Annual Business Plan 2008 (P.93-2007) - ninth amendment P.93-2007Amd.(9).

STATES OF JERSEY

r

ANNUAL BUSINESS PLAN 2008 (P.93/2007): NINTH AMENDMENT

Lodged au Greffe on 4th September 2007 by the Public Accounts Committee

STATES GREFFE

ANNUAL BUSINESS PLAN 2008 (P.93/2007): NINTH AMENDMENT ____________

1. In paragraph  (b), after the words"setoutinSummaryTable C, page  45", insert the words –

" , e x cept that the proposed figures for total States net revenue expenditure allocation in the said Table  C shall  be  decreased  by £12,425,000  in  2008,  by £15,964,000  in  2009,  by £23,657,000  in  2010,  by £30,000,000 in 2011 and by £35,000,000 in 2012 as shown for information in the following Table –

2007 2008 revised 2009 2010 2011 2012 Expenditure Expenditure Expenditure Expenditure Expenditure Expenditure Allocation allocation Allocation Allocation Allocation Allocation (restated)

£'000 £'00 £'000 £'000 £'000 £'000 Revenue Expenditure

tion 516,075 547,229 560,517 571,360 583,000 595,000 al Expenditure

tion 43,499 42,441 42,223 43,189 42,965 43,627 States Net

diture Allocation 559,574 589,670 602,740 614,549 625,965 638,627

2. In paragraph  (c), after the words"withdrawn from the consolidated fund in 2008", insert the words –

" ,  e xcept  that  the  proposed  total  net  revenue  expenditure  of £559,654,400  shall  be  reduced  to

£547,229,000 and that for the net revenue expenditure of each States funded body set out in the said Summary Table  A there shall be substituted the following total net revenue expenditure –

A m  e nded Summary Table A

Suggested Gross 2008 based on

Revenue revised Department Expenditure Income spending limit

(See Figure 7)

£'000 £'000 £'000

Ministerial Departments

Chief Minister 15,770 1,231 14,539 G rant to the Overseas Aid Commission 7,179 – 7,179 Economic Development 17,171 1,164 16,007 Education Sport and Culture 107,632 14,048 93,584 Health and Social Services 160,975 16,771 144,204 Home Affairs 43,404 1,576 41,828 Housing 13,605 35,620 (22,015) Planning & Environment 8,847 2,981 5,866 Social Security 143,181 7 143,174 Transport and Technical Services 36,921 15,458 21,463 Treasury & Resources 66,767 5,603 61,164

Non-ministerial States funded bodies

Bailiff 's Chamber 1,258 55 1,203 Law Officers' Department 5,392 195 5,197 Judicial Greffe 4,396 587 3,809 Viscount's Department 1,760 396 1,364 Official Analyst 635 60 575

Office of the Lieutenant Governor Office of the Dean of Jersey

Data Protection Commission Probation Department Comptroller and Auditor General States Assembly and its services

Proposed Revenue Expenditure 2008

adjustments to reconcile

Treasury: Interest and Repayment of Debt Social Security: Income Support Transitional Relief

Revenue Expenditure for Financial Forecast

746 36 710 22 – 22

279 65 214 1,476 – 1,476 709 – 709 4,981 24 4,957

£588,591 £95,877 £547,229 (45,029) (318) (44,711)

(9,700) (9,700)

643,337 95,559 492,818

Notes:

The Overseas Aid Commission Expenditure allocation appears as a grant from the Chief Minister's Department, as it has not yet been established as a States funded body under the new Public Finances (Jersey) Law 2005.

The PAC recognises that the Minister  for Treasury and  Resources has  the  ability  to reallocate funds between States funded bodies during a financial year."

3. After  paragraph  (c)  insert  a  new  paragraph  (d)  as  follows  and  renumber  subsequent  paragraph accordingly –

" (d ) to agree that the Revenue Expenditure for Financial Forecast' as set out in the reconciliation to the Financial Forecast below Summary Table A is the figure that shall be used on which to base Departmental comparatives in the States accounts for the year ended 31st December 2008;"

4. In paragraph  (g) after the words"SummaryTable C,page 45, for the period 2009 to 2012" insert the words –

" e x c ept that for the allocations in the said Table  C there shall be substituted the allocations in the following revised Table C –

d Table C – Total States Net Expenditure Allocations 2008 – 2012

2007 2008 revised 2009 2010 2011 2012 Expenditure Expenditure Expenditure Expenditure Expenditure Expenditure

Funded Bodies Allocation allocation Allocation Allocation Allocation Allocation (restated)

£'000 £'000 £'000 £'000 £'000 £'000 erial Departments

Chief Minister 14,403 14,539 14,903 15,192

Grant to the Overseas Aid Commission 6,331 7,179 7,334 7,476

conomic Development 16,005 16,007 16,395 16,713

ducation, Sport and Culture 96,094 93,584 95,599 97,451

Health and Social Services 137,095 144,204 148,816 151,699

Home Affairs 39,644 41,828 42,729 43,556

Housing 1,857 (22,015) (22,675) (23,132)

lanning and Environment 5,719 5,866 5,992 6,108

ocial Security 102,828 143,174 146,257 149,090

ransport and Technical Services 21,241 21,463 21,975 22,401

reasury and Resources 55,096 61,164 62,481 63,691

Ministerial States funded bodies

Bailiff 's Chamber

Law Officers' Department Judicial Greffe

Viscount's Department

Official Analyst

Office of the Lieutenant Governor Office of the Dean of Jersey

Data Protection Commission Probation Department Comptroller and Auditor General tates Assembly and its services

Revenue Expenditure Allocation

al Expenditure Allocation

States Net Expenditure Allocation

ments to reconcile to Financial Forecasts:

ncome Support - Transitional Relief Repayment of Capital Debt (revenue) Property Capital Receipts (capital)

Trf from Land Acquisition (capital)

States net expenditure allocation (as shown ncial forecasts)

1,179 1,203 1,232 1,256 5,097 5,197 5,324 5,427 3,738 3,809 3,901 3,977 1,339 1,364 1,397 1,424 564 575 589 600 695 710 727 741 21 22 22 23 209 214 219 223 1,444 1,476 1,512 1,541 696 709 726 740 4,782 4,957 5,064 5,162

£516,075 £547,229 £560,517 £571,360 £583,000 £595,000 £43,499 £42,441 £42,223 £43,189 £42,965 £43,627

£559,574 £589,670 £602,740 £614,549 £625,965 £638,627

(9,700) (5,600) (3,700) (2,200) (900) (42,214) (44,711) (45,700) (45,700) (45,700) (45,700) (700) (2,300) (4,000) (4,000) (4,000) (4,000)

(1,000)

£515,660 £532,959 £547,440 £561,149 £574,065 £588,027

he Overseas Aid Commission expenditure allocation appears as a grant from the Chief Minister's Department, solely for the purpose of the xpenditure allocations, as it has not yet been established as a States funded body under the new Public Finances (Jersey) Law.

he transitional relief for Income support is included in the allocations for social security.

he property transfers from ESC to Property Holdings have been recognised in 2008.

o comply with previous approvals in the Strategic Plan and previous Business Plans, spending in year 2009 is consistent with amounts oted in the 2007 Business Plan, thereby complying with the 3 year budgeting process.

o comply with previous approvals in the Strategic Plan and previous Business Plans, spending in year 2009 is consistent with amounts oted in the 2007 Business Plan, thereby complying with the 3 year budgeting process.

5. After  paragraph  (g)  insert  a  new  paragraph  (h)  as  follows  and  renumber  subsequent  paragraph

accordingly –

" (h ) to request the Minister for Treasury and Resources not to exercise his powers under Article 15(1)

(b) of the Public Finances (Jersey) Law 2005 regarding the reallocation of year end underspends before seeking the prior in principle' agreement of the States Assembly;".

PUBLIC ACCOUNTS COMMITTEE

REPORT

Background

In 1995 the Audit Committee of the day was particularly concerned about the poor response by Committees and Departments to their recommendations. It was felt that there was a lack of willingness to accept what was good practice to achieve economy, effectiveness and efficiency. In particular, in their report of 31st March 1995, the Commission recommended that "there should be available telling financial information". It was recognised that without information it is extremely difficult to impose fiscal discipline.

The Public Accounts Committee is not yet convinced that the transparency of financial information supplied to the States has reached the standard of best practice which it would wish to see. Some progress is being made, although slowly. The full conversion to GAAP accounting is a case in point. However, the Public Accounts Committee will be commenting more fully on this in its report on the 2006 Accounts of the States of Jersey.

The recent report by David Kern[1] also highlighted the lack of a medium term fiscal policy and fiscal discipline. Whilst his other suggestions regarding tax competitiveness but at the same time broadening the tax base, and encouraging local business are relevant, all of these are subordinate to the necessity for observing medium term fiscal discipline.

This is reflected in the fact that the 2004 States Resource Plan contained the following – THE STATES are asked to decide whether they are of opinion

to a p prove the States Resource Plan 2004 to 2008 and in particular –.

(b ) (i i) to agree that total States net revenue expenditure should be increased by no more than 3%

per annum for the years 2005 through to 2008;

There is little evidence that this 3% rate has been taken into account when preparing budgets. It has been maintained that the blame for expanding budgets rests with the politicians. Since 2004 the budgets forecast in the Business Plan appear not to have complied with this vote of the Assembly.

The  concerns of  the Public  Accounts  Committee  can  be  understood  by  consideration of the  graphs in  the Appendix.

Figure  1 shows that from 2003 to 2006 actual expenditure is growing significantly faster than the growth in the figures voted for in the relevant Business Plans.

For example, until October 2006 the Treasury maintained that the final Net Revenue Expenditure figure would be £441 million. By the following January, when the accounts were prepared, the actual Net Revenue Expenditure had become £465 million. At the same time, the original vote had been increased by allocation of underspends from 2005, service changes and a number of other transfers so that the alleged authorised budget figure was £466 million. Moreover, the departmental comparatives were based on the£466 million and not the original 2006 Business Plan figure of £441 million. This makes it extremely difficult to identify where significant spending has occurred and does not provide any reliable financial performance indicators for the Departments.

Currently the 2008 Business Plan indicates that the probable outturn for 2007 will be £482 million, an increase of £8 million on the forecast in 2006. It is clear from the graph that actual expenditure is growing much faster than the budgeted amounts as shown in the Business Plans.

Figure  2 charts Income against Net Revenue Expenditure. The levels of Net Revenue Expenditure forecast for 2010 onwards are such that the overall financial position will be in deficit. The size of the deficit depends on the accuracy of the estimates of income by 2010.

Figure  3 shows the effect of a modest reduction in Net Revenue Expenditure in 2008 with tighter control over growth in expenditure. The effect of this would be to ensure that there is, assuming the income forecasts are valid, no deficit in 2010 onwards. This forecast is summarised in Figure  8, which uses reduced levels of expenditure compared with the original Table  3.1 on page 12 of the Draft Business Plan.

The Public Accounts Committee is concerned about the rate of growth in expenditure, 96% in the past 10  years, against the growth in income, 92% over the same period as shown in the accounts of the States and compared with an increase of 46.6% in RPI. Apart from the inflationary pressures, with an ever-increasing spiral in spending, this pressure on spending will lessen the Treasury Minister's room for manoeuvre and could lead to a necessity to consider higher rates of taxation.

Figures 4 to 6 derive the estimate of the increased tax burden on the general population arising from the inability of the States to restrain spending. In 2006 the effect of the increase of expenditure from £441 million to £465 million was to add 14.8% to the tax bill of the general public.

The Public Accounts Committee has seen no evidence of concerted action to control expenditure. Moreover, there are still no clear financial performance indicators for Departments by which to measure their performance, nor are there reliable guidelines to use to set budgets.

The comment in the current Business Plan, on page 22,"that there may be limited scope for delivering further major efficiency savings" is not a phrase which would be recognised in the private sector or in the public sector on the mainland. Efficiency is an ongoing exercise not a "one-off" operation.

Tax changes

Due to external pressures, Jersey is making radical changes to its tax structure. The Goods and Services Tax will be introduced in 2008. There is considerable uncertainty over the future and it is not clear that the 3% rate can be maintained over the medium to longer term. The Minister has given assurances that the rate will remain constant for the first 3  years but the rate in year  4 will depend on the overall performance of the economy.

At the same time, the essential counterbalance to the new GST taxes, the Income Support Scheme, has yet to be finalised and we will not know whether it is operating smoothly until late 2008 at the earliest. It is not yet known whether the monies allocated for this are sufficient.

The other tax changes, 20 means 20 and zero/10, are only just beginning to be phased in, but the full effects of these will not be felt until 2009 to 2011. Moreover, there are also environmental taxes being designed.

There are problems with ITIS in that a side-effect has been the rise in supplementation which has been required to cover the increased numbers of low income workers coming into the tax net. A solution has to be found to this.

There have been assurances that there will be no more new taxes before 2012 but after this it will very much depend on the performance of the economy and the fiscal discipline of the States.

The Fiscal Strategy promised real control over States Expenditure and a commitment to balanced budgets. However, the performance so far is such that by 2011 there will be a structural deficit in the economy. If this deficit is tackled now, then the process will be less painful than leaving it until 2011. In addition, restraint of expenditure can be organised from within the Island rather than it being enforced by external circumstances in 2011.

The Council of Ministers has stated in each of the Business Plans that "States Expenditure will not exceed the amounts set out" Expenditure was to be restrained to keep RPIx at 2.5% and, in the Strategic Plan," total States net revenue expenditure should be increased by no more than 3% per annum for the years 2005 through to 2008".

Despite these brave words, we are being presented with a Business Plan which proposes an increase of some 7.3%, plus a further £9.7 million, considerably above the target set in the 2007 Business Plan.

There are wide-ranging changes in the tax structure, the effects of which are not yet known, and there is uncertainty in the world economic climate. The economy is buoyant at the moment. It is not the time to be expanding expenditure. It will also add to the confidence of the finance industry if the Island can demonstrate fiscal discipline as well as the existing certainty in the future tax structure.

Proposed action

There has been much play made of the difference between commitment and accrual figures. However, this amendment deals with the budgets and Business Plans and since they are not designed on an accruals basis then commitment figures must be taken.

In arriving at the proposed spending limit it was realised that the total must be sufficiently reduced to make Departments think, but not so reduced that it is impossible; it should be realistic.

The forecast Net Revenue Expenditure for 2008 in 2007 was £492  million. This is a growth of just over 4% over the original budget for 2007 and correlates with current inflation estimates. It is also in line with limiting the growth in Net Revenue Expenditure as a percentage of GVA. It represents a reduction of about 2.5%, or about £12.5  million, on the amount of£505  million requested by the Council of Ministers. Figure  7 shows the effect o the reduction on forecasts (Table 4.1 in the Business Plan). This is only an indicative allocation of resources as the Treasury Minister, using his powers under Article  15(1)(a) of the Public Finances (Jersey) Law 2005, may vary the heads of expenditure.

The Public Accounts Committee also feels that increases in expenditure must be limited for the period 2008 to 2012. At the same time, it is necessary to be consistent with the amounts already voted in the 2007 Business Plan. The Assembly has already voted, through the Strategic Plan and the various Business Plans, for a 3 year budgeting process as well as limiting growth in Net Revenue Expenditure. In order to restore fiscal discipline, it is more appropriate in the current economic climate, as well as maintaining consistency, to limit growth in NRE to 3% in 2009 and 2010, reducing this to 2.5% in 2011 and 2012. This will limit growth in the ratio of NRE to GVA. It also correlates with the target for RPIx.. The effect of this is shown in Figure 8.

It is essential that fiscal discipline is reinstated. The combination of limiting expenditure plus adoption of GAAP will provide the tools to effect this. Members would perhaps like to consider the fact that overall expenditure in Guernsey is apparently limited to the increase in RPI.

The difference between this and previous years is that the figure must be firm. There will be no adjustments using amounts voted in previous years and miscellaneous transfers to increase the figure voted in this proposition. Any funds arising from underspends should be returned to the Consolidated Fund before reallocation is considered. If there is a genuine need for additional funding and reallocation of underspends then this should come back to the States for approval.

The intention is that Departments will have a defined budget and will be expected to adhere to that budget. Services should not be expanded without proper analysis.

States Members should also note that these strictures also apply to them.

In the current forecast in the Business Plan, expenditure will converge with income in 2011/2012 and there will be deficits. If preventative action is taken now, then there should be a surplus in these 2  years when the effects of Zero/10 really become apparent.

Additional proposals

This restraint is only part of the inception of a formalised programme of broader control measures to be set up.

The Public Accounts Committee will initiate a study on applicability of the "Golden Rule". It is intended that this will be coordinated with the Corporate Services Scrutiny Panel and the Treasury Minister. Part of the structure for this has already been put in place by the Treasury Minister; it remains to build on this.

The rationale behind the "Golden Rule" is outlined in Figure 9.

At the same time budgets must be converted to accrual accounting and this must be included as part of the conversion to GAAP accounting. This must be effected as soon as possible.

The Treasury Minister is proposing to bring forward amendments to the Public Finances (Jersey) Law 2005. The Public Accounts Committee will be issuing its comments on these and will be bringing its own amendments to assist in the establishment of better medium term fiscal discipline.

Financial and manpower implications

The financial implications of this amendment are self-explanatory and it is intended that the reduction will restrain the employment of additional personnel on new services.

STATES OF JERSEY - Comparison of Actual Expenditure and Budget (per Treasurer's Reports)

£Mil

Figure 2

Income vs Net Relevant Expenditure (page xi of States Accounts)

640

540

440 £Mn

340 240

140

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 income 272 291 324 380 398 415 436 444 445 467 524 538 582 618 566 580 596 NRE 237 255 278 294 324 356 377 397 417 441 465 482 505 525 545 565 583

NOTE: The values for 2007 to 2012 are based on the forecasts given in the 2008 Business Plan

Proposed reduction in Net Revenue Expenditure vs Planned Net Revenue Expenditure and vs Public sector Income

640 600 560 520 480

£Mn

440

400

360

320

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Expenditure Planned 356 377 397 417 441 465 482 505 525 545 565 583 Reduced Expenditure Proposed 356 377 397 417 441 465 482 492 507 522 535 548 Public sector income 415 436 444 445 467 524 538 582 618 566 580 596

NOTE: The values for 2007 to 2012 are based on the values included in the 2008 Business Plan

Figure 4

STATES OF JERSEY ~ INCOME TAX PAYABLE BY EMPLOYEES (per Treasurer's Report)

STATES OF JERSEY ~ HOW HOLDING TO BUDGETS WOULD ALLOW INCOME TAX TO BE REDUCED

Figure 6

STATES OF JERSEY ~ POSSIBLE REDUCTION IN INCOME TAX PAYABLE BY EMPLOYEES IF BUDGET HAD NOT BEEN EXCEEDED

Figure 7: Indication of the effect of the changes to Cash Limits

Approved in 2007 Suggested 2008 2008 spending Business Plan For based on revised proposed in

Department 2008 spending limit Business Plan

£'000 £'000 £'000

Chief Minister

Overseas Aid

Economic Development Education Sport and Culture Health and Social services Home Affairs

Housing

Planning & Environment Social security

TTS

Treasury & Resources (includes repayment of capital debt)

Bailiff s Chamber

Law Officers

Judicial Greffe

Viscounts

Official Analyst

Lieut Gov

Dean

Data Protection

Probation

Comptroller and Auditor General

14,539 14,539 14,757 6,673 7,179 7,363 16,007 16,007 16,057 98,150 93,584 95,984 143,329 144,204 147,902 40,808 41,828 42,901 2,133 -22,015 -22,015 5,598 5,866 6,016 110,691 143,174 146,914 21,463 21,463 21,877

54,708 61,164 61,586

1,203 1,203 1,225 5,197 5,197 5,272 3,809 3,809 3,880 1,364 1,364 1,393 575 575 586 710 710 727 22 22 22 214 214 220 1,476 1,476 1,510 709 709 712

States Assembly 4,870 4,957 5,084 Totals £534,248 £547,229 £559,973

Capital expenditure allocation £42,162 £42,441 £42,441 Total States net revenue

expenditure £576,410 £589,670 £602,414 Reconciliation to Financial

Forecast

Less:

Int & Repymt of debt (42,214) (44,711) (44,711) Income Support-Tsntl Relief (9,700) (9,700) Property capital receipts (2,300) (2,300) (2,300) Total States net expenditure

allocation as shown in financial

forecasts £531,896 £532,959 £545,703

Note:

1. All figures in 2008 Business Plan reduced by 2.5%.
2. The transitional relief for Income support is included in the allocations for social security
3. The property transfers from ESC to Property Holdings have been netted out.
4. To comply with previous approvals in the Strategic Plan and previous Business Plans, spending in year 2008 is consistent with amounts voted in the 2007 Business Plan for 2008, thereby complying with the 3 year budgeting process.

Figure 8: Revised Forecast 2007 to 2012:

Forecast with limited net revenue expenditure growth

Year 2008 2009 2010 2011 2012 Income 582 618 566 580 596

Net Revenue Expenditure

Net Capital Expenditure Allocation Total States Net Expenditure Surplus For the Year

Income Support transitional Relief Amended Forecast Surplus

492 507 522 535 548 40 38 39 39 40 532 545 561 574 588 50 73 5 6 8 10 6 4 2 1 40 67 1 4 7

Growth in Net Revenue Expenditure 4.40% 3% 3% 2.50% 2.50%

Figure 9: The Golden Rule

"The Golden Rule is a rule that provides a guideline for the operation of fiscal policy. The Golden Rule states that over the economic cycle the government will borrow only to invest and not to fund current spending. Therefore, over the cycle the current budget i.e. net of investment, must balance or be brought into surplus.

The core of the Golden Rule framework is that as general rule policy should be designed to maintain a stable allocation of public sector resources over the course of the business cycle. Stability is defined in terms of three ratios. Firstly, the ratio of public sector net worth to national income. Secondly, the ratio of public current expenditure to national income and thirdly, the ratio of public sector income to national income. If national income is growing and net worth is positive then this rule implies that on average there will be net surplus of income over expenditure.

The justification for the Golden Rule derives from macro economic theory. Other things being equal, an increase in government borrowing raises the real interest rate consequently crowding out (i.e. reducing) investments as a higher rate of return is required for investment to be profitable. Unless the government uses the borrowed funds to invest in projects with a similar rate of return to private investment, capital accumulation falls with negative consequences upon economic growth.

The distinction between current and capital expenditure in the Golden Rule is related to a broader distinction between cash accounting and accrual accounting. Cash accounting reports the flows of money payments and receipts. If money is received during the accounting period it is counted as revenue even though it might be paid for services provided the previous or the following year. Similarly, payments are included if they are made this year no matter when the goods or services purchased are used. As a result, the proceeds of asset sales were treated exactly like current revenue (or in some cases as a reduction in expenditure) and as far as the budget was concerned, available for spending in the year in which they are realised. It was gradually recognised that a policy of selling assets to finance current expenditure was unsustainable. A simple ad-hoc response was to replace the cash measure of budget balance with an underlying measure which excluded asset sales.

A more systematic response to the defects of the cash budget balance measure has been to adopt a system of accrual accounting. The basic idea of accrual accounting is to separate current and capital expenditure and to recognise revenue and expenditure as they accrued rather than when they are realised as cash payments. Under accrual accounting the purchase price of capital assets is amortised over the life of the asset rather than being lumped in with current expenditure in the year of purchase.

The crucial summary measures in an accrual system of accounting are the operating result and the government's net  worth.  This  is  the  difference  between  income  derived  from  taxation  grants  and  government  business enterprises and current expenditure on goods services and interest payments, including an allowance for the depreciation of physical assets. A surplus on the operating result implies that income has exceeded current expenditure so that net worth is increasing. Similarly, a deficit corresponds to a reduction in net worth."

[1]

The Jersey Economy: Prospects, Opportunities and Threats: An Independent Assessment; by David Kern Economic Adviser to the BCC and former Chief Economist, NatWest Bank.