are some economic and fiscal headwinds that we will need to navigate.
There are significant expenditure pressures arising in 2018 some of which are included in our budget (such as the introduction of Income Support).
However, others such as an overspend for Education, Sport & Culture; further costs in relation to the Public Trustee; and Income Support costs in relation to waste charges are not budgeted for, but are unavoidable. In order to be able to accommodate these and other cost pressures both in 2018 and future years - and invest in new or improved services to support the delivery of the Policy & Resource Plan - it is vital that we deliver on the targets for revenues and expenditure we set last year as part of our Medium Term Financial Plan. The need to deliver cost effective and efficient public services will not and should not change as a result of improvement in the economic and fiscal cycle. It is incumbent on us all to challenge the status quo and ensure that opportunities to change the way public services are delivered - particularly where they have been identified such as in PWC's work last year - are fully explored and implemented.
The declining numbers of an economically active age in our community has again been highlighted by an increasing dependency ratio in the latest Annual Electronic Census Report.
Although more people are working beyond the age of 65, they are typically earning less than their younger selves and the aging demographic remains a challenge to our longer term revenues, which is something we will still need to address. This is one of the challenges which the Population Management Law review group have recognised that needs to be taken account of in their work.
The current position is positive and very welcome but cannot be assumed as ongoing, particularly when still faced with the uncertainties of Brexit and recognising that the global economy may be moving towards the end of long growth cycle. We have to ensure that we continue to act prudently and to plan for the next five, 10 and 20 years - and the challenges we know lie ahead.
Sir, returning to 2017, we have recorded a surplus of over £23m, after allowing for £8m to reinstate the full transfer to the capital reserve, versus a budget which planned to break even. This surplus is just under 1% of GDP.
There may be some in the Assembly, the media or our community who on hearing this will be asking 'whether a return to budget surplus in 2017 means that government will take the brakes off spending?' The answer is an emphatic 'no' because they are asking the wrong question. The questions we should be asking instead are: how much of this surplus should we using to rebuild the reserves depleted in the years 2008 to 2015 when we ran deficits? Should we using some of these funds to replenish the Future Guernsey Economic Fund to enable greater support for future economic development initiatives? Does this mean that we can help relieve the tax burden on hard pressed working families, many of whom have experienced little growth in their real earnings for a number of years? Can additional resources help delivery of our agreed policy priorities in the Policy & Resource Plan by enabling the acceleration of transformation? These are the questions which the Policy & Resources Committee now finds itself in the fortunate position of needing to consider and in due course we will bring recommendations to the States.
In considering this, I would also like to investigate the idea of participatory or community budgeting as a means of our community sharing in the decisions around where to invest; an innovative approach which, if carefully managed, could pay social and economic dividends.
Fortunately, in recent years, we have not had the harsh austerity that has been experienced by other governments elsewhere; but we are now reaping the benefits of fiscal discipline and control. It has not been easy - either practically or politically. Don't forget that at its peak, we ran a deficit of £37m in 2010. And it's not over. But we can take pride in having delivered on our promises to taxpayers.
At the same time we have invested in our economy through the commitments made from the Future Guernsey Economic Fund including to the Digital Greenhouse, Locate Guernsey and Guernsey Finance. We have also further underwritten our confidence with a commitment of £25m to the Guernsey Investment Fund to support the development of innovation and technology. With more people working in our economy, corporate tax receipts and property transactions increasing, we have evidence that economic strength is delivering stronger revenues; government expenditure restraint continues; and we have put in place rigour and discipline in planning for our future through the Policy & Resource Plan. These are reasons to be cheerful; these are reasons to be confident. The time is now right for us all to now collectively and unashamedly share and build on that confidence.
