Fiscal Policy Panel and warnings of the impact of leakage on the economic stimulus plan

1240/5(4443)

WRITTEN QUESTION TO THE MINISTER FOR TREASURY AND RESOURCES BY DEPUTY G.P. SOUTHERN OF ST. HELIER

ANSWER TO BE TABLED ON TUESDAY 28th APRIL 2009

Question

1. T h e most recent advice from the Fiscal Policy Panel warns against the impact of leakage' on the economic stimulus plan. Will the Minister

1. detail for members the major ways that leakage occursinoureconomy, and
2. what impact this leakage will have on his priorities foractionunder the economic stimulus plan, and
3. what measures he will take tomitigate such leakage?

2. D o es heaccept that nowis not the time to take moneyout of theeconomythrough additional taxesor other means and doeshe accept that the imposition of a wage freeze in the public sector in the 2009 settlement would reduce the quantityofmoney in the economyby £7.4 million and therefore increase the impact of the recession?

D o e s he further accept that the depth of the recession would also be made worse by any redundancies in

the public sector and that he will take appropriate steps to protect public sector jobs?

3. W ill the Minister inform membershow the figure of £2 million for the extensionof transition protection on IncomeSupportfor a further year was arrived at?

Answer

1. The most recent advice from the FPP (in their26th March 2009 letter to the Treasury and Resources Minister) is that discretionary fiscal policy is necessary, if the intention is to mitigate the adverse effects of the international crisis on the Jersey economy in the near term.

1. The FPPalsopointout in that letter that itis"worthbearingin mind that in a small open economy like Jersey there will be a risk that any stimulus put into the economyby the States will quickly leak out of the economythroughspending on imports". Leakage through spending on imports isoneof the major ways that leakage can occur in oureconomy. However, it canalsooccur through money intended to stimulate the economyleaking' into savings, not beingspent and not adding todemand in the economy.
2. The Minister will listen to the advice of an independent Evaluation Team madeupof key officers before deciding on the projects that will be funded by the money identified for discretionary fiscal stimulus. The Evaluation Team will be required toassess the businesscase,valueformoney and economic benefits ofeachproposal. Leakage will be a key consideration in determining the nature of the economic impact.
3. The rigorous evaluation process asoutlinedinpart b will help to mitigate the extent of any leakage from the overall stimulus package.

2. In setting out the plansfor the fiscal stimulus package it is clear that it isacceptednowis the time to be using the Stabilisation Fund to putadditionalmoney and therefore demand into the economy. However,it is not accepted that a wage freeze in the public sector would reduce the quantity of money in the economy. The overall impactof the States finances on demand in the economyisdeterminedby the difference between all expenditure and all incomenotthe policy adoptedforpublicsector pay. It follows that it is not accepted that such an approach would addto the depth of the economicdownturn.

It is also not accepted that the depth of the recession would be made worse by any redundancies in the public sector.  The external economic environment, the success of the global policy response and our own fiscal stimulus package will be the key to determining the depth and length of the downturn in Jersey.

3. T h e States have agreed transitional funding as set out in the table below:

From the table it can be seen that the drop in funding from 2009 to 2010 is approximately £2M.  Maintaining 100% protection for an additional year will therefore add approximately £2M to the 2009/2010 cost.  Additional funds would also be required in future years.

It should be noted that since this funding was approved by the States in the Business Plan debate in September 2008,  there  have  been  other  changes  to  the  Income  Support  scheme  which  have  an  effect  on  the  cost  of transitional relief.

A full analysis of these changes and a revised estimate of the cost for each year of the transition is currently being prepared and will be included in the final bid made by Social Security Department to the Economic Stimulus panel.