Expenditure Proposals for 2012 and 2013 and Draft Budget Statement 2011 (COMPLETE)

STATES OF JERSEY

EXPENDITURE PROPOSALS FOR 2012 AND 2013

AND

DRAFT BUDGET STATEMENT 2011

DRAFT

MINISTER FOR TREASURY AND RESOURCES

PROPOSITION

EXPENDITURE PROPOSALS FOR 2012 AND 2013 AND DRAFT BUDGET STATEMENT 2011

THE STATES are asked to decide whether they are of opinion –

1. to agree that total States net expenditure for 2012 and 2013 should not exceed £694,200,000 and £688,300,000 respectively, as set out in Summary Table A on page 50, with these sums including a minimum of £65,000,000 of savings proposals by 2013;
2. to approve the estimate of total taxation revenue in 2011 of £521,319,000 as set out in Summary Table B on page 74of the Budget Statement, with the sum to be raised through existing taxation measures and the proposed changes to income tax, goods and services tax, impôts duty, stamp duty and land transactions tax for 2011 as set out in the Budget Statement;
3. to agree that the sum of £31,000,000 be transferred from the Stabilisation Fund to the Consolidated Fund in 2010, in addition to the amount of £37,000,000 agreed on 19 December 2009 in P179/2009, resulting in a total transfer of £68,000,000;
4. to agree that the sum of £46,000,000 be transferred from the Stabilisation Fund to the Consolidated Fund in 2011.

MINISTER FOR TREASURY AND RESOURCES

Contents

Page

Part A – Introduction and Background

1. Foreword 6
2. Executive Summary 13
3. Economic Outlook 17
4. Financial Forecast 20

Part B – Comprehensive Spending Review Part 2

5. Background to the CSR 31
6. CSR Part 2 Process 32
7. CSR Part 2 Proposals 2012-2013 35
8. Capital Programme 2012-2013 40
9. Improved Financial Management 48
10. Summary Table A – States Expenditure 2011 - 2013 50

Part C – Draft Budget Statement 2011

11. Fiscal Strategy Review 52
12. Income Tax Proposals 59
13. Goods and Services Tax Proposals 64
14. Impôts Duty Proposals 67
15. Stamp Duty Proposals 70
16. Ongoing Reviews 72
17. Financial and Manpower Implications 73
18. Summary Table B – States Income 2011 74
19. Summary Table C – Consolidated Fund 2011 75

Index of Figures

Figure 3.1  September Business Tendency Survey results 18 Figure 3.2  Forecasts for the Jersey economy 19 Figure 4.1 Income tax forecast 21 Figure 4.2  Revised central financial forecast – before and after CSR, FSR

and Budget proposals 23 Figure 4.3  Forecast range of outcomes for the financial position 25 Figure 4.4 Summary of proposed FSR and Budget measures 26 Figure 4.5 Revised central financial forecast including CSR, FSR and Budget

proposals 27

Page

Index of Figures (continued)

Figure 4.6  Forecast for the Consolidated Fund and Stabilisation Fund balances 28 Figure 7.1  Savings proposals by Department 36 Figure 7.2  User Pays proposals by Department 36 Figure 7.3  Growth proposals by Department 37 Figure 7.4  Summary of impact of CSR proposals 38 Figure 7.5  Comparison with 2011 Business Plan 39 Figure 8.1  Previously approved 2011 Capital Programme and "in principle"

Capital Programme 2012-2013 (estimated costs) 41 Figure 8.2  Proposed revised Capital Programme 2012-2013 (estimated costs) 42 Figure 8.3  Housing Capital Programme 2011 and Proposed Indicative

Programme 2012-2013 (estimated costs) 45 Figure 8.4  2012-2013 Capital Programme funding and net allocation from the

Consolidated Fund 46 Figure 8.5  Trading Organisations Indicative Capital Programme 47 Figure 11.1  Impact of 5% GST by income and spending 54 Figure 11.2  The distributional impact of the two FSR measures (graph) 57 Figure 11.3  The distributional impact of the two FSR measures:

Single person (table) 58 Figure 11.4  The distributional impact of the two FSR measures:

Married couple, 2 children, £300k mortgage (table) 58 Figure 11.5  The distributional impact of the two FSR measures:

Pensioner couple (table) 58 Figure 12.1  Exemption thresholds for years of assessment 2010 and 2011 61 Figure 12.2 Impact of increasing exemption limits for some households 61 Figure 12.3  Proposed allowances for years of assessment 2010 and 2011 62 Figure 14.1  Duty increases proposed for 2011 68 Figure 14.2  A comparison of typical 2010 tax and duty levels for a range of

commodities 69 Figure 14.3  2010 retail prices excluding tax and duty – comparisons with the

UK (June 2010) 69 Figure 15.1  Proposed changes to stamp duty and Land Transactions Tax rates  70

Part A Introduction and Background

1. Foreword

MINISTER FOR TREASURY AND RESOURCES

This Budget is a pivotal one for the Island as, like many other economies around the world, we have to face up to our fiscal challenges. Before any of the measures proposed in this Budget are considered, the deficit is forecast to be £112 million by 2013. Agreeing the proposals set out in this Budget and those accompanying it in the Comprehensive Spending Review (CSR) Part 2 will mean we put States finances back on a sound footing in the post financial crisis world. In doing so we will lay solid foundations to build on our economic success and enhance the high quality of Island life we all enjoy.

We face these fiscal challenges for two reasons. Firstly, the global recession has undermined our tax revenues, particularly those from the financial services sector, and the latest estimates show a significant decrease in our tax revenues this year as a result. Forecasts show that this deterioration is unlikely to be quickly reversed. Let us be clear that this is not as a result of zero/ten, as compensating revenue raising measures are already in place – 3% GST, efficiency savings, 20 means 20 and economic growth.

Secondly, our fiscal situation has been exacerbated by an inability to control States spending. There has been a tendency for spending to rise year after year relative to previous plans, resulting in a significant increase in recent years.

The Council of Ministers' strategy to respond to this gap between our spending and income is a considered and clear three part plan.

1. Cutting spending through the CSR: to maximise spending savings, without inflictingunintendeddamageonfrontlineservices,inorderto minimise theneed for tax rises.
2. Economic Growth: toboosttheeconomyinorderto maximise jobsfor Islanders and tax revenues.
3. Raising taxes through the Fiscal Strategy Review (FSR): to increase taxes only as much asisnecessarytofund important investment andin a waywhichis fair and supportive of economic growth.

1. The Comprehensive Spending Review

The Council of Ministers has taken careful account of States members and Islanders' views and set a new challenging target for a minimum of £65 million savings by 2013. This is a significant saving and we are intent on delivering it without serious detriment to the level and performance of front line services. The highest priority for savings is through efficiency in existing practices and re-organisation of functions where this will reduce costs and improve performance. It is inevitable that some services will be cut but this will be done in a way that maintains the high standards of our key public services.

We all benefit from the high standards of our schools and health service and they are an important and valuable part of Island life. That is why the Council of Ministers is committed to ensuring that savings are well planned and targeted and have minimal impact on these front line services. We are also phasing them over three years with the larger savings only taking place in the later years, as is the case with the tax rises proposed as part of the FSR.

With over 50% of States spending on salaries and benefits, it would be unrealistic to assume that savings can be achieved without reducing manpower. However, phasing them in with the greater reductions in spending in 2012 and 2013 should allow time for the economy to begin to recover and help prevent a rise in unemployment. In addition, some of the savings in 2012 and 2013 may lead to public sector employment being transferred to the private or third sectors if they take on some aspects of service delivery.

The independent review of States staff terms and conditions identified potential savings, including pensions, of between £32 million and £42 million, but savings of this level could not be achieved in the short term and could be damaging to the economy. The Council of Ministers has proposed £14 million of savings as an achievable target by 2013 and staff and unions will have the opportunity over the next three years to shape which savings options are adopted. We will need to continue to work with staff and unions over the longer term to deliver further savings identified after 2013 and in the body of the report. The consultation that has already taken place with staff representatives will continue.

The objectives of the CSR are also to improve financial management, longer term financial planning and financial reporting. This involves introducing a new culture with greater certainty for departments over a number of years coupled with the flexibility between years to manage within agreed spending limits. Central reserves are being provided to manage forecast variations and unforeseen expenditure so that spending limits can be controlled. Importantly, provision is being made for restructuring costs which will be essential to deliver the savings proposed.

Finally, if we are to bring about fundamental change to the way government works in Jersey, we will need to go beyond 2013, further than the proposals set out in the CSR. The CSR must in time evolve into a strategic change programme that runs beyond the current three year horizon and addresses the fundamental questions of how government should be organised and the activities in which it should and should not be involved. Delivering the CSR in the next three years is going to stretch the public sector to the limit. It will take time to extend it into a strategic change programme and it will require major planning and investment to be successful and feed into future Strategic Plans.

2. Economic growth

A prudent level of economic growth has been assumed even in these difficult times. The CSR and FSR strategies are designed to ensure that Jersey remains competitive and so can continue to grow.

The financial forecasts contained in this report are predicated on a return to economic growth of 1% next year and further moderate growth of about 2% in 2012 and 2013. To factor in any stronger growth given the significant uncertainties around the global and local economies would be unwise.

We will of course be doing everything we can to ensure that we maximise economic growth going forward regardless of the global economic position. I will work with the Economic Development Minister to put in place the right policies to maximise growth. The first step has already been taken by allocating all of the £158 million in the Stabilisation Fund for fiscal stimulus to support local employment and businesses through the worst of the global downturn. This is a significant investment by the States and it will ensure we have a healthier economic base from which to build.

3. Fiscal Strategy Review Personal tax

Taxation, and personal taxation in particular, are controversial issues and this was apparent in the responses to the FSR consultation paper issued in June. Nearly 1,000 Islanders and many representative organisations contributed to this consultation and their input was much appreciated. Clear themes emerged from the responses that are representative of the different views in the Island. Involve (the independent charity commissioned to write up the responses to the consultation) summarised them as:

"...there seem to be two widely held perspectives; one which emphasises the high cost of living for those on lower incomes and wants to see a more progressive taxation system..and another perspective of concern that increased taxes on the wealthy will lead to Jersey losing financial services and affluent residents to international competitors"

This leaves me with a very difficult balancing act. No single measure will achieve the twin objectives of raising money in a fair way, where the better off pay a higher proportion of their income, while also minimising the impact on the economy. To deal with the latter point, the FSR tax increases announced today will be phased in over three years, with greater increases in later years.

An important aspect of fairness is that the better off contribute more. That is why I have asked that the Social Security Minister brings forward proposals to introduce 2% social security contributions above the ceiling for both employers and employees from January 2012. This will make the Social Security Fund more self-sustaining and reduce the need to supplement the fund from general taxation.

The increase in social security contributions will mean that those earning above the ceiling (£44,232 in 2011) pay more. Employers also pay more where they employ people earning above the ceiling. Those on low incomes and earning less than £44,232 will be unaffected by this change.

This proposed change to social security contributions will not take place until January 2012 so that employees and employers have time to prepare for the increase. It also protects against a rise in employment costs – however moderately – until the economy has as much time as possible to recover.

Although the Goods and Services Tax (GST) is controversial there is little doubt that it raises money in an efficient way that does minimal damage to the economy. It is for these reasons that I have proposed an increase in GST from 3% to 5% from 1 June 2011.

The Council of Ministers and I recognise that people are concerned about the impact a rise in GST will have on the less well-off in our Island. That is why I also propose, in the interests of fairness, to compensate those on income support and maintain an adequate GST bonus for those on low incomes but not receiving income support.

An increase in GST is preferred to an increase in domestic property rates because of the complexity of changing rates in Jersey and the potential difficulties in addressing issues of unfairness.

I have paid close attention to the views of businesses and Islanders about the potential impact of a higher rate of tax on the Island. There is a clear difference of views within the population between those that feel a higher rate of tax would be fair and those that think it would seriously damage our economy.

It needs to be recognised that much of our economy is reliant on the relatively low rate of income tax. The finance industry has been built on this low rate, and to change it would create the perception of instability and a high likelihood of a net decrease in revenues over time. It is difficult to provide empirical evidence to support this conclusion. However, understanding that much of the finance industry is highly mobile leads to the conclusion that an increase in our very long standing 20% income tax rate will create an incentive for business and individuals to move elsewhere. This would result in a loss of jobs and a loss of tax revenue, leaving a higher tax burden on the rest of us. This is particularly the case when our closest neighbour and key competitor has a 20% income tax rate. Even the suggestion that we are considering a higher rate of tax has been detrimental to our ability to attract new business. It is for these reasons that I believe we should commit to maintaining the current rate of income tax at 20%, removing the uncertainty around what has been the bedrock of the Jersey economy for so long - our low tax rates and stable personal tax system.

Business Tax

International businesses that use our Island also need to contribute more and, following consultation with industry, I propose to increase the International Services Entity (ISE) fees paid by many international companies (that are eligible) from £100 to £200. Eligible companies can pay the ISE fee to satisfy their obligation to GST.

4. Annual Budget proposals

As well as dealing with the key proposals concerning the FSR, this year's Budget will, as usual, address a number of other taxation issues.

I propose that impôts should rise this year in real terms across the board. This will both recoup some of the revenue lost as a result of the States decision not to increase impôts last year, and will also support the policies of the Minister for Health and Social Services. I have limited the increase in fuel duty, however, as I am mindful that this is less of a discretionary spend for many Islanders than alcohol and tobacco. Higher rates of stamp duty on higher value properties have been considered by the States in recent years and I am proposing that we should increase the stamp duty rates and Land Transaction Tax rates on property values over £1 million with effect from 1 June 2011. I am also proposing that profits arising from the exploitation of land in Jersey and importation of oil are brought into the charge to income tax at 20%. Finally, I am proposing that income tax exemption thresholds increase in line with average earnings growth, which will give most help to those on lower incomes currently paying tax at what I recognise is a difficult time.

Even when these proposals are factored in we should not forget that, relative to most other jurisdictions in the world, we will all still benefit from low rates of taxation – whether that is GST, income tax or social security contributions.

5. Ongoing reviews

I committed in my Budget last year to commission an independent review of the 1(1)(k) regime. I am considering the recommendations from the review and plan to provide initial conclusions in advance of the Budget debate itself.

The Business Tax Review is continuing and a significant amount of work has been carried out. I would like to thank all of those who responded to the consultation paper on such an important issue. Focus is now on the assessment of our zero/ten regime by the European Union's (EU) Code of Conduct Group. The process started in September and further consideration will be given to the regime at the next meeting at the end of November. No changes will be proposed to zero/ten before the Code Group has concluded its review and I will then be in a position to provide a further update in December. We continue to work closely with the UK and other Code Group members and I am confident that Jersey will continue to be in a strong position as a result.

I committed, as part of the Business Tax Review, to investigate whether it is possible to recoup the corporate tax revenue lost from certain non-finance companies with Jersey based business activities on the introduction of zero/ten, without unintended economic consequences. I am still committed to do this but am awaiting the completion of the Business Tax Review before concluding this matter. I will comment further on this matter in December.

6. Summary

This is a difficult Budget but we are facing tough economic times and action needs to be taken now. I have considered and rejected borrowing or using more of our reserves as a means of delaying the Council of Ministers' three-part plan. However, I believe that this would simply be putting off the inevitable. Neither of these options is sustainable when we face an ongoing imbalance between spending and taxation as they do not address the underlying issues. By 2011 we will already have borrowed significantly from reserves, exhausting the £158 million in the Stabilisation Fund in order to support the economy from the worst of the global recession. However, we cannot delay forever – there is no economic merit in doing so – and we must now face up to the decisions we have to make and take positive action.

It must be remembered that the figures included in this statement are based on best estimates. The central estimates of tax revenues are within a forecast range, and that range extends to around £35 million above or below the central forecast by 2013. The outturn could therefore be significantly different to the central estimates on which this Budget is based. The Consolidated Fund balance is forecast to be just under £11 million in 2011 and only just in balance in 2013 which shows there is very little room for manoeuvre. If outturn on tax revenues come in the lower range of forecasts, or economic conditions are weaker than expected then we will be required to consider further options to ensure we do not run negative balances on the Consolidated Fund. To commit to borrowing or using the Strategic Reserve at this early stage would remove large parts of the flexibility we may need if we have to deal with either of these eventualities.

The Fiscal Policy Panel has already reminded us that we should be planning to run surpluses again once the economy recovers. To go down either the route of borrowing or using our reserves also puts us in a much weaker position to rebuild the Stabilisation Fund and address any future economic problems.

I urge members to support the 2012 and 2013 expenditure proposals and the 2011 Budget as an integral part of the Council of Ministers' three part plan. In doing so, together we can:

• Deliver the required savings but without inflicting unintended damage on front line services and therefore maintain the high standard of public services we all enjoy.
• Implement tax increases in a fair and progressive manner that will minimise the impact on the economy.
• Provide the stability and certainty that Islanders and our businesses need to continue to deliver future economic success.
• Be confident that we faced up to our responsibilities now and avoided making things harder for us all in the future.

• Put in place a sound, credible and deliverable plan to restore public finances to good health by 2013.

Senator Philip Ozouf

Minister for Treasury and Resources  October 2010

2. Executive Summary

Expenditure Proposals for 2012 and 2013

The Council of Ministers proposed savings of £12 million for 2011 which were agreed by the States as Part 1 of the Comprehensive Spending Review (CSR). The Council is now proposing total spending limits for 2012 and 2013 which increase the level of savings to a minimum of £65 million by 2013.

The bases for determining the expenditure proposals for 2012 and 2013 are as follows:

• The outcomes of the major reviews for Education, Sport and Culture, Home Affairs and Court and Case Costs and initial outcomes for Employee Terms and Conditions provide a significant part of the detailed proposals.
• Targets have been set for the major reviews of Health and Social Services and Social Security and these will be completed in 2011, in order to inform the 2012 Business Plan.
• Proposals for savings from departments, including user pays charges, amount to just under £46 million, with an initial £14 million targeted from options for employee terms and conditions and a further £6 million from corporate procurement.
• Further central provisions are set aside for the restructuring of services which will be essential to facilitate the level of savings proposed.
• Central provisions are also provided for unforeseen items and to provide some flexibility to manage within the overall spending limits. These will only be used as a last resort and the target will be to underspend against each year's total spending limits.
• Proposals for the Capital Programme for 2012 and 2013 have also been agreed within the spending limits and substantial progress on an indicative programme through to 2017 has also been made.

Ministers have committed to these proposals and for the outcomes of the major reviews and indicative savings proposals for all departments to be published for information.

Further improvements to financial management, financial reporting and longer term financial planning are also being developed and will be delivered during 2011 as part of the implementation of the wider CSR process.

Draft Budget Statement 2011

The 2011 Budget includes the proposed FSR measures that are required (in addition to the significant savings outlined above) to take the first step towards balancing the Island's finances. There are also a number of smaller measures that form part of the normal annual Budget process.

The key features of the 2011 Budget are as follows: FSR proposals

The FSR measures proposed in this Budget are a critical part of the Council of Ministers' three part plan to address the forecast deficits. The tax increases are those which are necessary after the £65 million savings have been delivered through the CSR to bring the Budget back to balance in 2013 and provide the funding for key public services.

There are two key elements to the FSR:

• The introduction of 2% social security contributions above the ceiling for employees and employers from January 2012; and
• Raising GST from 3 to 5% with compensation for those on low incomes from 1 June 2011.

These two changes achieve the twin aims of delivering a package which is fair – where those on higher incomes pay more in cash terms and as a proportion of their income – and which minimises any impact on our competitiveness and wider economy.

International businesses must also contribute to the package. Therefore, the Treasury Minister is proposing to increase the basic International Services Entities (ISE) fee from £100 to £200. This will raise approximately £3 million in additional revenues.

Other Budget measures

Income Tax proposals

• Increase income tax exemption limits by 1.1% in line with the increase in average earnings for 2010.
• Bring profits arising from the exploitation of land and importation of oil and related products in to the charge to income tax.
• Introduce changes to the Income Tax (Jersey) Law 1961 which will help the department to carry out enhanced compliance checks and increase the collection of tax that is properly due.
• Introduce a £250 late filing fee for company tax returns which is the same as for personal tax returns.
• Introduce changes in some tax calculations to make it easier for Jersey resident shareholders of companies to complete their tax returns.
• Introduce amendments to provide greater clarity in the current pensions tax legislation.

Goods and Services Tax proposals

• Introduce amendments to provide greater clarity in provisions which apply to GST registered businesses.
• Introduce amendments to the late return penalty, £50, and late payment surcharge, 2.5%.

• Increase the value of a gift from £10 to £100 before it is treated as a supply for GST purposes.
• Introduce various other changes to provide greater flexibility for the business community.

Impôts Duty proposals

The Minister's impôts duty proposals are to increase the duty on alcohol, fuel and tobacco by 6.2%, 4.9% and 11.1% respectively. This represents:

• 58 pence on a litre of spirits
• 7 pence on a bottle of wine
• 2 pence on a pint of ordinary beer
• 35 pence on a packet of 20 cigarettes
• 2 pence on a litre of unleaded petrol

The proposed increases support the Health Minister in responding to health concerns relating to alcohol and tobacco, and are consistent with new strategies that are being developed including a policy which in time would bring duty and tax on alcohol and tobacco in line with UK levels.

The Health and Social Services department supports the proposals which are in line with the current States alcohol and tobacco strategies.

Stamp Duty and Land Transactions Tax proposals

The  Minister  proposes  to introduce  further  bands  of  stamp  duty  for  higher  value properties worth over £1 million as follows:

This  also  applies  to  Land  Transactions  Tax  so  that  purchases  of  share  transfer property are treated similarly to freehold property transactions. The changes will be introduced from 1 June 2011.

Financial forecasts

The financial forecasts have been revised for the 2011 Budget Statement and to inform part 2 of the CSR process.

The latest forecast shows that:

• £23 million of additional expenditure has been approved by the States Assembly for  2010,  made  up  of  £8  million  of  carry  forward  approval  and  additional expenditure approved in P64/2010 of £15 million.

• Central provisions to cover similar restructuring costs and other contingencies are included in the forecasts for 2011, 2012 and 2013 of £15 million, £23 million and £27 million respectively.
• Income tax receipts have deteriorated by £12 million from the Business Plan for 2010 and by lesser amounts in future years, mainly due to larger than expected falls in financial services profits.
• There remains a significant range of possible outcomes within the income forecasts, increasing from +/- £15 million in 2011 to +/- £35 million by 2013.
• Forecast deficits have increased to £112 million by 2013 before any CSR or FSR remedial action.
• The Capital Programme continues to receive annual funding of less than £20 million per year up to 2013.
• Increased savings proposals and the proposed Budget measures would achieve balanced budgets by 2013.
• The balance of the Consolidated Fund is forecast at only £11 million for 2011.
• The Stabilisation Fund will be exhausted by 2011, representing a £158 million investment in the economy by the States.

3. Economic Outlook

The world economy is only just emerging from the worst economic downturn since the 1930s. The latest forecasts from the International Monetary Fund (IMF) are that the world economy will grow by 4.8% in 2010 and 4.2% in 2011 although the IMF points out that recovery is likely to be "slow and sluggish" [1].

Central banks and governments across the world have so far prevented a replay of the 1930s Great Depression through the massive policy response they put in place. The larger economies have returned to growth this year but recovery remains fragile, not least because once the policy stimulus is withdrawn it is unclear how strong the underlying economies will be. A double dip' global recession is still a risk although it is not a central scenario for most economic forecasters.

Although the decline in global activity may have abated, the fallout remains. That is, the significant deterioration in government finances, the sharp rise in public debt and widespread unemployment in the leading economies across the globe.

From a Jersey perspective it would be imprudent to rely on a quick global rebound to repair the damage. We must plan for the fallout of what is now being called the great recession' to be long lasting.

There is little doubt now that the local economy has been significantly affected by the global economic environment. The profitability of our financial services sector fell by almost half in 2009 although, excluding any large one-off fluctuations, the fall was lower, but still substantial, at 25%. This has been driven by the impact of low interest rates on banking profitability. Not surprisingly, employment in the finance sector fell by over 500 last year and a further 110 in the first six months of this year. These reductions in employment have been predominantly full-time jobs and concentrated in the banking sector where employment is the lowest it has been since June 2006. The September Business Tendency Survey (Figure 3.1) shows there is scope for cautious optimism with finance firms reporting a further rise in business activity and they are more optimistic about future business. However, profitability still remains under significant pressure.

Figure 3.1: September Business Tendency Survey results Relative position of key business indicators (% balance*)

40 30 20 10 0 -10 -20 -30 -40 -50

Business Profitability Employment Optimism Future Future activity business employment

activity

*% balance = % of firms reporting increase less % reporting decrease Source: States of Jersey Statistics Unit

The impact of the downturn has been felt more widely than in the financial services sector. Unemployment reached nearly 1,300 in August, 380 higher than a year ago. Younger people have been affected more, with more than a quarter of those actively seeking work being teenagers aged between 16 and 19.

Gross  Value  Added (GVA)  fell  by  6% in 2009,  with  the  financial  services  sector recording the largest real-term fall at 12%. The only sectors to report positive growth in 2009 were agriculture and transport and communications.

Overall retail sales volumes have begun to stabilise after significant falls since 2008. However, non-food volumes are still well below their level in 2008 and fell in the second quarter of 2010. The September Business Tendency Survey shows that in the non-finance sector as a whole business activity is still falling, profitability remains under pressure, employment is being reduced and firms are still not optimistic about future business.

Under such circumstances it was right that the States agreed – on the advice of the Fiscal Policy Panel (FPP) – to use the Stabilisation Fund to support local employment and businesses. This has allowed the deficits forecast for 2010 and 2011 to be financed without recourse to significant fiscal tightening. In addition, it enabled £44 million of discretionary fiscal stimulus to be applied in a timely, targeted and temporary manner and invested in projects that had intrinsic value and which were required anyway. This has provided vital support for businesses and jobs at a time when it is most needed.

The most recent forecasts for the Jersey economy (Figure 3.2) point to a further decline in GVA this year. Next year should see a weak recovery with growth of about 1% predicted, and further moderate growth in 2012 of 2%. The FPP will publish their latest  assessment  of  economic  conditions  and  the  outlook  for  States  finances  in November and members will have their latest advice ahead of the Budget debate.

Figure 3.2 Forecasts for the Jersey economy

% change in GVA

10 8 6 4 2 0 -2 -4

-6 -8 -10

1999 2001 2003 2005 2007 2009 2011 Source: States Of Jersey, Economics Unit

4. Financial Forecast

Background

The financial forecast has been produced twice this year, in March to inform the preparation of the draft 2011 Business Plan, and then in October to inform the draft 2011 Budget and CSR Part 2 proposals.

The latest forecast incorporates States expenditure approvals agreed in the recent Business Plan and an updated estimate of all States income and expenditure. The economic assumptions on which the future forecasts are based have also been revised.

Analysis of the Forecast (October 2010) Expenditure approvals

Since the Budget 2010, £23 million of additional expenditure was approved by the Assembly in 2010, by means of a carry forward approval for £7.6 million and P64/2010, an approval under Article 11(8) of the Public Finance (Jersey) Law 2005 for £15 million. That additional expenditure was £8.5 million for court and case costs, £6 million for a voluntary redundancy scheme and £0.5 million for initial funding of procurement savings initiatives.

The expenditure allocations for 2011 were approved by the States in the 2011 Business Plan with only two amendments, one amendment being balanced by a reduction in the Central Reserves fund and the other amounting to a minor reduction in the overall spending envelope of £6,632.

Part 2 of the CSR process is now largely complete and the outcomes and proposed expenditure allocations for 2012 and 2013 are detailed in Part B of this report. In summary the proposals are to increase the level of savings in net revenue expenditure to £65 million by 2013, which represents a further £15 million of savings than agreed in the 2011 Business Plan.

The revised forecasts for States income have identified a number of variations which are summarised as follows.

Income Tax

The income tax assessments for the current year are substantially complete and show that the expected receipts for 2010, based on the year of assessment 2009 are £12 million lower than previously forecast. The main driver of the reduction is a larger than expected fall in financial services profits and its impact on tax revenues.

In September and October 2010 the Tax Forecasting Group (TFG) met to discuss the latest income tax forecast. The forecast agreed by the Group is set out in Figure 4.1 below.

Figure 4.1: Income tax forecast

The TFG set out the following reasons as to why there is a range of uncertainty increasing to about 8% on either side in the forecast by 2013:

• The forecast for 2010 is still subject to a high degree of uncertainty due to the number of assessments not yet complete and the difficulty of predicting how much tax will be paid by new taxpayers.
• The forecast for the whole period is based on the latest estimated assessments. Assessments that are too high are generally appealed by taxpayers early in the year, whereas assessments that are too low are not. In these cases there may be unexpected and sometimes significant payments of tax late in the year.
• The global recession and the fact that we are currently in a year of transition in our tax regime makes forecasting particularly uncertain.

The main reasons for the variation between the current forecast and the forecast included in the Business Plan 2011 are new data on income tax assessments relating to year of assessment 2009 and more recent data and assumptions on economic variables such as economic growth and interest rates.

Goods and Services Tax (GST)

The first full year of data from the GST system showed a slightly lower than predicted return in 2009 which has been reflected in future years.

The expectation is that the effect on GST revenues of the economic downturn remains limited on what is essentially a consumption tax. This is also the trend seen in the UK in respect of VAT receipts in previous downturns.

Impôts duties

As with GST the importation and consumption of commodities subject to impôts duties do not seem to have been materially affected by the downturn. The forecast for 2010 remains in line with the returns expected in March.

The long-term trend of revenue goods put to duty is declining which reflects the balance between the objectives of the twin health strategies to reduce consumption and that of raising additional revenue from increasing impôts duties. Consequently, annual increases in duty, at least in line with inflation, are fundamental to maintain the current level of revenues in the future. The forecast numbers for 2011 do not include any proposed increases in rates as these have been reflected in the "routine Budget proposals" line in Figure 4.2. These Budget proposals are summarised in Figure 4.4.

Stamp duty

So far in 2010, the housing market has seen a reduction in property prices from the 2009 position. The most recent figures indicate that in the first six months of the year, turnover of properties sold is about the same as that seen for the first half of 2009 but is significantly lower than that of previous years. It is expected that the levels of property turnover we are seeing now will continue in 2011 but a gradual recovery is predicted in future years.

2010 saw the introduction of a Land Transactions Tax (LTT), for which a cautious yield of £1 million was estimated. The actual return to date from this tax suggests the estimate was appropriate; a small projected increase for the year is included in the financial forecast.

Other income

There are two main variations in the forecasts of other income. Firstly, the current and forecast revenue from EU Savings Directive (EUSD) Retention Tax has decreased significantly. The previous forecasts had assumed a diminishing return as the level of retention tax increased, but now we believe there will be a more significant loss of revenue in the next couple of years as a result of further changes to the retention tax rate, eventual move to automatic exchange of information and lower investment returns on these funds.

The other main variation in the forecasts is in respect of investment income from cash balances. This is the return from the investment of the States "current account", the Consolidated Fund, and also funds from the Currency and Coinage account. With interest rates at an all time low the investment income forecast has reduced. The size of the Consolidated Fund to invest has also reduced.

In addition, changes have been made to the way various funds are managed. A Consolidated Income Fund (CIF) was launched to provide a simple and cost-effective way of pooling funds for investment purposes.

Overall financial position

The revised financial forecast at Figure 4.2 showing the overall position for the States of Jersey continues to predict substantial deficits in each of the three forecast years.

Figure 4.2: Revised central financial forecast

– before and after CSR, FSR and Budget proposals

Assumptions:

There are a number of assumptions behind the central financial forecast in Figure 4.2.

Income Tax

• The base income tax forecasts are drawn from the 2010 tax assessments for earnings and profits in 2009 and the current economic assumptions for GVA and other factors.
• The Tax Forecasting Group (TFG) has agreed forecasts using the income tax forecast model to apply the range of economic assumptions to the current data from the different income tax schedules to estimate a range of impact of the economic downturn and future tax revenues.
• The range of the income tax forecast can be seen in Figure 4.1
• As this is the first year of impact of the change to the zero/ten corporate structure and new personal tax anti-avoidance provisions, there is additional uncertainty, making forecasting particularly difficult.

Goods and Services Tax

• 2009 was the first full year of revenues and showed a slightly lower return (by £3 million) than expected which has been reflected in the future forecast.
• The future forecasts assume there will be little or no impact of the downturn and this is supported by the UK experience of stable VAT receipts during past economic downturns.

Impôts Duty

• The forecast assumes that the predicted trends in consumption are maintained, which include a drop off for some goods and that the current policy of increasing duties at rates at or above the Island RPI is maintained.
• There is an economic assumption that Impôts duties do not fluctuate significantly with the economic cycle.

Stamp Duty

• The forecast assumes that the activity seen in 2010 will continue in 2011.
• The assumption regarding house prices has been amended to reflect fall-off in price in 2010 followed by zero growth in 2011.
• The estimated impact of the new Land Transactions Tax continues to assume that £1 million per year will be collected.

Other Income

• The impact of much lower interest rates and the reduction in cash balances arising from future deficits has had a significant impact on these income forecasts. The assumptions from States advisors are for a slow recovery in investment returns.
• In addition, future returns from EUSD Retention Tax are expected to fall with the anticipated change in the retention tax rate and eventual move to automatic exchange of information. Increase in CIF asset value
• In 2010 a Common Investment Fund (CIF) was launched to provide a simple cost-effective way of pooling funds for investment purposes.
• Income previously recognised as investment income of the Consolidated Fund is now recognised as an increase in the CIF asset value and as an increased value of the Consolidated Fund forecast.

Island Rate

• The Island Rate will increase annually according to the Island RPI (March) as prescribed in the Rates Law and the proposed rate is reported annually to the States by the Comité des Connétable s.
• The economic downturn should not affect Island Rates.

Total States Net Expenditure

• The forecast for total States net expenditure reflects proposals in the Business Plan including amendments agreed during the debate but excludes depreciation which is a non-cash item.
• The forecast assumes that the total spending envelope for 2011, agreed in the Business Plan, and 2012/13 as set out in this Statement, are achieved and that further potential underspends against these targets must also be delivered.

The figures represent the central range within the forecast and should be thought of as indicative. The forecast is only as accurate as the assumptions on which they are based. The range of deficits resulting from the economic assumptions reflect the uncertainty that currently exists.

This  position  clearly  demonstrates  the  need  for  not  only  normal  annual  Budget measures  but  also  other  ways  of  "balancing  the  books".   The  Comprehensive Spending Review proposals and the Fiscal Strategy Review proposals are designed to meet this requirement.

However, there are still high levels of uncertainty in the forecasts and the achievement of the forecast financial position relies on States spending not increasing above the levels agreed by the States, a position which has not previously been adhered to, and that expected levels of income are achieved.

Certain items in the Financial Forecast can realistically only be estimated within ranges which reflect the possible outcome of various economic assumptions. However, in order for the States of Jersey to set a Budget, a figure from within the central range of forecasts is used for each of these items. Examples of these items include income tax, investment income and income support expenditure. The graph at Figure 4.3 illustrates the potential range of outcomes over the forecast period.

Figure 4.3: Forecast range of outcomes for the financial position

100 50

0 (50) (100) (150)

2009 2010 2011 Year 2012 2013

Proposals to address the deficit

The Minister for Treasury and Resources has committed to bring forward proposals to address the projected deficits and to return to balanced budgets by 2013. The three part plan comprises; firstly the £65 million target for expenditure savings from CSR Parts 1 and 2; secondly, proposals from the FSR and other routine budget measures; and thirdly, the gradual introduction of the FSR and budget measures over the next three  years  to  allow  for  any improvements  targeted in economic  growth  or  other forecast variations to arrive at balanced budgets by 2013.

A breakdown of the various FSR and other Budget elements is shown in Figure 4.4.

Figure 4.4: Summary of proposed FSR and Budget measures

The FSR proposals result in an increase in income by means of:

• a 2% increase in GST from 1 June 2011 raising around £30 million per year; and
• an increase in the level of contribution from International Services Entities fees by £3 million.

The FSR also proposes that a 2% increase in the social security contribution from employees  and  employers,  above  the  existing  ceiling,  will  result  in a  reduced contribution  to supplementation  required  out  of  the  States  Consolidated  Fund by approximately £16 million; shown in Figure 4.4 as a reduction in expenditure.

In  addition  to  this,  the  FSR  proposal  to  increase  the  rate  of  GST  would  be complimented by an appropriate increase in the level of income support, shown as additional expenditure.

The other Budget measures proposed include:

• an above RPI increase in Impôts duties, compensating for the amendment to the 2010 Budget which resulted in no increase to duties during 2010;
• a change to the structure of stamp duty rates for properties over £1 million; and

• a number of minor income tax changes affecting the 2011 year of assessment which will result in a small increase in income 2012

More information on all of these proposals can be found in the relevant sections of the Budget Statement, Part C of this report.

If these proposals are approved, a revised financial forecast would result as shown in Figure 4.5.

Figure 4.5: Revised central financial forecast Including CSR, FSR and Budget proposals

Stabilisation Fund

In  2009  the  States  agreed  to  apply  £44  million  of  the  Stabilsation  Fund  to  a discretionary fiscal stimulus package with the balance of the Fund to be applied to enable  public  services  to  be  maintained  as  States  revenues  reduced  during  the downturn and additional expenditure on benefits was required. According to the latest forecast (Figure 4.6) £68 million will be required in 2010 with a further transfer of £46 million required in 2011, after which the Stabilisation Fund will be exhausted.

Consolidated Fund

With projected deficits at a substantial level for both 2010 and 2011, the Consolidated Fund continues to require transfers from the Stabilisation Fund in order to ensure it is not overdrawn and to maintain a minimum balance to provide for unforeseen items and manage variations in States revenue forecasts, as recommended by the FPP.

At the end of 2010 there will be an estimated balance of £20 million (Figure 4.6). After the Stabilisation Fund is exhausted in 2011 only a small balance, estimated at £11 million will remain in the Consolidated Fund against a predicted deficit in 2012 of £18 million.

Figure 4.6:

Forecast for the Consolidated Fund and Stabilisation Fund balances

If the Budget proposals included in this Budget Statement are subject to amendments this  may  result  in  the  Consolidated  Fund  being  overdrawn.  The  Public  Finances (Jersey) Law 2005 does not allow a budget to be set projecting the Consolidated Fund as overdrawn for the relevant year so any amendments would require an alternative funding option. There is therefore little room for manoeuvre.

The forecast balance for 2012 shows a small negative balance. This, combined with the need to return to surplus once the economy has recovered, means that the outturn will need to be closely monitored and further options may need to be considered to deal with this.

In future years the phasing in of tax proposals and other measures in the annual budget will need to ensure the Consolidated Fund remains in balance as required by the Public Finance Law.

Part B

Comprehensive Spending Review Part 2

Expenditure Proposals for 2012 and 2013

5. Background to the CSR

The Comprehensive Spending Review (CSR) is part of the three part plan to address the structural deficit, along with encouraging economic growth and the Fiscal Strategy Review.

The 2011 Business Plan report identifies in detail the various components and principles of the CSR. In summary the objectives of the review have been to:

• control  States  spending  by  setting  tough  but  achievable savings  targets  and realistic growth proposals;
• improve financial management across the States by ensuring incentives are built in to the budgeting system to encourage improved decision making;
• extend the States planning horizon so that clear three-year plans are made and adhered to;
• bring greater transparency to financial planning and provide more complete cost information for decision making; and
• deliver better value for money and good management of assets and investments.

The process began in January and has developed in two parts.

Firstly, a minimum of £10 million of savings or user pays proposals were identified to be delivered in 2011. These proposals were worked up by departments, considered by Ministers and proposed in the 2011 Business Plan. The debate in September discussed the proposals and although there were significant amendments the States still approved £12 million of savings and user pays measures for departments.

Secondly, a more detailed and extensive review was carried out by all departments of how to deliver a minimum of £50 million savings by 2013. This Part 2 process also involved detailed external reviews of the major spending departments as well as Court and Case Costs and Terms and Conditions. The extent of the appropriate level of savings was discussed as part of the 2011 Business Plan debate and the Chief Minister committed during that debate to explore a higher level of savings and bring forward proposals alongside the Budget. The CSR Part 2 process and outcomes are detailed in Sections 6 and 7 respectively.

A parallel process to develop a prioritised capital programme within an agreed spending envelope, initially focussing on 2011 and then developing proposals for 2012 and 2013, is outlined at Section 8.

The CSR is about controlling public spending but it is also about introducing a culture and framework of longer-term financial planning and improved financial management and reporting. The principles of this aspect of the CSR were explained in some detail in the 2011 Business Plan and are summarised further in Section 9, together with initial proposals for improved financial management and reporting from the Treasury.

6. CSR Part 2 Process

The CSR Part 2 process began in February when all departments were asked to begin work to identify the options for a minimum of £50 million savings by 2013.

Initially, the focus was to identify options which could deliver savings by 2011 and be considered for the 2011 Business Plan. For many departments this early work identified opportunities for savings that could be delivered in later years and these options have been explored and worked up further for the Part 2 proposals.

For the reviews of major departments, governance structures were put in place involving the appointment of external consultants and independent on-Island reviewers. Political project boards and independent steering groups have been established and the latter included independent chief officers, with the ability to draw on external specialists if required.

For capital prioritisation, a series of officer and political workshops have considered the proposals for 2012 to 2017. This process considered all the schemes submitted by departments for inclusion in the programme and the outcomes of the process are detailed in Section 7.

Major Reviews

Governance Structure

An independent Steering Group was set up for each major review and included:

• An independent reviewer who also chaired the group. On two Steering Groups (Health and Social Services and Home Affairs), there was a further independent reviewer;
• The departmental Chief Officer;
• An independent Chief Officer; and
• One of the Chief Executive, the Deputy Chief Executive or the Interim Treasurer.

The groups met regularly under defined terms of reference and appointed external consultants as required. Internal resource was also available both from within the individual departments and also from the central CSR team. The terms of reference for each of the reviews were agreed by the Project Board comprising the Chief Minister, the Treasury and Resources Minister and the relevant Minister dependent on the nature of the review. For the Terms and Conditions Review, the States Employment Board acted as the Project Board.

Independent Reviewers

The Council of Ministers has been fortunate to appoint seven independent reviewers to contribute to the CSR process and their input has been invaluable. The independent reviewers have not only chaired their respective major review groups but also met regularly as a group to share and discuss findings and experience.

External Consultants

The major reviews for Home Affairs, Court and Case Costs and Terms and Conditions have  involved  external  consultants  working  with  the  departments  concerned.  The Education, Sport and Culture department has conducted a wide range of individual reviews on most aspects of its services and employed external advice as appropriate. An external peer review was then conducted to consider and challenge the proposals from the individual education reviews.

The major reviews for Health and Social Services and Social Security are due to commence shortly. For Health and Social Services the outcomes of the department's initial work has been reviewed by the independent Steering Group. The Steering Group has recommended a number of proposals to be pursued for 2012 and 2013 but has  also  recommended  that  a  major  strategic  review  is  required.  Expressions  of interest from external consultants are currently being considered and the intention is that this review will be completed, including consultation, in the summer 2011.

Targets have been proposed for savings from the Social Security department but the intention is that the detail of the savings options will await the outcomes of the income support  review.  This  started in late  summer  and  will  continue  into  spring  2011, reporting in time for the 2012 Business Plan.

Peer Reviews

The outcomes of the work by departments and the various external consultants have been considered by the relevant Ministers and by the independent Steering Groups. The independent Steering Groups have prepared reports with recommendations to inform and assist the work of the Council of Ministers. These reports have also been made available to States members.

For the non-ministerial departments, a series of Star Chamber' meetings have been held to consider the departments' proposals. These meetings have either involved the Chief Minister or Minister for Treasury and Resources, an independent States member, the Chair of Independent Reviewers and a representative of the CSR central team.

Council of Ministers workshops Ministerial Peer Review

The Council of Ministers has held a number of workshops during the Part 2 process. The initial workshops in late September involved a political peer review - of both the Steering Groups' recommendations and all other departments' savings proposals - by other Ministers enabling them to challenge and question the department Minister and the Chair of the independent Steering Group. This challenge process was supported by Assistant Ministers, the relevant department Chief Officers and the central CSR team.

Revised Targets

The Council of Ministers has also considered the balance between savings, FSR proposals and more routine budget measures required to address the deficits. The Council's deliberations have been informed by the revised financial forecast and the view from the 2011 Business Plan debate that a majority of States members would prefer targets of more than the initial £50 million from savings.

As a basis for the workshops, Ministers agreed to target a minimum of £65 million from the proposed savings, which after the proposed Budget measures would leave a target for FSR proposals of £47 million by 2013.

Allocation of savings, growth and user pays

The final series of workshops in early October brought together the outcomes of the peer reviews and also considered the proposals for growth and user pays. As a result of the workshops, initial allocations for individual departments were agreed together with targets for the Corporate Savings and Terms and Conditions reviews.

Initial Department Cash Limits for 2012 and 2013

The outcomes of the workshops have enabled initial cash limits for departments to be calculated which are within the target total spending limits. The Council of Ministers has committed to working towards these initial cash limits and the delivery of the outcomes from the CSR Part 2 process. These outcomes may vary as the individual proposals are worked up and the detail for each year will be presented in the 2012 and 2013 Business Plans in due course. Any variations in the proposals will be accommodated within the total spending limits now proposed for 2012 and 2013.

Further detail of the outcomes from the workshops is provided in Section 7.

7. CSR Part 2 Proposals 2012-2013

Targets for CSR Part 2

The Council of Ministers initially proposed spending limits for 2012 and 2013 as part of the 2011 Business Plan for debate in September. Following an amendment from the Corporate Services Scrutiny Panel to increase the savings in each of the years 2011 to 2013, the Chief Minister withdrew the proposition relating to future years but committed to additional savings by 2013 as part of the CSR Part 2 process.

Following the various workshops discussed in Section 6, the Council is now proposing that a minimum of £65 million of savings and user pays initiatives be proposed by 2013.

Savings

The proposals for £65 million of savings by 2013 are made up as follows: £m

2011 Department savings 12.0 2012/13 Department savings 30.4 2011/12/13 User Pays 2.2 2012/13 Corporate Savings  6.5 2012/13 Staff Terms and Conditions 14.0 Total Savings by 2013 65.1

The savings for 2011 to 2013 have been allocated to individual departments and initial cash  limits  have  been  calculated.  The  Council  of  Ministers  is  proposing  a  total spending limit for 2012 and 2013, calculated from the initial cash limits and central provisions and the capital programme allocation for these years. See Summary Table A for details.

The department savings for 2012 and 2013 agreed at the workshops and the 2011 savings agreed in the 2011 Business Plan are summarised in Figure 7.1.

Figure 7.1: Savings proposals by Department

The indicative proposals for savings by departments have been published separately for information, together with the outcomes of the major reviews which have been completed.

User Pays

The proposals amount to over £2 million of the total of £65 million. The detail of the proposals from departments  was considered at the workshops and the proposals agreed are set out in Figure 7.2.

Figure 7.2: User Pays proposals by Department