Medium Term Financial Plan 2016 - 2019 (as adopted as amended)

MEDIUM TERM FINANCIAL PLAN

2016-2019

(as amended following debate

at the States sitting 5-8 October 2015)

Council of Ministers

I.J. Gorst

A.J.H. Maclean

L.J. Farnham

R.G. Bryans

Sir P.M. Bailhache A.K.F. Green M.B.E.

K.L. Moore A.E. Pryke S.G. Luce S.J. Pinel E.J. Noel

P.F.C. Ozouf

P.F. Routier M.B.E.

Senator Chief Minister

Senator Treasury and Resources

Senator Economic Development

Deputy Education, Sport and Culture Senator External Relations

Senator Health and Social Services and

Deputy Chief Minister

Deputy Home Affairs

Deputy Housing

Deputy Planning and Environment Deputy Social Security

Deputy  Transport and Technical Services

Senator Assistant Chief Minister Senator Assistant Chief Minister

J.D. Richardson Chief Executive

R.W. Bell Treasurer of the States

Proposition

Medium Term Financial Plan 2016-2019

(as adopted on 8th October 2015 as amended)

The States are asked to decide whether they are of opinion:

to receive the draft Medium Term Financial Plan 2016-2019 and, in accordance with the provisions of Article 8 and 8A of the Public Finances (Jersey) Law 2005 –

1. to approve –

1. the intended total amount of States income for each of the financial years 2016 to 2019, as set out in Summary Table A and being the central forecast of the States income forecast range for 2016- 2019 as shown in Figure 18,
2. the total amount of States net expenditure for each of the financial years 2016 to 2019, being the total net revenue expenditure and the total net capital allocations, as set out in Summary Table B (as amended[1])

in order to deliver a balanced budget by 2019.

2. to approve the following amounts (not exceeding in the aggregate the total amount set out in paragraph (a)(ii) above) –

1. the appropriation of an amount to a revenue head of expenditure for each States funded body (other than the States trading operations) being the body's total revenue expenditure less its estimated income for the financial year 2016 as set out in Summary Table C (as amended[2]),
2. the amount to be allocated for Contingency for the financial year 2016 as set out in Summary Table D (as amended[3]),
3. the total amounts set out in Summary Table F that in a Budget for the financial years 2016 – 2019 may be appropriated to capital heads of expenditure, being an amount that is net of any proposed capital receipts, noting that the sum of up to £1 million of the 2016 allocation, up to £39 million of the 2017 allocation and up to £8,233,000 of the 2018 allocation will be subject to the States approval of the intended transfer of funds from the Strategic Reserve Fund detailed in paragraph (f), and the use of funding from the Criminal Offences Confiscation Fund subject to the requirements of the Proceeds of Crime (Jersey) Law 1999, and noting that future amendments to the Medium Term Financial Plan and appropriate legislation, as necessary, will be brought forward for approval to facilitate the funding for the office consolidation project and a future hospital provision.

3. to approve the total estimated non-cash net revenue expenditure for depreciation for States funded bodies (other than the States trading operations) for the financial year 2016 as set out in Summary Table C ,

4. to approve the following, as set out in Summary Table G (as amended[4]), in respect of each States trading operation for the financial year 2016 –

1. its estimated income;
2. its estimated expenditure;
3. its estimated minimum contribution to be made to the Consolidated Fund, if any.

5. to approve, in respect of each States trading operation, the total cost of the capital projects that each is scheduled to start during the financial years 2016-2019 as set out in Summary Table H (as amended[5]);
6. to agree, in principle, that the useof the Strategic Reserve Fund income, over and above that required to maintain the real value of the Fund (namely, in accordance with their Actdated 23rd September 2014, its valueat 31st December, 2012 uprated in line with increases in Jersey RPI(Y)), to be available to transfer to the Consolidated fund and to be allocated for the measures identified in Summary Table J (as amended[6]), and that withdrawals should be made from the consolidated fund in 2017 and 2019 to replenish the Strategic Reserve Fund and to request the Minister for Treasury and Resources to bring forward for approval the necessary report and proposition to enable the use of the aforesaid additional income of the Strategic Reserve Fund and the intended funds transfers.

COUNCIL OF MINISTERS

A separate Proposition (P.76/2015) to withdraw the Committee of Inquiry funding (£14m) and approve other funding for "short-term" measures from the Strategic Reserve Fund was agreed by the States Assembly alongside the draft MTFP 2016-2019 on 8th October 2015.

A proposition to amend the formula for the States Grant to the Social Security Fund (P.105/2015) to cap the grant at 2015 levels for the period of this MTFP, lodged by the Minister for Social Security, was also approved alongside the draft MTFP 2016-2019 on 8th October 2015.

Legislation changes will be brought forward to allow the Health Insurance Fund to make a contribution to Health expenditure of £15 million in 2017 and £15 million in 2018, in advance of the full implementation of the proposed Health charge and proposals will be required from the Minister for Social Security to be debated alongside the draft MTFP Addition for 2017-2019 in September 2016.

It is the Council of Ministers intention to bring forward the proposals for a Sustainable Funding Mechanism for Health at the earliest opportunity. If it is possible to introduce a new Health charge in 2017 then this could be offset against the proposed contributions to Health funding from the Health Insurance Fund (HIF).

The Minister for Social Security brought forward the legislative amendments to the Income Support (Jersey) Law 2007 (P.103/2015) and the Christmas Bonus (Jersey) Law 2011 (P.102/2015) in order to achieve savings of £10 million in the Social Security budget by 2019 and these were also approved by the States Assembly alongside the draft MTFP 2016-2019 on 8th October 2015.

Contents Page

ADDENDUM 8

1. COUNCIL OF MINISTERS FOREWORD 10 Council of Ministers Foreword from the Chief Minister
2. EXECUTIVE SUMMARY 11 Council of Ministers Executive Summary from the Treasury and Resources Minister

Our Plan

Headline Figures

Investing in Strategic Priorities

Conclusion

3. STRATEGIC AND RESOURCE PLANNING 17 Purpose

Strategic Goals

The Strategic Plan

The Medium Term Financial Plan

Demographics and Population Policy assumptions

4. RESOURCE PRINCIPLES AND FISCAL FRAMEWORK 22 Sustainable Public Finances

Review of Resource Principles

Jersey's Fiscal Framework

5. DEVELOPMENT OF THE MEDIUM TERM FINANCIAL PLAN  25 The first MTFP

Improvements to the MTFP

Presentation of the MTFP 2016-2019

Implications of Finance Law Amendment (P42/2015)

Managing Risk

6. ECONOMIC BACKGROUND AND OUTLOOK 33 Global Economy

Jersey Economy

Jersey's Fiscal Position

Adjusted Fiscal Position

7. FINANCIAL BACKGROUND AND BALANCING THE 2015 POSITION 42 Background

Balancing the Consolidated Fund in 2015

Funding measures proposed for 2015 and associated risks

8. FINANCIAL FORECAST 2015-2019 46 Summary Financial Forecast (as amended)

States Income Forecasts 2015-2019

Economic Assumptions for the MTFP

States Revenue Expenditure Forecasts for 2016-2019 (as amended)

Detailed Expenditure Forecasts for 2016 (as amended)

9. CENTRAL CONTINGENCY ALLOCATIONS 58 Rules of Operation

AME and DEL Contingency Allocations

Central Allocations for Economic and Productivity Growth Initiatives and Redundancy Provision

Central Contingency for Pay, PECRS and Workforce Modernisation

Central Contingency Allocations for Growth and Savings

10. ADDITIONAL FUNDING FOR PRESSURES, DEMOGRAPHICS AND GROWTH 63 Background

Allocating Funding to Strategic Priorities

Management of Growth Funding and Allocations

Types of Additional Funding

Growth proposals for 2016 (as amended)

Process for 2017-2019

Narrative of Individual Growth Projects

11. SUSTAINABILITY IN STATES FINANCES 75 Build-Up of the Shortfall

Sustainable Funding Measures

Public Sector Reform

Benefit Changes

User Pays

Sustainable Funding Mechanism for Health

12. 2016 PROPOSALS FOR SAVINGS AND BENEFIT CHANGES 84 Overview

Departmental Summary

13. ADDITIONAL PROPOSALS AND SHORT-TERM FUNDING MEASURES  88 Proposals for Additional Short-Term Funding

Funding Options for Short-Term Measures

Summary of Short-Term Proposals to fund the Shortfall in 2016-2018

14. CONTINGENCY PLANNING 97 Proposed Options for Contingency Plans

Summary of Contingency Plans

15. CAPITAL PROGRAMME 100 Introduction and Process

Annual Capital Programme

Narrative of Annual Capital Projects

Other Capital Projects and Funding Sources

Revenue Consequences of Capital Schemes

States' Trading Operations Capital Programme

16. MANAGING THE BALANCE SHEET 115 Overview

Property

Strategic Investments

Housing and Ports Incorporation

States Investment Strategy

Position on States Funds

Managing Pensions

17. MANPOWER SUMMARY 123 Reconciling a 2015 Position

Ongoing Control of Budgeted FTE

Impact of 2016 Proposals (as amended)

18. PLANNING FOR AN AGEING POPULATION (SOCIAL SECURITY) 127 Social Security Fund

Health Insurance Fund and Long Term Care Fund

19. LONG-TERM TAX POLICY 131 Overview

Principles

Budget Measures 2016-2019

SUMMARY TABLES FOR PROPOSITION 137 Summary Table A – Proposed States Income Targets for 2016-2019

Summary Table B – Proposed Total States Net Expenditure for 2016-2019 (as amended)

Summary Table C – Proposed Net Revenue Expenditure for States Funded Bodies for 2016 (as amended)

Summary Table D – Summary of Proposed Central Contingency Allocations for 2016 (as amended)

Summary Table E – Proposed Total Capital Expenditure Programme Funding Sources for 2016-2019

Summary Table F – Proposed Total Capital Programme and indicative Capital Projects for 2016-2019

Summary Table G – Proposed Income and Expenditure of each States' Trading Operation for 2016 (as amended) Summary Table H – Proposed Capital Programme for States' Trading Operations and Indicative Capital Projects for

2016-2019 (as amended)

Summary Table I – Consolidated Fund Forecast for 2015-2019 (as amended)

Summary Table J – Intended Strategic Reserve Transfers for 2015-2019 (as amended)

APPENDICES 149 Appendix 1 – Summary of Income Tax Forecasts for 2015-2019

Appendix 2 – Summary of GST Forecasts for 2015-2019

Appendix 3 – Summary of Impôts Duty Forecasts for 2015-2019

Appendix 4 – Summary of Stamp Duty Forecasts for 2015-2019

Appendix 5 – Summary of Other Income Forecasts for 2015-2019

Appendix 6 – Economic Assumptions for2015-2019 (April 2015)

Appendix 7 – Terms of Reference for Income Forecasting Group (IFG)

Appendix 8 – Financial Forecast – Additional Considerations (as amended)

Appendix 9 – Ports Incorporation (as amended)

REFERENCES

P.72/2015 (Add) – IFG Detailed Income Tax Update (June 2015)

P.72/2015 (Add)(2) – Department Annex to the MTFP 2016-2019 (July 2015)

P.27/2015 – Strategic Plan 2015

P.27/2015(Add) – Resources Statement to the Strategic Plan – Update of Public Finances

R.107/2015 – Fiscal Framework for the Medium Term Financial Plan 2016-2019 and Beyond

R.133/2014 – Long Term Tax Policy

R.136/2014 – Long Term Revenue Planning Review – Update – September 2014

P.69/2012 Medium Term Financial Plan 2013-2015

FPP – Pre MTFP Report (January 2015)

R.25/2015 - Formal Response of the Minister for Treasury and Resources to the FPP Pre-MTFP Report 2015

FPP – Annual Report 2015 (September 2015)

R.110/2015 – Formal Response of the Minister for Treasury and Resources to the FPP Annual Report 2015 P.75/2015 – MTFP 2013-2015 – Amendment for Committee of Inquiry (CoI) and Redundancy Provision P.76/2015 – Strategic Reserve Transfers – COI and MTFP funding

P.102/2015 – Christmas Bonus (Jersey) Law 2011 – Removal of benefit from 2016

P.103/2015 – Income Support (Jersey) Law – Amendment for benefit changes 2015-2019

P.105/2015 – Social Security Regulations – Amendment to States Grant to the Social Security Fund for 2016-2019

Addendum - Medium Term Financial Plan 2016-2019

At the conclusion of the States debate of the Draft Medium Term Financial Plan 2016-2019 on 8th October 2015 the States had considered fifteen amendments to the original proposition from the Council of Ministers.

The States approved five amendments. The changes required as a result of these agreed amendments are outlined in this Addendum. The relevant sections of the Medium Term Financial Plan Report (P.72/2015) and Medium Term Financial Plan Department Annex for 2016 (P.72/2015(Add)(2)) have also been amended to reflect the agreed changes and are available on the States Assembly website.

Amendments Agreed

First Amendment (proposed by the Council of Ministers) – re-phasing of Redundancy Provision

The Council of Ministers proposed this Amendment to reflect the outcomes of the first tranche of the Voluntary Release Programme and to allow the funding to be accelerated in line with the latest programme of reform.

The effect of the first Amendment is to increase the Total States Net Expenditure in 2016 by £6 million and to reduce the proposed Total States Net Expenditure in 2017 by £10 million. The Amendment increases the intended transfer from the Strategic Reserve to the Consolidated Fund in 2016 by £6 million and reduces the intended transfer from the Strategic Reserve to the Consolidated Fund in 2017 by £10 million. A separate proposition P75/2015 agreed an increase in Total States Net Expenditure for 2015 and P76/2015 agreed the required Strategic Reserve transfers, including £4 million in 2015 for the Redundancy Provision.

Third Amendment (proposed by the Council of Ministers) – removal of Ports of Jersey following Incorporation The Incorporation of Ports of Jersey (P.80/2015) was approved by the States Assembly on 8th September 2015, and

this Amendment was proposed by the Council of Ministers to reflect that decision and remove the revenue expenditure and income and capital expenditure proposals of Jersey Airport and Jersey Harbours from the Draft Medium Term Financial Plan 2016-2019. The revised Summary Tables G and H for the remaining States Trading operations were presented and approved by the States. Appendix 9 – Ports Incorporation, is also amended.

Sixth Amendment (proposed by Deputy Martin) – retain means-tested TV licence benefit for over-75s

The effect of the sixth Amendment is to increase the proposed net revenue expenditure limit for the Social Security Department by £157,000 in 2016 by re-instating the provision for means-tested TV licence benefit for over 75's, and to reduce the proposed net revenue expenditure limits for the Chief Minister's and Treasury and Resources Departments by £90,000 and £67,000 respectively in 2016.

Seventh Amendment (proposed by the Council of Ministers) – deferral of funding for States Members' pension scheme

A request for additional funding for the introduction of a pension scheme for States Members was submitted to the Council of Ministers as part of the Medium Term Financial Plan process for 2016 – 2019 by the Privileges and Procedures Committee. This followed a recommendation from the States Members' Remuneration Review Body (SMRRB) in 2014.

Under Article 24B of the Public Finances (Jersey) Law 2005, the Council of Ministers was required to submit the proposed estimates of the States Assembly to be determined by the States.

The Council of Ministers' seventh Amendment proposed that the decision on States Members' pensions be taken as part of a wider debate on the remuneration of States Members ahead of the new Assembly in May 2018, and that the additional funding for the States Assembly be deferred until at least May 2018.

The effect of the seventh Amendment is to reduce the proposed total States net expenditure by £100,000 in 2016 and 2017 and by £41,700 in 2018, and the proposed net revenue expenditure limit for the States Assembly by £100,000 in 2016.

Eleventh Amendment (as proposed by the Education and Home Affairs Scrutiny Panel) – to increase Education, Sport and Culture's net revenue expenditure limit and reduce Central Contingency in 2016

The effect of the eleventh Amendment is to increase the proposed net revenue expenditure limit for Education, Sport and Culture by £263,200 in 2016, and to reduce the proposed net revenue expenditure limit for Central Contingencies by £263,200 in 2016.

Overall Impact of Amendments

The overall impact of the five approved Amendments to the total net expenditure limits of the States of Jersey is minimal as the majority of the agreed Amendments are cost neutral in total and only affect the net revenue expenditure limits of individual Departments and the Central Contingency Allocations in 2016.

The only change to total States net expenditure, resulting from the seventh Amendment, is a reduction of £100,000 in 2016 and 2017 and £41,700 in 2018.

1. Council of Ministers' Foreword

Jersey is successful today because in the past it has planned for its future. This Medium Term Financial Plan continues in that tradition by creating a future governed by choice, not chance. The plan includes a clear strategy to balance budgets by 2019, as advised by the Fiscal Policy Panel. It focuses on the priorities agreed in the Strategic Plan: improving the lives of current and future generations by prioritising improvements in health, social services, education, and regenerating St Helier. It recognises the need to boost economic growth and diversification, essential for creating the jobs and income we need to pay for our public services.

This is a two stage plan, giving us time to ensure our reform programme is changing the way we deliver our services and that our savings proposals are making permanent reductions to base budgets. This is the first stage. It outlines total annual income and spending from 2016 - 2019 and departmental spending for 2016. The second stage will propose detailed departmental spending for 2017-2019, once we are satisfied that savings are being delivered. It will be published by the end of June 2016.

Making the right long term decisions is not easy. We need to prioritise health and social care as our society ages, support those with mental health issues more effectively, and help vulnerable children and families to reach their full potential. This plan will ensure that Jersey remains special. We are investing in education and developing the skills our children need to achieve fulfilling careers. We are improving our town, preserving our outstanding natural environment, and investing in our infrastructure.

The global downturn has had a longer and deeper impact than first anticipated, and while our income is still rising, it is rising at a slower rate than in the past. During the years of recession we invested in incentive and training schemes to help islanders into work and used more than £150 million from the Stabilisation Fund to support the economy, spending £29 million on capital projects.

We are transforming our government. We are simplifying processes and using technology to reduce bureaucracy and interact with people more efficiently. These changes will enable us to redirect money from current budgets to invest in our strategic priorities.

We will continue to support our economic recovery while global conditions remain fragile and we will invest in increasing productivity and economic growth. We will support new and established businesses, encourage innovation and inward investment. This will create rewarding jobs, increase living standards and raise the revenue we need to maintain high quality public services.

Senator I.J. Gorst Chief Minister

2. Council of Ministers' ExecutiveSummary

Our Plan

Jersey's government is determined to prioritise effectively and deliver efficiently for the whole community. We set our priorities in the Strategic Plan and we are now explaining how we will achieve them, highlighting the issues that we believe are most important to Islanders and providing long term solutions to the challenges we face.

Jersey provides a good quality of life, a unique environment, and our economy is improving. Our public finances are based on a strong balance sheet and a tradition of fiscal prudence. We have not been immune to the impact of the global financial crisis and have had to invest to support our economy through this challenging period.

Taking into account our latest income forecasts and our planned programme of investment in priority areas, we need to find a total of £145 million per year by 2019. This plan outlines how we will make these investments yet still balance our budgets by 2019.

Once we are satisfied that these savings are being delivered, we will introduce a new funding mechanism for health and social services, raising up to £35 million per year. We are also looking at user pays charges for services like liquid and solid waste, as is done elsewhere, raising up to £10 million to pay for services, improve environmental outcomes and manage demand.

We are also setting aside up to £20 million for targeted measures that can demonstrate they will improve economic growth, productivity, skills and job opportunities. The allocation of this funding to specific projects will be controlled by a strict governance structure.

Like previous generations, we have the foresight to change, adapt and pursue our goals. We are taking positive action to make our Island better. This is what this Medium Term Financial Plan does – focusing on the things we need to achieve, responding positively, confidently and directly to the challenges we face.

The headline figures

• We are living longer and we all want to remain healthy throughout our lives. That is why we are allocating up to £40 million of additional annual funding for health and social services by 2019.
• Jersey needs to remain globally competitive with a highly skilled workforce. We are focusing on raising educational standards to ensure every child reaches their full potential. We are preparing for demographic changes by extending some of our schools, and ensuring our young people are ready for the jobs that a modern island economy can deliver. To achieve this, we are providing up to £9 million of additional annual funding for education by 2019.
• The fallout from the global economic crisis means that we have seen income fall short of expenditure over the last few years. We had a £50 million shortfall forecast in the 2015 Budget, which was managed in 2015 by various short term measures. This gap will be closed permanently by 2019.

• In order to invest in our priority areas and improve our infrastructure we are bringing forward a package of measures to identify up to £145 million by 2019: we are finding staff and non-staff savings of £90 million; holding benefit spending at 2015 levels to save £10 million; raising up to £35 million per year through a new health charge; and introducing user pays charges for liquid and solid waste to raise £10 million per year. In this way, we will balance our budgets by 2019. We are starting the process of delivering savings and efficiencies before introducing any new charges.
• The transformation of the public sector must be planned and effectively implemented. To balance our budget over the life of this plan, and to ease the impact on Islanders, we will use some of our reserves to cover short term spending requirements. We will withdraw £70 million from the Strategic Reserve to fund items like our capital spending programme. We will withdraw £30 million from the Health Insurance Fund for extra investment in health over the next four years. The taxpayer contribution made to the Social Security Fund to support the pension costs of lower earners will be fixed at £65 million in each year of the plan, saving a total of £20 million.
• We will re-allocate this money to increase spending in our priority areas and to fund other one-off items, including £20 million for redundancies and £7 million each year for e-Government to reduce costs and reform the public sector; £168 million for capital projects, including more than £55 million for Les Quennevais, Grainville and St Mary's Schools; and up £20 million to invest in projects that promote productivity, skills, jobs and economic growth.

Improving health and well-being

By 2035, there will be seventy per cent more people over the age of 65 than there are today, and twice as many people over 85. We need to fund expensive new health technology, drugs and treatments, and we want Islanders to remain healthy throughout their lives.

This means we need to spend more on treatments, more on helping people to stay well, and more on the early years of life which are so important to lifelong health and well-being. We want to invest more in mental health services, as we recognise that a person's quality of life is about more than their physical health.

We intend to allocate up to £40 million of additional annual funding for health and social services by 2019, including £19 million to meet increased demand, more than £3 million on early interventions to support vulnerable families, £2 million more for mental health services. We will also invest an extra £4 million each year to maintain Health and Social Services' properties. This spending will be supported by the introduction of a new health charge.

We are continuing to develop options for our hospital, and these proposals will be brought forward separately to the Assembly.

Improving education

We want to ensure all our children reach their full potential. Over the last ten years, Jersey's academic performance has plateaued, so we are giving head teachers the autonomy to lead and we are building strong links between schools and businesses, so young people can leave school ready for the world of employment. We will cater for a growing number of pupils; invest more in IT; raise standards by supporting pupils whose attainment may be low; and invest in nursery education.

We intend to allocate up to £9 million of additional annual funding for education by 2019, including £3 million per year for IT education and for students who need extra support. We are also continuing to invest in our school infrastructure, more than £55 million for Les Quennevais, Grainville, and St Mary's Schools.

Economic growth

The OECD believes global growth will strengthen in 2015 and 2016, although significant risks remain, not least in the Eurozone. The outlook for Jersey is also increasingly positive. Businesses are reporting increased confidence, earnings are rising faster than inflation, employment is growing at record levels across most sectors and financial services growth is outstripping expectations. We do, however, have more to do. As the Fiscal Policy Panel has said:

The challenges of the ageing society and the risks about the future trend rates of economic growth require action now to develop a clear strategy for raising productivity (in both the public and private sectors) and competitiveness in the Jersey economy in the medium-term.'

We will support established and emerging industries, like the tech sector, continue to implement our financial services framework, support "Visit Jersey" and "Digital Jersey", and develop a new rural economy strategy.

We will work to ensure that legislation supports our reputation as a financial services jurisdiction with high standards, while striking the right balance between encouraging economic growth and furthering our social objectives. We will pursue inward investment opportunities and promote Jersey overseas; and we will support competition and innovation.

The economic improvements we are seeing follow a period when Jersey households experienced a squeeze in incomes as inflation outstripped earnings and unemployment rose. These trends are reversing, and as they do so, it is important to ensure the benefits are felt by all sections of our community.

This means continuing to ensure that work pays and that Islanders have the skills they need to succeed in the workplace – so we will maintain the £14 million annual investment introduced in 2012 to help people into work. We will also achieve economic growth and diversification by supporting migration that delivers the greatest economic and social value. This means working smarter not longer, investing in technology, capital and skills. This means businesses making more profit and workers being paid more as a result.

To support this, up to £20 million will be set aside for targeted measures that can demonstrate they will improve economic growth, productivity, skills and job opportunities.

Improving St Helier

St Helier is the engine of our economy, where most people work and most businesses operate. We intend to improve our town environment to ensure it is a great place to live, work, and spend time.

We will build much needed homes for Islanders, continuing to invest the £250 million bond issued to refurbish and build social housing. We will ensure that new developments help us to regenerate our town.

We will also fulfil our other strategic plan commitments, including providing more public space, improving transport around town and working closely with the Parish to improve services. This will include paying rates on States properties to provide them with more revenue.

Sustainable public finances

This Plan includes a package of savings totalling £90 million per year by 2019. Achieving this will require:

• simpler processes
• investment in e-Government
• restructured and merged departments
• removal of unnecessary regulations
• focus on priority services
• providing services more efficiently and cost effectively
• maintaining pay restraint – pay is being frozen in 2015 and will need to be constrained over the life of the plan to enable investment elsewhere

To support this, £20 million has been allocated to pay for staff redundancies and severance during the period of the plan. Our emphasis is on voluntary programmes, treating staff with respect and consideration, and using the 6% staff turnover rate to manage vacancies and reduce headcount naturally as staff leave. We have also allocated £7 million each year to support restructuring, enabling us to invest in e-Government and to complete the reform and modernisation of the public sector.

A further £10 million reduction in spending will be achieved by 2019 by making changes to benefits to hold the overall benefit spend at its 2015 level. These changes are aimed at promoting financial independence and ensuring public money is well targeted. Their effects on individuals will be minimised by spreading their impact across larger groups of claimants. For instance:

• most elements of income support will be held at 2015 levels during 2016, although increases are planned for rental and childcare
• phased changes will see lone parents treated in the same way as other adults in income support households
• the treatment of pension and maintenance income will be brought into line with earned income and all other income will be fully included in Income Support calculations
• jobseekers under the age of 25 will be treated in the same way as students of the same age
• more income support one-off payments will be made as loans

To help to meet the demographic pressures of an ageing population, we are also proposing changes to two benefits predominantly claimed by older people.

The Christmas bonus is paid to all local pensioners and is not means tested or targeted. From 2016 this bonus will no longer be paid.

The free television licence scheme for some pensioners aged 75+ was proposed to close to new entrants. People who already receive a free TV licence were proposed to continue to be eligible. However, the States approved an Amendment to the MTFP and the free television licence benefit will continue to operate to new entrants[7].

Some of the money saved through these measures will be used to improve the existing 65+ Health Scheme. This scheme is well targeted. It is aimed at pensioners whose income is too low for them to pay tax, and it helps older people to stay healthy and remain independent for longer, by contributing to dental, optical and chiropody costs.

We are confident that the Medium Term Financial Plan is flexible enough to deal with unforeseen events:

• we have improved the income forecasting process by formally constituting a broad based Income Forecasting Group (IFG).
• we will re-establish the working balance in the Consolidated Fund, our current account, at £20 million, providing more flexibility if circumstances change
• we have allocated contingency funds of £7 million each year

Investing in our assets

We will continue to invest in public infrastructure and are planning to spend £168 million on capital projects in the next four years. The largest expenditure over the period will be:

• Transport and Technical Services have £43 million allocated for infrastructure and will use most of this on a new sewage works
• More than £55 million for Les Quennevais, Grainville and St Mary's Schools;
• £21 million to replace essential IT systems
• £8 million for the next phase of the prison improvement (when sufficient resources are available in the Criminal Offences Confiscation Fund)

We will also bring forward plans for the future hospital; consolidation of government offices to reduce running costs; and the redevelopment of Fort Regent.

Conclusion

Jersey is facing similar issues to many advanced economies – an ageing society, intensifying global competition, rapid technological and environmental change. We must continue to plan, adapt and react if we are to remain successful.

This government is prioritising available resources for the benefit of all Islanders and this plan explains how we will achieve our strategic goals of prioritising health, education, economic growth and St Helier while delivering balanced budgets by 2019. It highlights the issues that we believe are most important to Islanders and provides workable solutions to the challenges we face.

This Plan strikes a balance. We are investing our available resources, including some of our reserves, in important priority areas and we are supporting the economic recovery, raising productivity and modernising our public sector.

We are clear about the choices we face. We have built solid foundations and by coming together as a community that recognises its challenges, we can continue to build a future that is as successful as our past.

Senator A.J.H. Maclean

Minister for Treasury and Resources

3. Strategic and Resource Planning

Our Purpose

The Council of Ministers, as the leaders of government of Jersey, serves and represents the best interests of the Island and its citizens. In order to do this, it must:

• Provide strong, fair and trusted leadership for the Island and its people.
• Deliver positive, sustainable economic, social and environmental outcomes for Jersey.
• Ensure effective, efficient and sustainable management and use of public funds.
• Ensure the provision of modern and highly valued services for the public.

Our Strategic Goals

The Council has a collective responsibility to deliver better lives for Islanders and a better future for Jersey by working to deliver a range of social, environmental and economic Strategic Goals:

SG1 Maintain a safe and just society.

SG2 Pforro malloaten dh eparoltthecatnindgs othceiailnwteerllebsetisnogfftohret hfrea iwl ahnodletchoemvumlnuenriatyb,l ep.roviding prompt services

Help people in Jersey achieve and maintain financial independence and safeguard the most SG3 vulnerable in our community.

SG4 Csthaanmdapridosn aanpdr obpueildr ssutrpopnlyg ocof mhomusuinnigtioesf .all types, promote affordability, improve housing SG5 Plifreolvoindge lae afirrnstincgla.ss education service, supporting the development of skills, creativity and

SG6 Increase the performance of the local economy, encourage economic diversification and

improve job opportunities for local people.

SG7 Promote sporting, leisure and cultural activities that enrich Islanders' lives.

SG8 Promote Jersey's positive international identity.

SG9 Protect and enhance the Island's natural and built environment.

Provide attractive and well maintained public spaces, protect the environment from the SG10 impact of waste products and develop public transport, road and cycle networks that meet

the needs of the community.

SG11 Look after Jersey's finances and assets, ensuring responsible use of public funds.

Government's performance in delivering against these Strategic Goals helps determine quality of life in Jersey. The community therefore expects the Council of Ministers to ensure the provision of quality services and infrastructure in support of the Goals.

The Strategic Plan process

Each new Council publishes a Strategic Plan for its term of office which –

• identifies the Council's key priorities for its term of office, focusing on the key areas where significant change will make the biggest difference to Jersey's future;
• sets the strategic direction for detailed delivery plans.

This process requires the Council to review Jersey's progress against the Strategic Goals and identify where priority focus is required in response to key pressures or opportunities. The 2015 Strategic Plan identified five Priorities where the Council believes such focus is required –

• Sustainable Public Finances
• Improve Health and Wellbeing
• Improve Education
• Optimise Economic Growth
• Improve St Helier

Prioritisation does not automatically mean additional funding. In some areas, targeted growth has been agreed to invest in new initiatives or respond to increasing demand but prioritisation is also about transforming the way we develop services, processes - and even strategy. Focusing people on what is expected helps create the incentive to innovate, collaborate and find new ways of working with existing resources.

The Medium Term Financial Plan process

This Medium Term Financial Plan (MTFP) sets out the States' overall tax and spending envelope for the next four years and departmental expenditure limits for 2016. This is the first stage of the current MTFP proposals with an MTFP Addition to be presented in June 2016 which will propose the detail of department spending limits for 2017- 2019.

In developing the MTFP, the Council has taken decisive action to place Jersey on a path to fiscal balance and address any structural deficit by 2019 in line with the Sustainable Public Finances' priority. This has required difficult decisions to balance funding for the services and infrastructure that underpin government's broader Strategic Goals with the investment required to progress its key Priorities.

Additional funding for existing services or new growth amounts to nearly £22 million for 2016. This investment has been achieved whilst containing departmental revenue expenditure to an increase of just 1.6% compared to 2015, by challenging existing expenditure in the context of the strategic priorities.

The Medium Term Financial Plan is split into two parts:

• The formal lodged report providing the background to the financial and economic position, the revenue and capital expenditure proposals and details of the measures that are proposed to maintain a balance on the Consolidated Fund, proposals to actively manage the balance sheet over the next four years and deliver balanced budget by 2019.
  • In this MTFP , the proposals will be presented in two stages with the total States income targets and expenditure limits, together with the detailed allocations for 2016 proposed in this report for debate in October 2015; and
  • An MTFP Addition will be presented by the end of June 2016, which will propose the detailed allocations for 2017-2019 within the total expenditure limits agreed.

• A detailed Annex which provides summaryinformation for each department, describing the department's purpose and responsibilities and the major change initiatives planned in 2016 to support the Council's Priorities and government's broader Strategic Goals. The Annex also provides detailed financial information at a department level to support the proposals in the formal report, including:

detail of how the proposed department expenditure limits will be allocated to services for 2016;

a summary service analysis for the department for 2016, including manpower levels;

a Statement of Comprehensive Net Expenditure for each department for 2016; and

a reconciliation of the changes in expenditure allocations since 2015.

Strategic Planning and Population Policy

Like many other jurisdictions, Jersey is facing demographic challenges in the years ahead. More people are reaching retirement age, people are living longer.

In 2014, there were more pensioners living in Jersey than ever before and the total number of deaths in the Island was the lowest since 1952. This is something to celebrate, but we must also plan and prepare. The population projections produced by the Statistics Unit highlight that:

• We could have as many as 28,000 people aged over 65 by 2035, compared to 14,000 in 2010;
• We will also see the number of people aged over 85 increase from 2,000 to 5,000.

This will cost us more. This is why the size of our workforce is so important. Currently, for each person in Jersey receiving a pension, there are about four working age people paying contributions to fund that pension. With net nil migration, there would only be two working age people for each pensioner by 2035. This is because as we age, our workforce is also shrinking.

Figure 1: Jersey population under different net migration scenarios (nearest 1000):[8]

These projections show that if we have net nil migration, we will also have over 7,000 fewer workers by 2035, which would equate to £400 million of economic value. This is not sustainable, leaving us unable to maintain our standard of living or services, possibly leaving Jersey as a place where employers cannot recruit, where young people seek opportunities elsewhere. This has happened in other places.

Jersey must resolutely respond to this challenge by taking action to maintain an adequate, appropriately skilled workforce. In doing this, we cannot do as other places have done and encourage high levels of net migration to fund our ageing society. In Jersey, this would require net inward migration averaging 3,000 people a year to maintain a dependency ratio – the ratio of workers to pensioners – at the current levels. This is unacceptable to the Council of Ministers and most Islanders.

So, while inward migration must have a part to play in ensuring we rise to the challenges, this is only part of a coherent package of policy measures to deliver a sustainable future.

This is why the Strategic Plan 2015-18 prioritised sustainable public finances, improving health and well-being, improving education, optimising economic growth, and improving St Helier.[9]For example, it contains priorities designed to:

• Improve outcomes for Islanders - investing in early intervention to avoid future costs, whether that be supporting vulnerable families to improve the outcomes of children in later life, or helping people lead healthier lifestyles;
• Generate greater efficiency and effectiveness in our public sector, reducing our costs and enabling us to re-prioritise spending to support our ageing society;
• Deliver more income - supporting productivity improvements, increasing participation in the workforce, investing in education and skills that businesses need, so that we generate more economic output with the resources we already have to fund services;
• Improve the town of St Helier – ensuring our town is a better place to work, live and visit, enabling us to preserve and protect our countryside for everyone's enjoyment.

Collectively, these Priorities promote the most efficient use of Jersey's resources and support a more sustainable future. The Medium Term Financial Plan supports these strategic priorities.

At the same time, we need to acknowledge that net inward migration must form part of the solution to the challenges we face.

Our economy is increasing sophisticated, operating in a globalised and complex world driven by technological and regulatory change. In this world, all our needs cannot be sourced locally.

Employers must be able to access staff with the skills, market knowledge and experience they require if we are to stimulate growth and create job opportunities for established Islanders, including children leaving education.

We also need to be realistic about the extent to which government can exercise control over the size of our population and migration. We cannot control who is born, who dies, or whether established Islanders leave Jersey, or return to Jersey in later life, often with a family.

What we can do is to identify different future population scenarios, understand their potential impact on services and infrastructure, and plan for our future.

We can then use our legislation to limit the availability of work and to manage migration in support of these plans. Most people who move to Jersey do so in order to work, with over 90% of all new migrants working.

We have had in place a planning assumption for net migration of +150 households per year, equating to net migration of +325 people per year. We pursued this level of migration for a number of years. It was most recently affirmed in the Interim Population Policy for 2014 – 2015 in April 2014. This outlined that the Control of Housing and Work (Jersey) Law 2012 should be used to support this planning assumption, setting a direction consistent with a stable working age population in the future, and granting permissions for workers who deliver the greatest economic and social contribution to Jersey.

In the last six years, the Island's population has increased by an estimated 5,400 people. Of this number, about 70% (3,830) was due to natural growth or net migration in line with the planning assumption of +150/+325.

In practice, demographic change over the last six years has meant that Jersey's population has reached its current level of 100,800 about 12 months ahead of modelling projections based on net migration of +350 a year.10 Within

the timescale of the MTFP 2016-19, this faster rate of increase has no significant implications for services, infrastructure or funding. It does, however, mean that the capacity of services and infrastructure to accommodate long term growth in Jersey's population is being eroded faster than intended.

As the same time, sensitivity to demographic change depends on a range of factors, not just population size - consumer behaviour and technology all have a significant bearing on demand. Water consumption provides a practical example: In the last six years, the Island's population increased by approximately 6%, but water consumption actually reduced. The widespread introduction of metering and improvements to the distribution network absorbed the impact of rising population. In the longer term, more costly solutions to ensure an adequate water supply will become more pressing, but the point remains that demand management can be effective, and this needs to be considered alongside population issues to provide a sustainable, planned future.

An important aspect of sustainability is the need to avoid taking decisions that focus just on the short-term. Transforming health and education, regenerating St Helier and improving productivity in our economy are long term changes whose impact cannot be neatly aligned to the political election cycle. We need to set a long term, shared vision of what we want Jersey to be like in the future and how different policy interventions will support these ambitions. Then we can properly monitor progress over time. That is why the Council has committed to the development of a new, rolling, long term plan which will set a planning horizon 15-20 years ahead. The new planning process will provide for better insight into the impact of demographic change, informed appraisal of migration planning assumptions and proper evaluation of the long term progress in key areas such as education and skills, health, economic participation, productivity, urban living and quality of life.

10 Jersey Population Projections 2013 Release, States Statistics Unit, September 2013

4. Resource Principles and Fiscal Framework

Sustainable Public Finances

The States agreed to make sustainable public finances a priority as part of the Strategic Plan in April 2015. Simply put, if the finances of this Island do not continue to be sustainable, then it will not be possible to fund the other strategic priorities.

The ambition of the Strategic Plan is to place Jersey on a sound path to structural fiscal balance and aim to balance States income and current expenditure (including depreciation) over the economic cycle. The Council of Ministers aim to achieve this by 2019, in line with the advice of the Fiscal Policy Panel (FPP).

Resource Principles for Spending and Taxation

The Medium Term Financial Plan has been developed in line with the Resource and Taxation Principles reviewed and agreed as part of the Strategic Plan (April 2015). The Medium Term Financial Plan aligns resources to priorities, maintains core services and meets government's statutory responsibilities. It will be supported by a new Fiscal Framework which will set out a clear and transparent decision making process. It will assist in making fiscal decisions that support the Island's economic objectives as set out in the Strategic Plan and underpins medium- term fiscal sustainability.

The Resource Principles agreed in the Strategic Plan are:

Spending

• Be prudent, taking account of the uncertain economic and financial outlook and build flexibility into future plans.
• Identify and implement all possible savings and efficiencies.
• Challenge existing expenditure in the context of strategic objectives.
• Optimise service delivery, to improve service delivery and value for money.
• No additional spend unless matched by savings or income.
• Support the economy in line with advice from the Fiscal Policy Panel.
• Undertake a comprehensive programme of zero-based budget reviews including a consideration of whether there is an obligation to provide the service.
• Maintain balanced budgets over the economic cycle.
• Actively manage our assets by maximising investment returns within agreed levels of risk.
• Plan expenditure on capital and infrastructure over the longer-term and consider carefully the appropriate sources of funding for other projects, including borrowing.

Taxation

• Taxation must be necessary, justifiable and sustainable.
• Taxes should be low, broad, simple and fair.
• Everyone should make an appropriate contribution to the cost of providing services, while those on the lowest incomes are protected.
• Taxes must be internationally competitive.
• Taxation should support economic, environmental and social policy.
• We shall develop a new Fiscal Policy framework and look at ways to promote financial stability.

Jersey's Fiscal Framework for MTFP 2016-19 and beyond

In advance of the debate on the Medium Term Financial Plan, the Minister for Treasury and Resources will publish a paper which follows up the report Updating Jersey's Fiscal Framework' published as R.102/2014, building on its recommendations and setting out the framework that will cover decisions taken over the course of the Medium Term Financial Plan 2016-19 and beyond.

It will build on the experience in Jersey in recent years, draws on international best practice and sets out a clear and transparent decision making process. It will assist in making fiscal decisions that support the Island's economic objectives as set out in the Strategic Plan and underpins medium-term fiscal sustainability.

The fiscal framework is a key pillar of Jersey's macroeconomic framework but it is critical that wider policy also focuses on improving productivity and competitiveness. The supply side of the economy is essential for aligning short-term objectives (e.g. the need for discretionary policy to support the economy) and longer-term fiscal objectives (e.g. medium-term sustainability of public finances) when interest rates cannot be used as a macroeconomic policy instrument.

The key components of the fiscal framework are summarised below and will be set out in more detail in the paper published before the debate. Experience internationally with setting and maintaining fiscal rules has been mixed and for these reasons the framework will use fiscal guidelines that are overseen by the FPP rather than strict fiscal rules.

Fiscal guidelines

1. Aim to balance the States' current budget (which excludes capital expenditure but includes depreciation) over the economic cycle.
2. The Social Security Funds (including the Health Insurance and Long-term Care Funds) should be kept on sustainable medium-term footing through Government Actuary Department (GAD) reviews and well planned policy changes.
3. Monitor the States' net asset position over the economic cycle and relative to size of the economy.
4. The FPP will advise on progress in keeping to the above guidelines through their normal reporting structure and with continued focus on medium-term sustainability.

There are a number of other rules effectively in place as a result of the Public Finances Law that limit the amount the States can lend or borrow it is not suggested they are changed or removed from the law at this stage. However, they should be kept under review to make sure they do not constrain fiscal policy decisions that are in keeping with the fiscal guidelines and FPP advice.

Rules for the key funds

The rules for the key funds (set out below) will remain as already agreed by the States, although the operation of the funds will need to be consistent with the new fiscal guidelines.

1. The Strategic Reserve
2. The Stabilisation Fund
3. The Housing Development Fund, and
4. Consolidated Fund

The Fiscal Policy Panel

The role and responsibilities of the FPP are now on a statutory basis in the Public Finances Law and the FPP's Annual Report will remain the cornerstone of fiscal framework. With the formation of the new Income Forecasting Group (IFG) the FPP have agreed to endorse the economic assumptions used for financial forecasts which will help improve the transparency and credibility of that part of the forecasting process.

The Annual and Medium-Term budgetary framework

Jersey has made significant steps forward in establishing its medium-term planning framework in recent years. Building on these positive developments the new framework follows the FPP's advice (similar recommendations have been made by the Comptroller and Auditor General (C&AG) and Corporate Services Scrutiny Panel) that MTFP and Budget Reports will include new information that can help inform decision making.

Further development

Fiscal frameworks should evolve over time and learn from experience and best practice elsewhere. An integral part of the previous framework and this one is that it is kept under review and that there is a continuous process of improvement. However, any changes to the framework should be explicit and transparent and in context of the existing framework and its future evolution.

5. Development of the Medium Term Financial Plan

The First Medium Term Financial Plan 2013-2015

The Medium Term Financial Planning framework, whereby overall States income targets and maximum annual spending limits are set for a period of years, equivalent to the term of a Council of Ministers, was established by Amendments to the Public Finances (Jersey) Law, the Finance Law', in 2011.

The overarching objective of the process was to provide greater control of States spending, funding certainty for departments over a set period of time (with the setting of minimum departmental spending limits) whilst still retaining sufficient flexibility to manage emerging pressures and changes in priorities within overall spending limits through the annual growth allocation and the allocation of an annual central contingency supported by annual end-year flexibility for departments.

The first Medium Term Financial Plan enabled total expenditure to be controlled to the limits proposed in 2012. The difficulties experienced within the medium term planning framework resulted from significant reductions in income forecasts and insufficient flexibility being retained within the plan to adapt to the extent of these changes. The significant reduction of income forecasts and available funding seen from 2012-2015 has not been a familiar trend in Jersey, except where the reduction in income was planned over a period of time as part of the move to the 0/10 corporate tax strategy and where we anticipated the initial phase of the global financial crisis, resulting in the increase in GST from 3% to 5%.

Improvements to the Medium Term Financial Plan

The variations in income and economic forecasts over the period of the first Medium Term Financial Plan has emphasised the need to provide sufficient flexibility within the income and expenditure forecasts over the four year period of this Plan to accommodate such changes. The Council of Ministers is proposing contingency plans within the range of income forecasts provided by the Income Forecasting Group.

The draft proposals for the presentation of Medium Term Financial Plan 2016-2019 seek to address the recommendations and comments of the Fiscal Policy Panel (FPP), Corporate Services Scrutiny Panel (CSSP) and the Comptroller and Auditor General (C&AG) in various reports.

Flexibility and Contingency Plans

The MTFP includes a number of proposals at Section 13 to provide a contingency against variations in income and the Council of Ministers will continue to identify further opportunities in advance of the presentation of an MTFP Addition for 2017-2019 by the end of June 2016 and in annual Budgets over the course of the MTFP.

The presentation of the expenditure proposals in two stages provides more time for detailed plans to be developed for the period 2017-2019 and these will be brought forward in the MTFP Addition. The Council of Ministers is only proposing that one year's growth be allocated in 2016 and that future growth be dependent on the achievement of income levels and the delivery of the required savings and funding measures.

The Council of Ministers is maintaining central contingency allocations to provide for the areas of expenditure which are most volatile (income support and other benefits) and also for unforeseen and unavoidable funding issues to provide time for departments to reallocate existing budgets to accommodate them.

Contingency plans also need to be considered for variations which result in an improvement in the States financial position. In the short-term this would involve reducing the drawdown from the Strategic Reserve, considering any re-phasing of savings and in the longer-term any surpluses that arise should be used to replenish the Stabilisation Fund. However, by agreeing total expenditure limits for all four years of the MTFP any improvements in States income cannot be spent without amending the MTFP, this remains an important constraint.

Rolling Approval and Rolling Forecasts

The new Income Forecasting Group (IFG) has been established on a formal basis with a clear timetable for the preparation of income forecasts and which will always provide a four-year rolling forecast. The IFG reports will be published and summarised in each annual Budget or MTFP.

The forecasts in the MTFP Addition and each annual Budget will include income and expenditure forecasts on a rolling four year basis. The expenditure and income levels will only be approved for the period of the current MTFP but this more detailed information will provide a clear framework and basis from which future year's proposals can be developed.

Central Growth Allocation

The Council of Ministers is proposing that the growth funding for 2016 is included in department's cash limits but that future years growth funding is held centrally. This is in line with the Corporate Services Scrutiny Panel's recommendations and the intention is that similar proposals will be brought forward in the MTFP Addition proposing central growth allocations for 2018 and 2019 to be agreed in the annual Budgets.

Capital Allocations Process

The Treasury, in consultation with the Law Draftsman, have been reviewing the options for changing the capital allocations process. The Treasury will work with departments and Scrutiny and will finalise any proposals for change for consideration by the States in preparation for the MTFP Addition 2017-2019.

The Council of Ministers has established an annual capital allocation of up to £35 million from the Consolidated Fund which will be allocated to projects in each annual Budget. The additional proposals for other projects reflect the need to identify other sources of funding for the more significant capital investment.

The MTFP provides for only the total capital expenditure limits to be approved for each of the four years and requires the allocations to projects in annual Budgets to be adjusted to reflect the financial position or any capacity issues. The Treasury has been working with departments to ensure that approved projects can be delivered more effectively and will continue to work with the construction industry to consider the impact of the different capital programmes on local construction capacity.

Adjusted fiscal position

To gain a better understanding of the scale of the economic impact of the proposals over the life of the MTFP it is possible to adjust the States operating balance to take account of what will actually be spent on capital projects in a particular year rather than what is allocated and what the impact will be from the balance on other States funds such as Social Security and the Health Insurance Fund (HIF).

This information is included in this report to be in keeping with FPP advice and the fiscal framework (see Section

6) and the detailed analysis at Appendix 8.

Presentation of the Medium Term Financial Plan 2016-2019

The Council of Ministers is conscious that there still remains uncertainty in the economic outlook for the Island and income forecasts for 2016–2019 and, therefore, cannot commit to additional funding for service pressures, the uprating of benefits or additional funding for priority services beyond 2016 until detailed plans for savings and other measures to balance the budget have been established.

The Council of Ministers is therefore only proposing detailed department revenue spending limits for 2016. However, it is setting total expenditure limits for each of the years 2017-2019 such that the budget is balanced by 2019.

Public Finances (Jersey) Law Amendment

The Minister for Treasury and Resources consulted with the Council of Ministers and Scrutiny and has proposed changes to the Finance Law which have been agreed by the States (P42/2015 – June 2015) and will afford the Council, and the States, time as well as flexibility to consider how the current financial challenges should be addressed.

The Minister for Treasury and Resources also acknowledged the intention of the Amendment from the Corporate Services Scrutiny Panel and the States has agreed proposals to accelerate the timescales proposed by the Panel to allow all the required MTFP proposals for 2017-2019 to be brought forward by the end of June 2016. This will be in the form of an MTFP Addition for 2017-2019.

The Council of Ministers is also considering whether further legislative amendments are required in due course to improve the current arrangements for the allocation of funding to capital projects, in particular other capital projects which will require alternative sources of funding. If such amendments are to be proposed they will be brought forward for debate before the MTFP Addition is proposed in June 2016.

As a result of the agreed changes, in this draft MTFP for 2016-2019 the Council of Ministers is proposing:

• total States income targets for each year 2016 - 2019;
• total maximum expenditure allocation limits for each year 2016 - 2019;
• total capital expenditure allocation limits for each year 2016 - 2019;
• minimum department spending limits and central contingencies for 2016 only; and
• proposals for States Trading Operations for 2016 only.

The Council of Ministers is also presenting a MTFP Departmental Annex which will provide the detail of departments' purpose, responsibilities and detail of the spending proposals for 2016.

There will be no change to the 2016 Budget report, to be lodged in October 2015, which will recommend to the States:

• tax and funding proposals for 2016; and
• individual capital projects for 2016.

The MTFP Addition for 2017-2019, to be lodged by the end of June 2016, will propose:

• minimum department spending limits for 2017-2019;
• central growth and central contingencies for 2017-2019,
• proposals for States Trading Operations for 2017-2019.

Alongside the MTFP Addition the Council of Ministers will also present a further MTFP Department Annex providing the details of each department's spending proposals that have been developed for 2017 to 2019.

Other considerations

The purpose of the Council of Ministers is to serve and represent the best interests of the Island and its citizens. It is not only responsible for setting strategic direction for the Island, but also for the organisation – the public service  - which  takes  a  leading  role  in  the  delivery  of  these  goals.  Risk  management  is  integral  to  these responsibilities.

Figure2 sets out the main types of risk that the States of Jersey must address. The examples shown cover risks to the public and wider Island interests and as well as those inherent in running a large and complex organisation such as the public sector. All four types of risk are closely connected and must be taken in to account in the Council's strategic and resource planning.

Figure 2 – Types of Risk

Strategic Risks

The Strategic Plan 2015-18 sets out the broad range of economic, social and environmental Strategic Goals which the Council of Ministers, as Jersey's government, is expected to deliver.

Strategic risks are the threats that could materially affect Jersey's ability to achieve these goals. In many cases, strategic risks emanate from external factors such as global economic pressures, the rise of new technologies and climate change. International treaties and conventions can also impact on a small, independent jurisdiction like Jersey. Closer to home, issues such as demographic change and the health profile of our population could have profound implications for Jersey's future.

Strategic risks pose difficult and complex challenges but also present real opportunities. In an increasingly competitive world, places that can demonstrate that they have effective measures in place to address key strategic risks are more likely to succeed.

Management of strategic risk therefore plays a fundamental part in our strategic planning process. In developing the Strategic Plan 2015-18, the Council of Ministers considered key strategic risks and their potential impact on the Island. The Plan explains how the five priorities for this Council's term of office were chosen in response to these key pressures and opportunities.

Hazard Risks

The Council of Ministers has a responsibility to consider emergencies that might affect the Island, assess their likelihood and put in place appropriate measures to prevent, mitigate, respond to or recover from such events. These risks are managed through the Community Risk Register which helps inform strategic, operational and financial planning.

Financial Risks

Financial risks relate to the effective, efficient and sustainable management and use of public funds. The Council of Ministers has a responsibility to –

• develop and implement fiscal policies to support its plans and provide the infrastructure and services citizens need; and
• maintain effective systems to ensure, efficiency, resilience, good internal controls and compliance within the public sector.

A key measure proposed in Strategic Plan 2015-18 to improve management of risk at a fiscal policy level is the development of a new Fiscal Policy Framework. This will ensure that fiscal policy development draws upon independent advice from Jersey's Fiscal Policy Panel and takes into account risks to the sustainability of public finances.

The Public Finances (Jersey) Law 2005 provides for the proper financial management of resources and robust governance arrangements to manage financial risk within the public sector.

Revenue Streams

The largest single component of States income is income tax revenue. The new Income Forecasting Group (IFG) has been established to agree and provide four year rolling income forecasts as advice for the Treasurer of the States. The Terms of Reference for this group, which can be found in Appendix 7, explains that this group is responsible for providing forecasts on States income from taxation and duty and reviewing Social Security contributions.

These forecasts are based on historical data and are modelled using base data and economic assumptions that have been endorsed by the FPP. These assumptions provide the ranges of higher, lower and central outturns for all the different types of States income, not just taxation and duty, along with some other factors to provide an illustrative range within which the central forecast sits. The forecast range provides an indication of the likely risk in the income forecasts and can be used to establish a degree of flexibility within the forward plans.

The risk is that the assumptions do not correctly reflect the actual for the outturn, for example, interest rates continue to be held at an all-time low for longer and whilst some of that risk is expressed in the range of forecasts it is also important to recognise these adjustments when they arise.

The IFG produces an absolute minimum of two reports each year, no later than March and no later than September. These dates ensure that sufficient review and comparisons are made.

Contingency Planning

If the forecasts for income from taxation and other States income are not reflected in the outturn position action on contingency plans may be needed.

As part of this MTFP a working balance on the Consolidated Fund has been reinstated. A balance of approximately £20 million allows for some outturn shortfalls to be managed without needing to take immediate action in the current year that you would not otherwise take because of the Public Finances Law requirement.

Article 9(3) of the Public Finances (Jersey) Law 2005 requires the Council of Ministers to lodge a proposition to amend the Medium Term Financial Plan if, at any time, it appears that amounts paid into or from the Consolidated Fund at the end of any financial year will differ from the approved MTFP and therefore would result in a deficit.

In addition to the working balance, Growth is to be held centrally for the period of this MTFP and will only to be transferred to individual departments once sufficient comfort can be achieved around States income and savings and also that departments can demonstrate the need.

Scenario Planning

The process of scenario planning usually begins with a long discussion about how the participants think that big shifts in society, economics, politics and technology might affect a particular issue. From this the aim is to draw up a list of priorities, including things that will have the most impact on the issue under discussion and those whose outcome is the most uncertain. These priorities then form the basis for sketching out future scenarios.

A good example of how this methodology is used in the States of Jersey is around the economic assumptions from the FPP. The range of assumptions will inform the MTFP planning in terms of the levels of risk in states income and the scale of flexibility that may need to be considered and provided for over the four year period.

Future improvements to modelling will include the consideration of further scenarios. Financial Management

Robust financial management is critical to the success of this MTFP and the States of Jersey's ability to deliver quality public services whilst achieving value for money from public expenditure.

With the level of savings required over the period of this plan and the continued pressure on our fiscal position, departments will need even stronger systems and processes to manage spending reductions still to be implemented.

The format of this MTFP demonstrates the spending plan through setting States limits for each of the years with the overall limit allocated to departments for 2016. In the MTFP Addition in June 2016 the overall limits for all the future years will also be allocated to departments once the detail of how savings will be achieved have been worked up.

Asset Management

The States of Jersey has historically neglected to invest in its assets, particularly buildings. This was a key driver to making Jersey Property Holdings responsible for the whole estate enabling appropriate plans to be put in force for property.

All departments are required to develop an asset management strategy, which should be appropriate to the nature and scale of the department's assets and operations. That strategy provides guidance to managers and a clear framework in which decisions can be made.

Departments will have identified requirements for the monitoring, maintenance, replacement and disposal of assets including integrated maintenance, investment and disposal plans and will take a whole life cycle approach that commences with the identification of the need for an asset, considers initial capital requirements and ongoing operational cost and terminates with the decommissioning of the asset or any liabilities thereafter.

Investment Management

The majority of States investment holdings are invested via the Common Investment Fund (CIF), facilitating improved risk management, greater diversification across asset classes and investment managers as well as reducing costs through economies of scale.

The relatively small proportion of investment held outside the CIF includes Currency Fund infrastructure investments and part of the Social Security Reserve Fund portfolio which is managed passively by Legal and General.

Investment managers are rated by the States of Jersey's investment advisor Aon Hewitt who then advise us of any managers that have been put on watch or have been downgraded. The Treasury Advisory Panel (TAP) is then responsible for taking the advice from Aon Hewitt and deciding whether to recommend the removal of a manager or allow them to adjust and recover the rate.

The TAP membership includes an independent chair and the Treasurer of the States who is required to advise the Minister for Treasury & Resource on investment matters. The introduction of any new asset classes, strategy weightings for individual Funds and appointment of Investment Managers comes through this review process and the advice is recorded and presented to the Minister.

With return comes risk. In the last three years the States of Jersey has enjoyed substantial returns from its investments through positive market conditions and manager performance, the balance of return versus certainty is a different fund by fund and our advisors provide us with the necessary insight into future likelihoods.

Operational Risks

Operational risks relate to the capacity, capability and effectiveness of government departments in turning government strategy into action. The Council has a responsibility to ensure that:

• cross-cutting risks to the operational effectiveness of the public sector are managed; and
• operational risk is embedded into departmental planning processes.

Many governments are coming to terms with the risk that traditional service delivery models for public services cannot be sustained. The Council is seeking to mitigate this risk in the Strategic Plan 2015-18 through its commitment to a comprehensive Public Sector Reform programme. Delivery of key work streams such as e- Government, workforce modernisation and service redesign will ensure that the States of Jersey can deliver more productive and sustainable public services with tighter resources.

Each department maintains its own risk register to provide assurance that operational risks to the delivery of its Strategic Goals programme are being managed.

This departmental approach is necessary in an organisation providing services as varied as hospital operating theatres, schools and sewerage treatment works but there is also need for corporate management of risks that cut across departmental boundaries. The increasing role of partner organisations such as Digital Jersey, Visit Jersey and Andium Homes in the delivery of services previously managed by the States of Jersey also adds an important new dimension to risk management.

Way Forward

The States of Jersey has effective systems in place to manage different types of risk at both strategy and delivery levels. The challenge is to ensure that these processes are properly embedded into government's strategic planning and policy development processes.

The Strategic Plan 2015-18 commits to the development of a new long term plan for Jersey. Some of the key benefits of the new strategic planning process include the introduction of an improved performance framework and sustainability assessment tools. Such features will add to our understanding and management of risk. Work is already underway to review corporate risk management across the public sector. This will be aligned with the development of the new long term plan to further strengthen the integration of risk management into the strategic planning process.

6. Economic Background andOutlook

Economic and fiscal outlook Global economy

In their June Economic Outlook the OECD believe that global growth will "strengthen in the course of 2015 and 2016, but will remain modest relative to the pre-crisis period". This improvement will be assisted by very supportive monetary policy, a slower pace of fiscal consolidation, financial repair and lower oil prices. Investment, however, has yet to recover.

According to the OECD the appreciation of the US dollar against most currencies since mid-2014 is shifting global demand more toward Europe, Japan and some emerging market economies. Although growth in emerging markets is slowing due to specific factors in China, Brazil and Russia.

After a weak start to 2015 growth in OECD and non-OECD countries is expected to pick up in the remainder of 2015. In 2016 growth is projected to strengthen slightly in the OECD and more strongly in the non-OECD area. A key factor is that growth in the US is expected to recover after turning slightly negative in early 2015 as a result of relaxed monetary conditions, less drag from fiscal policy, lower energy prices and improving household finances. However, the pick-up will be tempered by the strong dollar and falling investment in the energy sector. In the euro zone and Japan activity will be supported by lower oil prices, weaker currencies and monetary policy conditions.

The OECD highlighted a number of extraordinary risks to this outlook, including financial turmoil in emerging markets, a sharp slowdown in China and an "unfavourable resolution of Greece's situation". With Greece failing to make a repayment to the IMF at the end of June and therefore falling into arrears with the IMF the situation continues to deteriorate. The European Central Bank has refused additional liquidity for the Greek banking system and despite the imposition of capital controls Greek banks remain under severe stress. The outcome is still uncertain and even more so for the wider implications for the Eurozone and global economies. However, the likelihood that it will culminate in a more significant drag on the global economy than the OECD anticipated in June is much higher.

Figure 3: World economic growth quarter-on-quarter % changes at annual rates

Source: OECD Economic Outlook 2015/1

Jersey Economy

The most recent data on the performance of the Jersey economy continues to show positive developments. The Business Tendency Survey (BTS) for 2015Q2 showed that the headline all sector business activity remains close to the highest level since the survey was introduced in September 2009. Overall for all sectors nine of the ten indicators were largely unchanged after the significant improvements in the previous survey.

Figure 4 shows that in the finance sector conditions appear to have improved in the first two quarters of 2015 after indications of a slight slowdown in the last quarter of 2014. Overall in the finance sector eight of the ten indicators were positive and finance businesses expect both profits and employment to increase this year..

Figure 4: Finance business tendency results

% balance of respondents

Source: States of Jersey Statistics Unit

The positive sentiments in the qualitative surveys are now translating into firm improvements in key economic variables. The 2014 Survey of Financial Institutions published on the 1 July shows a much larger increase in financial services profits than was expected with net profit for banking 28% higher, for trusts 14% higher and the legal sector 23% higher. The results also showed a strong increase in spending on goods and services in the local economy. Initial indications are that this strong profit growth has not lead to significantly higher corporate tax receipts in 2014 although the implications for future tax receipts will be assessed alongside other economic developments ahead of the next update of the financial forecasts by the Income Forecasting Group (IFG).

These positive developments in financial services are being reflected in the non-finance sector BTS results. Eight of the ten indicators for the non-finance sector as a whole were relatively unchanged after significant improvements in the previous quarter. Within the non-finance sector the construction sector was generally more negative in the second quarter but nine of the ten indicators have shown increases since late 2013.In the wholesale and retail sector three indicators improved compared with the previous quarter although two declined and five were essentially unchanged.

Figure 5: Non-finance business tendency results

% balance of respondents

Source: States of Jersey Statistics Unit

An important indicator going forward will be what the Business Tendency Survey shows about the extent to which businesses in Jersey are working above and below capacity. The FPP indicated in their Pre-MTFP Report that spare capacity in the Jersey economy is expected to be used up between 2017 and 2019 but that the assessment is subject to great uncertainty.

Figure 6 shows that the BTS indicator has moved positive in the finance and non-finance sectors in the first two quarters of 2015 suggesting that firms are now working slightly above capacity for the first time since the survey began (it has been positive once before in June 2014 but the indicator was still broadly neutral).

As the BTS has only been in existence since the onset of the financial crisis this indicator does need careful consideration alongside other indicators. To fully assess how capacity utilisation evolves over the life of the MTFP it will be necessary to consider global economic conditions, the competitiveness of financial services sector, trends in Jersey GVA, labour market conditions and the ability of businesses to employ people locally. The FPP will cover such issues as it updates its Pre-MTFP advice in its annual report this year and beyond.

Figure 6: Capacity utilisation

% balance of respondents above/below capacity

Source: States of Jersey Statistics Unit

Although official Statistics Unit GVA estimates are only available until 2013, there are consistent messages from other economic data available that the economy could have returned to growth in 2014. Firstly, not only are there 140 less Actively Seeking Work in May than in the same month in 2014 but employment has continued to grow in 2014. Figure 7 shows that in December 2014 total employment was 1,980 or 3.7% higher than a year earlier. Most private sectors reported increases with employment up 400 in the finance sector, 360 in wholesale and retail and 310 in construction.

Figure 7: Employment trends in Jersey

% change in total employment in December each year compared to a year ago

Source: States of Jersey Statistics Unit

Like many other economies in the aftermath of the global financial crisis Jersey households experienced a squeeze in incomes as unemployment rose and earnings growth tended to be lower than inflation. In Jersey now both of these trends are in reverse and indicating a more positive economic situation generally. Figure 8 shows that average earnings in Jersey exceeded inflation in 2013 and 2014 after thereverse being the case for four of the previous five years. Taken together with the trends in average earnings this means a large proportion of GVA appears to have grown in real terms in 2014.

Figure 8: Earnings growth and inflation

% change in average earnings and retail prices index

6.0

5.0

4.0 RPI

Average

3.0 earnings 2.0 1.0

0.0

2006 2007 2008 2009 2010 2011 2012 2013 2014 -1.0

Source: States of Jersey Statistics Unit

Drawing on all the trends within the local and global economies the FPP expect that the economy has returned to growth in 2014 and that moderate growth will continue until 2018 when the economy is likely to return to capacity. However, they also point out that:

.. there is no evidence to suggest that the trend rate of growth in Jersey will be significantly positive. Therefore, future fiscal trends should be tested against a trend rate of real economic growth of 0% a year.

On the basis of this advice the financial forecasts underpinning the MTFP have been derived from the economic growth assumptions that are highlighted in Figure 9.

Figure 9: GVA trends

% change in real GVA,actual and FPP assumptions

Source: Fiscal Policy Panel

It is worth noting that the strong growth in financial services profits reported in the Survey of Financial Institutions is much higher than suggested by any of the indicators available to the FPP at the time they advised on the economic assumptions. Such strong growth in a significant component of GVA (roughly 20% of the total), everything else being the same, not only gives greater confidence that the economy returned to growth in 2014 but also that growth was significantly higher than the FPP anticipated.

The FPP also highlighted concerns about Jersey's productivity performance in recent years and that looking ahead any increase in productivity would be a considerable improvement on previous performance. The latest data on productivity performance (as measured by GVA/fte) shows that productivity was broadly flat in the economy as whole in 2013. In addition, the trend is clear that over recent economic cycles there has been no productivity growth and potentially a slight decline in productivity over the most recent part of the economic cycle. This has been a combination of falling financial services productivity and relatively flat productivity in the non-finance sectors.

Figure 10: Productivity growth in Jersey

GVA per person employed (full-time equivalent), 2013 prices

Source: States of Jersey Statistics Unit

The FPP highlighted that such productivity trends when combined with the fiscal implications of the ageing society will risk pushing Jersey's public finances back out of structural balance in the long-term. In particular the FPP advised in their 2015 Pre-MTFP Report that:

The States should act now and develop a clear strategy for raising productivity (in both the public and private sectors) and competitiveness in the Jersey economy. Ongoing improvements in these areas will help to manage the fiscal consequences of an ageing society and make it more likely that Jersey's economy will grow in the future.

As well as investing in health, education and infrastructure as set out in his MTFP, the Strategic Plan sets out how we will try and rectify this productivity performance and optimise economic growth by in particular:

• Promoting jobs and growth in the technology sector, with a particular focus on Fintech.
• Delivering and further enhance the existing Financial Services Policy Framework
• Promoting higher productivity in all economic strategies, including the new Tourism, Retail and Rural Economy Strategies
• Developing a new and challenging Enterprise Strategy, a new Innovation Strategy and attract more inward investment
• Reviewing and upgrading the existing Skills Strategy
• Developing a new Competition Framework and reviewing opportunities to promote competition
• Identifying and addressing barriers to work for key groups
• Adopting environmental management principles to help improve productivity and efficiency and attract environmental businesses in line with our economic growth objectives.

Jersey's fiscal position

The FPP also advised what the overall approach should be on fiscal policy over the life of the MTFP:

The States should develop a plan that will address any structural deficit by 2018 and 2019. Care should be taken to ensure that the range and timing of the measures minimises the risk to the economic recovery, which, in the early stages, may involve using the States' reserves.

Once Jersey is on a sound path to structural fiscal balance, the States should aim to balance its tax revenues and current expenditure over the economic cycle, including an appropriate allowance for depreciation.

The Council of Ministers has taken this advice seriously and framed the MTFP to follow this advice in terms of addressing any structural imbalance and being careful about the impact on the economic recovery. The chart below shows that after all the measures proposed in the MTFP the current budget (including depreciation) will move from a deficit of £99m (2% of GVA) in 2016 to being in slight surplus by 2019. This therefore suggests that on the basis of the FPP advice any underlying structural mismatch between revenue and expenditure should be addressed by 2019.

Figure 11: States current budget position £000

Source: Treasury and Resources Department

Over the 2015-19 period total Consolidated Fund revenue expenditure will increase slightly in nominal terms by just over 1% in total and at a slower rate than in previous years (between 2011 and 2015 it increased by about 12%).

Figure 12: Trend in total Consolidated Fund revenue expenditure £m

Source: Treasury and Resources Department

To get a better understanding of the scale of the economic impact of the proposals over the life of the MTFP it is possible to adjust the operating balance to take account of cash flows in terms of what will actually be spent on capital projects rather than what is allocated and what the impact will be from the balance on other States funds such as the Social Security and Health Insurance Fund (HIF).The detailed tables are provided as Appendix 8 to this report.

Figure 13 shows how the calculation can be built up. Firstly the initial operating balance is adjusted for the best estimate of the capital expenditure profile. Given the scale of capital expenditure on key projects such as social housing, sewage treatment works, a new school and by SoJDC (and the fact that they are not financed from tax or other revenue taken from the economy in the year of the spend) this suggests that the net fiscal position moves from one of moderate deficits (moving toslight surplus) to one of significant deficits throughout the 2015-2018 period, tailing off somewhat in 2019. The final adjustment to include the position on the trading, Social Security and Health Insurance Funds is relatively minor and does not alter this profile significantly.

Figure 13: Adjusted fiscal position (as amended)

*2015 also includes carry forward adjustment and Budget measures Source: Treasury and Resources Department(see also Appendix 8)

These adjusted deficits are large relative to the size of the economy, suggesting that significant fiscal support could be added to the economy over the life of the MTFP. They rise from just less than 3% of GVA in 2015 to a peak of nearly 7% in 2016 before falling back slightly in 2017 and 2018 and more sharply in 2019 to just over 2%.

In the initial years this does suggest that significant fiscal support will remain in place while the economy is performing below capacity, though there may be risks about the scale of fiscal support in the later years if the economy continues to recover and spare capacity is used up.

This is a high level assessment and it will be important to consider how capital expenditure and construction related spend actually impact on the economy. For example, whether there are large projects that may spend a high proportion on imported capital equipment and/or a high proportion on employment in the Jersey economy. In addition there could be delays in key projects and/or some could be brought forward which could significantly alter the profile of capital expenditure. The economic implications of the profile will be kept under review to determine whether adjustments or compensating measures could be required in future years. The FPP will continue to advise on future economic conditions and spare capacity in the economy which will be instrumental in determining whether action is required.

Figure 14: Adjusted fiscal position

% of GVA

Source: Treasury and Resources Department (see Appendix 8)

7. Financial Background and balancing the 2015 Position

Financial Background

The financial forecast in the 2015 Budget identified a reduction in States income compared to MTFP forecasts (March 2012)of £50 million for 2015.The Budget 2015 identified a range of measures to balance the Budget and maintain a positive balance on the Consolidated Fund in 2015.

June 2015 - Update of States Income Forecast

The latest forecasts of States income (June 2015), prepared for the draft MTFP, show an operating shortfall of £66 million for 2015 before the measures previously identified, this includes the proposed £10 million allocation for Committee of Inquiry expenditure.

Figure 15 - Financial Forecast for 2015 (June 2015)

Balancing the Consolidated Fund in 2015 2014 Outturn

Although the Budget 2015 forecast a balance of £14 million on the Consolidated Fund at the end of 2014, the outturn for 2014 was lower than expected as a result of a number of variances. As a result the openingposition on the Consolidated Fund is £4.7 million.

Budget 2015 predicted 2014 position 14,179 Jersey Property Holdings receipts lower than budgeted (1,606) Restructuring Provision unspent balances returned early 2,701 Difference between forecast and outturn (1,628) Transfer of Housing Dept. underspend to Andium Homes Limited (2,250) Financial Forecast measures (roundings) 16 Dwelling House Loans Fund balance transfer higher than budgeted 414 Less Capital re-phased from 2014 to 2015 (999) Housing Development Fund transfer delayed until 2015 (6,120)

2014 outturn 4,707

In addition to the adjustments from the 2014 Outturn there are other changes to the predicted balance including the reduction in the latest forecast of States income for 2015. These require further measures to be proposed to ensure the Fund remains in balance as is required by Article 9(3) of the Public Finances (Jersey) Law 2005.

£'000 Opening balance 2015 from 2014 Accounts 4,707 Forecast deficit Financial Forecast (Figure 15 - includes CoI and latest income predictions) (66,041) Base Capital Programme Allocation for 2015 from Consolidated Fund (4,090) Estimated JPH Capital Receipts shortfall (against £9m target) (1,140) Consolidated Fund adjustment for Capital funding (MTFP 2013-2015) (2,285) Jersey Car Park increased return applied to Capital (Budget 2015 measures) (1,135) Departmental 2% savings (Budget 2015 measure) 11,981 FOI underspend (Budget 2015 measure) 1,000 Department non-carry forward (Budget 2015 measure) 5,000 Delay of PECRS pre-1987 debt early repayment (Budget 2015 measure) 2,000 Reduced pay award allocation (2.5% to 1.5% - Budget 2015 measure) 3,480 Transfer from HDF (Budget 2015 measure) 6,120 Reduced contribution from Social Security underspend to LTC Fund (Budget 2015 measure) 5,000 Jersey Water Preference Share – proposed redemption (Budget 2015) 6,800 Jersey Post – Special Dividend 2,000

Estimated shortfall for 2015 (26,603)

In order to address this position potential measures have been considered and agreed by the Council of Ministers and include further savings and underspends to be achieved by department in 2015. Also there are a small number of Capital schemes where the budgets are being returned to the Consolidated Fund as they are no longer required.

Estimated shortfall for 2015 (26,603) Proposed pay freeze for 2015 5,200 Return of Capital unspent contingency amounts 1,540 Redesign of capital project for RIS/PACS IT replacement IT Assets 400 Forecast underspend in Social Security in 2015 2,000 Additional AME contingency available from 2014 Carry Forward (LTC) 2,000

Projected Consolidated Fund balance for 2015 after measures (15,463) Change in Accounting Policy

In addition to these measures, the Treasury & Resources Department, as part of its regular review of the States of Jersey's Accounting Policies to ensure compliance with updates to IFRS and to ensure that the financial statements provide the most reliable and relevant information, has identified a change in accounting policy for the 2015 Jersey Financial Reporting Manual around revenue recognition, particularly for income tax.

The collection of current year basis tax was introduced in 2006, prior to that date all tax was collected on a prior year basis and new taxpayers did not pay tax in the first year. Assessments were also created on a prior year basis and collected in the year that the assessment was raised. i.e. assessments for 2004 income were raised and paid in 2005.

Taxpayers that existed prior to 2006 continue to be assessed on a prior year basis. All new taxpayers

since 2006 with employment income have tax collected via their salaries in the year in which they earn it but, at present, the assessment is not raised until the following year and the tax collected is accounted for as a payment in advance.

The proportion of tax collected on a Current Year Basis in 2006 was 4.5% of the tax collected from employment income. This increased to 34.5% in 2014 and will at some point reach 100%. If this policy is left unchanged, an ever-increasing proportion of the tax collected from employment income will be treated as prepaid (i.e. the tax is collected a year before the bill is raised) when it can be demonstrated that the tax liability can be reliably measured and it is probable that the tax will be received.

In order to reflect the now significant proportion of income tax revenue collected from CYB taxpayers and given the demonstrable accuracy of estimates of their eventual tax liability, it is proposed that the accounting policy is updated to recognise CYB tax revenues in the current year. This amendment will have a minimal recurring impact on the financial statements and a one off prior year restatement of 2014 income tax revenue in the 2015 Financial Report and Accounts of approximately £60 million.

As a result of the measures and the accounting policy change, the forecast balance on the Consolidated Fund at the end of 2015 is estimated at approximately £45 million.

Committee of Inquiry

Funding will also be required in 2015 for those departments where the current contingency funding for the Committee of Inquiry is likely to be exceeded and the States has already approved that the Minister for Treasury and Resources bring forward a proposition to the States.

The proposition for £14 million will be brought alongside the MTFP proposition and is intended to be debated at the same sitting. The proposition will propose the withdrawal of the funds from the Strategic Reserve for up to the £14 million to be agreed by the States. This funding will not all be required in 2015 and the balance of expenditure approval will be proposed in the MTFP 2016-2019 as part of the Contingency proposals.

Risks to the 2015 Proposals

The proposals for 2015 are still subject to variation and there are risks associated with the proposals, however, the 2015 position will be closely monitored and further forecasts of States income will be prepared for the 2016 Budget in October.

The proposals are also subject to the successful negotiations with trade unions in relation to the proposed pay freeze for all pay groups except Nurses and Midwives.

8. Financial Forecast 2015-2019

Summary of Financial Forecast for draft MTFP 2016-2019

The draft MTFP 2016-2019 is proposed on the basis of States income and expenditure forecasts as at June 2015. The forecasts take into account the latest economic assumptions (April 2015) and the latest proposals to address the shortfall for 2015, summarised in Section 7. The next forecasts will be prepared by the Income Forecasting Group (IFG) and presented to the Council of Ministers in October 2015 to inform the 2016 Budget.

Figure 16 summarises the forecast position and proposes a return to balanced budgets by 2019, including depreciation, in accordance with the recommendations ofthe Fiscal Policy Panel in the Pre-MTFP Report of January 2015. The proposed sustainable savings and funding measures are described in Section 11 and Section 12 the measures to manage the balance on the Consolidated Fund in the short-term are outlined in Section 13.

Figure 16 – Summary of Financial Forecast for draft MTFP 2016-2019 (as amended)

States Income Forecasts 2015-2019 Background

The forecasts for all States income derived from taxation and duty have been reviewed and agreed by the new Income Forecasting Group (IFG). The IFG forecasts are summarised here with further details in the Appendices to the MTFP report. The detailed Income Tax Forecast update prepared for IFG is published by the Minister for Treasury and Resources as an Addendum to the MTFP (P.72/2015(Add)).

The States income forecasts have been revised at three stages from the previous published forecasts for the Budget 2015:

• In November 2014, a set of provisional forecasts were produced internally to enable initial work developing the new Strategic Plan and MTFP with the Council of Ministers.
• In March 2015, a full formal revision of all States Income forecasts was carried out to inform the draft Strategic Plan debate and these were published in Resource Statement – Update on States Finances 2015- 2019' (P.27/2015 Add) in April 2015. These forecasts were based on the provisional 2014 outturn and modelling which used the economic assumptions from the Fiscal Policy Panel (FPP) Pre-MTFP Report in January 2015. At that time the new Income Forecasting Group (IFG) recommended that a further update be carried out in May 2015 to ensure the draft MTFP could be based on the most up to date information.
• The final update presented to the Council of Ministers in June 2015 is based on a revised set of economic assumptions as at April 2015 and endorsed by the FPP together with further in-year information available from the first quarter for 2015. This final set of income forecasts includes a further review by IFG of taxation and duty forecasts and by Treasury officers for other income.

The forecasts of States income are a critical component of the States medium and long term financial planning. They are also required as part of an annual Budget and MTFP, alongside forecasts of States revenue and capital expenditure, to assess the projected balance on the Consolidated Fund. This is a requirement of the Minister for Treasury and Resources as part of the Public Finances (Jersey) Law.

Summary

The forecasts of States income are presented as a range and within the context of uncertainty in the economic outlook. This uncertainty has been emphasised by the IFG in its current report and by the FPP in its report in January 2015.

The uncertainty in the forecasts reflects a general uncertainty in the outlook but certain factors which are emphasised by the IFG relating to:

• income tax from shareholder income,
• the impact of public sector reform,
• the impact of the UK banking reforms, and
• the outcome for Jersey of the referendum on the UK's future relationship with the EU.

For this reason it is important that the States must include appropriate flexibility in the proposals for the MTFP 2016-2019 to recognise the potential range of outcomes and the risks for States income forecasts around the downside of the central scenario.

Movement in forecasts since MTFP 2013-2015

In early 2012, when the original MTFP economic assumptions and forecasts were prepared, the extent and depth of the consequences of the unfolding euro crisis were not fully apparent. This meant that forecasts at that time did not fully anticipate the fallout from the euro crisis, that recovery in the international economy was delayed and that the low interest rate environment was maintained for longer than expected. This had direct and indirect implications for the Jersey economy which ultimately meant that it was weaker for much longer and that growth in average earnings and employment were more subdued than originally anticipated.

As a consequence of these trends the labour market underperformed and the biggest impact was on the forecasts of income tax revenues.

The forecasts of States income in the Budget 2015 identified a further reduction compared to MTFP forecasts of £35 million in 2014 and £50 million in 2015.

The 2015 Budget proposed measures to manage the deficits in 2014 and 2015 and the indications were that these reductions in income forecasts were not temporary and would need to be addressed with sustainable measures over the period of the next MTFP 2016-2019.

Draft MTFP forecasts 2016-2019 (March 2015)

The March 2015 update, published in the Resources Statement to the Strategic Plan (P.27/2015 Add), was based on the provisional 2014 outturn and economic assumptions from the FPP Pre-MTFP Report in January and show a reduction in States income forecasts compared to the Budget 2015. The reduction was primarily due to:

• A reduction in the 2014 outturn for income tax relative to the Budget 2015 forecast.
• A smaller reduction in income forecasts from 2016 to 2018 reflecting slightly lower assumptions for average earnings and financial services profits growth and a further reduction in income from 2018 is expected due to a low trend rate of economic growth.
• Information from financial services companies suggests lower growth in profits than was forecast for the Budget 2015.
• Inflation, employment growth, average earnings and interest rate expectations are all now generally lower than expected in the Budget 2015, particularly in the latter years of the forecast period.
• For other income the change in interest rate profile and investment returns together with lower fund balances have reduced investment income forecasts.

Draft MTFP Forecasts 2016-2019 (June 2015)

The latest update, which is to be used as the basis for the draft MTFP, is based on revised economic assumptions as at April 2015, which have been endorsed by the FPP. There are three key but slight changes to the latest assumptions relative to the assumptions made in January 2015:

1. Financial Services profit growth – is now expected to be slower in 2015, 2016 and 2017, than in previous forecasts.
2. Inflation – is now expected to be slightly higher in 2015 and 2016.
3. UK policy interest rates – are now expected to be very slightly lower in 2015 and 2016 and very slightly higher in 2017.

Further information was also available by June 2015 which is taken into account in re-modelling the income tax forecasts this relates to:

• New employment data for December 2014, which shows stronger than expected employment growth in the last half of 2014.
• Analysis of Business Tendency Survey data from December 2014 influencing the central financial services profits assumptions.
• Updated information on company income tax assessments for 2014 following the formal appeal period, these figures affect the starting point of the company income tax forecast for 2015 and specific information relating to future years expected tax liability.

The impact on the modelling of States income forecasts is as follows:

• The forecast models for income tax and impôts duties have been recast for the new economic assumptions.
• The forecasts for GST are based on past trends related to the overall direction of the economy and are therefore not affected by the minor changes in economic assumptions.
• Stamp duty forecasts are based on assumptions for house prices and market turnover which are un- changed since the last update and there is no additional data to affect the future forecasts.
• The 2015 stamp duty forecast has increased based on improved in-year information.
• Reductions in the 2015 special and ordinary dividend proposed by Jersey Post.
• Minor variations reflecting the small changes in RPI assumptions impacting on the Island Wide Rate and the proposed return from Andium Homes.

Figure 17 shows the central forecast scenario for the draft States income forecasts for the MTFP and indicates the movement since the forecasts for the Budget 2015.

Figure 17 – States Income Forecasts for draft MTFP 2016-2019 (June 2015)

Further details of the States income forecasts in Figure 17 are provided in Appendices 1 to 5 of this report and at Figure 20.

Overall range of forecasts

The latest economic assumptions provide a range of assumptions higher, lower and central. These assumptions are used within the modelling of the different types of States income along with some other factors to provide an illustrative range of income forecasts.

In the MTFP 2013-2015 a range of +/- 5% was applied to the forecasts but consideration by the IFG has resulted in a different approach. The proposed range in the forecasts by 2019 is over £130 million between the higher and lower scenarios which represents broadly +/- 9% around the central scenario. The proposed range represents a funnel around the central scenario as can be seen in Figure 18 and includes the proposed mechanism to offset the States payment of rates and a sustainable funding mechanism for health.

The central scenario is broadly the mid-point of the range but as proposed by the IFG there are risks on the downside of the central scenario and the proposals for the MTFP must consider and include appropriate flexibility within this range, particularly on the downside. The response to any variations in income will vary depending on the scale of change but the Council of Ministers has identified contingency plans at Section 13 depending on the scale of variation.

Figure 18 – Forecast range of States Income to 2019 (June 2015)

£'000

900,000 Budget 2015 as

amended

850,000

MTFP forecast 800,000 (June 2015)

Higher Growth 750,000 Scenario

700,000 Lower Growth

Scenario 650,000 Outturn 600,000

2013 2014 2015 2016 2017 2018 2019

Includes Proposed Mechanism to offset States Payment of Rates and Proposed Sustainable Funding Mechanism for Health

Summary of Economic assumptions for the draft MTFP 2016-2019

R.102/2014 Updating the Fiscal Framework' recommended the involvement of the FPP in the preparation of economic assumptions to be used for financial forecasting. The FPP has endorsed the latest economic assumptions for April 2015; these have also been considered by IFG and agreed as the basis for the draft income forecast modelling for the MTFP 2016-2019. The economic assumptions factor in the latest local and international developments. A report has been prepared for IFG by the Economics Unit and is included in the detailed Income Tax Report (published as an Addendum to the MTFP) and is summarised here.

Changes in assumptions 2015 Budget to FPP Pre MTFP Report (January 2015)

The main features of the economic assumptions when compared to the Budget 2015 are:

• Real economic growth is expected to be slightly stronger in 2014 and 2015 but slightly weaker in 2016 and 2017. For 2018 and beyond the FPP advised that the States should plan on the basis of a trend rate of real growth of 0%.
• Inflation (as measured by RPI and RPIY, for example) is expected to be lower until 2017, recognising the recent sharp falls in oil prices and lower market expectations for interest rate increases.
• Financial Services profits are expected to grow more slowly following information obtained through a series of interviews with financial services companies in November and December 2014. This is a key assumption for the company income tax forecast.
• Employment is expected to grow more quickly in 2014 and 2015 rather than in 2016 and 2017.
• Average earnings growth is expected to be weaker in 2015 and 2016.
• Interest rates are now expected to increase later and more slowly, according to financial markets expectations.

Changes in assumptions FPP Pre MTFP Report (January 2015) to April 2015

There are three key but slight changes to the latest assumptions relative to the assumptions made in January:

1. Financial Services profit growth – is now expected to be slower in 2015, 2016 and 2017.
2. Inflation – is now expected to be slightly higher in 2015 and 2016.
3. UK policy interest rates – are now expected to be very slightly lower in 2015 and 2016 and very slightly higher in 2017.

The economic assumptions factor in the latest local and international developments. The assumptions are included at Appendix 6.

Figure 19 – Economic Assumptions (April 2015) for draft MTFP 2016-2019

April update and revised range in Economic Assumptions

A full set of economic assumptions were provided by the FPP in the Pre-MTFP Report in January, however the IFG recommended that it wouldbe helpful, particularly in relation to the latest UK interest rate profiles that a further revision be considered in April and updated forecasts be remodelled and presented to Council ahead of the MTFP lodging in July.

The economic assumptions from the FPP (April 2015) have been expanded to provide an upper and lower range of assumptions. The range of assumptions have informed the MTFP planning in terms of the levels of risk in States income and the scale of flexibility that may need to be considered andprovided for over the four year period and contingency plans are discussed at Section 13.

The current forecasts reflect this update and provide the basis of the forecast recommended by the IFG for inclusion in the draft MTFP 2016-2019.

The full range of the economic assumptions showing the higher and lower ranges are shown at Appendix 6.

The next income forecasts will be prepared by the Income Forecasting Group(IFG) and presented to the Council of Ministers in October 2015 to inform the 2016 Budget.

Figure 20 – Detailed Forecasts of States Income for the draft MTFP 2016-2019 (June 2015)

States Revenue Expenditure Forecasts (as amended)

The detailed proposals for 2016 and the indicative forecasts of States expenditure for 2017-2019 represent the outcomes of the spending and savings review of the Council of Ministers. The proposals will be developed with departments ahead of the presentation of the MTFP Addition at the end of June 2016 when the detail spending limits for 2017-2019 will be proposed.

Figure 21 – Total States Net Revenue Expenditure Forecasts for 2016-2019 (as amended)

The details of department's spending allocations are provided in the MTFP Department Annexpublished alongside this report. The Annex also provides each department's purpose, responsibilities and change initiatives and commentary on the various savings and growth initiatives for 2016. Thedetails of additional funding proposed for Growth are included at Section 10 and details of Central Contingency Allocations are provided at Section 9 of this report.

Depreciation

Following the recommendations by the Fiscal Policy Panel (FPP) in their Pre-MTFP Report' issued in January 2015, estimated depreciation has been included in the financial forecast when identifying whether there is a forecast surplus or deficit.

Recognising depreciation in this way acknowledges the estimated expenditure required to maintain and renew States' assets. This is a measure of depreciation that ensures the capital stock that helps to provide public services does not deteriorate over time resulting in significant backlog and potentially increased lifecycle costs.

The estimated annual depreciation charge does not represent actual expenditure out of the consolidated fund but the inclusion of it in financial planning assumptions when balancing tax revenues and current expenditure provides for a cash balance in the consolidated fund. This balance then ensures that there are sufficient resources available to fund the annual capital programme allocations at an appropriate level to maintain the States' asset base.

The principle of including depreciation in the measure of expenditure was reiterated by the Comptroller and Auditor General in the Review of Financial Management' report issued in April 2015. The recommendation to include depreciation in the measure of expenditure for which funds are allocated by the States Assembly has been accepted and the MTFP Proposition now asks States Members to approve the total amount of non-cash net revenue expenditure.

The forecast reduction in depreciation from 2014 to 2015 is primarily the result of the incorporation of the Housing Department in July 2014. In the first six months of 2014, prior to incorporation, the Housing Department incurred depreciation charges of £9.5 million. These charges are now recognised in the accounts of Andium Homes Limited and fall outside of the MTFP financial forecast. The forecast increase in depreciation over the MTFP period 2016 – 2019 is directly correlated to the indicative capital programme over the same period with the increase predominantly related to the increase in the Transport and Technical Services Infrastructure Rolling Vote; all expenditure on infrastructure assets, with the exception of the creation of additional assets, is recognised as depreciation in the year it is incurred.

Figure 22 – Department Net Expenditure 2016-2019 (as amended)

An analysis of the movements from 2015 to 2016 are detailed in Figure 21 and the following table Figure 23 provides a comparison by department of these movements.

Figure 23 – Department Cash Limits for 2016 (as amended)

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9. Central Contingency Allocations

Central Contingencies Rules of Operation

The operation and management of central contingencies is covered by Financial Direction 4.3 which requires all departments, in the first instance, to demonstrate that requests cannot be funded from within existing cash limits. A business case is then submitted, with the support of the accounting officer, for consideration by the Treasurer of the States. The Treasurer will advise the Minister for Treasury and Resources who in turn will consult the Council of Ministers before making a decision on the allocation of funds.

All central contingency allocations are recorded in a formal and public Ministerial Decision. Central contingency allocations are reported to the Council of Minsters as part of quarterly financial monitoring and to the States as part of the half-yearly Budget Management Report.

Types of Central Contingency Allocation Central Allocation - AME Contingency

The Annual Managed Expenditure (AME) contingency is set aside to provide for un-forecast variations in Income Support and other tax funded benefits which are in excess of the 1% contingency provided by the Social Security Department within its annual cash limit. The level of income support and benefits is difficult to forecast and significantly influenced by the performance of the economy. At a level of £2 million the central AME contingency provides a further 2% cover for this area of expenditure and also provides some contingency for higher education grants. This is another budget where there is significant uncertainty over the period of the MTFP 2016-2019 and is dependent on the policies adopted by the UK government and UK universities.

Any AME contingency budget unspent at the end of a year would normally be expected to be carried forward to provide further contingency against variations in future years. Conversely, if forecasts were suggesting an overspend that would exceed the AME contingencies the Council of Ministers would need to consider funding from other available contingencies or if necessary consider a re-allocation of existing expenditure budgets.

Central Allocation - DEL Contingency

In the MTFP 2013-2015, the intention was to provide within the Departmental Expenditure Limit (DEL) contingency for one-off unforeseen and unexpected items. In practice, a number of recurring pressures emerged in the first two years of the MTFP which the Council of Ministers agreed to provide from contingency. Several of these have now been prioritised within the additional funding for 2016-2019 and are proposed as part of departments' base budgets in 2016.

The principles should be that the first call on any emerging pressure or priority is within the department itself. The contingency must only provide a short-term funding solution in order to allow a department some time, generally during the remainder of a financial year, to adjust its spending plans accordingly. It must not provide a recurring source of funding for the remainder of the MTFP period.

The Minister for Treasury and Resources, along with all other Ministers, is determined to ensure discipline and adherence to these principles is achieved, particularly when significant savings and efficiencies are being delivered across the States.

P.72/2015.Amd(11), approved by the States Assembly during the MTFP debate on 6th – 8th October 2015, resulted in an increase to the net revenue expenditure limit for Education, Sport and Culture of £263,200 which is funded by a decrease in Central Contingency Allocations of an identical amount. The DEL contingency has therefore been reduced by £263,200 in 2016.

Central Allocation - Committee of Inquiry in 2016

The debate of P20/2015 in May 2015 stated that the Minister for Treasury and Resources bring forward a Strategic Reserve request for £14 million for the Committee of Inquiry, if funding could not be funded from other sources. The Minister for Treasury and Resources is proposing that up to £14 million be transferred from the Strategic Reserve to the Consolidated Fund and is requesting that £10 million be allocated to the Contingency in 2015 to be allocated to departments as required.

The balance of £4 million is the estimate of the expenditure required in 2016 and the Council of Ministers is proposing this be allocated to Contingency such that it may be allocated to the appropriate departments as further expenditure is required.

If at any time the Council of Ministers is advised by the Accounting Officer that the current allocation may be exceeded a further proposition will need to be brought to the States to determine any further allocations and also the agreed funding source. This would also be likely to give rise to an Amendment to the MTFP.

Central Allocation - Economic and Productivity Growth Drawdown Provision

The Council of Ministers is proposing that a £5 million funding provision be created in each year of this MTFP period that could be drawn down if new economic growth and productivity initiatives can demonstrate they cannot be funded from existing resources and that have a strong rationale that they can have a positive impact on productivity and can be allocated additional funding.

Financial management of the allocations would be through the Minister for Treasury and Resources and reported to Council of Ministers based on recommendations from the proposed Ministerial Oversight Group – the Economic Policy Group (EPG). Further details of the Provision are included in Section 13, Short Term Proposals.

Central Allocation - Restructuring Provision

In the MTFP 2013-2015, the Restructuring Provision supported the final year of the CSR programme and Phase 1 – the enabling' stage - of the Public Sector Reform (PSR) programme which commenced in 2012. In this first phase, the funds were used predominately to support the individual workstreams of Workforce Modernisation, e- Government, Lean and Culture which incorporated leadership, training and engagement.

In the MTFP 2016-2019, the Restructuring Provision is required to maintain support for PSR in the second phase – the implementation' stage – and is required for the following projects:

• To complete the Workforce Modernisation project;
• To continue funding for e-Government initiatives – the project is currently funded up to 2015, further allocations will be required in 2016 and future years to deliver the full capability;
• To provide programme support for PSR; and
• To provide a funding route for future Voluntary Release Schemes and Compulsory Redundancies if required.

Central Allocation - Redundancy Provision

The voluntary release scheme provides a mechanism for employees who wish to volunteer to leave the organisation through redundancy or early retirement to receive a redundancy payment or immediate pension. The scheme has been made available to all employees in 2015.

It is anticipated that future use of such schemes would be more targeted throughout 2016 to 2019 focusing on areas where re-design of services are identified that will add value to the services provided by the public sector. This focused approach in partnership with our Unions should reduce the need for compulsory redundancy and facilitate the achievement of the £70 million people saving targets for the period.

The Council of Ministers has already identified £2 million in 2015 and is proposing to set aside up to £10 million in 2016 and up to a further £5 million in 2017 and 2018 to the central redundancy provision.

All applications received will be considered by department Chief Officers and authorised where the business case demonstrate financial viability. The current terms of the scheme and any future alterations require approval of the States Employment Board. Release of central funding for redundancy payments requires authority of the Chief Executive, Treasurer of the States and the Director of Human Resources.

P.72/2015.Amd, approved by the States Assembly during the MTFP debate on 6th – 8th October 2015, resulted in a re-phasing of the Redundancy Provision in order to enable savings arising from the initial Voluntary Release Scheme to be taken as soon as possible. The amendment increased the intended transfer from the Strategic Reserve to the Consolidated Fund in 2016 by £6 million and reduced the intended the intended transfer from the Strategic Reserve to the Consolidated Fund in 2017 by £10 million, with an additional £4 million being transferred from the Strategic Reserve in 2015 (as approved in P.75/2015 and P76/2015).

Central Allocation - Workforce Modernisation, Pay and PECRS Provision

As part of the Public Sector Reform programme, the Workforce Modernisation project continues to be developed in partnership with the Trade Unions. It will deliver an improved, more productive and sustainable public service by unifying at least 11 pay groups (75% of the workforce) onto a single reward framework with the same employee terms, conditions and policies that are fair, transparent, and fit for the future, thus providing equal pay for work of equal value (addressing pay parity issues to meet Jersey discrimination legislation), and enabling well designed jobs to be managed through an improved performance culture that provides organisational flexibility and supports continual service redesign.

The introduction of modern reward structures require funding in order to facilitate employees moving onto their new terms and conditions whilst maintaining services and redesigning the organisation.

The current proposals are for the new PECRS CARE scheme will be open to new starters from 1 January 2016 and to existing staff from 2019. The increased employer contributions for new starters are included from 2016 and the full employer costs of the new scheme will be phased in at £2 million p.a. over 3 years from 2019.

Central Allocations for 2017-2019

The allocations to central contingency for 2016 are being proposed by the Council of Ministers as part of this MTFP.

The central contingency allocations for 2017-2019 are only indicative as part of the total States net expenditure limits. The level and detail of these contingency allocations will be improved and defined over the course of the next 6 to 9 months in order that they can be proposed at the appropriate level of detail in the MTFP Addition by the end of June 2016.

Figure 24 – Summary of Central Allocations for 2016 (as amended)[1]

Note: The 2016 allocations for uprating benefits, non-staff inflation, growth funding and associated savings are allocated to departments. The 2017-2019 indicative allocations are held in central allocations but as proposals are developed will be allocated to departments as part of the proposals in the MTFP Addition at the end of June 2016.

The indicative central contingency allocations for 2017-2019 include: Central Allocations for Pay, Price s, Benefits and LTC Provision

Provision is being made for the pay, price andbenefit uprating for each of the years 2017-2019. The provisions are before savings to be achieved and represent 2% for pay and non- staff inflation and the appropriate uprating formula for tax funded benefits.

The actual allocations to departments will depend on the delivery of the planned programme and profile of savings and the achievement of the States income forecasts. The Council of Ministers will also be informed by the latest economic assumptions for each year and the progress of workforce modernisation and pay negotiations.

The States Grant to the Social Security Fund is proposed to be capped at 2015 levels as part of the short-term measures to ensure a positive balance on the Consolidated Fund (see Section 13)

The increase to the grant to the Long-Term Care Fund is based on an agreed formula determining the annual uplift which will be provided and allocated to Social Security on an annual basis.

Central Allocations for Additional Fundingand Growth

The Council of Ministers is only proposing the allocation of additional funding and growth to departments for 2016 amounting to £22 million. The assumption is that this level of funding is provided to departments on a recurring basis but that any increases for 2017-2019 will be determined in the MTFP Addition in June 2016.

Indicative additional funding and growth allocations for 2017-2019 will also be dependent on the delivery of the planned programme and profile of savings and the achievement of the States income forecasts.

In the MTFP Addition in June 2016, the allocations will be made to Central Growth, in line with Corporate Services Scrutiny recommendations, according to what is affordable and with any re-prioritisation of funding that is required. Typically, the allocations to departments from the central growth allocation will be agreed by the States in the annual Budgets.

The Council of Ministers has included additional funding of £1 million from 2017 for the proposal for the States payment of rates in line with the Comment to the Strategic Plan. The additional funding and compensating additional income are both included in the proposals and will be subject of a separate presentation to the States.

Central Allocations for Savings

The programme and indicative targets for savings are described in more detail in the Section 11 and Section 12. The savings are made up of targets for redesign, reform and reorganisation, planned pay restraint, restraint on price inflation, benefit changes and user pays. The savings for 2016 held in the central allocation represent the level of proposed pay restraint in 2015 and 2016.

As the programme and allocation of savings to a department level are identified and agreed, these will be allocated to departments spending limits for the respective years. The intention would be that as part of the MTFP Addition at the end of June 2016, the majority of the savings targets will be fully allocated across departments.

The savings targets will also be reviewed relative to the income forecasts and as these are refreshed it may be necessary to adjust the savings targets to ensure the States still achieves balanced budgets by 2019.

10. Additional Funding for Pressures, Demographics & Growth

Background

The Long Term Revenue Planning Review (R.136/2014) presented to the States in September 2014 summarised the initial requests from departments for additional funding for the period 2016-2019.

The Council of Ministers then established the initial four strategic priorities of Economic Growth, Health and Wellbeing, Education and St.Helier ahead of the Strategic Plan. Departments were asked to review existing base budgets and consider if any of the initiatives to deliver the strategic priorities required additional revenue or capital funding over the period of the MTFP 2016-2019.

In many cases the delivery of the strategic priorities will be achieved or partly delivered by the re-prioritisation of existing resources or the redesign of services. This is particularly the case in those departments where the greater extent of savings target has been allocated to date. The reallocation of resources also recognises the necessary spending constraint in order to deliver sustainable public finances and balanced budgets by 2019.

The Corporate Management Board carried out initial categorisation and prioritisation of the revised bids for additional funding. This work was carried out alongside an ongoing spending review, supported by external advisors, to identify savings and efficiencies both across the States and within individual department programmes.

The bids were categorised as:

• Base Pressures – addressing pressures created by a shortfall in projected income or in maintaining standards (eg. H&SS).
• Committed – services, initiatives or legislation which have been committed to by the States or the Council of Ministers during the course of the MTFP 2013-2015 and where permanent funding is now required, often replacing temporary contingency funding.
• Demographics – addressing demographic pressures within existing policy and assuming existing service standards are maintained.
• New Growth – departmental or strategic priorities which require additional funding or growth in base budgets.

Resources Statement (P.27/2015.Add)

In preparation for the Strategic Plan debate the Council of Ministers gave initial consideration to the investment required in the strategic priorities and has continued to develop and refine the programme of additional funding alongside the savings proposals.

Funding the increasing cost of healthcare

The Health and Social Services Department has undertaken a full review of the next phase of the P.82/2012 proposals. The funding from the MTFP 2013-2015 of £11 million is being maintained and the 2% investment in service standards and healthcare inflation is also being maintained and extended over the period 2016-2019, in order to provide a stable base from which to drive forward transformational change. The underlying cost drivers of changing drug treatments and new therapies will continue.

The review of the White Paper programmes has enabled a re-profiling of the funding request for 2016 and 2017 and further work is to be carried out to extend this review to 2018 and 2019, such that this can be considered as part of the detailed proposals in the MTFP Addition for 2017-2019 by the end of June 2016.

The provision of modern, safe and appropriate health and social care services is predicated on the delivery of the whole programme – as is the size a hospital required in the future. Key aspects of this programme of change have already been implemented in accordance with the States decision to support P.82/2012. It is important that this change continues and accelerates if health and social care services are going to be adequate to meet the needs of the ageing demographic into the future. It is important to balance this need against the need to deliver sustainable and affordable healthcare. The additional funding currently proposed for Health and Social Services amounts to £7.9 million in 2016 increasing to £39.5 million p.a. by 2019.

Funding for strategic priorities in Education

Education is another one of the four main strategic priorities of the Council of Ministers. Additional funding is being prioritised to address raising standards, support and improve the ICT investment in schools and to address the demographic pressures from early years through to post-16 education.

The crucial work on improving standards will include additional funding in three main areas:

• Targeted funding to address the risk of low performance across all groups of pupils vulnerable to lower attainment. If young people in Jersey are to meet and exceed outcomes of their peers in neighbouring jurisdictions a local equivalent to the UK's Pupil Premium' is required. Growth funding aims to bring the level of entitlement for those less advantaged pupils in our schools in line with those in the UK, resulting in higher standards achieved.
• Raising standards is not possible without robust data systems. An enhanced data insight team would provide the essential analytical tools to match those available to all education services in the UK. The addition of two data analysts is required.
• The expansion of the School Achievement and Standards Team to include two additional Professional Partners. This is the most effective and economical means of expediting the changes necessary to raise

standards.

The level and profile of funding has been reviewed since the Resources Statement and a slight smoothing of the profile achieved. The additional funding currently proposed for education amounts to £4.8 million in 2016 increasing to £8.6 million p.a. by 2019.

Funding to maintain support of the economy

The MTFP 2013-2015 provided significant funding to support the strategic priorities of economic growth and getting people into work. This important injection of funding was allocated across a range of projects in different departments and amounted to £14 million per annum by 2015. As part of the spending review, this investment is being maintained from 2016 where it continues to provide effective investment in the ongoing priorities, or will be reprioritised towards other measures to grow the economy.

In addition the Council of Ministers is making provision centrally for funding of economic and productivity growth initiatives which cannot be met from the resources in base budgets of £5 million p.a. over the MTFP period (see Section 13).

Funding for other priorities and pressures

A number of requests arise from pressures and commitments from the period of the first MTFP. For example, the expectation of income from handling and disposal of Guernsey waste has not materialised, and there is an ongoing resource required to facilitate the Freedom of Information legislation, agreed during the MTFP 1 period.

In total, additional funding for other departments amounts to £9 million in 2016 and would increase to £12 million by 2019 if this is affordable.

How growth is being proposed for 2016

For 2016, the Council of Ministers is proposing that the additional funding is incorporated in Departments' cash limits. The Council of Ministers has conducted a series of workshops and the prioritisation of available funding has evolved over a period of discussion. The States Assembly has the opportunity to debate the additional funding allocation as part of the MTFP. The Council of Ministers is proposing that only the 2016 level of additional funding is agreed on a recurring basis. Any additional profile of funding will need to be approved in the MTFP Addition or in future Budget debates.

How growth will be handled in 2017-2019

Only the growth for 2016 is being allocated to departments. Unlike the first MTFP, the intention is to use a central growth allocation for 2017-2019 as part of the proposals for the MTFP Addition at the end of June 2016.

The level of additional funding and growth envisaged for 2017-2019 is and can only be agreed on the basis that the savings targets and/or projected income levels are achieved. If either savings or income forecasts fail to reach the proposed targets the level of additional funding will need to be revisited. The total spending limits for the four years cannot be exceeded and the financial position needs to be balanced by 2019.

The levels of health growth in future years could also be reviewed pending the approval by the States of a sustainable funding mechanism for Health, being phased in from 2018 but which by 2019 is required to deliver income of £35 million.

Process for monitoring growth

Procedures are currently in place to report on the progress of implementing the growth proposals for 2013-2015. These procedures, which involve extended quarterly monitoring and reporting to Corporate Management Board and the Council of Ministers, were introduced immediately following the first MTFP debate for the financial year 2013.

These procedures will continue through the period of the next MTFP 2016-2019 at a similar level of detail and will be extended to closely monitor progress towards the achievement of savings targets.

MTFP Seventh Amendment (P.72/2015.Amd (7))

A request for additional funding for the introduction of a pension scheme for States Members was submitted to the Council of Ministers as part of the Medium Term Financial Plan process for 2016 – 2019 by the Privileges and Procedures Committee. This followed a recommendation from the States Members' Remuneration Review Body (SMRRB) in 2014. Under Article 24B of the Public Finances (Jersey) Law 2005, the Council of Ministers was required to submit the proposed estimates of the States Assembly to be determined by the States.

The seventh amendment to the MTFP from the Council of Ministers proposed that the decision on States Members' pensions be taken as part of a wider debate on the remuneration of States Members ahead of the new Assembly in May 2018, and that the additional funding was deferred until at least May 2018.

Figure 25 – Additional Funding for Growth 2016 and Indicative Growth Proposals for 2017-2019 (as amended)

Note: Treasury and Resources – Asset valuation is represented as one-off funding due to the requirement to undertake asset valuations only in particular years so recurring funding not required as it is with most proposals.

Detail of Proposals for Additional Funding for Growth

Strategic Priority for Health

HSS 2% investment in Service Standards and Healthcare Inflation £4.2m in 2016 £19.0m in 2019

The 2% funding for Health and Social Services is provided to assist the department to respond to changes in standards of care recommended by the Royal Colleges and other professional bodies; to maintain services at a comparable standard to neighbouring jurisdictions; provide for increases in demand for specific care, meet healthcare specific inflation costs (e.g. drugs) and make new drugs, treatments and therapies available to islanders where appropriate. Therefore, the exact allocation of this funding each year is variable and dependent on factors outside the control of the department. The actual additional costs to the department are historically approximately 0.5% higher, and are managed through targeted efficiency savings year on year.

HSS White Paper funding – P.82/2012 Health Transformation

HSS Early Intervention – Services for Children £1.9m in 2016 £3.6m in 2019

Investment in early intervention can have a profound impact on a broad range of socio-economic, health and wellbeing factors, including future development, learning, behaviour, health and the ability to build positive, secure attachments, and on truancy, conduct disorder and risk-taking behaviours such as substance misuse and mental illness. UK studies have shown that each child with untreated behavioural problems costs statutory services an average of £70,000 a year by the time they reach 28 years old, the average cost of an individual spending a lifetime on benefits is £430,000 not including lost tax revenue and returns of up to 3 to 7 times the original investment can be achieved by the time the young person is 21 years old.

Investment and service redesign is needed in order to:

• deliver the States' statutory obligation to safeguard and promote the welfare of children,
• prevent breakdown of families where children are disabled and/or have very complex needs,
• improve outcomes for the most vulnerable children with high and/or very specialist needs,
• minimise the risks of young people's suicide and increase treatment modalities for children and young people with mental ill health, and
• deliver timely and high quality child protection services to prevent further and/or more significant harm.

HSS Healthy Lifestyles £0.4m in 2018 £0.4m in 2019

Further investment in prevention and health promotion programmes has been phased in order to reduce costs in 2016 and 2017. From 2018 additional investment is planned to introduce targeted prevention programmes on key initiatives, such as weight management programmes introduced through schools and referral schemes through primary care. Prevention and early intervention is more efficient and effective in the longer term than treatment and will reduce the incidence of long term conditions. Investment will enable clinicians to focus on health promoting activities thereby improving health outcomes for Islanders.

HSS Mental Health Services £0.4m in 2017 £1.8m in 2019

One in four people will experience a mental health problem at some point in their lifetime and one in six adults has a mental health problem at any one time. One in ten children aged between five and 16 years has a mental health problem, and many continue to have mental health problems into adulthood. Mental health problems can have a wide ranging impact including: obtaining housing, partaking in education and training, physical health and relationships with family and friends. Investment has already been made to improve and develop services but more is needed which will result in a single integrated adult' service (spanning both mental health and physical health needs), incorporating specialist expertise for individuals with alcohol and/or drug dependency, dual diagnosis', learning disability, autism, a new recovery model, investment in more community services and improved medium and low secure facilities. The Mental Health Strategy has been produced with Islanders, carers and service users and includes investment priorities relating to crisis, recovery, early intervention and criminal justice.

HSS Out of Hospital Services £0.3m in 2016 £7.5m in 2019

Over the 30 years from 2010 to 2040 the numbers of Islanders over 65 is projected to rise by 95%; in the period to 2020 the increase is projected to be 35%. This demographic change will create a surge in demand for health and social care services which would overwhelm the current capacity of existing services.

The current numbers of hospital beds, operating theatres, residential and nursing care beds and other key community services would be inadequate to meet demand. Investment has been made into out of hospital' services during MTFP 2013-2015; as planned these now need to be enhanced and expanded, including expanding the Rapid Response, Reablement and Crisis team, the Step Up / Step Down beds, and implementing integrated pathways for Long Term Conditions and multimorbidities, in order to provide 24 hour support in the community, enabling people to live independently in their own homes for as long as possible. More detail can be found P82/2012.

International evidence demonstrates that IT is a critical enabler to supporting integrated health and social care and to delivering safe, effective services for patients. Investment including IT integration which will support a single care record, and facilitate teams working closely together (including Primary Care and the voluntary sector) to meet the needs of Islanders.

HSS Acute Services £1.6m in 2016 £7.3m in 2019

Plans are progressing for a Future Hospital. This will provide a modern building and we must begin to make the changes in the way we provide the services now in order to continue improving quality and reducing cost as well as to ensure services are appropriate for the newly designed Hospital. Priority investments in ambulatory emergency services' are needed in order to ensure there is sufficient capacity in the transitional period up to the opening of the Future Hospital, and patient pathways can be redesigned to reduce hospital length of stay and ensure only those needing an inpatient stay are admitted. This work stream will be underpinned by an ongoing process of workforce redesign to ensure best value is obtained from these posts and they are appropriate for a future where care will be wrapped around the needs of patients.

Strategic Priority for Education

ESC Primary School Demographics £0.7m in 2016 £1.7m in 2019

Primary school numbers are set to increase due to a high number of births in 2010, 2011 and 2012 (average 1,092 per year compared to 1,006 in 2007-09). Average birth numbers are predicted to be 1,029 per year until 2020. As a result it is predicted that 400 new primary school places, (which equates to an average of 3 additional classes per year) will be required in the non-fee paying primary sector between 2016 and 2020. Additional capacity has been created as part of the primary school building programme in 2014-15.

ESC Secondary School Demographics £1.3m in 2016 £2.1m in 2019

Pupil numbers in secondary schools are predicted to increase from 2017-19 for Year 7-11. In addition, more pupils are staying in education until 18, resulting in additional pressure from 2016. There were 90 more pupils in the system in 2015 than when forecast. There is capacity in the four 11-16 schools to meet this increase in demographics, which is in effect a reversal of the decline we saw over the previous MTFP period.

ESC Nursery Education Fund  £0.4m in 2016 £0.3m in 2019

The Nursery Education Fund (NEF) provides parents with the opportunity to access 20 hours per week (term time) of early years education at a registered private or voluntary sector nursery for children aged 4. Alongside nurseries in States primary schools, NEF registered nurseries enable approximately 95% of children in their pre-school year to access free early years education. High birth numbers in 2010-12 will result in more children requiring States funded places. As the capacity in States primary school classes is fixed (average of 500 places filled) any increase in numbers (currently forecast to be circa 19%) will need to be accommodated in the private and voluntary sector and funded through the NEF.

ESC Revenue consequences of capital schemes – ICT Skills Strategy £0.8m in 2016 £0.8m in 2019

The IT strategy was launched in October 2012 to provide the best IT education possible, a workforce fluent in technology and a prosperous, successful island. The initial £3 million funding from 2013-2015 enabled the infrastructure to be improved and saw schools starting to develop solutions that meet the needs of their pupils, provide teachers with continual first class professional development and develop the IT skills that are important in the 21st century. Funding of £750,000 from 2016 onwards will enable the increased cost of the fibre infrastructure to be met, together with continued investment in both training and physical IT within schools to support the continued delivery of school business cases. Each school has different teaching and learning methods including pedagogy, teacher training and physical equipment.

ESC Revenue consequences of capital schemes – New Schools £0.1m in 2016 £0.5m in 2019

New premises cost more to run than previous premises due to the increased and additional facilities provided. The new schools at St Martins and Les Quennevais, additional primary classes at six schools and Archive Store extension for Jersey Heritage Trust will all require increased non-staff revenue budgets to run.

ESC Raising Achievement Funding £0.8m in 2016 £2.4m in 2019

Academic outcomes for Jersey students have plateaued in recent years and are now trailing the UK. If young people in Jersey are to meet and exceed outcomes of their peers in neighbouring jurisdictions a local equivalent to the UK's Pupil Premium' is required. This provides targeted funding to address low performance across all groups of pupils vulnerable to lower attainment. Additional funding to UK schools is £2.5 billion per year. Jersey cannot access this funding but has the same issues surrounding both children with identified disadvantage and LAC (looked-after-children') pupils. Growth funding aims to bring the level of entitlement for those disadvantaged pupils in our schools in line with those with identical disadvantages in the UK, resulting in higher standards achieved. There are a whole range of methods that have been tested and evaluated to raise standards. The department will select from these as appropriate. It is likely to include booster classes, 1:1 tuition, peer mentoring, teacher training and teaching assistants.

ESC Provision of a Data Team £0.1m in 2016 £0.1m in 2019

An enhanced data insight team, to provide the analytical tools at least matching those available to the education services in the UK, is essential if young people in Jersey are to meet and exceed outcomes of their peers in neighbouring jurisdictions. Additional and more accurate data would enable the current Professional Partner team to challenge our schools more effectively and enforce accountability. It would also enable continued long term planning in a period of constantly changing demographics. This team does not only provide schools' data, but also has an important link to the statistic unit and population predictions.

ESC Extend Professional Partnering £0.3m in 2016 £0.3m in 2019

The success of the Island's primary school sector has a clear link with engagement with high quality school self- evaluation under the Professional Partner scheme, established in 2009-10. The Professional Partner programme has ensured rigour in pupil assessment and improvements in teaching, learning, care and curriculum provision. For further school improvement to impact on higher attainment, schools and colleges must become more accountable for outcomes. With greater autonomy comes an increased need for enhanced school accountability, evaluation and inspection. The expansion of the School Achievement and Standards Team, encompassing two additional Professional Partners, is the most efficacious and economical means of expediting essential change and raising standards. Analysis demonstrates this will be far more cost effective than importing school accountability models from other jurisdictions (e.g. Ofsted in England, Estyn in Wales, VSSE in Guernsey).

ESC Early Years £0.3m in 2016 £0.3m in 2019

In 2012-2013 a working group reviewed the Early Years' provision within the Island and highlighted the absence of a coherent and cohesive support system (universal, targeted, specialist) for children and families from pre-birth to five. Within the Education Law pre-school is not statutory and, unlike the UK, receives no funding allocation from the States. Multi-agency work in recent years has clearly identified all the under-fives with special educational needs in states nurseries and pre-school. Working with this group ensures the children get the best possible start to their education and will ensure they are better able to access school when they start. Research shows early intervention is key.

Funding for Other Priorities

CCA Revenue consequences of capital schemes – New Police- £0.1m in 2016 £0.4m in 2019

Station and Prison Phase 6

The additional facilities provided in the new Police Station will lead to increased running costs compared to the former buildings so increased revenue budget is required to adequately fund these costs with a part year in 2016. In 2019, there are also additional costs due to the next upgrading at the prison.

CMD Financial Services/McKinsey Implementation £0.5m in 2016 £0.6m in 2019

The Jersey Government supported a jurisdictional review of the Financial Services sector in 2012/2013 which produced a strategy and from which a government policy framework was developed. Both require significant government involvement to maintain the sector. This involvement requires resources both manpower and operating costs. Over the past 18 months the benefits of this involvement has resulted in the industry stabilising and growing. Given the changing external environment the immediate future is even more challenging. This funding is essential for ensuring the future of employment and tax income from this critically important sector which supports all other sectors of the economy.

CMD Freedom of Information – Central Unit £0.1m in 2016 £0.1m in 2019

This growth funding is for a permanent Central Freedom of Information Unit (CFU) located in the Chief Minister's Department. A temporary CFU team is currently in place but their funding ends on 31 December 2015. No specific FoI funding for individual departments will be allocated after 31 December 2015 so a small permanent CFU will help manage various aspects of the Law for the States in 2016 and beyond. Departmental costs are being absorbed within budgets, with inevitable consequences to the work previously undertaken by those Officers involved.

The CFU's role is to manage the permanent execution of the Law for the States. The CFU is customer facing, tracks metrics, provides policy recommendations, trains departmental staff in the various disciplines required to handle FoI requests and assists in managing the States' legal and reputational risks associated with the Law. The CFU currently receives FoI requests sent to the States via foi@gov.je, a form on www.gov.je/foi and by post. The CFU coordinates, tracks, records and sends the responses back to the requestor. After the requester receives the response the CFU publishes final response on gov.je on behalf of the States.

CMD Joint Safeguarding £0.1m in 2016 £0.1m in 2019

The Council of Ministers have agreed to establish an Adults' Safeguarding Board bringing together agencies that work with adults who are, or may be, vulnerable and unable to take care of themselves or protect themselves from significant harm or exploitation (this includes physical, emotional or sexual harm, financial abuse or neglect). The purpose of the Board is to develop policies and procedures which help protect those adults and, in the event that someone does suffer harm, to investigate and bring forward recommendations to help prevent a reoccurrence. In an aging society, where increasingly more adults are cared for a multitude of different settings, it is imperative that steps are taken to help ensure their safety. Failure to do so has very considerable consequences, first and foremost in human and social terms, but also economically as recently experience in Jersey in relation to the historic abuse children.

CMD ISD Increased revenue budget required £0.4m in 2016 £0.5m in 2019

Consumerisation is changing the way staff prefer to work, with the use of tablets and smart phones etc. to access corporate data. Without the appropriate funding it will be impossible to ensure security of the corporate data as users will seek out alternative solutions themselves.

The States of Jersey Wide Area Network (WAN) connects all departments to provide applications, telephony and connection to the internet. If the network has insufficient bandwidth capacity all IT services and telephony can be badly affected. To ensure departmental services are efficient and effective the network infrastructure must grow to cope with increase in demand and services.

The Microsoft EA agreement is a five year contract with three year break point and the price is guaranteed at the start for any licenses under the agreement for the first three years. Microsoft has indicated that the cost of licences will be increasing in two steps in 2015 and 2017.

JD Edwards is expected to be end of life in 2020 and a replacement is essential to ensure we are on current, supported technology and software. A new system will ensure that we can support the current and future business operating model and changes that will create.

DPC FoI – Office of the Data Protection Commissioner £0.1m in 2016 £0.1m in 2019

The Freedom of Information (Jersey) Law 2011 creates the new statutory role of Information Commissioner whose department is charged with regulatory oversight. Due to risks of conflict, the Law Officers' Department are unable to provide the necessary legal support to the OIC for FoI as they do for Data Protection. Funding therefore needs to be allocated to the OIC to ensure appropriate legal support is available.

LOD Revised Pay and Rewards Structure £0.2m in 2016 £0.2m in 2019

A review of the Law Officers' Department by CAPITA in 2011 highlighted discrepancies in the pay awards of legal advisers.  There  was  a  lack  of  transparency,  career  progression,  large  inconsistencies  in  pay  bands  and  an imbalance with market pay. In  2013, the States Employment  Board agreed a new scheme,  in line  with the Workforce Modernisation project, to overhaul the reward structure for the Legal Advisers and the new scheme was implemented in 2014, with new job descriptions and competencies, pay bands and grades.

LtG Cadet and Military Support Officer £42k in 2016 £45k in 2019

Since its introduction, with short-term funding agreed in the last MTFP, this post now requires permanent funding. The CMSO has  fostered links  between  Jersey  and  its  Cadet Organisations.   The  loss of  the post  would  be detrimental  to  those organisations.  The CMSO promotes  Jersey  to  Military  Units,  and his appointment  has significantly increased the number of service visitors and revenue to the Island. Community projects are also undertaken by the Military for the benefit of Jersey. The CMSO is heavily involved in successfully supporting Island events and is a skilled organiser, without his input many Island events could suffer. Based at Government House he has developed an extensive network of contacts that support him in his role. His contribution to the Office of the Lieutenant-Governor is significant.

SA States Members' Pensions (as amended) £0m in 2016 £0.1m in 2019

Following a recommendation made in 2014 by the States Members Remuneration Review Body (SMRRB), the Privileges and Procedures Committee members agreed that although the present financial situation of the States remains challenging there is, in fact, unlikely ever to be a time when it would be easy or uncontroversial to introduce a pension scheme for States members, and therefore, it would be unfair on members to continue to ignore the recommendation of SMRRB.

As a result of the approval of P.72/2015.Amd(7) from the Council of Ministers, this funding has been deferred until at least May 2018, to allow any decision on States Members' pensions to be taken as part of a wider debate on the remuneration of States Members ahead of the new Assembly in May 2018.

SSD Child Personal Care Benefit level 2 & 3 £0.5m in 2016 £0.5m in 2019

During the States debate of Deputy J A Martin of St Helier's amendment to the draft Income Support Regulations (P.90/2014) in respect of components payable to children with disabilities and long-term health conditions, the States strongly supported a move to make payments to children with severe or very severe disabilities irrespective of the income or means of the family. As identified by the Minister for Social Security both prior to and during the debate, acceptance of the amendment carried with  it significant  implications in  terms of both  funding and administration, and this additional funding request is essential to ensure adequate funding for agreed legislation changes.

TTS Energy from Waste – shortfall in income £1.1m in 2016 £1.3m in 2019

Since the commissioning and operation of the new Energy from Waste (EfW) plant at La Collette, the unit rate received from the Jersey Electricity Company in respect of power has steadily reduced, mainly due to European energy market conditions (down 30% in 2015 compared to 2012). In addition, the economic downturn and success of the Island's recycling initiatives have reduced waste volumes. The assumptions used in calculating the cash limit have also assumed an increase in income of 2.5% per annum. The net effect of this is that the income budget is now unrealistically high – projections indicate that the shortfall will be in excess of £1.2m for 2016 - 2019 unless unit prices substantially increase.

TTS Energy from Waste – no Guernsey waste income £1.5m in 2016 £1.6m in 2019

In the 2013-15 MTFP, the Transport and Technical Services Department's cash limit was reduced by £1.5 million, to recognise the net anticipated effect of income from importing and treating Guernsey Waste. Guernsey is still considering the best way to deal with their municipal and bulky wastes and published its Waste Management Strategy on 29 January 2014.

As part of the fact finding exercise for this document, Guernsey stated that the earliest that they could consider export of waste was 1 January 2016, which means that the income in 2015 is unachievable. Despite on-going discussions, export of waste is unlikely to commence until 2017 at the earliest and will require the prior approval of both Jersey and Guernsey States Assemblies, the Waste Regulators and the UK.

TTS Tipping fees shortfall £0.3m in 2018 £0.3m in 2019

Income is dependent on the level of construction and demolition activity in the Island and available locations for disposal or treatment of inert waste. Historically, tipping fee income has been on a downward trend and the availability of a new inert waste site which is due to open in 2018/2019 in St Peter's Valley will have a further negative impact on income. The TTS department is not able to control this reduction in income and once La Collette  inert  waste  site  is  full,  the  loss  of  all  tipping  income  will  create  a  bigger pressure on  income,  of approximately £1.3m.

TTS Bus Contract – Main and School Bus Contract Shortfall £0.3m in 2016 £0.3m in 2019

The new bus contract has delivered significant savings in addition to an increase in service levels, these savings have contributed to the CSR targets achieved by the department in 2011 - 2013. Increases in bus ridership have meant that expenditure on concessionary fares for pensioners and the school bus service is significantly in excess of budget. Concessionary fares are a substantial contractual cost of the service and these costs will continue to increase year on year, unless changes are made to the concessionary travel rules. The growth bid over the period of this MTFP represents the current shortfall in contractual payments.

TTS Revenue consequences of capital schemes – new Sewage- Not Req'd until £1.7m in 2019

Treatment works (from 2019)

This provision is required from 2019 to fund the cost of capital from the currency fund infrastructure investment for a period of time until liquid waste charges are fully established to provide a revenue stream from which the costs of capital could then be funded in due course.

T&R Additional Property Maintenance (HSSD Properties) £4.0m in 2016 to £4.0m in 2019

Jersey  Property  Holdings  (JPH) procured  a  condition  survey  in  2014  to  identify  and  categorise  backlog maintenance in the Health (excluding the General and Acute Hospital) property estate, responsibility for which moved to JPH in 2015. The survey identified the poor condition of the portfolio and determined the requirement over a 15 year period to bring and maintain the estate in a good order. JPH will undertake further phased surveys on the remaining estate to determine the maintenance deficit.

Two growth bids were originally submitted, from Health and Social Services and JPH respectively to address the maintenance deficit, and following discussion by the Council of Ministers, the two entities were tasked with reprioritising these to produce a consolidated bid. That work has led to two lines of additional funding being included under Treasury and Resources as follows:

• Hospital transitional maintenance £2.85m, and
• JPH Backlog Maintenance (including Health and Community services properties) £1.15m.

Bringing the two items together and with the budget being allocated to JPH with a ring-fenced' budget for Health will allow a delivery schedule to be agreed with Health and further reprioritisation in year if necessary across the two sums.

A growth bid of £4 million per annum will address a proportion of the highest needs across the overall estate in the next MTFP period. Failure to undertake this necessary work will result in a greater call on JPH's reactive maintenance budget to address building and services failures, which is a less cost effective way of providing a fit for  purpose  estate  for  occupiers  and  service  users and  would  reduce  funding  available  for  other  priority maintenance.

T&R Asset Valuation £0.3m in 2017 only

The States of Jersey accounting policy requires that land and building assets are revalued every five years with an interim valuation in the third year of the cycle. A one-off increase in funding is required in 2017 to fund the next full valuation of States of Jersey's land and buildings.

T&R Strengthening Shareholder Relationship Resources £0.2m in 2016 £0.2m in 2019

Treasury and Resources provides the shareholder function for the States to its strategic investments such as Jersey Electricity, Jersey Telecoms and SoJDC.  This role has a wider and more diverse scope now; in 2014, the Housing Department left the States and became a separately incorporated body, Andium Homes Limited and in 2015 the States approved legislation which will lead to the incorporation of Ports of Jersey. The Incorporation is awaiting Privy Council approval and an appointed day.  There have been several reviews carried out in recent years on Treasury and Resources' function as a shareholder and this additional funding will enable the department to action  the  recommendations  of  these  reviews  including  strengthening  the  governance  surrounding  the relationships and providing Treasury with the necessary resources to engage specialists in relevant areas as and when needed.

T&R Payment of Rates on States' Properties £1.0m in 2017 £1.0m in 2019

In accepting the Connétable of St Helier's Amendment 7(6) to the Strategic Plan 2015-18, the Council of Ministers agreed to provide in the MTFP for the payment of rates on States properties and the additional income required to fund this payment.

In order to meet this commitment, the Council proposed to bring forward an overall package for the funding and provision of municipal services to the Assembly for separate approval. This package will need to be developed in co-operation  with  the  parochial authorities. It  follows  that the payment  of rates will  be contingent on the identification and approval of this income stream, and an agreement for the fair and reasonable funding and efficient and effective provision of municipal services.

The £1m allocation is an estimate of the likely additional cost of paying rates on States' properties which will be refined in advance of the development of the 2017 budget submission. It is mirrored by a commensurate increase in States income in order to achieve the required cost neutral position.

11. Sustainability in States Finances

Background

The Council of Ministers is working towards the recommendation of the FPP that the States should aim to balance its tax revenues and current expenditure, including an appropriate allowance for depreciation, over the economic cycle, and that the economy is expected to be close to full capacity by 2018/2019.

Equally, it is important that the States' fiscal position (the combined impact of expenditure and revenue decisions) continues to support the economy in the early stages of recovery.

The Council of Ministers is adopting a three-part approach to balancing States' finances by 2019:

Firstly, to secure the economic recovery forecast by the FPP and lay the foundations for raising productivity and the underlying rate of economic growth over future economic cycles, thereby increasing States revenues;

Secondly, to focus on;

- a programme of savings, efficiencies and expenditure constraint; and

- consideration of the level of provision of benefits and changes in fees and charges for services where appropriate.

When these measures are recognised agreement will be given to the introduction of an additional charge for Health.

The investment in health services envisaged could only be approved with the agreement to additional funding being introduced, in accordance with previous decisions to ensure sustainable funding of Healthcare.

Ministers have a set a target to deliver £145 million of savings, charges and other measures by 2019. The target represents a central plan, this will be continually reviewed over the MTFP period and particularly in advance of the proposals for the MTFP Addition in June 2016. The target will be adjusted, as required, for any variation in income forecasts and the delivery of the programme of savings and other funding measures.

The sustainable measures for savings, efficiencies and other funding measures are being phased in to minimise the risks to the economic recovery. As a result short-term measures are required in the years 2016-2018 to ensure a positive balance is maintained on the Consolidated Fund, these are described in Section 12.

Contingency measures and options to address any variations in income forecasts are set out at Section 14.

The target of £145 million includes the £12 million of savings already taken from cash limits in 2015 as part of the 2015 Budget measures.

Build-up of the shortfall

A funding shortfall was identified in the 2015 Budget and the income forecasts at that stage indicated that sustainable measures would be required over the period of the next MTFP 2016-2019 in order to return to balanced budgets.

The Council of Ministers is proposing additional funding of £61 million, described in Section 10, for significant investment in Health of £40 million p.a. by 2019, the investment in improving Education of £9 million p.a. by 2019 and the additional funding for other departments of £12 million p.a.

The Council of Ministers is also proposing to maintain the investment in economic growth from the first MTFP and to establish a base capital programme of £35 million p.a. by 2018/2019.The proposals also allow for the inclusion of depreciation in determining total current expenditure levels, as proposed by the FPP

This level of investment coupled with the latest income forecasts indicate a significant shortfall in funding in each of the years of the MTFP 2016-2019, as illustrated at Figure 26.

Figure 26 – Projected Funding Shortfall before savings and funding measures

Sustainable Funding Measures Economic Growth

The latest economic assumptions endorsed by the FPP show that the economy is expected to return to real growth in 2014 and that growth will continue in the 2015-17 period. The latest data, particularly on financial services profitability does suggest that the economy grew significantly more strongly than expected in 2014. However, significant risks remain, not least relating to the outlook for the international economy. TheCouncil of Ministers will therefore continue to focus on delivering fiscal support to the economy in the early years as advised by the FPP to ensure that growth returns on a sustained basis.

The investment in health, education and infrastructure set out in this MTFP will help to support the economy. In addition, the Strategic Plan sets out how existing policies on growth and productivity will be reviewed, refreshed and enhanced to help achieve the growth forecast in coming years but also quite criticallyachieve sustained productivity-led economic growth over future economic cycles. In particular:

• an increased focus on new, high potential growth sectors;

• increased innovation, enterprise and inward investment across all sectors;
• promoting competition within a new competition framework;
• an updated skills strategy;
• identifying barriers to work for key groups to improve participation; and
• ensuring Jersey has sustainable public finances and low inflation.

Recognising the importance of investing in our economy and jobs, additional funding allocated through the current MTFP of £14 million by 2015, for getting people into work, back to work and employment initiatives, is being maintained, although as with all areas of expenditure may be subject to savings targets.

In addition the Council of Ministers is making provision centrally for funding of economic and productivity growth initiatives which cannot be met from the resources in base budgets of £5 million p.a. over the MTFP period (see Section 14).

Spending Review and savings measures

The Council of Ministers and the Corporate Management Board have met a number of times to explore how to meet the funding shortfall and agreed that, as staff costs are a significant element of States expenditure, a target on People costs should be implemented along with other measures.

Furthermore, it was agreed that, in order to make the level of savings required, departments should increasingly be working collaboratively. E-Government will assist in this regard by simplifying and minimising processes.

In an initial savings exercise, departments were asked to identify how they might contribute to a savings target of £50m and then in tranches of £10m up to £80m (excluding Health and ESC). This clearly showed that some savings were achievable but, as the target got higher, concentrating solely within departments was not sustainable. Those savings which could, and should, be made from this exercise have been banked' and included in MTFP 2016-2019. Further savings are being scrutinised for future consideration by the Council of Ministers.

The spending review is now building on the Public Sector Reform programme and developing various savings programmes and themes across departments in order to deliver service redesign, savings and efficiencies between 2016 and 2019. The current target is for £70 million of staff related savings and £40 million of savings on non-staff expenditure, changes to benefits and user pays charges.

Public Sector Reform

The Public Sector Reform programme (PSR) started life in 2012 following the Comprehensive Spending Review work which saved £61m between 2011-2013, (see R008/2014: MTFP Update to the department Annex for 2014). In the 2012 Strategic Plan, one of the then Council of Ministers' strategic priorities was to Reform Government and the Public Sector'. In May 2012, the then Council of Ministers agreed a way forward focussed around three core elements – Service Redesign, Culture Change and Workforce Modernisation. Following initial groundwork, particularly on mapping customer interactions with the States, a formal PSR programme was proposed and agreed as follows:

Public Sector Reform is a long term programme, proposed to run over 6 years to 2018, the purpose of which is to help forge a more innovative, efficient and less expensive government which will increasingly be seen as a partner of the private sector in growing and diversifying the economy as well as a deliverer of essential public services to the citizen. In addition, Reform will deliver a more flexible, efficient and sustainable public sector workforce which will be better able to meet the future challenges Jersey will face over the next 10-20 years. It is about changing how we deliver services which may save money, may avoid increasing costs or may mean costs increase less than they might otherwise have done.

The Programme has been split into manageable phases – Phase 1 (2013/14) which created the enabling infrastructure to deliver sustainable reform in the latter phases. Much is to do with e-Government, but modernisation of the workforce and using proven methodologies to re-engineer States' processes by concentrating on the customer is vitally important.

Much has been achieved in the first phase, the highlights of which are:

• A Jersey Lean Academy has been developed and rolled out across the States providing a proven and consistent methodology to empower its work force to problem solve and redesign processes and taking out waste whilst ensuring customer focus.
• A business case for implementing e-Government has been approved whilst exemplar projects have been implemented ahead of refocussing on the major customer departments of Income Tax and Social Security. The Social Security Department acted as a pilot both for the Lean Academy and the development of e- Government tools.
• A Reward system is being developed to model alternative Reward Frameworks based on a Job Evaluation system piloted in Health and Social Services and now extended to other States Services (excluding Teachers and Uniformed Services). This will allow the States to consider the alternative Reward system to consolidate and streamline the current myriad of pay scales across departments to ensure equal pay for equal work' as well as providing increased flexibility and mobility within the workforce.
• In tandem with this work, all Terms and Conditions are being reviewed to ensure they are consistent and modernised.
• A States-wide Engagement programme has been developed to ensure all staff are aware not only of the PSR programme but what is going on within the States. This not only increases productivity and motivation but ensures consistent messages are communicated to all staff.
• A Performance Management Framework has been developed and is being piloted to ensure all staff are regularly appraised and to identify training and development requirements for the future.
• An Office Consolidation Project aims to ensure that office space can be used as efficiently and effectively as possible and modern office requirements implemented wherever possible.

Phase 2 of the PSR programme was predicated on using the enabling tools developed during Phase 1 to redesign services to be modern, efficient and more customer focussed. This has coincided with the current requirement to reprioritise funds within the States to meet the strategic priorities and should provide the basis for redesign and restructuring which is now required to meet projected budget shortfalls in MTFP 2016-2019.

People Savings - £70 million

There are a number of ways these savings will be achieved:

• Managing staff attrition – when any post becomes vacant due to a retirement, a member of staff leaving or a contract finishing, serious consideration is being given as to whether filling the post is the right thing to do. The States HR Department have already identified all posts which will fall vacant in the next 5 years and departments are considering whether through service redesign or e-Government a post can be saved and the financial saving realised.
• Pay restraint – a pay freeze has already been proposed for 2015 and pay restraint over the next 4 years will be required. The Workforce Modernisation project is key to this element as is working closely with our staff representatives.
• The current Voluntary Release Scheme will also contribute to this target as staff willing to leave the organisation can be assisted in doing so with a resultant post being saved or a redesign being implemented. It is anticipated that future use of such schemes would be more targeted throughout 2016 to 2019 focusing on areas where re-design of services are identified that will add value to the services provided by the public sector. This focused approach in partnership with our Unions should reduce the

need for compulsory redundancy and facilitate the achievement of the £70 million people saving targets for the period.

• Service Redesign, through Lean methodology or with the enablement of e-Government, will also help achieve this target as will consideration of whether a service could be stopped, reduced or provided in a completely different way e.g. by an external or 3rd sector organisation. A good example of this can be seen in Transport and Technical Services where initial plans have been put forward which will transform the way its services are delivered in the future.

Figure 27 – Indicative Staff Savings Targets

Other savings - £40 million

These would be non-staff savings and also some user pays charges where they are considered appropriate:

• Service Redesign, as mentioned above, will havesome non-staff savings, for instance, TTS restructuring will attract savings in supplies and services costs etc.
• The current plan is that nonon-staff inflation has been included in the MTFP 2016-2019 which will mean departments have to become more efficient in order to absorb inflationary increases from outside suppliers. It also means best value must be obtained from all procurement activities throughout the States.
• Office Consolidation will also provide a catalyst to more efficient and effective workingenvironments which should lead to a cost reduction.
• Social Security has proposed a number of changes to benefits which will promote financial independence, improve the targeting of benefits whilst minimising individual impact. These are summarised in greater detail below.
• In some areas, it is appropriate that a user of a particular service pays for that service rather than being subsidised by the tax payer. Planning fees are a good example here and every effort should be made to ensure full cost recovery in these circumstances. TTS is proposing alternative funding for liquid and solid waste in the future and this will contribute to a reduction in Statesnet expenditure in these areas, as well as provide a funding mechanism for later stages of the capital spend.
• The States provide many grants and subsidies to outside organisations and, with the tight financial control required in MTFP 2016-2019, it is appropriate that our partners are also asked to contribute.

The PSR programme will coordinate and monitor all of the projects which will deliver the savings targets in MTFP 2016-2019; this work is just beginning but the infrastructure is in place.

2016 department savings have been agreed and the breakdown is shown in the MTFP Departmental Annexwith highlights explained in Section 12 of this document. By June 2016, individual departmental cash limits for 2017 to 2019 will be identified in the MTFP Addition, which will include the savings proposals for those years.

Figure 28 – Indicative Other Savings Targets

Changes to Benefits - Target of £10m by 2019

The great majority of Social Security's budgets are used to provide benefits to individuals. Changes in benefit expenditure are being considered using thefollowing major themes:

• Promote financial independence– use changes in benefit to promote activities that will support the financial independence of claimants, and protect benefits which are supporting the financial independence of claimants;
• Improve targeting of benefits – change benefits in areas where public money is not specifically targeted to vulnerable groups; and
• Minimise individual impact – spread changes over larger groups of claimants, rather than a few individuals.

Further  details  are  provided  in  Section 12 of  this  document  and  the  Social  Security  section  of  the  MTFP Department Annex to be published as an Addendum to this report.

The effect of the approval of the Sixth Amendment to the MTFP (P72/2015 (Amd 6)) is to reinstate the provision for  means-tested  TV  licence  benefit  for  over  75's  (£157,000),  which  had  been  part  of  the  Social Security department's proposed benefit changes.

User Pays - Charging for certain services– Target of £10m by 2019

The Council of Ministers has been quite clear about its policy regarding sustainable measures which require departments to firstly demonstrate that every effort has been made to prioritise existing services, drive out all savings and efficiencies and demonstrate that public services are efficient and providing value for money, before increasing or introducing new charge for services.