Fiscal Policy Panel Report: response of the Minister for Treasury and Resources.

Recommendations

Accept/ Reject

Comments

Target date of action/ completion

1

The focus in 2014 and 2015 should be on supporting the economy (by running deficits) while there is still spare capacity.

Accept

Draft Budget 2015 sets out proposals to put significant amounts of investment into the local  economy  in  2014  and  2015  to continue  to  support  it  while  conditions remain  weak.  The  Panel's  own  analysis shows that the level of support amounts to 3%  of  GVA  in  2014  and  nearly  5%  in 2015.  This  is  largely  a  result  of  the significant  investment  planned  in  our infrastructure  through  the  capital programme.

It is recognised that there are always risks associated with delivering capital projects on time, and Treasury is clearly focused on delivering the plans for this year and next. Learning from experience in recent years, Treasury has been, and is, improving how it monitors and progresses capital projects which will ensure they are carried out as quickly and efficiently as possible, getting money into the economy while there is still spare capacity.

Already underway and will be achieved through implementation of Draft Budget 2015.

2

This focus should not be deflected in light of lower tax receipts (out-turns or forecasts), especially where this is a result of a weaker than expected economic performance. The Panel supports the Budget's proposed approach to mainly use savings and reserves to fund the potential shortfall in income because it limits the negative impact on the economy in the short term.

Accept

This is a key recommendation and one that should be given due regard as the States makes the decisions for the Budget 2015. Much attention will rightly be given to the latest income tax forecasts, but the Panel have advised that this should not result in us taking actions that damage the economy in the early stages of its return to growth. The Minister acknowledges the support of the Panel and will endeavour to ensure that any potential shortfall in income in 2014 and 2015 is funded in a way which limits any negative impact on the economy.

Already underway and will be achieved through implementation of Draft Budget 2015.

Recommendations

Accept/ Reject

Comments

Target date of action/ completion

3

If there is a structural deficit in the public finances, the States should plan to address it once the economy has recovered. Structural changes in taxation, or expenditure programmes are easier to introduce once the economic recovery is fully established. This will be an important consideration for the next MTFP.

Accept

The advice on the timing of any action to address  a  potential  structural  deficit  is noted, and work is well underway to meet this recommendation as part of the Long- Term  Revenue  Plan  (LTRP)  2013–2020 which  analyses  the  financial  position  in future  years.  Treasury  will  continue  to improve  this  analysis  over  the  coming months in preparation for the next MTFP 2016–2020. In addition, the LTRP will set out in detail the process for assessing the structural  position,  determining  whether any action is required, and how we should plan to make any decisions. A clear and considered process will prevent any knee- jerk reactions that could hinder economic recovery.

The tax and spending proposals in the next MTFP  will  need  to  include  sufficient flexibility to adjust the fiscal position over the  4 year  period  to  allow  for  changing economic  conditions  and  to  address  any underlying structural issues.

The Panel, elsewhere in their report, state that ahead of their report next year they will undertake additional analysis to help the States better understand the structural position  of  the  States'  finances.  The Minister  believes  this  work  will  be extremely  important  in  determining  what should be proposed in the next MTFP in terms  of  the  extent  and  timing  of  any adjustment of the balance between taxation and spending.

To be included in next MTFP.

4

The States should bear in mind the following principles when forming the next MTFP –

Aim to balance the budget over the economic cycle – i.e. surpluses and deficits which broadly balance out over more than one MTFP period.

Adopt prudent

Accept

The FPP's comments are welcome and reflect some of the lessons learned from the first MTFP. In particular, recognising that the next MTFP will cover 4 years rather than 3, so it will be even more important to set an affordable level of expenditure and to build in sufficient flexibility in expenditure proposals and a level of prudence in the assumptions for States income.

The Minister for Treasury and Resources will give consideration to certain changes to the Public Finances Law to provide greater flexibility in the management of

To be included in next MTFP

Recommendations

Accept/ Reject

Comments

Target date of action/ completion

assumptions for income and realistic assumptions for expenditure.

Include flexibility within a clear framework for expenditure.

States' finances over the MTFP period. The first MTFP focussed on providing resources to create jobs, stimulate economic growth and provide essential investment in healthcare. This meant investing heavily in the early part of the MTFP period and leaving less flexibility than was initially intended in 2014/2015. The current Public Finances Law already allows the MTFP to retain greater flexibility in growth, capital and contingency allocations until the later years of the new plan and this will be used to a much greater extent in the next MTFP. The new Council of Ministers will also review the underlying Resource Principles as part of the work on the proposed Long- Term Plan and new Strategic Plan.

5

It is very important that the States makes plans about how to deal with the expected improvement in economic conditions and reduction in spare capacity from 2016 onwards. It is even more important to consider how fiscal policy would need to change if growth turns out to be higher than expected, or if capacity constraints started to be felt. In either case, this would mean running tighter fiscal policy and topping up the Stabilisation Fund. The plans could include –

Reducing departmental expenditure and/or raising revenue to run surpluses (or at least

Accept

Work is already underway as part of the LTRP to assess the options for a balanced budget over the period of the next MTFP and  beyond.  These  options  will  include balancing  requirements  for  growth  and service  improvements  with  a  level  of compensating savings or efficiencies. The Minister for Treasury and Resources has confirmed the rules for the future operation of the Stabilisation Fund, and the LTRP will consider options to replenish this Fund when  economic  conditions  deem  it appropriate.

A  Long-Term  Tax  Policy  is  also  being developed and will provide the framework within  which  revenue-raising  options  for the  next  MTFP  and  beyond  can  be considered if necessary.

Officers  in  Treasury  have  been  working with representatives from the Construction Council for some time to assess the overall (public  and  private  sector)  level  of construction  activity  going  forward. This work will provide essential information to assess the resources required on- and off- Island, and how this relates to the capacity of  the  local  construction  sector.  In addition, consideration will be given to the appropriate  responses  should  there  be indications that on-Island capacity may be

Work underway as part of LTRP and next Strategic Plan will need to focus on improving Jersey's economic potential.

Recommendations

Accept/ Reject

Comments

Target date of action/ completion

smaller deficits).

Managing how capital projects are delivered so as to put less strain on local capacity.

Continuing with policies which will improve Jersey's economic potential, such as those which aim to increase productivity, innovation and reduce structural unemployment.

exceeded  at  any  point.  A  Long-Term Capital  Plan  has  already been  developed over 25 years, which will make it easier to identify  the  opportunities  to  profile  and adjust capital spending to reflect the state of the economy and the wider political and strategic priorities.

Improving Jersey's economic potential in the future will be key to improving living standards,  prosperity  and  in  turn,  public finances.  The  Minister  for  Treasury  and Resources  in  previous  Budgets  and  the MTFP has continually supported policies which  will  improve  economic  potential and, in particular –

Supporting  the  economy  through  the downturn  through  discretionary  fiscal stimulus that helps maintain employment, reduces the loss of capacity in the economy and  delivers  valuable  investment  in  our infrastructure.

The different Back to Work schemes to help unemployed people and prevent key target groups from being frozen out of the labour  market  (reducing  the  associated costs with people being out of work for long periods or at critical stages in their skills development).

The  new  Economic  Growth  and Diversification Strategy with the renewed focus  on  innovation  and  competiveness (including  the  new  Jersey  Innovation Fund),  growth  in  financial  services  and implementation  of  the  McKinsey  report, the  new  enterprise  strategy  and  raising productivity across the economy. However,  it  is  recognised  that  there  is more  work  to  be  done  on  improving Jersey's  productivity  performance  across all  sectors.  This  will  be  an  important challenge for the next Council of Ministers and  must  be  a  key  priority  for  the  next Strategic Plan.

Recommendations

Accept/ Reject

Comments

Target date of action/ completion

6

The Treasury should look at how budgeting for capital projects and the use of capital allocations can be improved, because the current system may make it harder to adjust capital expenditure and therefore fiscal policy. During our fact-finding visit, the Treasury confirmed that work is already underway and it will be important that this is finalised in time to influence the next Medium-Term Financial Plan.

Accept

The  Treasury  is  considering  potential changes to the way funding is allocated to capital projects and how the Consolidated Fund balance is managed – this will also include consideration of what changes may need  to  be  made  to  the Public  Finances Law. This work will be planned such that any  Law  changes  are  taken  forward  for States' approval before the next MTFP is lodged in July 2015.

Capital  monitoring  information  has  also increased,  and  information  relating  to specific  project  updates,  projected cashflows and reasons for any delays, will also be valuable in managing the overall capital programme.

Before July 2015

7

The delay to introducing the long- term care charge was appropriate, but there is no need for further delays given the planned fiscal stance in 2015 and 2016.

Accept

This recommendation is consistent with the adoption of the Draft Budget 2015, as it does not propose any further delays in the introduction of the long-term care charge. The Minister for Treasury and Resources acknowledges  that  given  expected economic conditions, the planned deficits in 2015 and 2016 will provide appropriate support to the economy without delaying the  introduction  of  the  long-term  care charge any further.

Underway and will be achieved through implementation of Draft Budget 2015

8

The States should monitor the value of the Strategic Reserve relative to the size of Jersey's economy and States' expenditure. The States should give an indication of the desired size of the Strategic Reserve.

Accept

The Minister for Treasury and Resources is committed to maintaining the value of the Strategic  Reserve  in  future  relative  to inflation, and ensuring that it is only used in the manner set out in the revised policy for  the  Strategic  Reserve  alongside  the Draft  Budget  2015.  The  size  of  the Strategic Reserve is a key indicator of the strength  of  Jersey's  public  finances,  and the Minister is determined that this strong position will not be eroded over time.

It is agreed that the size of the Strategic Reserve should also be monitored relative to  the  size  of  the  economy  and  States' expenditure.  Future  decisions  about payments  to  and  from  the  Strategic

Future reference to the value of the Strategic Reserve will include monitoring it relative to the size of the economy and States' expenditure.

Recommendations

Accept/ Reject

Comments

Target date of action/ completion

Reserve  should  only  be  made  after  due consideration of how the value of the Fund has varied relative to the these factors.

In their report, the Panel state that "it is hard to say what the optimum size of the Strategic  Reserve  should  be",  and  the Minister agrees with this view. The matter is  complicated  by  the  fact  there  are competing uses for any funds that could be paid  into  the  Reserve,  such  as  other government  expenditure  priorities  or rebuilding the Stabilisation Fund. Nonetheless, the Panel's recommendation does  require  the  States  to  give  an indication  of  its  desired  size.  Further consideration will be given to this issue as work  on  updating  the  fiscal  framework ahead  of  the  next  MTFP  continues, including seeking the views of the FPP on any proposals, and this issue in particular.

9

The States should produce projections for future States' income and expenditure for the next 20 years, adopting an approach similar to that used by the UK's Office for Budget Responsibility. This will complement the balance sheet information the States already publishes in its annual accounts.

Accept

The  Minister  acknowledges  the  Panel's views, and supports the further extension of  States'  planning  horizons.  Much progress has been made in the last 5 years in relation to extending both the horizons and  the  context  of  States'  financial planning. We have –

Moved  from  annual  to  3/4 year budgeting.

Incorporated  these  improvements  in financial planning and budgeting into our legislation.

Been developing the LTRP over 2 MTFP periods to support that process.

Been developing a Long-Term Capital Plan over 25 years for the replacement of our essential infrastructure and assets.

The next States Strategic Plan is proposed to be set within the context of a first States Long-Term  Plan  looking  much  further ahead  than  we  have  before,  and encouraging  co-ordination  of  all  States' long-term  planning  in  one  document. Progress  on  this  work  should  mean  that this recommendation is fully implemented into our planning procedures by the time of the next MTFP.

To be completed to inform next MTFP and Long-Term Plan.

Recommendations

Accept/ Reject

Comments

Target date of action/ completion

10

The States should continue to monitor the outlook for the Social Security Funds through the planned 3 yearly actuarial reviews, and include the uncertainties and projections in its medium-term fiscal plans and long-term assessments of sustainability.

Accept

In line with past FPP advice, the States' Accounts for 2013 included the position on the Social Security Funds for the first time; and  in  Draft  Budget  2015  the  States' financial  position  was  also  presented, including the impact of the Social Security Funds.  In  addition,  the  3 year  actuarial review of the Social Security Funds will continue.

Ensuring  that  these  recent  developments are  an  integral  part  of  our  financial planning  will  allow this recommendation to  be  implemented,  and  will  mean  that future  medium-term  fiscal  plans  will continue to include the implications of the uncertainties and projections on the Social Security  Funds.  This  will  allow  a consistent and more holistic assessment of the States' fiscal position on an ongoing basis.

Already completed and to be repeated as part of future financial planning.