Resource Plan 2004-2008 and the financial forecast deficit

1240/5(1956)

QUESTION TO BE ASKED OF THE PRESIDENT OF THE POLICY AND RESOURCES COMMITTEE ON TUESDAY 7th OCTOBER 2003,

BY CONNETABLE A.S. CROWCROFT OF ST. HELIER.

Question

With reference to the recently agreed Resource Plan, (P.118/2003), would the President inform members -

1. w h ether the Committee wasaware that the forecast deficit figure of £22 million by 2008, as quotedin the Resource Plan,was not cumulative; and, whether the Presidentwouldagree that the forecast therefore understated the actual figure by £14 million, and, if the answerisinthe affirmative, explain why this information was not revealed?
2. w hether the Committee was aware that its Resource Plan proposition would require savings of approximately 600 staff over the four year period 2005 to 2008,and,if the answerisin the affirmative, will he explain why this information was not revealed? and,
3. o f the precise methodologyandassumptionswhich underpin theforecastof a twoper cent increasein revenue per annumduring the ResourcePlan period, andwhat sensitivity analysis, if any,wasconducted in respect of this methodology and the assumptions made, what external professional advice was commissioned, if any, to qualify these, and whether heispreparedto state what the cumulative deficit of £36 million projectedfor 2008 would becomeif tax receipts were togrownotby 2 per cent perannumas forecast butintherange of -3per cent to +3 per cent perannumover the Resource Plan period,assuming that spending remained unchangedat 3 per cent perannumgrowth?

Answer

1. T h e Committeewas fully aware that the forecast deficit figure of £22 million by2008wasnotcumulative.

T h e form of presentation does not differ from previous years' financial forecasts and is the universally

accepted means to present both actual and budgeted performance.

T h e t otal deficit over the period 2004-2008, were no measures to deal with the situation introduced, would

be £71 million; however, the in-year deficit for 2008 would be £22 million, although it has always been intended that early measures would be taken to avoid this deficit occurring.

2. T h e Policy and ResourcesCommittee did not explicitly discuss a manpowersavingofupto600 jobs in initially considering the 2004-2008 Resource Plan, concentrating instead upon the financial difficulties in whichthecommitteeandallofus find ourselves.

T h e Committee did, however, consider whether the savings required by the targets set in the Resource

Plan were realistic and further to extensive consultation not only with Committee Presidents but also including States Members, both the Finance and Economics and the Policy and Resources Committees agreed that the proposals of the Resource Plan were achievable.

U p to 600 staff savings over the period to 2008 is not an unrealistic target provided there is a political will,

and indeed is implicit given that 60% of our expenditure is staff related.

I m u s t add of course that the estimate of up to 600 posts is just that at this stage, an estimate, and until the

Fundamental Spending Review process is further progressed, the eventual figure will not be known.

3. In  come tax forecasts are received by the Finance and Economics Committeetwice annually. The first occasion is for the purposes ofproducing the Resource Plan.These figures are then revised later in the year, whenmoreup to date information is available, for the Budget.Theseforecasts are then publishedin

the Resource Plan and Budget document respectively.

A s I indicated in a similar question earlier this year, the Comptroller bases his estimates on the previous

years' assessments, and these are broken down between the component areas of -

• sole traders,

• partnership,

• employees, and

• companies, including International Business Companies and Exempt Companies.

E s ti m ates of the likely percentage increase are then factored in for each of the forecast years in respect of

–

• Trading profits,

• Company profits,

• Wages and salaries,

• Investment income, and

• Property rentals.

T h e tax yield for each sector is then calculated by taking the effective rate of tax for that sector for the

previous year of assessment and applying this to the new sector charge.

B a s ed on past rates of tax collection, an estimate is made of the likely collection of tax in each sector, year

by year, and similarly for collection of tax arrears and estimates of tax repayments. Finally, an estimate of the level of early assessments, which produce an early receipt of tax revenues, is made in respect of individuals who leave the Island during the year.

T h e Comptroller will also factor into his calculations any effect on tax revenues arising from the

relocation or change in profitability of any major institutions, or indeed any new factors of which he becomes aware.

T h e i nitial estimates, produced for the Resource Plan are improved later in the year by reference to the tax

assessments for the current year, which have all been issued by the end of September. It is these updated figures which will be used in the Budget Report to be published in early November.

T h e p rocedure generally follows the way in which tax revenue forecasts are prepared in the UK.

I t s h ould be noted that the 2004 Income Tax revenues will be based on income earned in 2003, and

business profit earned in 2002. As a result, a reasonable indication of the levels of tax revenues likely for 2004 can be made prior to the budget being set, due to the time lag in the existing tax structure.

B e c a use of the confidential nature of certain information, the forecasts are prepared primarily by the

Comptroller of Income Tax. However, recognising the ever increasing importance of these forecasts, particularly given our current funding difficulties, the Finance and Economics Committee has commissioned the building of a more detailed tax forecasting model in order to further improve the process.

T h e Comptroller's estimates are indeed subject to a compounded annual +/- 3% forecasting variance,

within which recent forecasts have proven to be accurate.

H o w  ever, given the uncertainty inherent in forecasting tax receipts far into the future, the range of

variation is only applied as far forward as 2005, by which time the range covers an upper end of £437 million and a lower limit of £343 million resulting in a financial forecast of between a deficit of £57 million and a surplus of £37 million.

H o w e ver, I should like to stress that these would be the very outer limits of our current forecast, and as the

Committee revises forecasts twice yearly, much more robust figures within a narrower range would be available well in advance.