Strategic Plan 2006 to 2011 (P.40-2006) - 11th amendments

STATES OF JERSEY

r

STRATEGIC PLAN 2006 TO 2011 (P.40/2006): ELEVENTH AMENDMENTS

Lodged au Greffe on 5th June 2006 by the Corporate Services Scrutiny Panel

STATES GREFFE

STRATEGIC PLAN 2006 TO 2011 (P.40/2006): ELEVENTH AMENDMENTS ____________

After the word "Appendix" insert the words –

", except that in Commitment One, Outcome 1.2 –

(a) fo r Actions 1.2.2 and 1.2.3 substitute the following Actions –

1 .2 . 2 . Retain any budget surpluses that occur before the introduction of the 0/10 tax changes (due in

2010) in the Consolidated Fund until the extent of any structural deficit as a result of the new fiscal strategy becomes clear with these surplus funds being be used to maintain revenue and capital spending in the short term whilst any structural deficit is addressed (T&R).

1 .2 . 3 .  

Improve  overall  fiscal  framework  by  the  immediate  establishment  of  a Stabilisation  Fund,  into  which  the

following funds will be transferred –

i. T h e balance of excess funds over liabilities held currently in the Dwelling Houses Loans Fund as they become available (T&R).

ii . T h e capital receipts from property sales identified in Action 6.2.3 ofthis Plan, estimated to

reach at least £4 million per year by 2009 (being the capital element of the savings arising from the Change Programme) (T&R).

ii i. T h e non-capital element of the Change Programme Efficiency Savings identified in 6.2 of

the Strategic Plan (estimated to reach £6.64 million per year by 2009) (T&R).

1 .2 . 4

forward for approval by the States detailed proposals for the control of inflation to update the current inflation

strategy, with the proposals to include details of the future use of the balance in the Stabilisation Fund created under 1.2.3 above and the operation and long term use of the Fund which will be broadly as described in the Economic Growth Plan (P.38/2005) as adopted by the States. The proposals will also cover the role of fiscal measures, particularly GST rates, in this context (T&R) (ED).

CORPORATE SERVICES SCRUTINY PANEL

REPORT

0. In troduction

The Panel in considering the draft Strategic Plan at its meeting on 13th April 2006, decided to focus its attention on the Financial Framework as this was linked to its responsibility for scrutinising the States Business Plan and Budget.

1. O  bjectives

The Panel set out the following objectives for the review –

To examine the original purpose for the establishment of the Dwelling House Loan Fund and to consider the options for the use of the balance in the Loan Fund.

To examine the projected corporate and departmental efficiency savings for the years 2005 to 2009

To clarify the potential extent of the revenue gap (black hole').

To investigate the proposed use of a Stabilisation Fund.

To consider the Minister's enhanced anti-inflation strategy (Strategic Plan 1.2.2)

1.2. S ub-Panel

The Panel decided to invite two additional members, Senators L.  Norman and B.  Shenton, to join them for th purpose of this review, both being non-Executive members of the States. The Panel subsequently discovered that Scrutiny Panels did not have the power, under Standing Orders, to co-opt other members; however, Sub-Panels did have that ability. The Panel, therefore, decided to form a Sub-Panel to undertake this particular review. The Sub-Panel was constituted as follows –

Deputy P.J. Ryan, Chairman Senator L. Norman

Senator J. Perchard

Senator B. Shenton Constable D. Murphy Deputy J. Gallichan

Officer support: Mr. M. Haden and Miss S. Power

The Panel was of the opinion that a change to Standing Orders should be considered to allow for greater flexibility in respect of co-opting additional members to a Scrutiny Panel in the future.

3. I n vestigations

The Panel Chairman and Deputy Gallichan met the Head of Financial Planning, Treasury, and the Director, Property Holdings Department, to discuss the corporate and departmental capital and revenue efficiency savings.

The Panel received a Briefing Note from the Head of Corporate Capital, Treasury, on the Dwelling House Loan Fund, statistical information from the Head of the Statistics Unit and background economic information from the Economic Adviser, Chief Minister's Department.

Relevant papers are available for downloading from the Scrutiny website.

The Panel held a public hearing on 18th May 2006 with the Treasury and Resources Minister who was accompanied by the Treasurer of the States. The transcript is available on the Scrutiny website.

4. S u b-PanelFindings

The Sub-Panel considered its findings following the public meeting with the Minister and agreed on the following key points –

the balance of the Dwelling House Loan Fund should not be used to fund initiatives in the Strategic Plan;

the balance of the Dwelling House Loan Fund should be applied instead to the establishment of a Stabilisation Fund

efficiency savings from the Change Programme should be applied to the Stabilisation Fund. This would prove to the public that the States was serious about reducing expenditure.

it would be irresponsible to increase States expenditure above previously agreed levels at this stage when the Island is embarking on a high risk fiscal strategy, the accuracy of the future financial impact of which is still unclear;

the purpose of the Stabilisation Fund should be clarified in the Strategic Plan as at present there was a blurring between: (a) the concept of a Stabilisation Fund, as conceived in the Economic Growth Plan, to address cyclical periods of growth/inflation/recession/deflation in the economy, and (b) the requirement for a fund in which to deposit budget surpluses arising from the introduction of GST to address subsequent structural deficits arising from the introduction of Zero/ten.

an inflation strategy which maintained a strong discipline over public spending should remain a key strategic aim for the Island.

5. S ub-Panelrecommendation

The Sub-Panel agreed to recommend to the full Corporate Services Panel that it seek to amend P.40/2006 accordingly.

The full Panel unanimously accepted the recommendation of the Sub-Panel and agreed to adopt, in principle, a draft report prepared by the Chairman, subject to further revision.

2.0 S trategic Plan 2006 to 2011 (P.40/2006): Eleventh Amendments

The Panel's agreed amendments and accompanying report were lodged au Greffe' on 5th June 2006.

After the word "Appendix" insert the words –

", except that in Commitment One, Outcome 1.2 –

(a) fo r Actions 1.2.2 and 1.2.3 substitute the following Actions –

1 .2 . 2 . Retain any budget surpluses that occur before the introduction of the 0/10 tax changes (due in

2010) in the Consolidated Fund until the extent of any structural deficit as a result of the new fiscal strategy becomes clear with these surplus funds being be used to maintain revenue and capital spending in the short term whilst any structural deficit is addressed (T&R).

1 .2 . 3 .  

Improve  overall  fiscal  framework  by  the  immediate  establishment  of  a Stabilisation  Fund,  into  which  the

following funds will be transferred –

i. T h e balance of excess funds over liabilities held currently in the Dwelling Houses Loans Fund as they become available (T&R).

ii . T h e capital receipts from property sales identified in Action 6.2.3 ofthis Plan, estimated to

reach at least £4 million per year by 2009 (being the capital element of the savings arising from the Change Programme) (T&R).

ii i. T h e non-capital element of the Change Programme Efficiency Savings identified in 6.2 of

the Strategic Plan (estimated to reach £6.64 million per year by 2009) (T&R).

1 .2 . 4

forward for approval by the States detailed proposals for the control of inflation to update the current inflation

strategy, with the proposals to include details of the future use of the balance in the Stabilisation Fund created under 1.2.3 above and the operation and long term use of the Fund which will be broadly as described in the Economic Growth Plan (P.38/2005) as adopted by the States. The proposals will also cover the role of fiscal measures, particularly GST rates, in this context (T&R) (ED).

3.0 R eport on Amendments – Executive Summary

New paragraph 1.2.2 ensures that early GST receipts/budget surpluses do not go into Stabilisation Fund but are held instead to help address structural deficits post 2009.

Forecasts post 2009 suggest structural deficits rising to £40 million in 2013

Re-appraisal of black hole' may reduce but unlikely to eliminate deficits

Stabilisation Fund (SF) intended as counter-cyclical and counter-inflation tool

Clarification of 2008/2009 forecast surpluses not appropriate for SF

New paragraph 1.2.3 accelerates the establishment of a Stabilisation Fund and places funds into it progressively via: (i) the balance of the DHLF, (ii) the capital receipts element of the efficiency savings, and (iii) the remaining un-allocated balance of the revenue efficiency savings.

Numerous refs. to 2005 States decisions limiting public spending growth

Recent success in control of inflation through limits to spending growth

DHLF not income flow'

Places balance of DHLF and efficiency savings into SF

Property capital receipts once spent = slow erosion of property capital base

Achievement or not of Efficiency Savings outside scope of amendment

1. Increases deficits byremovalofDwellingHousesLoansFund(DHLF)
2. Increases deficits byremovalofcapital element of Efficiency Savings
3. Increases deficits by removal of non-capital element of Efficiency Savings (remaining unallocated £6.7 million per annum)

(i), (ii) and (iii) place increasing pressure on the Council of Ministers to reduce/delay spending

New paragraph 1.2.4 provides for the early presentation by Treasury & Resources and Economic Development of a report on the usage, size etc. of the Stabilisation Fund created in new paragraph 1.2.3 for a States debate.

Closes off or converts funds in SF for other uses

No allowance for next recession in forecasts

Report and States decision on usage guidelines, size of fund, fiscal levers etc.

Where are we in the economic cycle

Conclusion

Inflationary pressures

o GST in 2008

o 2% real economic growth annually as per Economic Growth Plan

o end of ITIS deflationary impact in 2007

o proposed  RUDL charges to non-Jersey owned businesses

o public spending growth as per Strategic Plan?

Balanced budgets over the full economic cycle rather than the next five years

0. A ddressingbudget deficits post2009
1. A m endment: New paragraph 1.2.2

This part of the amendment is designed to ensure that budget surpluses created largely as a result of the early introduction of GST in 2008 are held over to address budget deficits evident from 2010 and into the future after the introduction of 0/10 Corporation Tax and the loss of tax receipts from the business sector as a result.

2. The Black Hole' in States Resources Forecast

The Resources Forecast (Page 17 of the Strategic Plan) indicates significant budget deficits in 2010 and 2011 as a result of the introduction of the zero/ten fiscal changes, after the surpluses provided in 2008 and 2009 by the introduction of new Goods and Services taxes and revenue raising changes to existing taxes such as 20 means 20'.

The Minister told the Sub-Panel reviewing the Financial Framework that his overall objective was to maintain balanced budgets over the longer term'. However, even over the six year period covered by the Strategic Plan, the forecast is for an overall deficit by the end of the period of £12  million.

The Panel requested the Treasury to provide indicative' figures after 2011 using similar assumptions and growth patterns as used in 2010 and 2011 and any other assumptions such as the phasing out of tax receipts in 2012. The result is shown in Table  1. The size of the continuing deficits forecast for 2012, 2013 and 2014 indicates that there remains a very strong likelihood of a serious structural problem that will need to be addressed from 2010 onwards.

Table 1: Extended Financial Forecast 2012 - 2015

2012 2013 2014 2015 £' m £' m £' m £' m

tes Revenues (2006 Budget) 480 485 500 516 icipated States Revenues – GST, 20/20 56 58 60 61 tential States Revenues 536 543 560 577 enue Expenditure Forecasts 527 540 553 567 ital Expenditure Forecasts 43 44 45 46

tal Net Expenditure Forecasts

enditure growth

nsfer of Parish welfare and residential care (May 06)

tal Net Expenditure Forecasts (inc. Parish transfer)

tribution from Dwelling Houses Loan Fund

ding from Island Rate for transfer of Parish Welfare tal Net Expenditure Forecasts less contributions

enditure growth after DHLF

ft Strategic Plan Surplus/(Deficit)

570 584 598 613

1.0% 2.5% 2.5% 2.5%

10 10 10 10

580 594 608 623 –

10 10 10 10

570 584 598 613

2.3% 2.5% 2.5% 2.5% (33.3) (40.9) (38.5) (35.8)

The Minister advised the Sub-Panel that these figures should be taken with a health warning: they are almost academic; they are sort of a mathematical extension to where we are now, rather than a realistic position.' Referring to the anticipated Black Hole' caused by the fiscal changes he said: Because there are a variety of contributing factors to the £80-£100  million deficit and we are taking a very prudent line, I do not think I will have any nasty shocks in terms of financial forecasts.' When pressed to comment on the possibility that the indicative figures beyond 2011 contained a clear warning of a continual structural deficit, the Minister said: I think it is intended to indicate that we could live within our means within a 5 year period but yet at the end of it, if nothing else changed those figures, there could be difficulties thereafter. I have also said that, inevitably, things will change and those figures will alter. What this is simply indicating is that the strategic policies within this plan over a five year period are capable of being delivered while we still achieve our budget.'

The Sub-Panel noted the encouraging out-turn figures for 2005 as reported in the Financial Report and Accounts and the assurance that the financial forecast would be revised on a regular twice-yearly basis. The Minister told the Sub-Panel: Structural deficits do not happen overnight, and this plan says that over the next 5 years we can achieve balanced budgets. We will review the plan next year. It will not be in December 2010 that we suddenly say: "We have got a problem." We should be aware of that by 2008 and 2009 and plan it accordingly at that time. The whole idea is not to have sudden shocks to the economy but to plan on a rolling programme in advance.'

The Sub-Panel supports the Minister's insistence on the importance of delivering balanced budgets. Despite the assurances of the Minister, however, the Sub-Panel was not convinced that the outlook indicated in the draft Strategic Plan Financial Forecast and beyond provided sufficient confidence for relaxing the tight spending controls of the last few years, as envisaged in the draft Strategic Plan. This is discussed further in the next section.

3. T h e Stabilisation Fund

Page 16 of the Strategic Plan (2nd paragraph of Financial Framework) refers to the creation of a stabilisation fund into which will be paid "budget surpluses in times of economic growth" It is not clear as to whether the Council of Ministers intends that the budget surpluses indicated for 2008 and 2009 will be paid into the stabilisation fund, but it is very clear that the surpluses are as a result principally of early GST receipts before 0/10 and not economic growth.

The Strategic Plan does not go into any detail about the proposed Stabilisation Fund; however, it appears to the Panel that what is being proposed is not the same form of Stabilisation Fund as proposed in the Economic Growth Plan (P.38/2005), as agreed by the States., which is designed to address cyclical movements in the economy rather than a structural deficit. For ease of reference the relevant section from the Economic Growth Plan (P38 2005) as approved by the States is included with this report at Appendix A.

The effective control of inflation and the creation of a stabilisation fund are indeed crucial to our future economic well being and future economic competitiveness, but to help with the avoidance of doubt this amendment ensures that budget surpluses as a result of the early GST receipts are retained as a short-term cushion to help to address any residual structural deficits after 0/10 and not confused with the establishment of a true stabilisation fund which is addressed in section six of this report.

4. T h e proposed RegulationofUndertakings Licence Fees

The Sub-Panel noted that one of the major proposals contained in the draft Zero/Ten tax changes to take effect in 2010 (currently out for public consultation), involved the charging of licence fees to businesses at a level of £500 per Regulation of Undertakings Manpower Licence (RUDL fees).

It was further noted that although the new locally owned Limited Trading Partnership (LTP) would be able to avoid the RUDL fees through offsetting against personal tax liabilities, non locally owned companies would not be able to follow this avoidance route.

The Minister for Treasury and Resources was questioned about this at a private hearing on the 12th May 2006 by the Sub-Panel dealing with zero/ten' and look through'. The following points became apparent.

1. The RUDL fee proposal is deliberately targeted at non Jersey owned companies in order to recover an element of taxation from this sector that would migrate to other jurisdictions under the zero tax regime.
2. The size of the fees would be set at zero for the financial services sector so that they would escape increased costs, bearing in mind that they would be taxed at the 10% side of the 0/10.

3. The size of the fee for non finance sectors would be driven by the total tax' recovery target of approximately £5m.
4. The cost of the fees to non Jersey owned businesses would not be off-settable against any tax in another jurisdiction through a double tax' agreement, (unlike the present 20% Corporation Tax).
5. The fees will be irrecoverable by non Jersey owned companies and will represent real increased costs (not offset-able through double taxation agreements with the UK).
6. To the extent that these companies enjoy market power' they would be likely to pass on the extra costs to their customers. i.e. the RUDL fees will be inflationary.

0. C reation of a StabilisationFund
1. A m  endment: New paragraph 1.2.3

This  amendment addresses  the contributions  from savings  and  potential  new  income flows' in three  parts represented by –

1. t heDwellingHousesLoansFund(DHLF),
2. the £4 million a year savings' from capital receipts; and
3. the remainingunallocatednon-capital element of the efficiency savings

This amendment accelerates the establishment of a stabilisation fund, but additionally it has the effect of putting pressure on the Council of Ministers to take action in one of three ways –

1. Continue spending plans with increased budget deficits;
2. Continue spending plans andincrease taxation to reducebudget deficits; or
3. Reducethegrowth in expenditure tothe level foreseenin the 2006Budget report toreduce budget deficits.

For the sake of absolute clarity, the Panel does not advocate actions (1) or (2), but fully expects the Council of Ministers to review their spending plans as a matter of urgency in order to maintain their commitment to delivering balanced budgets and eliminating deficits over the period of the Strategic Plan. Only when it is clear that increased revenues will cover any future deficit should the Council of Ministers embark on its full spending programme.

2. I n creased expenditureplansintheStrategic Plan

The Financial Forecast in the 2006 Budget Report, which was agreed by the States in December 2005 (only 6  months ago), shows a series of single figure budget deficits for the period 2006 to 2009 with a very large deficit of £70  million appearing in 2010 with the introduction of the new0/10' corporate tax structure (see Table 2).

To address the immediate forecast deficits the agreed policy of the States in recent years, up to and including the 2006 Budget, has been to constrain public spending within strict limits. The following statements were made in 2006 Budget report -

"These projections also assume that States expenditure increases remain within the modest levels set in the recent States Business Plan debate of an average of around 2.5% per annum over the next 5 years." Page viii Para 1.4

"The Committee's main objectives for the period 2006 to 2010 are to: restrict increases in total States net expenditure to affordable levels, within the expenditure framework in the Fiscal Strategy and States Business Plan" Page x Para 2.4 first bullet point.

"The Committee is not able to control interest rates, however it will continue to endeavour to reduce inflationary pressures by constraining the growth in States spending to a level below the forecasts of inflation." Page xi 2.5 (last para.)

Table 2: Financial Forecast 2006 to 2010 (2006 Budget)

Estimates

2006 2007 2008 2009 2010 £' 000 £' 000 £' 000 £' 000 £' 000

Income

Income Tax 385 403 417 432 381 Impôts 46 44 43 41 40 Stamp Duty 17 17 17 17 17 Other Income 24 24 24 24 24

Total Income 472 488 501 514 462

Expenditure and Transfers to Reserves

Total States Net Revenue Expenditure 441 454 467 480 490 Capital Allocation 39 39 39 39 42 Transfer to Strategic Reserve – – – – –

Total States Net Expenditure 480 493 506 519 532 Deficit for the year (8) (5) (5) (5) (70)

"The States approved, in the Business Plan, an increase of 2.7% in total States spending" "The revenue expenditure has increased by 3.8% in 2006" "This increase has only been afforded due to the significant reduction in the capital allocation from £43m in 2005 to £39m in 2006." Page xi 3.1.

"The planning of a five-year programme has been achieved despite a significant reduction in the annual capital allocation from £43m in 2005 and £45m per annum in the years 2006 to 2009 to a new allocation of £39 million per annum for 2006 to 2009, only increasing to £42 million in 2010." Page xv 6.

In  contrast  to  the  above  statements,  the  Resources  Forecast  in  the  draft  Strategic  Plan  proposes expenditure growth in 2007 and 2008 of 4.3% and 3.8% respectively. The Plan proposes a year on year increase in States revenue and capital expenditure amounting to a total of approximately £57  million in additional spending over a five year period above that envisaged in the 2006 Budget financial forecast. (See Table 3)

The Strategic Plan financial forecast includes a contribution to income of £32  million over the period coming from the balance in the Dwelling House Loan Fund. Cosmetically this appears to reduce the expenditure growth in 2007 and 2008 to 3.5% and 3.2%, yet even this is still in excess of the growth in spending foreseen in the 2006 Budget.

In addition to the balance of the Dwelling House Loan Fund the £20 million of efficiency savings, originally earmarked in the Fiscal Strategy to part fill the Black Hole' deficit caused by zero/ten corporate tax, is now to be reinvested' in new public spending initiatives.

Table 3: Financial Forecast 2006 - 2011 (Strategic Plan Resources Statement)

2006 2007 2008 2009 2010 2011 £' m £' m £' m £' m £' m £' m

es Revenues (2006 Budget) 472 488 501 514 462 471 icipated States Revenues - GST, 20/20 – – 47 49 51 53

ential States Revenues 472 488 548 563 513 524 venue Expenditure Forecasts 442 463 479 493 504 518

pital Expenditure Forecasts

al Net Expenditure Forecasts

penditure growth

nsfer of Parish welfare and residential care ay  06)

al Net Expenditure Forecasts (inc. Parish nsfer)

ntribution from Dwelling Houses Loan Fund

ding from Island Rate for transfer of Parish lfare

penditure growth after DHLF and Island Rate ome

jected Surplus/(Deficit)

39 39 42 42 45 46

481 502 521 535 549 564 2.8% 4.4% 3.8% 2.7% 2.7% 2.7%

7 10 10 10 10 10

488 512 531 545 559 574

– 4 7 7 7 7

7 10 10 10 10 10

2.8% 3.5% 3.2% 2.7% 2.7% 2.7%

(9) (10) 34 35 (29) (33)

The difference between the spending plans in the 2006 Budget and the Strategic Plan can be seen clearly by placing the two Total Net Expenditure Forecast lines alongside each other. (See Table 4)

The Minister told the Sub-Panel that the proposed increase in spending was consistent with his policy of a balanced budget: I think we have to balance a variety of requirements that we have.  My overall objective is to maintain balanced budgets over the longer term and if by spending some or all of the efficiency savings I was of the view that balanced budgets could not be maintained over the longer term, I would have concerns. I am still of the view that balanced budgets can and must be maintained over the longer term and if we choose to use some of those efficiency savings at the present to maintain our infrastructure, we have to accept the fact that we have at all times to look at the overall policy of those balanced budgets.

Table 4: Comparison of expenditure forecasts

The Council of Ministers claim that the draft Strategic Plan is fully funded from within existing spending limits' but then goes on to qualify this statement "when the contributions from savings and potential new income flows are taken into account".

The Panel believes that this statement should be subject to scrutiny. In the Panel's view, the draft States Strategic  Plan  represents  a  significant  and  premature  shift  away  from  the  2006  Budget  policy  of constrained States expenditure. The key questions are –

Where are the new income flows' and savings coming from? and

What effect might the proposed additional spending have on inflation?

3. N ew incomeflows'

1. The Dwelling Houses Loans Fund

£32 million of the surplus funds available in the DHLF (from a total balance at the end of 2005 of some £52.7 million) is identified as the key element in the new income flows' which will fund the proposed net increase in States expenditure through to 2011.

A briefing note on this Fund which was provided by the Head of Corporate Capital, Treasury, is attached at Appendix B.

The Panel does not accept that this Fund can be accurately described as a new income flow'. Although it has grown larger over the years as loan capital with extra interest (over that charged to it) has flowed back into the fund from borrowers several times over since the 1950's, once spent there is no further income flow'. There have been very few (if any) new borrowers over the last few years from which continuing income flows through interest charges will derive once the balance of outstanding capital and interest has been returned. The figures for recent years show that the outstanding loans have been run down at a rate of about 15% a year.

A policy in the 1990s that made the interest charges un-competitive against traditional sources of mortgage capital, coupled with a much lower interest rate climate and competition amongst lenders, effectively led to a closing-off of the fund to new borrowers. There is a legitimate argument that the fund should now be returned to its original source if it is no longer required. When the fund was created in the middle of the last century (the fund was created under the Building (Loans) Jersey Law 1950) the Strategic Reserve did not exist, however the argument goes that the fund should now be returned to the nearest fit' source i.e. the Strategic Reserve.

It is probable that had the original funds placed in the DHLF been placed instead in a strategic reserve', had one existed at the time, then over the years similar capital appreciation would have occurred through investment, as has occurred through the DHLF.

The Panel believes that the States' original intention was to retain a strategic public asset whilst at the same time assisting first time buyers of homes on lower incomes. In some ways it might have been better for the Finance and Economics Committee to have been responsible for the administration of the DHLF, with prospective recipients of the loans endorsed by the Housing Committee. The Panel does not believe that the original intention was to convert these funds into future revenue or capital spending at some stage.

The Panel's amendment in sub-paragraph (i) does not follow thereturn to Strategic Reserve' line but it does go some way towards it in that the funds would ebb and flow in the Stabilisation Fund (depending on the cyclical nature of the economy) without theoretically actually being irrevocably spent.

The Panel proposes that, instead of using the Dwelling House Loan Fund to fund additional spending, the balance of excess funds over liabilities should be retained as a strategic asset and transferred to a Stabilisation Fund, as described in section six below.

The effect of the Panel's amendment on the Financial Forecast, as shown in Table  5, is to increase the projected deficits. It should, however, be noted that this is entirely due to the proposed increased spending plans of the Council of Ministers. The inclusion of the Dwelling House Loan Fund in the Strategic Plan masks the impact of the additional spending. Diverting the use of these funds will oblige the Council of Ministers to review their spending increases.

Without increases to spending this table would be roughly equivalent to that presented to the States in the 2006 Budget.

Table 5: Financial Forecast excluding DHLF contribution

2006 2007 2008 2009 2010 2011 £' m £' m £' m £' m £' m £' m

evenues (2006 Budget)

ted States Revenues – GST, 20/20 l States Revenues

 Expenditure Forecasts Expenditure Forecasts

t Expenditure Forecasts iture growth

 of Parish welfare and residential care (May 06) t Expenditure Forecasts (inc. Parish transfer)

tion from Dwelling Houses Loan Fund  Contribution from DHLF

472 488 501 514 462 471

– – 47 49 51 53

472 488 548 563 513 524

442 463 479 493 504 518

39 39 42 42 45 46

481 502 521 535 549 564

2.8% 4.4% 3.8% 2.7% 2.7% 2.7%

7 10 10 10 10 10

488 512 531 545 559 574

– 4 7 7 7 7

0 (4) (7) (7) (7) (7)

from Island Rate for transfer of Parish Welfare 7 10 10 10 10 10 Surplus/(Deficit) after Scrutiny adjustments (9) (14) 27 29 (36) (40)

rategic Plan Surplus/(Deficit) (9) (10) 34 35 (29) (33)

2. The ChangeProgramme Efficiency Savings

The Change Programme targeted £20  million per annum to be achieved by 2009 mainly through corporate and

departmental efficiencies but also with a capital contribution through the Property Plan.

Appendix  C details the latest sources and estimates of the efficiency savings. From its discussions with the Head of Financial Planning and the Director, Property Holding Department, the Panel has seen no reason to suspect that this target is not achievable. The focus of its review has been on how it is proposed to use these savings.

It is clear that the £20  million savings were originally intended to part fill the structural deficit as a result of 0/10 (the black hole'). However, the Minister told the Sub-Panel that the Council of Ministers now believed that we can live within that range, still spend that £20  million, and still achieve balanced budgets over the period. We will do that by making sure by way of prudence on our revenue expenditure and our capital expenditure.'

The efficiency savings are not clearly identified as a separate line in the Resources Forecast table on Page 17. The Panel requested therefore that an amended Forecast be prepared by the Treasury to show the effect of removing these savings from the calculation. Removing the efficiency savings from the Financial Forecast is shown in two parts: (a) the capital receipts and (b) the non-capital element.

1. C a pitalreceipts

The Property Plan targets net capital rising from £0.7  million in 2007 to£4  million per annum from 2009 onward. Although  there  was  always  an  element  of  the £20  million  that  would  come  from capital  receipts' in  the proposition (P.58/2004) agreed by the States on Public Sector Reorganisation, this was originally to be £5  million and not the latest figure of £4  million, so in fact an extra£1  million is to be saved from revenue expenditure over P.58/2004.

These capital receipts will very slowly erode the capital base of the States property portfolio and if spent will slowly erode the overall level of States Capital Assets. Technically they should not really be described as efficiency' savings, although they do result in an improving cash position for the States through better use and perhaps disposal and/or alternative purchase of property. This can be described as running the property portfolio more efficiently'. However the public perception of efficiency savings' is – efficiency' improvements result in a like for like lower cost of running the public administration and services every year (revenue expenditure) once they have been made.

By placing these capital receipts into the Stabilisation Fund as per amendment sub-paragraph  (ii) we maintain the overall capital base of the States. The effect of this amendment on the Financial Forecast is shown in Table 6.

Table 6: Financial Forecast excluding DHLF contribution and capital receipts

2006 2007 2008 2009 2010 2011 £' m £' m £' m £' m £' m £' m

Revenues (2006 Budget)

ipated States Revenues – GST, 20/20 tial States Revenues

ue Expenditure Forecasts

Remove Property Capital Receipts

l Expenditure Forecasts

Net Expenditure Forecasts diture growth

er of Parish welfare and residential care (May 06) Net Expenditure Forecasts (inc. Parish transfer)

ibution from Dwelling Houses Loan Fund

Remove Contribution from DHLF

472 488 501 514 462 471

– – 47 49 51 53

472 488 548 563 513 524

442 463 479 493 504 518 1 2 4 4 4

39 39 42 42 45 46

481 503 523 539 553 568

2.8% 4.4% 3.8% 2.7% 2.7% 2.7%

7 10 10 10 10 10

488 513 533 549 563 578

– 4 7 7 7 7

0 (4) (7) (7) (7) (7)

ing from Island Rate for transfer of Parish Welfare 7 10 10 10 10 10 diture growth after Island Rate income 2.8% 4.6% 4.0% 3.0% 2.7% 2.7%

ed Surplus/(Deficit) after Scrutiny adjustments (9) (15) 25 25 (40) (44) Strategic Plan Surplus/(Deficit) (9) (10) 34 35 (29) (33)

2. N o n-capitalelementof the efficiency savings

The non-capital element of the efficiency savings amounts to £16  million revenue savings each year by 2009. These savings fall into a different category to the £4  million per year of capital receipts.

The Panel acknowledges that £10  million of the non-capital efficiency savings has already been reallocated by the States in the 2005 and 2006 Budgets. The remaining efficiencies targeted in the section 6.2 of the draft Strategic Plan amount to £6.64  million and are composed of –

£1.3 million through the implementation by 2008 of the Head of Profession model for the finance function within the States (6.2.1);

£1.6 million through transformation of HR and IT functions by 2008 (6.2.2)

£1.5 million revenue savings from property by 2009 (6.2.3)

£0.510 million by centralising customer facing services by 2009 (6.2.5)

£1.9 million through improved procurement arrangements for goods and services by 2009 (6.2.6)

The Panel proposes that, instead of immediately re-investing' these sums into new forms of expenditure from 2007 onwards, the remaining efficiency savings are retained in a stabilisation fund, as explained in section six below. The effect of this amendment on the Financial Forecast is shown in Table 7.

Table  7  Financial  Forecast  excluding  DHLF  contribution  and  capital  receipts  and  non  capital  revenue savings

2006 2007 2008 2009 2010 2011 £' m £' m £' m £' m £' m £' m

Revenues (2006 Budget)

tial States Revenues

ue Expenditure Forecasts

Remove Property Capital Receipts l Expenditure Forecasts

Net Expenditure Forecasts diture growth

er of Parish welfare and residential care (May 06) Net Expenditure Forecasts (inc. Parish transfer)

ibution from Dwelling Houses Loan Fund

Remove Contribution from DHLF

472 488 501 514 462 471

472 488 548 563 513 524

442 463 479 493 504 518 1 2 4 4 4

39 39 42 42 45 46

481 503 523 539 553 568

2.8% 4.4% 3.8% 2.7% 2.7% 2.7%

7 10 10 10 10 10

488 513 533 549 563 578

– 4 7 7 7 7

0 (4) (7) (7) (7) (7)

ing from Island Rate for transfer of Parish Welfare 3 7 10 10 10 10 10 diture growth after Island Rate income 2.8% 4.6% 4.0% 3.0% 2.7% 2.7%

ed Surplus/(Deficit) after Scrutiny adjustments (9) (18) 19 19 (46) (50) Strategic Plan Surplus/(Deficit) (9) (10) 34 35 (29) (33)

4. Panel's views

Clearly, if the Panel's amendments regarding the capital receipts and/or revenue efficiency savings are accepted, in addition to the amendment regarding the Dwelling House Loan Fund, the forecast deficits will increase significantly compared to the Forecast shown in the draft Strategic Plan.

The Panel believes that this cumulative revised forecast position reveals starkly the potentially precarious nature of the Island's financial position in 2010 and 2011 as the scale of corporate tax changes take effect.

The Council of Ministers insists in their Strategic Plan that the forecasts for 2010 and beyond must be considered indicative' at this stage and that early action would be taken by the Council of Ministers to address a structural deficit. The Panel accepts that this will be the case and that the Council of Ministers may have legitimate grounds for believing that the future financial position will be much healthier as the full effects of the Fiscal Strategy unfold.

Nevertheless, the Panel does not believe that now is the right time to relax the tight spending controls which have been central to recent States Budgets. The existing spending controls as approved in the 2006 Budget should be maintained until the future position is much clearer with regard to the Black Hole' and any structural deficits remaining after 2011. New paragraph 1.2.3 i) is designed to achieve this position. Additionally, the Panel believes that the significant new information in the Resources Forecast of the Strategic Plan which extends a further year's projections over that presented to the States during the 2006 Budget, and also particularly the information illustrated in the extended forecast to 2015 in Table 1 above, suggests that the States would be well advised to reconsider some of the reinvestment' of the Efficiency Savings agreed by the States in the 2006 Budget, certainly until the eventual position after 2011 becomes clearer. It is for this reason that the Panel has proposed parts (ii) and (iii) of the new paragraph 1.2.3.

As a consequence of the Panel's amendments, it will be necessary for the Council of Ministers to review the extent and the timing of their spending plans. The revenue and capital items identified in the draft Strategic Plan list a series of important new initiatives: the improvement of social housing, home ownership, the income support system, law and order, the need to care for the growing number of elderly people in our population and anti- discrimination measures'

The Panel acknowledges that it may be easy for the Council of Ministers to criticise amendments which will oblige them to rethink their spending plans. They may say that these are the very initiatives which will be threatened by the Panel's amendments.

The Panel does not accept, however, that these social priorities need be abandoned by the Council as it is certain that there are other expenditure projects, for example in the capital programme, which could be re- prioritised.

The Panel does not believe it is within its remit to identify specific changes which will be necessary to the draft Strategic Plan spending initiatives should its amendments be approved. It has not undertaken any such exercise. Indeed, the lack of financial detail in the Plan prevents any detailed analysis. It is for the Council of Ministers to undertake this review and bring forward suitably revised proposals in the States Business Plan.

0. In  flation Strategy
1. A m  endment: New paragraph 1.2.4

This amendment makes the policy guidelines of the Stabilisation Fund an urgent priority for the Council of Ministers. The amendment does not attempt to pre-empt due consideration of its purpose, terms of usage, and ideal size, simply to accelerate provision for the initial establishment (in 1.2.3) and thereafter accelerate policy formulation on its use (in 1.2.4). The Panel believes that detailed work on a Stabilisation Fund long before the next recessionary cyclical downturn should be a top strategic aim.