Corporate Services Finance - Approved Sub-Panel Minutes - 7 March 2008

Present

Deputy P J D Ryan, Chairman Connétable D Murphy Connétable P Hanning Deputy R Le Hérissier

Apologies

In attendance

R. Mann, Adviser

M. Haden, Scrutiny officer

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Agenda matter

Action

The Sub Panel considered a paper prepared by its adviser covering matters arising from the Business Plan 2009 presentation on 1st February 2008. It was noted that the issues outlined in the paper were linked to the objectives as set out in the Scoping document and the Sub Panel's terms of reference. It was agreed that this paper provided a template for issues to be addressed over a period of time and that, to start with, the Sub Panel would focus attention on certain key issues:

Following  a  presentation  from  the  Minister  on  progress  in developing the 2009 States Business Plan the Finance Sub Panel met the Minister for Treasury and Resources, the Treasurer of the States and the Head of Financial Planning to discuss the following matters:

Financial forecasting: The Sub Panel was informed that the major element of the forecast concerned Income Tax. This element was the  responsibility  of  the  Comptroller  of  Income  Tax  who  was assisted by a forecasting group.

The detailed tax information considered by the group was strictly confidential  and  the  Minister  himself  was  not  party  to  that information.

The forecast group did not consider a range of scenarios but made an assumption of an average 2% economic growth.

Formal  methods  were  in  place  by  which  the  forecast  group considered  the  appropriate  base  for  the  forecasts  and  the assumptions regarding the influence of trends in inflation, average earnings,  and  company  profits.  The  base  evidence  could  be provided to the Sub Panel for examination.

The  experience  and  instinct  of  the  forecasting  group  was  also

applied to their assessment and it was maintained that this was an important factor in the development of a forecast with a fair degree of accuracy.

It was extremely difficult to predict tax income due to the range of factors  involved:  for  example,  wage  increases,  company profitability, varying company reporting timetables. The economy was subject to volatile external factors and a margin of variance should be expected in the forecasts.

It  was  suggested  that  too  much  reliance  was  placed  on  spot forecasts which were published three times a year (to coincide with the Business Plan and Budget process) and that it would be more relevant to examine trends.

It was noted that the newly established Fiscal Policy group might require further studies of the economy which would help to inform these trends. This group  was charged with commenting on the appropriateness of the States financial position/forecasts.

It was suggested that political debate on States expenditure should be separated from income forecasts. There was a risk that States spending  plans  could  be  heavily  influenced  by  short  term fluctuations in forecasts. The key political question should rather be to determine what was a sustainable level of public expenditure.

The question of zero-based budgeting was discussed. However, it was noted that, whilst this process might be appropriate for discrete services, the totality of the States services was too complicated for such an exercise.

A suggestion that some form of external validation of the forecast might  contribute  towards  greater  confidence  in  the  income forecasts. It was suggested however that this would not reduce the range of uncertainty in the forecasts. Nor would it be helpful if an external  body  attempted  to  second  guess'  the  outcome  of  the forecasting group. The Sub Panel's proper role was to monitor the forecasting process to ensure that it was robust.

Furthermore it was suggested that introducing a form of external validation  would  tend  to  perpetuate  a  decision-making  process based on income forecasts rather than on an understanding of sustainable levels of public expenditure. The Chairman remarked that it would be worthwhile to debate further the point made about de-linking decisions on spending plans from financial forecasts.

The Sub Panel was informed that the Minister would shortly be entering a discussion with the forecasting group regarding their assumptions. It was agreed that the Sub Panel would subsequently call the Minister to a public hearing to discuss the outcome of these discussions. This would be an appropriate way forward rather than the Sub Panel approaching the forecasting group directly.

Pay policy: de-coupling the impact of GST from pay awards

It was noted that the States pay policy was that any pay settlement over and above the amount provided in the Business Plan would have to be funded from within departmental cash limits. Under the new  Public  Finances  (Jersey)  Law  2005  Chief  Officers  were responsible  for  finding  ways  to  meet  any  increased  settlement. There  was  no  contingency  fund  to  allow  for  this  eventuality. Consequently there would be an impact on services and jobs.

For 2008 the importance of de-coupling pay awards from the effect of GST had been emphasised as GST related settlements would undermine  the  Fiscal  Strategy.  It  was  noted  however  that negotiations  with  employee  groups  might  result  in  a  different outcome,  as  had  occurred  in  2007.  This  had  had  a  significant impact on health services.

The Sub Panel stated that it was essential that the implications of the  pay  policy  were  communicated  clearly  and  that  vulnerable services were identified to the public and advised the Minister that it would monitor this matter.

Mitigating risks

The  Sub  Panel's  adviser  asked  whether  there  was  a  process available to mitigate identified risks. The Sub Panel was informed that  an  explicit  risk  strategy  did  not  currently  exist.  The establishment of the Stabilisation Fund, however, was a step in this direction. A further step would be the introduction of a three year business planning cycle; however moves in this direction had not proved to be successful.

The Sub Panel thanked the Minister for the opportunity for this discussion and the Minister and his officers withdrew.

Sub Panel priorities

Following the above discussion, the Sub Panel confirmed that it would focus on the following matters in its :

• Financial  forecasting:  the  robustness  of  process  and opportunity for greater Scrutiny oversight. It was agreed that the Sub Panel would formally request the Minister to attend a  hearing  following  his  discussions  with  the  forecasting group.

• The  requirement  for  clarity  around  the  communications issues and intentions in relation to failure to de-coupling pay awards from GST.

• Risk mitigation: The adviser  was requested to provide a briefing note

• Three year financial planning: The adviser was requested to provide a briefing note.

The Sub Panel noted that the Council of Ministers had highlighted certain department spending pressures and had requested Scrutiny Panels  to  consider  whether  approved  spending  limits  should  be increased to cover these items. It was agreed that the Chairmen's Committee should encourage all Panels to engage in this process.