States'ExpenditureForecasts-further evid.

STATES' EXPENDITURE FORECASTS

FURTHER EVIDENCE SUBMITTED

BY THE COMPTROLLER & AUDITOR GENERAL TO THE FINANCE SUB-PANEL

OF THE CORPORATE SERVICES SCRUTINY PANEL

FEBRUARY 2010

TABLE OF CONTENTS

Introduction................................................................................................................... 5 2010 Budget................................................................................................................... 6 Actual spending growth................................................................................................. 7 Implications for future spending growth ...................................................................... 8 Implications for the States' deficits............................................................................... 9 Rates of GST................................................................................................................. 10

Table One: Data underlying Figure 3.1 in the 2010 Budget Report........................... 11

Table Two: Future States' deficits: scenarios adjusted to take account of spending

trends............................................................................................................... 12

Introduction

1. In December 2009, I published updated evidence that I had submitted at the request of the Finance Sub-Panel of the Corporate Services Scrutiny Panel concerning expenditure forecasts published by the States of Jersey. That evidence updated evidence that I had published in April 2009.
2. Since December 2009, the Panel has asked me to consider three further questions which relate to the 2010 Budget of the States. These questions are:

1. How would the spending forecasts contained in the 2010 Budget be exceeded if past increases in spending were to continue during the period covered by forecast included in the Budget Report?
2. What would be the expected budget deficits if spending continued to increase at the rate experienced in recent years?
3. What rate of GST would be required to eliminate such deficits?

3. This paper sets out my responses to these three questions.
4. The figures set out in this paper are illustrative only. In response to the questions put to me, they do no more than show what might happen if certain events occur.

2010 Budget

5. The forecasts set out in the 2010 Budget were summarised in the following graph[1]:

50 25 0 -25 -50 -75 -100 -125

2009 2010 2011 2012 2013 2014

6. The graph shows that by 2014, on a pessimistic view, the States deficit would be of the order of £80 million. The detailed data underlying this graph are set out as Table One at the end of this paper.
7. However, even this pessimistic scenario assumes a reduction in spending growth from the rate experienced in recent years.

Actual spending growth

8. Although the rate of growth in spending[2] has varied over the past ten years, in recent years, it has exceeded 6% per annum.

Year of Annual increase

account Actual %

2001 417

2002 410 -1.68 2003 443 8.05 2004 460 3.84 2005 484 5.22 2006 504 4.13 2007 522 3.57 2008 562 ** 7.66 2009 598 * 6.41

* Estimated

** Excludes £103 million Energy from Waste plant

Implications for future spending growth

9. Table One shows that the pessimistic scenario for future deficits shown in the 2010 Budget report assumed that expenditure would grow at a lower rate than has been experienced in recent years. Further it did not take into account the need for additional spending to make up for backlogs in infrastructure maintenance (e.g. roads, sewers and sea defences). This would suggest that expenditure might rise more quickly unless restrained.
10. If expenditure were to grow at 6% annually (i.e. at less than the rate of recent years) it would grow as follows[3]:

Increased by 6%

Probable p.a. £ million £ million

2009 580*

2010 615 2011 652 2012 691 2013 732 2014 776

* Excludes supplementary approvals

Implications for the States' deficits

11. This calculation implies that, if this rate of spending growth were to continue and no change were to be made to the assumptions about future States' income, the States' deficits would exceed by a considerable margin the pessimistic scenario set out in the 2010 Budget Report. The outcome is shown in the following graph.

12. The data underlying this graph are set out in Table Two at the end of this paper.
13. These figures should be treated with some caution. In past years, the rate of growth of States' spending has varied. Constant growth of 6% per annum may thus be regarded as unlikely. But experience of recent years has also shown that the States have not been able to hold spending growth within forecast levels.

Rates of GST

14. As requested, I have calculated the rate of GST which would be required in each year to clear the forecast deficit[4]. The result is as follows:

2010 2011 2012 2013 2014

Expected GST receipts per forecasts

(assuming rate of 3%) 51 52 54 55 56 Deficits

(pessimistic scenario) -77 -107 -128 -146 -171

Rate of GST required

to clear deficits 8% 9% 10 % 11% 12 %

15. Whilst these increases in rates may appear substantial, the deficits as shown in the pessimistic scenario are indeed substantial. If deficits at this level were allowed to occur, they would eliminate a substantial proportion of the States' Strategic Reserve within the period of the forecast.

Table One: Data underlying Figure 3.1 in the 2010 Budget Report

2009 2010 2011 2012 2013 2014 Prob'le Fcast F'cast F'cast F'cast F'cast

BASE CASE States Income

States Expenditure

Net Revenue Expenditure

Capital Expenditure Allocation Forecast surplus/(deficit)

PESSIMISTIC SCENARIO States

Income

States Expenditure

OPTIMISTIC SCENARIO States

Income

States Expenditure

Table Two: Future States' deficits: scenarios adjusted to take account of spending trends

2009 2010 2011 2012 2013 2014 Probabl

e Fcast F'cast F'cast F'cast F'cast

BASE CASE States Income

States Expenditure

Net Revenue Expenditure

Capital Expenditure Allocation

Forecast surplus/(deficit)

PESSIMISTIC SCENARIO States Income

States Expenditure - adjusted

OPTIMISTIC SCENARIO States Income

States Expenditure