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2020 Budget Report Speech given by Deputy Gavin St Pier

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Tuesday 05 November 2019

Sir,

I must begin by advising Members that I have an interest to declare in respect of Proposition 26 - that is to say in relation to TRP on attached domestic glasshouses. Of course, in accordance with the Rules, I withdrew from the Committee meeting that considered this matter - and did not participate in the decision that led to the Proposition that is before members.

It is an honour to present the States of Guernsey Budget for 2020 on behalf of the Policy & Resources Committee. It is an honour but it is not a pleasure. This is the eighth consecutive Budget which I have led in this Assembly. The previous seven have not been particularly easy, but I was hoping - and indeed I think had a reasonable expectation - that the last of this term would be easier than has proven to be the case. In the event, this has been a very difficult Budget to compile. This is the antithesis of the pre-election giveaway Budgets that we have become used to witnessing in other jurisdictions.

We wish we were presenting different proposals but, given the substantial demands for increases in revenue expenditure budgets, it is nevertheless a realistic budget which we reasonably expect the States to achieve next year.

This was also a Budget prepared in the context of a revised approach to political engagement during the process, responding to last year's Budget debate. In the early part of the year, all States' Members were invited to submit suggestions of particular measures they would like considered. These were all researched and then reviewed by the Committee as part of its compilation of the budget proposals - and brief commentary on each of them is included in Appendix 5 on page 125 of the Budget Report. I should like to take this opportunity to thank all States' Members who engaged in this exercise.

In addition, there was a comprehensive programme of engagement and meetings with all Committees during the Budget process - again, these meetings were very valuable in developing an understanding of the expenditure pressures being faced by Committees and undoubtedly were key to shaping the budget proposals before you today.

This year's Budget Report includes a new Appendix, Appendix II, which begins on page 108 of the Report. This breaks down the real cost of providing public services and the impact of the current tax regime on individual households. It is intended to provide context and clarity over where public funds come from, how they are spent, and the value that is provided. I am sure that Deputy Trott's good friend, Mrs Le Page from St. Sampson's, has discussed this at length with him and I expect him to share snippets of this conversation with us when he speaks. However, I should point out now that Guernsey's tax take - the contribution required by islanders to pay for the public services we all utilise every day - remains relatively small as a proportion of the economy - 21% of GDP in Guernsey - compared to 26% in Jersey, 38% in the United Kingdom and 53% in France. If we are to meet the increased demand on public services, we are going to need to raise additional revenues. Like any organisation, particularly large organisations, the States will contain examples of waste - some of which will no doubt be egregious. I do not condone that and we must continue to identify those examples and work to eradicate them.

And we must absolutely continue to drive with determination and rigour benefits derived from the transformation of the delivery of services. This has been recognised in Proposition 4. However, we do our community no service at all pandering to a popular narrative that all their current needs - and more in the future - can be met costlessly for them, either by simply slaying a mythically inefficient spending dragon, or by finding someone else to pay more in taxes. But on the other hand too, we cannot use the real, systemic upward pressures on public services as an excuse or cover to fund all manner of new expenditure - and in the process soak islanders with an increased tax burden. In other words, there is a balance to be struck. Where we choose to strike it, is a matter of subjective judgement that will be criticised by those who think it should have been struck either higher or lower. These are difficult and unpopular messages to deliver - but I am not afraid to deliver to them.

Section 2 of the Budget Report outlines some of the mounting long-term fiscal pressures which we will be facing as a result of economic and societal changes including: climate change policy, Long-Term Care funding, the final resolution of which is going to become increasingly urgent; funding the States' Pension, changes to the policy for funding of NICE drugs and treatments; introduction of a secondary pension scheme; and access to primary health care.

There will be separate policy letters on each these issues in due course, which will all undoubtedly have merit in their own right, but will also have long-term financial implications, which will result in a significant change to the scale and distribution of costs borne by individuals and the productive economy.

These specific issues are in addition to the baseline expenditure pressures, which will rise due to the unavoidable demographic changes as a result of the ageing population and the attendant increase in the dependency ratio. In addition, as set out in proposition 1, we are intending to submit a Policy Letter for consideration in the first quarter of 2020 which reports on the findings of a review which we commissioned of the myriad of public service employment terms and conditions, together with any recommendations to ensure that remuneration to employees is based on the principles of fair and equal pay. This will include a timeline for the implementation of any recommendations.

As set out in proposition 2, in January 2020, the States will be asked to debate a Policy Letter from the Policy & Resources Committee that sets a revised Fiscal Policy Framework within which the States should operate. This will need to address what the appropriate long-term aggregate level on States' revenues should be. Due to the exceptional narrowness of the existing tax base, there is very, very little opportunity to raise additional revenues from the current structure. Therefore, it will be proposed that a review is initiated to examine our options: options to raise further revenues from corporate taxes; and options for the introduction of new taxes in areas such as a ring-fenced health tax or consumption taxes. Put simply, we are going to need to carefully consider the level of public services that is affordable and realistic - and decide how we will raise the revenues to pay for them.

This week's debate is not the opportunity to consider these long-term structural policy considerations without the benefit of comprehensive briefings, evidence and engagement, suffice to say that with Propositions 11 and 12 (which deal with cannabis and aircraft registries respectively,) I believe that we have almost certainly reached the end of the road as to what can be achieved in extending the scope of the zero-10 corporate tax regime. This Budget debate should focus on the proposals for 2020 and ensuring that we are approving a budget which balances the revenues raised from our community with the pressures on the delivery of public services, without adding to the financial pressures which the next States will face.

In respect of the 2020 Budget, the good news is that the income projection is some £6million ahead of that expected in the Medium Term Financial Plan - this is as a result of revenue raising decisions made in previous budgets and continued strength in the economy. Of particular note, is the resurgence in the property market with increases in both the volume and value of transactions, leading to document duty receipts being significantly ahead of estimate. The modest growth in income tax receipts has enabled a £575 increase in the single person allowance to be recommended. This means that, over the four-year term of this States' Assembly, personal income tax allowances will have increased from £9,675 in 2016 to £11,575 in 2020 - a total increase of £1,900 which has reduced an individual's annual income tax bill by £380 - over £30 a month - or £760 a year, over £60 a month for a couple

As promised in last year's Budget debate, an impact analysis has been carried out in respect of the annual increase in domestic TRP tariffs flowing from the Personal Tax, Benefits and Pensions Review - and for the introduction of tiered bandings with higher tariffs for larger properties. The detailed report is included in Appendix IV to the Budget Report from page 120, but, in summary, it shows that the impact of increases in baseline TRP tariffs is broadly proportional, as people tend to increase the size of their home as their income rises. In respect of the introduction of tiered bandings, this is again a proportional and progressive measure, which affects a small number of households and has a low average impact as the tiering starts at a TRP value of a property which is one-third above the average. There will of course always be exceptions to the broad impacts but we have to design a tax system around the whole rather than the exception. Therefore, this Budget Report includes a recommendation at Proposition 23A that the second phase of tiered domestic building TRP tariffs is implemented as planned in 2020.

Whilst speaking of TRP, it's also worth noting that at Proposition 21 we're seeking an increased contribution from the business sector by phasing over 5 years the adoption of a single Office and Ancillary Accommodation category.

This Budget Report also includes proposals at Proposition 25 to address an unfair anomaly which has resulted in different TRP rates being applied, dependent on whether an outbuilding is attached or detached. The proposals, which are notto raise additional revenue, would remove this anomaly and also create a new category for outbuildings which are, for example, unused or derelict for which a lower TRP tariff will apply. They would not be included when assessing the total TRP unit value of a domestic property. For administrative efficiency and in order to ensure that TRP is not charged on a large number of items such as small sheds, coal bunkers, play houses, etc. the exemption previously applied for detached outbuildings under 10m² (approx. 107ft² ) would continue.

The Budget Report includes at paragraphs 1.26 to 1.31 the effect of the proposed budget measures, both by equivalised income decile and by household composition, in monetary terms and relative to a household's gross income. In monetary terms, the budget measures are broadly progressive, with the effect on the highest income decile at £117 per annum being more than double that of any other income decile. This compares to £17 per annum (32p per week) for the lowest income decile. The overall average impact on households is estimated at £36 per year - or 0.1% of household income.

The Policy & Resources Committee has researched options to benefit those on lower incomes by changing the personal income tax allowance system. Two initiatives were considered - firstly the introduction of a lower income tax rate band whereby the first £5,000 of an individual's taxable income would be subject to income tax at 10% instead of 20% and, secondly, by applying an additional personal allowance of £1,000 for individuals with an income up to £35,000.

However, both of these measures would have come with a substantial cost - £15million and £5million respectively and would not effectively target those individuals on lower-middle incomes; it would also add administrative complexity and cost. However, it should be remembered that there has been significant reform of the benefit system which includes support for those experiencing in-work poverty. The Income Support scheme, which was introduced in July 2018, is now costing approximately £5million more than the Supplementary Benefit and Rent Rebate Schemes it replaced, which constitutes significant progress in improving the welfare system and has undoubtedly benefitted many low-income households.

Turning to revenue expenditure, the 2020 position is £27million greater than included in the Medium Term Financial Plan. There are two reasons for this - savings delivered are £7million lower than anticipated and expenditure is £20million higher.

In respect of the delivery of savings, whilst there has been a timing delay, we have no evidence that these savings are unachievable and the imperative remains to realise.

Delays have arisen due to the later than anticipated finalisation of the contract with Agilisys - which I am pleased was completed over the weekend. Technology solutions are at the heart of the improvements planned through service redesign, which are vital to enable the States to fundamentally improve services to customers while delivering those services at a lower cost. I am very pleased to advise and confirm that the planning work undertaken in close partnership with Agilisys, has reaffirmed the levels of savings previously being forecast and it should now be possible to start to accelerate delivery.

It is important to understand that, whilst some of the initiatives are styled as 'corporate' - such as organisational and service design; future digital services; procurement; and property rationalisation, their success is dependent on the commitment, co-operation and contribution from all States Committees. These are corporate in that they are States-wide initiatives, not that they are the sole responsibility of the Policy & Resources Committee.

The Policy & Resources Committee is recommending that £20million of additional funding is allocated to Committees to fund non-discretionary requirements (£15.5million) and service developments of £5.4million. This means that of the £27.9m requests received, some of which will be appropriately funded through other means, there is only £3.35million of service development requests for which funding is not being recommended. More detail of what is funded within the £5.4m and what is not funded within the £3.35 million is set out in Appendix VI of the Report on pages 129 and 130.

The non-discretionary requirements includes £3.5million for funding inflationary increases in costs, £1million for accommodating increases in demand for services and £11million for what is being described as 'baseline pressures.' This includes £2.9million to fund the Strategic Partnership with Agilisys, as the profile of the contract value is for higher costs in the early years.

However, the balance of these baseline pressures is generally where Committees are already incurring ongoing expenditure without having ongoing funding in place - for example where in-year savings from one post have been used to fund recruitment of a permanent member of staff in another, which gives rise to an unfunded commitment in future years. The inevitable result of these lapses in process and discipline, is to present what now amounts to a fait accompli. In fully funding these baseline pressures, it must now be clearly accepted that there is a firm expectation that Committees will exercise the appropriate control in future and remain within States-approved budgets. Committees are responsible for managing their expenditure within their authorised budgets, including in response to changes in demand and changing priorities. An incremental budgeting approach of always providing additional funding for new or expanded services, creates unsustainable cost pressures. The expectation should not be that additional funding can be provided in order to fund increases in services, but that consideration is first given to reallocating existing resources by reducing or ceasing other services.

If Committees are unable to accommodate expenditure pressures within their budgets, they should not make spending decisions to commit ongoing funding, but instead submit a bid for additional funding as part of the annual budget process.

In respect of the service developments, following a rigorous review and prioritisation exercise and dialogue with Committees, every request was subject to a standardised scoring and ranking process. It is, of course, vitally important that our limited resources are focussed on delivering on our collectively agreed policy priorities and not diverted onto other matters. However, Committees have the flexibility to allocate their service development funding to the initiatives which they consider are of the highest priority. The Policy & Resources Committee is not seeking to micro-manage Committee spending but is concerned that there was a need to increase budgets for 2020 by almost £11m for baseline pressures, some of which was due to funding being committed to services without sufficient budget being available. P&R is recommending that there is a simple check before the funding is allocated (based on the submission of a simple form) which confirms how the funding will be applied and that the ongoing costs in 2021 can be managed within the 2020 allocation (i.e. we are not storing up unknown budget pressures for 2021.)

In addition, it is unlikely that full year costs will be required in 2020 (as illustrated in the '2020' column above) as so many of the service developments rely on the recruitment of staff. Therefore, any funding not required in 2020 would be available to supplement the in-year funding in the Budget Reserve (including to support the allocation of additional funds to HSC to deal with the orthopaedic backlog.)

I am sure that Committee Presidents will take the opportunity within their speeches to provide detail on the need for additional funding for the public services they deliver, the service developments for their Committee and what the benefits and outcomes of them are expected to be.

Proposition 23B proposes an increase in commercial TRP tariffs by a further 5% that, if approved, would result in a further £850,000 being available for service developments.

This would mean that of the £27.9million of requests received from Committees, only £2.5million - less than 10% would not have a funding source identified or allocated.

In addition to the adverse revenue expenditure position, the 2020 Budget also includes provision of £6.7million to fund the projected Aurigny loss. This excludes any funding in respect of operating the Alderney routes, which are currently subject to a Public Service Obligation tender process and, therefore, provision has been made within the General Revenue Account Reserve. Whilst it is completely correct that, as the States are 100% shareholder, the annual Budget should make prudent and transparent provision for the Aurigny losses, these provisions do directly mean that there is less funding available for allocation to Committees. The sharp increase in the losses recorded and projected by Aurigny means that there is an immediate and urgent need for a co-ordinated and coherent government approach to all aspects of air route operation and support to develop and safeguard air links to and from Guernsey.

By Proposition 38, the Policy & Resources Committee is intending to develop such a framework for consideration by the States by April 2020 which will, as a minimum include the need to: maintain air links that are of strategic importance to the island; stimulate the economy through the enhancement of routes available for both business and leisure travellers; consider the likely effects of the revised framework on Aurigny's financial position; and determine how any conflicting interests are to be reconciled.

The funding for these expenditure pressures has only been made available, as the Policy & Resources Committee has reduced the recommended appropriation to the Capital Reserve from the level assumed in the Medium Term Financial Plan, to the level considered necessary to fund the expected progression of the projects and programmes within the current capital portfolio and pipeline. This is provided for in proposition 5.

In summary, despite the unprecedented pressure on the cost of and demand for public services, a balanced budget is once again being presented for 2020. We do not choose to fund our current expenditure from borrowing like most other governments. In the 70 years 1948-2018, the UK's annual budget deficit has averaged 2.45% of GDP. That would currently equate to borrowings of £80m a year for us. It is no wonder that the UK's debt mountain, is now over 85% of the entire national economy. That would be like us having debts of £2.8billion.

The States' finances are in a strong position following many years of financial discipline, delivery of savings - even if not as large or fast as we'd would have liked - recent economic growth and transferring funds to reserves - for which this States and our community should be rightly proud.

Before concluding, I would like to thank all those officers across the States, including the States' Treasurer, Assistant States Treasurer and their team for the hard work that has been required to compile this year's Budget Report. And I must also thank the members of my Committee. This is our fourth - and of course the final Budget of this States together. No doubt like most Committees, we test each other's patience all too frequently; but their candour, teamwork and good humour has made my role as President somewhat easier.

Sir, we believe that the Budget Report being considered today is realistic and appropriate for 2020 and we wholeheartedly commend it to the States.

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