Progress Report by the Minister for Treasury and Resources on the Response to the Fiscal Policy Panel Annual Report April 2013.

STATES OF JERSEY

PROGRESS REPORT BY THE MINISTER FOR TREASURY AND RESOURCES ON THE RESPONSE TO THE FISCAL POLICY PANEL ANNUAL REPORT APRIL 2013

Presented to the States on 19th April 2013 by the Minister for Treasury and Resources

STATES GREFFE

2013   Price code: C  R.32

REPORT

Introduction

In November 2012 the Minister for Treasury and Resources published an updated response to the Fiscal Policy Panel Annual Report 2012. The issues raised in the FPP report are of great significance to the Island, hence the Minister for Treasury and Resources presents this report to set out progress in tackling the issues facing the local economy. This report is in 2 parts: the first gives an update on prevailing economic conditions  and  how  they  are  affecting  Jersey;  and  the  second  sets  out  progress achieved to date on each of the Panel's 7 recommendations.

The economic situation in early 2013 Part 1

The current position for the UK economy

The UK economy forms a part of the contextual analysis for considering Jersey's economy. Some of the current economic issues identified by the UK's Office for Budget Responsibility (OBR) are set out below.

The Fiscal Situation

Government efforts in the UK to trim spending have not helped to reduce the deficit as planned, because economic growth has been so weak. The OBR, the fiscal watchdog set up by the Chancellor in 2010, has recently cut its growth prediction in half, to an expansion in Britain of just 0.6% this year. A flat economy means poor tax receipts and a sizable benefits bill, with a significant and persistent gap between income and spending. The OBR's evaluation of the March budget concludes that the measures will be growth-neutral overall. Britain's deficit has been £120 billion for the last 2 years, and will remain at that level for another one, according to the OBR. This means that Britain's debt-to-GDP ratio is set to peak at 86% in 2016–17. The Government faces this forthcoming period, of a worsening of the situation, at the same time that its options are limited by the commitment to ring-fence health spending, and by the need to accommodate both parties in the coalition. It is sensible to assume that the path to Government budget management is going to be slow and arduous.

Monetary Policy

The Bank of England said in February that inflation will remain above its goal for the next 2 years and risks to the economic recovery are weighted to the downside. The central bank's Inflation Report said the outlook for consumer-price growth is higher than forecast in November because of the weaker pound and increases in energy bills.

Since  the  publication  of  the  FPP's  annual  report  in  October  2012,  economic developments  have  tended  to  support  their  view  at  the  time  that  "Risks  to  the downside have increased due to the ongoing sovereign debt crisis in the euro area, and the resulting fiscal consolidation and financial market turmoil". In particular –

• World economic forecasts have been downgraded, and concerns remain about the situation in the eurozone and to a lesser degree the fiscal situation in the US.
• As mentioned above, in the UK, the Office for Budget Responsibility (OBR) now forecast that UK economic growth will be 0.6% in 2013 compared to 1.2% in the December 2012 forecast for the Autumn Statement. In 2014 the forecast is now for 1.8% compared to 2.0% in December 2012. The OBR state that: "With the economy entering 2013 with somewhat less momentum than we expected in December, a weaker outlook for consumer spending, business investment and exports has prompted us to revise down our near-term growth forecasts". The OBR expect that even by 2017 significant spare capacity will remain in the economy and that output will not have returned to potential.
• The sequence of Business Tendency Surveys has continued to show extended weakness in the local economy. In addition, retail sales volumes at the end of 2012 were 1% lower than in the corresponding quarter of 2011.
• Out-turns  in  terms  of  GVA,  employment,  average  earnings  and  company profits data have generally been weaker than that expected at the beginning of 2012 during the planning stages of the MTFP.
• There remains considerable uncertainty around the financial services sector with the ongoing UK FATCA negotiations and changing global competitive and  regulatory  environment.  The  latest  labour  market  data  shows  that employment in financial services was down 280 in December 2012 compared with a year ago, 1,000 lower than the peak recorded in 2008.

Part 2

Progress Report on the FPP Recommendations Recommendation from the FPP (1)

The Panel's assessment of the economic outlook for the Jersey economy has been downgraded for 2012 and 2013, and there are indications that significant spare capacity will remain in the economy over this period. This leads the Panel to advise that the States should act now to give discretionary fiscal support to the economy in 2012 and 2013, and if practical to a greater extent than set out in the MTFP.

Current Progress (1)

Treasury and Resources, with the support of all service Departments, has carried out a review of the Capital Programme planned for 2013, 2014 and 2015 against the "3 Ts" criteria. These criteria were used to assess projects for their suitability in providing a fiscal stimulus to the local economy. It is accepted that the criterion of timelines can only be a reasonable estimation in the later years of 2014 and 2015.

Recommendation from the FPP (2)

While the consideration of additional discretionary stimulus should not be limited purely to capital expenditure, it is clear that with such significant capital allocations over the life of the MTFP, consideration could be given as to whether, in a timely, temporary and targeted manner –

Capital Allocation in 2012 and 2013 can be spent in the year of allocation. Capital allocations from 2014 and 2015 can be brought forward to 2012 and 2013.

Unspent allocations in 2012 from previous allocations can be spent as quickly as possible in late 2012 and 2013.

Current Progress (2)

As background information, set out on the next page is a summary of approved capital allocations for 2013 and proposed allocations for 2014 and 2015.

Please  note  that  these  amounts  represent  the  approval  of  schemes  for  2013  and proposed allocations for 2014 and 2015. The actual cash-flow will vary from these approved amounts in the year because the capital projects can occur over a longer time period than a single financial year. Cash-flow on capital expenditure therefore will be a combination of prior approvals and current approvals (as shown in the table in Section 3 below).

A number of steps have been taken by Treasury and Resources and the Council of Ministers to accelerate the spending of capital allocations so as to provide a stimulus to the local economy and take advantage of the very competitive prices that have been generated in recent tendering exercises.

1. A full review of the Capital Programme for 2013, 2014 and 2015 has been carried  out  and  each  of  the  funded  schemes  has  been  tested  against  the "temporary, timely and targeted" criteria. This report is attached in full as Appendix 3.
2. Joint work has been done with Parishes to bring forward capital schemes that are a priority for the local area.

1. Parish of Trinity

The Minister for Treasury and Resources approved, in line with the current Investment Strategy for the Currency Fund, up to a £6 million Infrastructure Investment in the Parish of Trinity to provide financing for Phase 1 of a building project on Field No. 578 for the purpose of building first-time buyer homes.

The development, to be carried out by the Parish of Trinity , increases the supply of social and affordable homes, aiding a reduction in the current affordable homes shortage. This is in line with the "House our Community" priority set out in the 2012 Strategic Plan. The provision of monies to the Parish for this project provides further stimulus to the economy.

The interest rate offered to the Parish is favourable and below the rate that they could agree with a Bank. However, at the same time, the interest rate exceeds the current long-term cash returns received by the Currency Fund. This investment will produce a guaranteed rate of return  for  the  Currency  Fund  and  will  provide  a  good  mix  of investments for the fund within the agreed risk profile.

2. Parish of St. Saviour – Langtry Gardens

The Minister, in accordance with Standing Order 168(2)(b), agreed the acquisition of the 80 social rented homes, comprising 32 social rented bungalows and 48 social rented apartments and associated land and common parts, for a total sum of £8,000,000.

It should be noted, on practical completion, the 32 bungalows are to be resold to the Parish of St. Saviour for a total sum of £370,000 plus

any  accrued  fees  incurred  by  the  Public  associated  with  the supervision of development.

3. A  review  has  been  undertaken  by  Treasury  with  the  support  of  service Departments  to bring  forward  as  much  capital  expenditure  in 2013  as  is possible. The table below sets out the planned spend in 2013 for each of the major  capital  spending  Departments,  being:  Housing,  Jersey  Property Holdings and Transport and Technical Services, on a quarter by quarter basis.

The expected level of spending by these major Departments is £62 million. In addition, capital allocations are amounting to £29 million have been provided for by Jersey Harbours and Airport. Some of this will be spent in 2013, but we are advised by this separate Trading Organisation that their spend profits will peak  in  later  years.  Furthermore,  Departments  with  smaller  allocations amounting in total to £16 million will also be progressing their schemes and adding to the spending during 2013.

Please note that the expected level of spend in 2013 differs from the approved capital budgets for the year because the approved budget includes schemes that will take more than one year to complete.

A further breakdown of the spending by the major Departments involved in delivering capital projects, Housing, Transport and Technical Services and Property Holdings, is set out below.

This is the first time that we have published a quarter by quarter analysis of spend. We have  taken  this  step  in  order  to  encourage  the  Departments  to  spend  the  capital allocations that have been provided.

Housing