Draft 2014 Budget - Report - 26 November 2013

CONTENTS

1. EXECUTIVE SUMMARY ....................................................................................................... 2
2. KEY FINDINGS AND RECOMMENDATIONS ....................................................................... 4
3. CHAIRMAN'S FOREWORD .................................................................................................. 8
4. INTRODUCTION ................................................................................................................. 10
5. THE DRAFT BUDGET AND THE ECONOMIC CONTEXT .................................................. 12
6. TAXATION PROPOSALS .................................................................................................... 20
7. IMPOTS PROPOSALS ........................................................................................................ 31
8. GROWTH ALLOCATIONS .................................................................................................. 39
9. 2014 CAPITAL PROGRAMME ............................................................................................ 41
10. MAJOR CAPITAL PROJECTS ............................................................................................ 46
11. THE LONGER-TERM PICTURE ......................................................................................... 61
12. CONCLUSION .................................................................................................................... 64

13. APPENDIX 1: PANEL MEMBERSHIP, TERMS OF REFERENCE AND EVIDENCE CONSIDERED .................................................................................................................... 65

14. APPENDIX 2: REPORT FROM CIPFA ................................................................................ 70
15. APPENDIX 3: REPORT FROM MJO CONSULTING ........................................................... 90

1. EXECUTIVE SUMMARY

1. The Draft Budget contains the proposals of the Minister for Treasury and Resources in respect of taxation (including Impôts); growth expenditure; the 2014 Capital Programme; and the funding of three Major Capital Projects. The latter includes proposals to borrow up to £250 million for the Housing Project and to use £297 million from the Strategic Reserve for the Hospital Project. The Draft Budget does not explicitly cover the Liquid Waste Project but the Minister has indicated a spending envelope for it of £75 million, to be funded from capital allocations and internal borrowing from the Currency Fund.
2. The Draft Budget has been prepared in a local economic context which remains fragile. Overall, in some respects the Draft Budget displays an improved approach to financial management compared to other jurisdictions and to previous Budgets. However, there are questions regarding the presentation of information at a high level and in respect of certain individual proposals. As the Fiscal Policy Panel (FPP) and our advisors have indicated, the Draft Budget lacks some information which is required to understand its overall impact.
3. We have found that improvements in the collection and presentation of economic data and information would be beneficial, notwithstanding the challenges to do so in a jurisdiction the size of Jersey. No reports on the economic outlook in Jersey have been published by the Economics Unit since December 2012 – a situation which must be addressed. We have also recommended the re-introduction of Input / Output Tables although we are mindful that any improvements in data collection should not place undue pressure on local businesses.
4. The most significant taxation proposal is the reduction in the Marginal Rate of Income Tax from 27% to 26%. We have found that the economic rationale for this measure is questionable. It is intended by the Minister to be a first step towards independent taxation. Whilst the proposal has been presented as good news for taxpayers, the majority will not benefit until 2015 at which time they will also feel the effects of the Long-Term Care Charge.
5. Other taxation proposals have been welcomed by stakeholders. We received submissions, however, that further measures could have been taken to help the Island's economy. Whilst the Minister is already considering some such proposals, we have recommended that he look particularly at measures in respect of productivity that would support the local economy.
6. The proposed increases in Impôts were the most controversial issue, with industry representatives perhaps unsurprisingly against them. We were advised that the increases would negatively impact on the industry at a time when it continues to face significant challenges. As the primary reason for increasing Impôts on alcohol and tobacco is health- related, additional income raised should be put towards the alcohol and tobacco strategies.

We have also recommended that the Minister  take steps to end  the position whereby irreconcilable differences appear to exist between him and the industry regarding prices and price comparisons – an unhelpful situation for all. The Minister should also take steps to resolve the question of how much duty-free tobacco and alcohol is consumed in the Island.

7. We have found that there will be no growth allocations to debate in the Draft 2015 Budget as all growth monies for 2015 will have been allocated this year. In respect of capital expenditure, a programme for 2014 of approximately £89 million has been proposed. As the FPP has highlighted, capital expenditure in 2012 did not reach the levels promised and there was a failure to deliver the fiscal stimulus which the Executive had set out to achieve. We have recommended that the 2014 Capital Programme be examined to clarify whether there is a structural deficit within the States' finances. We have also found that the revenue implications for each 2014 capital project have not been provided, despite the Minister's acceptance of a previous Scrutiny recommendation to do so.
8. The three proposed Major Capital Projects display some welcome long-term thinking in respect of the funding mechanisms. There is a risk, however, that the injection of such large amounts of capital funding over the next ten years could overheat the local economy; it must not be forgotten that the private sector will also undertake capital projects. Forecasting the economic impact of such expenditure is difficult given the current challenges in measuring capacity within the construction industry and we have recommended that the Minister seek to improve the information currently available.
9. In terms of the Hospital Project, we concur with the FPP about the proposed use of the Strategic Reserve and fear there is a risk that an unwelcome precedent could be set. We have recommended that the Minister ensure that policy underlying the Strategic Reserve is clearly defined before approval for a transfer is sought. Furthermore, it is apparent that £297 million may not be the final spending envelope. Whilst we welcome the Minister's intention to secure funding from the Assembly in stages (and all withdrawals from the Strategic Reserve require States approval) we have recommended that the Minister provide scenarios which assume a higher spending envelope to ensure clarity about the potential implications.
10. With regard to the Liquid Waste Project, the detailed funding mechanism cannot be agreed until the Assembly has had an opportunity to debate a liquid waste strategy and, until that time, the spending envelope of £75 million cannot be regarded with certainty. More information is also required on how £1.7 million per annum in savings would be delivered by the Department of Transport and Technical Services as a means of repaying internal borrowing from the Currency Fund.
11. Ultimately, our review has highlighted that there are other emerging issues and spending pressures which sit outside the Draft Budget and which remain to be addressed.  

2. KEY FINDINGS AND RECOMMENDATIONS

Key Findings

1. The economic situation in Jersey remains fragile. (5.10)
2. As the FPP has indicated, the Draft Budget lacks information required to understand the overall impact of proposed fiscal policy and the latest position of States finances. (5.16)
3. No reports on the economic outlook in Jersey have been published by the Economics Unit since December 2012. This must be addressed. (5.20)
4. Input / Output Tables are no longer produced for Jersey as the modelling programme which allowed their production has been discontinued. There is reluctance to re-introduce them due to the potential pressures on businesses. (5.25)
5. Notwithstanding questions regarding the presentation of information at a macro level and in respect of certain individual proposals, overall the Draft Budget displays an improved approach to financial management compared to other jurisdictions and to the past. (5.28)
6. The economic rationale for the proposed reduction in the Marginal Rate is questionable. (6.16)
7. The proposed reduction in the Marginal Rate is intended by the Minister to be a first step in aligning the Marginal and Standard Rates and thereby a first step towards independent taxation. (6.19)
8. The majority of taxpayers will not benefit from the reduction in the Marginal Rate until 2015, at which time they will also see money taken from their pockets through the Long-Term Care Charge. (6.28)
9. As a matter of urgency, further work must be undertaken in considering and identifying taxation measures in respect of productivity that will support the local economy.  (6.45)
10. As the primary reason for increasing Impôts on alcohol and tobacco is health-related, the additional income raised should be put towards supporting the alcohol and tobacco strategies. (7.10)
11. Industry representatives have advised that proposed Impôts increases would negatively impact on the industry at a time when the industry continues to face significant challenges. (7.19)
12. There are irreconcilable differences between the Minister and industry regarding prices and price comparisons. This is unhelpful. (7.26)

13. Industry figures for how much tobacco consumed in the Island is purchased duty-free cannot be verified or denied by government. (7.32)
14. There will be no growth allocations to debate in the Draft 2015 Budget as all growth monies for 2015 will, if the Minister's current proposals are adopted, have been allocated in the current Draft Budget. (8.9)
15. As the FPP has highlighted, and as the 2012 Accounts make clear, capital expenditure in 2012 did not reach the levels which had been promised. There was a failure to deliver the fiscal stimulus which the Executive had set out to achieve and an opportunity was therefore lost. (9.16)
16. The Minister accepted a recommendation from the Scrutiny Review of the MTFP that the Draft Budget provide revenue implications for the 2014 Capital Programme. However, the Draft Budget does not indicate such implications for each of the projects on the Programme. (9.20)
17. Although there are some questions regarding the details of the proposals, the Draft Budget displays some welcome long-term thinking in respect of the funding of Major Capital Projects. (10.5)
18. The Panel supports the FPP's findings and recommendations in respect of the Strategic Reserve that matters should be resolved before any transfers from the Reserve are agreed and highlights the risk that a precedent could be set with its use for the Hospital Project. (10.30)
19. The spending envelope of £297 million for the Hospital Project may not represent the final figure. (10.37)
20. The Panel welcomes the Minister's intention to provide break points during the Hospital Contract. All withdrawals from the Strategic Reserve require States approval. (10.41)
21. The current investment strategy for the Currency Fund indicates that 60% of it can be invested in the Alternative Investments Class. As of 31st December 2012, the Currency Fund stood at £67 million, of which 60% is £40.2 million. The investments in the Liquid Waste Project and the JIFC car park will amount to £42 million and the margin for error therefore appears tight. (10.62)
22. The detailed funding mechanism for the Liquid Waste Project cannot be agreed until the Assembly has had an opportunity to debate a liquid waste strategy, until which time the spending envelope of £75 million cannot be taken as certain. (10.63)
23. More analysis is required of how £1.7 million per annum in savings would be delivered by the Department of Transport and Technical Services. (10.64)

24. There is a risk that the injection of large amounts of capital funding over the next ten years could overheat the local economy. It is not only the public sector which will seek to undertake capital projects in coming years. Forecasting the impact of such expenditure on the economy is difficult given the current challenges in measuring capacity within the construction industry. (10.77)
25. There are other spending pressures that are still to be addressed and which sit outside the Draft Budget. (11.12)

Recommendations

1. The Minister for Treasury and Resources should request that, from 2014, the Economics Unit recommence the publication of reports on Jersey's economic outlook. (5.21)
2. The Minister for Treasury and Resources should consult the Chief Statistician regarding whether any improvements could be made to the collection and presentation of statistics regarding Jersey's economy, including the re-introduction of Input / Output Tables, without undue pressure being placed on businesses. (5.26)
3. As a priority, the Minister for Treasury and Resources should identify further taxation measures in respect of productivity to support the local economy. (6.46)
4. The Minister for Treasury and Resources should confirm that additional income raised from increased Impôts on alcohol and tobacco shall be put towards funding the alcohol and tobacco strategies. (7.11)
5. The Minister for Treasury and Resources should resolve differences with the industry in respect of price margins and comparisons for alcohol and tobacco and should update the Assembly by July 2014 on results of his work. (7.27)
6. The Minister for Treasury and Resources should consult the Chief Statistician and Economic Advisor about whether any work by the Statistics Unit could help to address the question of how much duty-free tobacco and alcohol is consumed in the Island. (7.33)
7. The 2014 Capital Programme should be examined to determine which elements are new and which relate to refurbishment or renewal of existing assets in order to clarify whether there is a structural deficit within the States' finances. (9.17)
8. The Minister for Treasury and Resources should ensure that the purpose and optimal size of the Strategic Reserve and the conditions for its use are clearly defined before seeking approval for a transfer from the Strategic Reserve for use towards the Hospital Project. (10.31)

9. The Minister for Treasury and Resources should provide the Assembly with scenarios regarding the Hospital Project which assume a higher spending envelope than £297 million. (10.38)
10. The Minister for Treasury and Resources should clarify for the States Assembly how £1.7 million in savings each year would be delivered by the Department of Transport and Technical Services. (10.65)
11. The Minister for Treasury and Resources should seek to improve the information available on capacity within the construction industry. (10.78)

3. CHAIRMAN'S FOREWORD

3.1 The theme common to the Fiscal Policy Panel's report and to the reports of both of our advisors is a plea for a macro review showing how all the pieces of the Budget fit together and how they relate to the Medium Term Finance Plan. Input/output tables would be a valuable aid to such a review.

3.2 Notwithstanding questions regarding the presentation of information at a macro level and in respect of certain individual proposals, overall the Draft Budget displays an improved approach to financial management compared to other jurisdictions and to the past.

3.3 It should be noted that the majority of taxpayers will not benefit from the reduction in the Marginal Rate until 2015, at which time they will also see money taken from their pockets through the Long-Term Care Charge.

3.4 The proposed increases in Impôts were the most controversial issue, with industry representatives perhaps unsurprisingly against them. We were advised that the increases would negatively impact on the industry at a time when it continues to face significant challenges. As the primary reason for increasing Impôts on alcohol and tobacco is health- related, additional income raised should be put towards the alcohol and tobacco strategies and we will be bringing a proposition to this effect.

3.5 Productivity is a fundamental part of economic growth and, given the comments by Standard

& Poor's on our economic growth –"the recovery is likely to be uneven and shallow" – consideration of taxation measures in respect of productivity in the economy in the public and private sectors is an area demanding urgent work.

3.6 There is a risk that the injection of large amounts of capital funding over the next ten years could overheat the local economy since it is not only the public sector which will seek to undertake capital projects in coming years. Forecasting the impact of such expenditure on the economy is difficult given the current challenges in measuring capacity within the construction industry. It is equally important to consider whether there is, in fact, a structural deficit underlying States finances.

3.7 The Panel supports the FPP's findings and recommendations in respect of the Strategic Reserve that matters should be resolved before any transfers from the Reserve are agreed and highlights the risk that a precedent could be set with its use for the Hospital Project.  

3.8 The Panel feels strongly that our recommendations are essential for the prosperity of the Island and we commend them to the Treasury.

9. I would thank all those people who have contributed to the production of this report. It has been a demanding few weeks for those involved, not least of all the officers of the Treasury and our own Scrutiny Officers.

Senator Sarah Ferguson Chairman

Corporate Services Scrutiny Panel

4. INTRODUCTION

1. The Draft 2014 Budget was lodged on 8th October  2013 and will be debated on 3rd December 2013. The Ministerial Foreword to the Draft Budget states that it proposes "a package [of measures] that is designed to support the aims of economic growth and job creation."
2. The Draft Budget contains proposals of the Minister for Treasury and Resources in a number of areas. These include the amount of income to be raised through taxation (including Impôts); the allocation of growth expenditure; and the 2014 Capital Programme.
3. For some time prior to publication of the Budget, the Minister indicated that, alongside these more commonly seen elements of the Budget, he would bring forward funding proposals for three major capital projects: Housing, Hospital and Liquid Waste. The Minister has proposed borrowing to fund the Housing Project and the Strategic Reserve is, if approved by the States Assembly, to be used for the Hospital Project. The overall funding mechanism for the Liquid Waste Project is not explicitly covered in the Budget proposition but elements are included in the proposed 2014 Capital Programme.
4. Given the significant matters which the Minister intended to address in the Draft Budget, we agreed to undertake a more detailed Scrutiny Review than has perhaps been undertaken previously. We set out to consider all elements of the proposition. Our Terms of Reference may be found in Appendix 1. Matters relating to housing, the hospital and liquid waste would not normally fall within our remit. We therefore restricted our consideration to the financial aspects of those proposals, namely the spending envelopes which have been identified and the funding mechanisms which the Minister has proposed. Indeed, many aspects of the Draft Budget touch upon the remit of more than one Scrutiny Panel and, in that regard, we are grateful to our colleagues on the Education and Home Affairs Scrutiny Panel for having considered elements relevant to their remit and for the provision of their comments.
5. Our review has by necessity been undertaken within a short time frame; the confidentiality of Budget proposals is strictly kept until lodging of the proposition and the public nature of a Scrutiny Review could therefore not begin until that time. We acknowledge the States decision to extend the lodging period for the Draft Budget from six to eight weeks as that has undoubtedly made our task easier. We also acknowledge the efforts of the Minister and his Department in briefing us on draft proposals whilst the Draft Budget was being developed. Whilst we may have been unable to start our work in earnest until the Draft Budget was published, the advice and information we received from such briefings allowed us to start that work quickly and on an informed basis. We are also grateful for the work of our expert advisors, the Chartered Institute of Public Finance and Accountancy (CIPFA) and MJO Consulting, whose reports may be read in Appendices 2 and 3.

6. After beginning with an examination of the Draft Budget on a general level (including a look at the economic context in which the Draft Budget has been prepared and lodged), we shall consider the specific proposals in the order in which the proposition asks for States approval. We shall therefore first look at the income-raising proposals, before moving on to consider the proposals in respect of growth allocations and the 2014 Capital Programme. We shall then consider the Minister's proposals in respect of the Housing, Hospital and Liquid Waste Projects. We have not considered explicitly the capital programmes for States Trading Operations, but we shall finish our report with consideration of how the Budget fits with long- term financial management of public finances and how it therefore  complements wider attempts to address emerging issues and spending pressures.

5. THE DRAFT BUDGET AND THE ECONOMIC CONTEXT

1. The Budget has been prepared and lodged by the Minister for Treasury and Resources under Article 10 of the Public Finances (Jersey) Law 2005. Article 10 dictates what the Minister must (or can) propose in the Draft Budget. Unlike in recent years, the Draft Budget for 2014 covers all of those elements, namely:

1. The amount of income to be raised by taxation. The Minister has proposed, under Part
   1. of the Budget proposition, estimated income for 2014 of £639,513,000.
2. A maximum amount, if any, that the States may borrow. The Minister has proposed under Part (e) borrowing of up to £250 million for housing purposes.
3. Amounts, if any, of growth expenditure to be allocated. The Minister has proposed under Part (b) the allocation of £2.21 million and £1.46 million for 2014 and 2015 respectively.
4. For each capital project to be started or continued for which no other approval exists, a capital head of expenditure. The Minister has proposed under Part (c) a capital programme for 2014 totalling £88,892,000.
5. Details of each capital project to be undertaken by a States Trading Operation. Approval is sought for capital projects totalling £2,351,000 under Part (d).
6. Amounts, if any, to be transferred between the Strategic Reserve, Stabilisation Fund, Consolidated Fund or other Specially Constituted Fund. The Minister has proposed under Part (f) the transfer of £10.2 million from the Strategic Reserve to the Consolidated Fund.

2. The taxation measures covered in Part (a) of the proposition include a number of specific proposals in respect of Income Tax, GST, Stamp Duty and Impôts.
3. According to the Public Finances Law, the Minister cannot propose a Draft Budget if, on the basis of its proposed measures, the Consolidated Fund were to be left in deficit at the end of the year. The very last table in the Draft Budget describes the position of the Consolidated Fund and forecasts that, at the end of 2014, the Fund will stand at £5.709 million. When the Medium Term Financial Plan (MTFP) was developed in 2012, it had been forecast that the Consolidated Fund would in fact stand at £11.563 million at the end of 2014.[1] Our advisor from CIPFA has indicated that he had some difficulty in tracking movements in the Draft Budget between the Consolidated Fund, the Stabilisation Fund and the impact of Contingency Funding. The Fiscal Policy Panel (FPP) has recommended that consideration should be given to the maximum buffer' that is required in the Consolidated Fund "for remaining contingencies in a year", above which level funds should be transferred to the Stabilisation Fund.[2]

4. The Draft Budget has reportedly been "designed to support the aims of economic growth and job creation." In his foreword to the Draft Budget, the Minister states that "there have been some positive economic developments at the global level in recent months." However, it is apparent that a sustainable recovery' has not yet established itself.[3]
5. The Draft Budget goes on to report that, in 2012, economic activity in Jersey (as measured by Gross Value Added (GVA)) fell by 4%, the fifth consecutive annual fall. Latest information showed that business activity in the finance sector was improving. News for the non-finance sector was still negative but was the least negative' it had been since September 2010. Headline business activity remained negative but was less negative. Real earnings in Jersey had increased for the first time in four years which could be taken as an indication that economic trends had improved. Total employment fell from 2011 to 2012, with an increase in part-time employment masking a decrease in full-time employment.[4]
6. During our review, we asked both the Chamber of Commerce and the Institute of Directors for their assessment of how the Island's economy was currently performing. The Chamber advised us that "things are still very tight in Jersey" and that the Island would need to make sure it was on the back of any recovery in the United Kingdom (UK) as "the UK is our main source economy."[5] The Institute of Directors advised us that the medium-term outlook for the Island's economy was still fragile and that whilst there was reportedly some optimism in London about the UK's circumstances, the Institute's members had  encountered some surprise from Institute members in the UK that the Island was not in fact ahead of the UK (as people in the UK would expect the reverse to be true).[6] Both witnesses called for the Draft Budget to help stimulate the economy (see Chapter 6).
7. Our advisor from MJO Consulting has provided an analysis of the state of Jersey's economy in his report (see Appendix 3). He has looked at recent developments in respect of GVA, employment and performance in the finance sector. He indicates that "although the finance sector has long dominated Jersey's economy, its share of GVA has fallen from a peak of 53% in 2000 and stood at 40% in 2012" and that "in 2010, the combined non-finance sector of the economy overtook finance in its contribution to GVA for the first time in at least a generation." He has highlighted that there is a "likelihood that parts of the economy are in structural decline" and that there are "some significant concerns for the finance industry."

8. The Minister and the Assembly benefit from the work of the FPP in understanding Jersey's economic position. The FPP published its report on 5th November 2013 and briefed States Members on the same day.
9. The FPP's report indicated that, in terms of the international outlook, global growth had slowed by more than forecast in 2012 and below long-run average growth was expected for 2013. Some of the major downside risks in the global economy (such as the potential collapse of the Eurozone) had dissipated, but other significant risks had increased and there had been a change in the pattern of growth in the world economy. In respect of Jersey's economic outlook, the FPP referred to the fall in GVA in 2012 and forecast GVA growth of between -2% and 2% for 2013 and between -2% and 3% for 2014. The FPP reported that surveys  indicated  an  improvement  in  local  conditions  in  2013  compared  to  2012. Nevertheless, the FPP also identified that things had gone wrong' in Jersey in 2012 and that "the fiscal stance was less accommodative in 2012" in that fiscal policy had been pro- cyclical, rather than counter-cyclical – contrary to advice which the FPP had previously given. The FPP ultimately made eight recommendations, some of which related directly to the areas we had covered in our review, and we shall return to those recommendations in later chapters of our report.

11. Taking into account this economic context, our advisor from MJO Consulting has raised questions regarding overall income forecasts for future years. In his report, our advisor has provided an analysis to show the impact of updated economic forecasts, advising that "from a macroeconomic perspective, it has been difficult to understand what is being proposed in the  Budget  and  to  calculate  the  impact  of  the  fiscal  changes  on  the  economy."   We understand that income forecasts have been updated, which have been considered by our advisor in connection with what was included within the MTFP. The following table indicates what this consideration has revealed:

Scrutiny 1 and Scrutiny 2 refer to forecasts generated upon the basis of assumptions identified by MJO Consulting during the Scrutiny Review of the MTFP in 2012.

12. Our advisor has highlighted that "significant downside risks to the economic outlook" have been identified. He has also highlighted that revised income forecasts do not take into account the specific measures proposed in the Draft Budget (i.e. reduced income through a reduction in the Marginal Rate of Income Tax).
13. Our advisor from CIPFA, meanwhile, has stated that "the total impacts of [the Draft Budget's] Income Tax proposals have a recurring structural change in the base line position for the Income Tax component of the States Income model." The FPP also referred to structural changes in the tax system in its own report, for instance through the proposed reduction of the Marginal Rate of Income Tax. Indeed, we have noted the FPP's comment that "Draft Budget 2014 lacks a lot of basic and important information that is required to understand the overall impacts of proposed fiscal policy and the latest position of States finances." The FPP expressed its disappointment on this matter as it represented "a step back from previous Budgets  in  terms  of  completeness  and  transparency."   The  FPP  therefore  made  a recommendation as to what, in its view, each Budget should include.[7]
14. CIPFA has advised us that, whilst the year-on-year impact of taxation measures has been stated (see the next chapter), "what is less clear is how this reduction in the baseline Income Tax yield position is tracked to the latest MTFP position, Budget 2013 position and latest In- Year Forecasts." We understand that the Draft Budget (and the summary tables it contains) was prepared on the basis of the MTFP financial framework adjusted only for  Budget

measures and does not in itself provide a full reforecast of States income or expenditure. CIPFA has indicated that the Draft Budget forecasts income taxation revenue of £474.965 million (the most substantial part of the overall £639 million which the Draft Budget estimates will be raised in total through all income-raising measures), the same figure embedded within an adjusted MTFP position for 2014. Revised forecasts indicate, however, that overall revenues may be lower than previously forecast (by £9 million in 2013; £13 million in 2014; and £26 million in 2015). CIPFA has also highlighted that revised forecasts did not take into account measures proposed in the Draft 2014 Budget. Ultimately CIPFA has advised:

"It  is  difficult  to  accurately  track  and  test  2014  budget  income  tax  position  of approximately £475m based on this Budget Presentation particularly in the context of the Economics Unit mid-range forecast of £460m (actually £462m based on the 2013 YOA – year of assessment) for 2014 which itself excludes the relevant Budget 2014 proposals requiring a net reduction of some £10.9m on potential tax yields or £5.5m from the MTFP baseline position. The lack of transparency on tracking baseline figures does not provide the level of confidence which we would expect in the overall financial modelling surrounding the £474.965m used for the 2014 budget at this stage of the process."

15. CIPFA therefore has concerns "over the affordability of various Budget proposals (given transparency issues and the aspirational nature and relative lack of firm details behind some of the Capital Proposals) and the positioning of the 2014 Budget against the overall fiscal strategy that the States has previously set for itself." CIPFA has therefore recommended that the Draft Budget would benefit from "a full Macro Model – MTFP adjusted for all Budget Proposals – on the assumption they are all approved by the States on a hypothetical basis."

17. The FPP's report was presented on 5th November 2013, just under a month before the debate on the Draft Budget. We have noted that, prior to publication of the FPP's report, no reports on the economic outlook in Jersey had been published by the Economics Unit since December 2012. The production of no reports in 2013 represents a change from 2011 and 2012 when the Unit published three reports each year on the economic outlook.
18. We understand there may have been concerns regarding the use of resources within the Unit for the production of reports which no-one seemed to read and to which nobody referred. Nevertheless, one potential implication of the decision to cease publishing such reports is that the FPP could become relied upon as the sole (public-facing) provider of economic  advice  and  its  report  could  become  the  only  source  of  publicly  available, authoritative information on the performance of Jersey's economy. In practical terms as well, the FPP's report is only published a few weeks before the Budget debate, when reports produced earlier in the year could provide a useful basis on which Members, Scrutiny Panels and the wider public could begin to assess the Draft Budget against the economic backdrop.

19. We believe it is important for the Assembly and for the public to have access to sufficient economic data and information. Further to the FPP's own recommendations, we therefore believe that it would be beneficial for the economic outlook reports to be reinstated to insure that there is sufficient information publicly available about economic performance. We accept that the Economics Unit may wish to examine the timetabling of such reports in order to ensure that they dovetail appropriately with the publication of the FPP's report to avoid the risks of duplication of effort or confusion.

KEY FINDING

20. No reports on the economic outlook in Jersey have been published by the Economics Unit since December 2012. This must be addressed.

RECOMMENDATION

21. The  Minister  for  Treasury  and  Resources  should  request  that,  from  2014,  the Economics  Unit  recommence  the  publication  of  reports  on  Jersey's  economic outlook.
22. It is apparent, however, that there are challenges in assessing the economic circumstances in Jersey due to the difficulty in collating certain types of data. This may in part be because of the size of the Island as a jurisdiction but it was acknowledged during our review that, without certain types of data, some economic assessments could be difficult to achieve. As the Economic Advisor told us, when asked about assessing the economic impact of certain measures within the Draft Budget:

"It is very hard. You need to know what the counter factor would be if you are going to do a detailed assessment but secondly, you probably need more detailed economic data than we have in Jersey. You would need detailed national accounts, probably input/output tables as well but in terms of the individual interventions, yes, you can assess the impact. You know, Advance to Work, what is the impact there? They are monitoring the people that go through Advance to Work, that enter employment. That is monitored on a monthly basis. In terms of an economic growth and diversification strategy, the enterprise strategy has got smart objectives in there. The Innovation Fund has got an assessment framework to see the impact of that. In terms of the overall  macro  implications  of  the  Budget,  as  I  said  before,  getting  the  capital investment right, meet the 3Ts, then you are minimising the risk. Yes, you can look at the amount of money that you put into the economy. Unfortunately we do not have a detailed model where we can say: "Okay, if the Government did this, this would be the impact. If it did that, that would be the impact" because we do not have the detailed information but we can look at it."[8]

23. We noted the Economic Advisor's reference to Input / Output Tables and the fact that their use would be of benefit to the work of the Economics Unit. Such tables were provided in the past for  Jersey  through  work  undertaken  by  Strathclyde  University.   During  our  public hearings  with  the  Minister  and  his  Department  we  asked  why  this  exercise  had  been discontinued. We were informed that gathering data for the production of such tables would potentially place an undue burden on businesses which were already being asked to comply and assist with the collection of other data through surveys undertaken by the Statistics Unit. The Minister himself suggested that the model of the economy had changed somewhat since the 1990s (when Input / Output Tables had been produced) and that a better understanding of Jersey's economy had been developed through the undertaking of other work, for instance the commissioning of the McKinsey Report'.[9] Nevertheless, it would be beneficial if means to collect data such as that previously collected through Input / Output Tables could be identified.
24. Our advisor from MJO Consulting speaks in his report of the need for improved economic data. He advised us of the need to improve information in respect of productivity, for instance, given that it is "one of the most important concepts in measuring the supply-side performance of an economy and with it, the efficiency of labour." His analysis suggests that "any significant renewal in productivity growth and output is not a foregone conclusion."

KEY FINDING

25. Input / Output Tables are no longer produced for Jersey as the modelling programme which allowed their production has been discontinued. There is reluctance to re- introduce them due to the potential pressures on businesses.

RECOMMENDATION

26. The  Minister  for  Treasury  and  Resources  should  consult  the  Chief  Statistician regarding  whether  any  improvements  could  be  made  to  the  collection  and presentation of statistics regarding Jersey's economy, including the re-introduction of Input / Output Tables, without undue pressure being placed on businesses.
27. Overall, the Draft Budget was described as quiet' in some of the testimony we received given that it did not go as far in stimulating the economy as such contributors would have liked to have seen. Our advisor from CIPFA, however, has recognised a "commendable level  of  innovation  and  drive  within  the  2014  Budget  especially  in  embedding  wholly necessary projects of national significance within the States' Financial Strategy." In CIPFA's view, whilst the Draft Budget was "bold", it was not without some risk. CIPFA has indicated the approach taken in the Draft Budget in some respects resembles the punch through' approach found in the UK where attempts are made to square the circle' "of reducing resources  with  higher  expectations  /  demand."   However,  Jersey's  approach  is commendably  different  in  that  the  Draft  Budget  displays  more  medium  to  longer-term thinking. In CIPFA's view, the Island therefore has access to "a more robust approach to the formulation of Financial Strategy than most organisations we have worked with and would easily be placed within the top quartile of organisations, in terms of good practice within Financial Strategy measured against the standards outlined within the CIPFA Financial Management  Model."   In  CIPFA's  view,  whilst  transparency  and  visibility  of  the  Draft Budget's impact could be improved (and revised economic forecasts appeared to provide a cautionary note on the economic foundations for the Draft Budget), comparatively speaking the Draft Budget could be viewed favourably if considered alongside budget-setting in other jurisdictions.

KEY FINDING

28. Notwithstanding questions regarding the presentation of information at a macro level and in respect of certain individual proposals, overall the Draft Budget displays an improved approach to financial management compared to other jurisdictions and to the past.

6. TAXATION PROPOSALS

1. The Draft Budget asks the Assembly to approve an estimated income for 2014 of £639,513,000. This estimate takes into account a number of specific measures which the Minister has proposed and which we shall explore in this chapter and, in the case of Impôts, the next chapter. The Minister's proposals cover the following areas:

1. Income Tax

Significant Income Tax proposals include:

• Increasing exemption thresholds by 1.5% and the age of entitlement to higher exemption thresholds;
• Enhancing tax relief for parents with children in higher education and removing restrictions to child allowance by reference to the child's earned income;
• Reducing the Marginal Rate from 27% to 26%;
• Removing the three-year rule of residence for making lump sum charitable donations; and
• Allowing High Net Worth Individuals (previously known as 1(1)(k)s') registered under a pre-July 2011 regime to elect to the new regime introduced at that time.

Some administrative changes have also been proposed including the revision of relief due to the self-employed in respect of Social Security contributions and the repeal of the tax credit for electronic tax returns.

2. Goods and Services Tax (GST)

The Minister has undertaken to look at GST legislation in order to support the development of an aircraft registry. Some administrative changes have also been proposed including clarification of the position regarding white goods, carpets et al in respect of supplies to zero-rated dwellings and clarification in the Law of the definition of an existing building'. No changes to the overall rate of 5% have been proposed.

3. Stamp Duty

The Minister's only proposal is to continue the extension of the maximum threshold for first-time buyer relief from £400,000 to £450,000.

4. Impôts

Increases in Impôts on alcohol, tobacco and fuel (and on  Vehicle Emission Duty (VED)) have been proposed.

2. The Minister reiterated on more than one occasion the message given in the Draft Budget that his proposals were a package of measures and should therefore be treated (and voted upon) as such. The Draft Budget advises that, in total, the package of measures will see an additional £294,000 of income collected in 2014 but a cost' to the Treasury of £5.47 million in 2015. Those figures take into account assumptions made in the MTFP, however.[10] Our expert advisor from CIPFA has indicated that the cost' of taxation measures alone (i.e. exclusive of Impôts) would amount to £10.9 million on a full-year basis (i.e. not taking into account MTFP assumptions which have been unadjusted for actual re-forecasting). Notwithstanding their comments about the impact of the proposals on baseline budgeting (see the previous chapter), CIPFA has advised that the "quantification and impacts of the individual component changes to the Taxation Revenue appears to be well worked through."
3. We asked the Assistant Minister who would be the winners and the losers of the package' and were advised that:

"I would like to think that there are no losers in terms of those on the higher earning bands are not made any worse by this budget and those on what we deem to be (it is a definition) middle Jersey', we are trying to help those because over the past five or six years, they have taken the brunt of the tax changes that have gone through, just to try and alleviate some of the pressures on them. I believe that those who are less fortunate have been and continue to be well supported."[11]

4. The Institute of Directors indicated its view that not everyone would benefit from the Draft Budget proposals, however. The Chamber of Commerce, meanwhile, said that, in its view, the winners would be low- to middle-income earners who did not smoke or drink.[12]
5. The package' contains a large number of taxation proposals. During our review, we focussed on the most significant of those proposals and sought to understand the rationale underlying them and the potential impact they would have. We also received submissions to suggest that the Draft Budget could have gone further with its taxation proposals.

The Proposed Reduction in the Marginal Rate

6. Perhaps the most significant of the taxation proposals we considered was that the Marginal Rate of Income Tax should be reduced from 27% to 26%. The Marginal Rate has been at 27% since 1998 and at times in its history has been as high as 30%. Approval of the Draft Budget would see it drop to its lowest ever rate.

7. We were consistently advised that this measure would affect 84% of taxpayers although that did not include individuals and couples exempt from paying tax or, indeed, individuals or couples not required to complete a return. In terms of figures, we understand that (for the year of assessment 2011) 39,701 individuals or couples were charged at the Marginal Rate whilst 7,535 were charged at the Standard Rate. 14,463 were exempt from Income Tax and a further 6,893 were not required to make a tax return. The Draft Budget provides the breakdown of Marginal Rate taxpayers by single people and couples.
8. All taxpayers assessed at the Marginal Rate would be affected by the reduction. Furthermore, we were informed that, due to the manner in which assessments are made, some 1,200 individuals or couples would find themselves assessed at the Marginal Rate rather than the Standard Rate. All in all, the measure would cost' the Treasury £7.8 million in revenue that would otherwise be gained if the Marginal Rate were not reduced.
9. The Minister explained that 25% of taxpayers on the Marginal Rate would see the benefit immediately (i.e. in 2014), whilst the remainder would see the benefit in 2015 (on account of their Income Tax being assessed on a prior-year basis).[13] The Draft Budget confirms that the impact of the measure would not be felt until 2015. The Minister put to us, however, that:

"If people are confident that they are going to have their tax reduced, then they are going to be more confident about their spending. They are going to feel better about house prices, I hope. They are going to feel better about security of their jobs. They are going to feel better about being able to ensure that their incomes are rising."[14]

10. The Institute of Directors, whilst saying that the reduction would not in itself make a difference in terms of jobs, indicated that the money left in people's pockets would indeed hopefully find its way into the economy:

"I do not believe those people are likely to be saving at the moment because of the economic circumstances we all find ourselves in, so one would imagine, yes, some of it will find its way into retailers, et cetera, locally to the extent there is a marginal increase, yes."[15]

11. The Assistant Minister similarly stated that it would be difficult to track what happens with the extra money people would be left with, but he hoped it would be spent in the local economy, albeit "there is no cast iron guarantee."[16]
12. The Chamber of Commerce welcomed the tax break, as more money would be left within people's pockets, but highlighted that the money which would be put back' represented a small proportion of overall States expenditure. The Chamber President also stated:

"I think we are saying in the short term customers, consumers will welcome a bit more cash but before we trumpet it as a big give back and a great measure, we would want it to be put in the context that you do realise that this money is going to be clawed back in part a little bit down the road. So it is great news short term. People need some money at the moment. They are finding things hard, but they need to be aware this is not a long-term give. It is a short-term give."[17]

13. In terms of the rationale underlying the proposed reduction, there appear to be various aspects. In light of the Minister's comments, however, there appeared to be some hope that the measure would assist the economy by leaving people with more money in their pockets and boosting confidence.
14. MJO Consulting has advised us that "it is not clear at this stage if this structural change to the tax system has been considered from an economic perspective." The measure would not be a good economic tool, in terms of fiscal stimulus, as there would be a time lag between its implementation and its impact and that "given the fall in GVA in 2012, the high levels of unemployment and widespread feelings of job insecurity, there is limited confidence in the Jersey economy." Furthermore, the proposed reduction would not in itself increase confidence: "it is incorrect to assume that a tax cut on its own can deliver confidence and influence expectations in a positive way."
15. We asked, via the Economics Unit, that the FPP consider the Minister's proposal in respect of the Marginal Rate. The FPP described the proposal in its report as "perhaps the most significant measure." It would be a structural change and would not score highly as a fiscal stimulus measure. The FPP therefore suggested that "to ensure such a decision can be afforded,  careful  consideration  of  the  structural  position  of  States  finances  is  required although it is not clear from the Budget 2014 report that this has been undertaken." The FPP highlights that the people who would benefit most from the reduction would be "those at the high income end of the 27% rate and at the margin of the 20% rate. The desirability, or otherwise, of this distributional change is a matter for the States."[18]

17. We sought to understand how the Minister's proposals, and in particular the  proposed reduction in the Marginal Rate, would fit with long-term tax policy. We were informed that it was policy to ensure that people did not unwittingly drop out of the tax system. Reducing the Marginal Rate would not cause that. We were also advised that the long-term policy was to keep taxation low, broad and simple and that reducing the Marginal Rate would achieve that aim because it would "reduce the tax so we are going towards a lower rate of tax for people."[19]

18. There was also the fact that a 1% reduction in the Marginal Rate had been recommended by the Tax Policy Unit as a first step in aligning the Marginal and Standard Rates and thereby facilitating subsequent work on the introduction of independent taxation. Alongside the Draft Budget, the Minister has published a feasibility report on the introduction of independent taxation. We were advised that decreasing the Marginal Rate, in conjunction with the 1.5% increase in exemption thresholds, would be a step towards independent taxation in that it would facilitate subsequent alignment of the Marginal and Standard Rates. Such a move would simplify the taxation system and thereby provide for an easier context in which to move towards a system of independent taxation, with separate assessment.

KEY FINDING

19. The proposed reduction in the Marginal Rate is intended by the Minister to be a first step in aligning the Marginal and Standard Rates and thereby a first step towards independent taxation.
20. We believe it is important to consider the Draft Budget in the context of what else might be on  the  horizon  in  terms  of  charges,  particularly  given  that  the  Draft Budget  has  been described as good news and providing a tax break for taxpayers.  The money that is going to be clawed back' to which the Chamber referred relates to the effects of the proposed Long-Term Care Charge.
21. The Long-Term Care Charge is due to be introduced in 2015. It will be a contribution collected from Jersey residents with income high enough to pay Income Tax and it will include both working-age adults and pensioners. Liability for the charge will be assessed in the same way as Income Tax liability, although an upper income limit would apply. The rate will start at 0.5% in 2015 and rise to 1% in 2016. It is intended that it should remain at 1% for three years. In 2015, it is anticipated that the charge will generate £8 million and in 2016 (when the rate increases to 1%), £16 million.
22. In its report, the FPP welcomed the fact that plans for the Long-Term Care Charge have taken the medium term into account. The FPP indicated it would keep "a watching brief to see whether this plan to phase in the charge is appropriate, given the economic outlook and fiscal balance in 2015 or 2016, and report back on this in the next annual report."[20]
23. The effect of the reduction in the Marginal Rate will not be felt until 2015 for most taxpayers assessed at the Marginal Rate (as they will be assessed on a prior-year basis). The implication is that, for such taxpayers, 2015 will see a slight drop in their Income Tax assessment. However, at the same time the Long-Term Care Charge will be introduced and will be felt in 2015. Whether the Long-Term Care Charge is a contribution or a tax, as some submissions to us suggested, the impact on those taxpayers' pockets is ultimately the same.

24. The Institute of Directors indicated that more attention could have been given in the Draft Budget to the introduction of the Long-Term Care Charge. They advised us:

"The long-term care will be a half a per cent, going up to 3 per cent, which will suck money out of the economy. That extra tax will come out. It does come in 2015, exactly the same time as most people are taking advantage of the marginal relief, so as a range of tax measures I do not think they hit the spot because it is neither low, broad nor simple."[21]

25. The Chamber of Commerce also said that the introduction of the Long-Term Care Charge should not be forgotten, highlighting that it would take money from people's pockets which had been put back by the reduction in the Marginal Rate of Income Tax. Our advisor from MJO Consulting has also raised the subject of the Long-Term Care Charge and the fact that it would be introduced in 2015, thereby countering the beneficial impact of the proposed reduction in the Marginal Rate for the 75% of people who would stand to benefit from that reduction.
26. When we raised this matter with the Minister, we were advised:

"The other thing, Chairman, to respond to your question is that we have done the thinking around that because the long-term care charge will be across a broader base because it is across people's earned income and unearned income as well. So it is a broader base than the 84 per cent of taxpayers who are paying at the marginal rate."[22]

27. We asked for examples to be provided to indicate how taxpayers might be affected by the cumulative impact of the proposed reduction in the Marginal Rate and the Long-Term Care Charge. The following table indicates the figures provided to us by the Department of Treasury and Resources. It indicates the tax saving that such households would expect to see in 2014 through the measures being proposed in the Draft Budget and the amount such households would be expected to contribute in 2015 for the Long-Term Care Charge when the rate would be 0.5%. The rate is expected to increase to 1%, at which point the amounts paid would also increase.

KEY FINDING

28. The majority of taxpayers will not benefit from the reduction in the Marginal Rate until 2015, at which time they will also see money taken from their pockets through the Long-Term Care Charge.

Other Parts of the Package

29. In terms of other parts of the package' of taxation proposals, we received some favourable comments from stakeholders. For instance, both the Chamber of Commerce and Institute of Directors welcomed the proposal to increase allowances for taxpayers with children in higher education. The Education and Home Affairs Scrutiny Panel advised us that it too was supportive but that it should be seen as a first step in addressing questions surrounding the funding  of  students  in  Higher  Education.   The  Panel  highlighted,  for  instance,  that consideration could feasibly be given to the parental income thresholds used to assess whether parents should begin to contribute towards the costs of tuition and maintenance.
30. This measure will only apply to taxpayers assessed at the Marginal Rate, however. In that regard, we were advised that 1,013 taxpayers would stand to benefit in relation to 1,166 children. There would be 535 taxpayers (with 685 children) assessed at the Standard Rate of Income Tax who would not benefit.

31. The Institute of Directors supported the proposals in respect of High Net Worth Individuals, advising that:

"The point of that is to enable more of the high net worth individuals that are already here to bring more of their funds into the Island to be administered in the Island and generate tax revenue. So we very much support that."[23]

32. The Institute estimated that approximately 18 individuals might choose to change to the new regime and explained in clear terms why such individuals might wish to do so:

"If I am faced with a wealthy individual who came to Jersey in 2011 and he wants to buy a garage, if he buys a garage in Guernsey he pays no tax. If he buys a garage in Jersey he pays tax. It is as simple as that."[24]

33. We were informed by the Minister that income from Stamp Duty was down although information from the construction industry suggested that there might be an upturn in income the following year. The maximum threshold of first-time buyer relief would continue to be increased "to help those Islanders get on the property ladder. It is one of government's policies to encourage home ownership, along with the deposit scheme that we introduced this year. It is a way of helping Islanders get on the property ladder." Increasing the limit still further could have led to a bubble in the market, however.[25]
34. Given the Minister's seeming desire to put something back into people's pockets, we questioned him on whether any alternatives to the reduction in the Marginal Rate had been considered in that regard. We were informed that a greater increase in the exemption thresholds (potentially by the 3% anticipated in the MTFP) would have taken more people out of paying tax and this would have been against the principles of long-term tax policy.
35. We also considered whether any consideration had been given to amending the rate of GST. The Chamber of Commerce indicated that there was no pressure amongst its members to reduce the rate from its current level of 5% but advised that there was a case for the de minimis level to be looked at. However, the President advised of his view that there were other matters which might also affect local retailers and which would need to be addressed beyond the de minimis level: parking, investment and technology.[26]
36. The Assistant Minister informed us that there were two difficulties with reducing the rate of GST as an option. First, it would be an untargeted measure (affecting everybody) rather than targeting simply those paying Income Tax at the Marginal Rate, and, secondly, there would be no guarantee that retailers would in fact lower their prices accordingly. The proposed reduction in the Marginal Rate would therefore be the most effective tool of achieving the Minister's aim of providing something back to taxpayers.[27]

Other Measures?

37. Both the Chamber of Commerce and Institute of Directors questioned whether the Draft Budget could have gone further in supporting the economy. The Institute, for example, was concerned that there was little amongst the taxation measures in the Draft Budget which would stimulate economic growth in the short term and indicated that it wished the Draft Budget "to demonstrate and create an aura of an Island or an economy that is open for business, wants  business,  is  not  complacent and  is  hungry to  get things  done."   The Institute's view was that there was a basket of measures' which could be adapted for implementation in Jersey from what was within use elsewhere.[28]
38. Specifically, the Institute asked why 100% capital allowances had not been introduced:

"The point of 100% capital allowances is simply to accelerate investment by local business in a new bit of plant and machinery. It was difficult for us really to see what the downside in that in economic terms was for the Treasury."[29]

39. The Minister advised us that this proposal had been considered but had ultimately not been pursued as "the actual proposal that was being asked was not 100% write-off, it was effectively 300% write-off in terms of capital allowances. People were asking us for a tax system that would give them a credit for an investment, not just an offset."[30]
40. The Institute had also proposed the development of a Seed Enterprise Investment Scheme, similar to what had been introduced in the UK in April 2012.

"Rather than at the moment we seem to be stuck in this idea that we have zero per cent tax for most companies; therefore, how could we possibly improve matters for them? Fundamentally, we think that is the wrong direction of travel for this debate. As the burden of taxation moves, as it is elsewhere in the world, from corporates to individuals, one must look at the individuals as being the people who drive the investment and the economic growth behind the corporates."[31]

The Institute therefore felt that it would be good if individuals were allowed to invest post-tax income into a company in order to allow the company to create jobs. The Institute accepted the scheme would need to be tightly drawn to counter risks of abuse but it would, in the Institute's view, be of more potential benefit than the Jersey Innovation Fund. In that regard, the Institute saw the Innovation Fund as Stage 2' in a process for which Stage 1' had yet to be covered and which would be covered by a seed investment scheme. In terms of the risks, the Institute also advised us that "it [is] difficult to see how the appetite for investing public money in brand new start-up businesses will go from nothing at all, which is where we are at the moment, to a huge hunger for risk taking."[32]

41. The Chamber of Commerce was also in favour of greater measures being taken to encourage investment and referred to the measures which the Institute of Directors had suggested:

"I would certainly welcome tax breaks for inward investment, yes. The scale of them and how they were applied we would have to debate, but Jersey has got to do a little bit more to attract this business and to grow its economy. My basic concern with the budget is that it is a very stable and a very certain budget but this is not necessarily a time just for stability and certainty. We need a little bit of motivation, a little bit of action, and we need to get going."[33]

42. The Minister expressed his disappointment at the criticism he had received for not taking the measures to which the Institute and Chamber had referred:

"We have deployed every effort to support business through the downturn: fiscal stimulus, economic growth strategy, financial services reorganisation, Digital Jersey, giving Economic Developmentthis refrain is not coming from Economic Development I hasten to add, it is coming from the I.O.D. (Institute of Directors) and Chamber. So we have given Economic Development all the support."[34]

43. In terms of the measures specifically proposed by the Institute of Directors, the Minister advised that consideration had been given to capital allowances and that consideration would be given to it once again, as well as to the Seed Enterprise Investment Scheme. The Minister highlighted, however, that such schemes had been introduced in other jurisdictions against the backdrop of very different taxation systems, thereby intimating that any scheme introduced would need to be right for Jersey.
44. Our advisor from MJO Consulting has considered the suggestion that a Seed Enterprise Investment Scheme could be introduced. In his report, he considered the significance of productivity  to  economic  performance  and  has  advised  that  it  is  "unfortunate  that  an opportunity  was  missed  in  the  Budget  to  reinforce  and  highlight  the  productivity improvements that [certain strategies] could generate for the economy." Our advisor was referring to work undertaken by Digital Jersey and the Department of Education, Sport and Culture in that regard. He has intimated, however, that further measures could feasibly be taken  to  promote  productivity  and  has  referred  to  examples  from  elsewhere,  such  as Singapore.

KEY FINDING

45. As  a  matter  of  urgency,  further  work  must  be  undertaken  in  considering  and identifying taxation measures in respect of productivity that will support the local economy.

RECOMMENDATION

46. As a priority, the Minister for Treasury and Resources should identify further taxation measures in respect of productivity to support the local economy.  

7. IMPOTS PROPOSALS

The Proposals

1. The area of the Draft Budget which generated most comment during our review concerned Impôts and the proposed duty increases on alcohol, tobacco and fuel. We received a number of submissions from industry representatives, to which we refer below, although we recognise that they had a particular interest in this matter and we therefore considered the evidence received accordingly. We shall focus on Impôts separately in this chapter, albeit they form part of the Minister's package' of income-raising proposals.
2. The Minister has proposed the following increases in Impôts in the Draft Budget:
   • Tobacco  11%
   • Strong beer and cider  11%
   • Spirits  11%
   • Wine  5%
   • Weak beer and cider  5%
   • Fuel  2%
   • VED  5%
3. In  terms  of  the  impact  such  increases  would  have,  the  Draft  Budget  advises  that  an additional  £594,000  would  be  raised  in  2014  through  these  measures,  although  that calculation takes into account assumptions which had been made in the MTFP regarding Impôts. The Draft Budget indicates that if such assumptions were not accounted for, the proposed  increases  would  raise  additional  revenue  in  2014  (compared  to  2013)  of £3,163,000. During our public hearings, we were informed that the Impôts increases would have an impact of 0.25% in terms of RPI.
4. The Draft Budget states that, in formulating Impôts proposals, the Minister takes into account the prevailing economic conditions; the Island's financial position; and the tobacco and alcohol strategies. Consideration is therefore given to the rate of inflation and consultation is undertaken, particularly with the Ministers for Health and Social Services; Home Affairs; and Economic Development. From our public hearings, however, the primary reason for the proposed increases, particularly in respect of tobacco and alcohol, appeared to be to reduce consumption. The Assistant Minister advised us:

"Providing we maintain our revenues, then from a Treasury point of view we balance our budget, so to speak but, if increasing duty helps people change their behaviour and reduce consumption of both alcohol and tobacco, then that is a good thing for our Island and the knock-on effect for our colleagues at Health and Social Services is that they see less people with less disease coming through their facilities."[35]

5. In terms of this justification for increases on health grounds, the Liberation Group could not see any link between duty increases and health benefits; in that regard, in their view the specific problems of a small minority "need to be solved with targeted education." This would not be helped by the fact that increased duties would lead to greater buying in supermarkets and therefore unsupervised' drinking at home.[36] The Jersey Hospitality Association made similar comments.[37]
6. In the MTFP, it was stated that there were no plans for any significant changes to the setting of Impôts over the period of the Long-Term Revenue Plan (i.e. to 2019). The strategy was therefore "to increase duties by RPI [] for all categories except alcohol and tobacco, where above RPI increases will be considered to support Health strategies on these." The MTFP reports that such increases could raise an additional £8.5 million per annum by 2019.
7. We were informed that duty rates could potentially be set on other bases. For instance, Randalls Limited advised us that they had suggested to Ministers "to apply a sliding scale of duty as they have in the UK, as opposed to our two tier system whereby we tax from 1.2 degrees alcohol up to 4.8 at one rate and then it jumps by 50% for product above 4.9%."[38]
8. As we shall explore below, industry representatives had concerns regarding the Impôts proposals due to the potential impact there would be on business, due to perceived inaccuracies in price comparisons and because increases might lead to greater duty-free consumption. However, one member of the public who wrote to us stated that the proposed increases were "disappointing" but he felt that they were acceptable provided that the additional income raised was put towards the relevant area (e.g. income from fuel duty would be spent on road maintenance).
9. This argument has some logic: if the reason for increasing Impôts on alcohol and tobacco is primarily on health grounds, then it appears a reasonable expectation that the income raised would be put towards the alcohol and tobacco strategies which the Draft Budget is purported to support. Undertakings could be made by the Minister to ensure that this income is subsequently used for health purposes. Indeed, we were advised that additional funding for health would be required, given the need to deliver on agreed reforms to health and social care services and to meet the previous commitment to provide the Department of Health and Social Services with 2% real growth per annum.

KEY FINDING

10. As the primary reason for increasing Impôts on alcohol and tobacco is health-related, the  additional  income  raised  should  be  put  towards  supporting  the  alcohol  and tobacco strategies.

RECOMMENDATION

11. The Minister for Treasury and Resources should confirm that additional income raised from increased Impôts on alcohol and tobacco shall be put towards funding the alcohol and tobacco strategies.

The Impact on Business

12. The Panel received a number of submissions from industry representatives in opposition to the Minister's proposals, particularly in respect of tobacco and alcohol. The Liberation Group felt that the proposed increases were "excessive and will cause real harm to Jersey's tourism hospitality sector as well as hitting the hard working people of Jersey." The increases were, according to the Group, between three and seven times the rate of inflation as it had stood in June 2013. The Group further stated that "Jersey's duty increases are a blunt instrument that clearly has not worked in the past", advising that collections were down in 2013 and that 2014 was likely to see a similar result. The Group could therefore see no evidence for the claims that the proposals would see increased revenue.  A number of correspondents highlighted that the increases would see some Impôts rise to some of the highest levels in Europe: the new Impôts on spirits, for example, would reportedly put Jersey only behind Sweden and Finland. The Liberation Group was not aware of another jurisdiction which was looking to increase duties at such rates (even taking into account Guernsey).[39]
13. The Liberation Group also advised that lower earners tended to be higher consumers of alcohol  and  tobacco.   The  Assistant  Minister  did  not  believe  that  people  were  being penalised, however:

"There is a very modest duty on what we call standard beers and ciders, lower alcohol content ones of something like two pence per pint. I think that is quite a modest increase. If someone drank two pints a night for seven nights a week, that would only be 28 pence. I think that is quite a modest increase in duty."[40]

14. We  understand,  however,  that  the  Household  Spending  Survey  2009  /  10  shows  that households in the lowest income quintile have the lowest weekly spend on alcohol of the five income quintiles. As a result, the weight for alcohol in the RPI (low income) is lower than in

the RPI for all households (4.3% and 5.5% respectively). Low income households do have the second greatest weekly spend of the five income quintiles on tobacco, meaning there is a higher weight for tobacco in the RPI (low income) compared to the RPI for all households (2.5% compared with 1.7% respectively).

15. The Chamber of Commerce also spoke against the proposed increases and argued that increases based upon RPI (or RPI plus a percentage, as occurs in Guernsey) would be preferable.[41] The Institute of Directors commented to a lesser degree but questioned whether the time was right for such increases when the Tourism Shadow Board had yet to complete its work. The Institute understood the health reasons for proposing increases "but based on the percentage increases it appears that the Treasury have taken the view that there is a lot more unhealthy people this year than there have been in recent years. So the percentage increases seem out of line with what has come before."[42]
16. The Liberation Group stated that "this is the worst possible time to hit us with these increases as we are struggling to see any green shoots of economic recovery in the Island."[43] A similar message was given by Randalls Limited, which reported that business had declined over recent years due to the fall in tourism, the poor economic context, unemployment, the smoking ban and the high business costs. Randalls also pointed out that the promotion of the sale of alcohol was permitted in the UK, but not in Jersey, whilst UK businesses could also benefit from income derived from gaming machines – unlike their Jersey counterparts. Randalls stated that some outlets could close as a result of the proposed increases being implemented.[44]
17. We also received a written submission from the Jersey Hospitality Association, in which we were advised that:

"Trading wise, the Tourism industry in 2013 had a very difficult winter and spring. We experienced improved trading through the key summer months; however, this improvement will be affected if these increases are adopted by the States. The hospitality industry in Jersey faces high operating costs compared to our competitor markets so it is important that our sector of the economy is not constrained further through excessive above inflation duty increases (RPI in June was 1.5%) and we are allowed to remain competitive particularly as we expect significant challenges again in our core UK market in 2014."[45]

18. The Assistant Minister questioned whether prices of alcohol and tobacco had that great an influence on people's choice of holiday destination:

"Most people are a bit more sophisticated when they come to choosing their choice of where they take their vacations by what is on offer to see and do in those locations. I think that is where our tourism industry has to concentrate its efforts, to making sure that we are a destination because of what we have to offer here, not the price of our cigarettes and our alcohol."[46]

KEY FINDING

19. Industry  representatives  have  advised  that  proposed  Impôts  increases  would negatively impact on the industry  at a time when the industry continues to face significant challenges.

Price Comparison

20. One of the principal bones of contention amongst the industry representatives from which we heard was the price comparisons which the Minister had published alongside the Budget proposals. Randalls Limited, for instance, challenged those comparisons, stating that the average pint of lager in Jersey cost £3.30 and not £3.79 as the Minister had suggested.[47] The Liberation Group posed a similar challenge, highlighting that the average price of a pint of Carling in its 74 pubs was £3.50, not £3.79. Similarly, the Group claimed that the UK Retail Price for a pint of lager was £3.50 and not £3.30 as the Minister had published. The Chamber  of  Commerce  also  expressed  concerns  regarding  the  price comparisons  and highlighted that "this issue comes up nearly every year."[48]
21. The Chamber of Commerce spoke of the figures taken for the UK and asked whether it was a reasonable comparison for Jersey's averages to be compared to the UK national average rather than with a particular area within the UK that might be comparable to Jersey in terms of level of affluence. The Chamber also advised that "the UK prices are taken from the Office of National Statistics. The O.N.S. produced that data in 2010, so you have got three years worth of RPI that is not taken into account if you are comparing a 2010 figure to a 2013 figure."[49] It was subsequently clarified that the Chamber was referring to regional price variations within the UK which had been based on 2010 data, rather than overall UK figures which indeed dated from June 2013.
22. At our public hearings with the Minister, we were advised that the figures for Jersey prices were generated from the work of the Statistics Unit. The Unit produces an annual report that compares prices between Jersey, Guernsey and the UK for a range of products (not simply alcohol and tobacco) which involves the collation of 2,500 separate price quotations. UK figures are for the most part taken from the Office of National Statistics. The most recent report was published in September 2013 in respect of June 2013.

23. The Liberation Group highlighted the high operational costs of doing business in Jersey and the role the industry played in employing local residents and expressed its dismay at being attacked for charging too high prices.[50] The Minister, however, appeared convinced that high costs of alcohol and tobacco could not be blamed upon Impôts increases: "The facts are the facts. Even if we are out by 50%, there is an inexplicable margin on a pint of beer and a tot of whiskey."[51]
24. We put it to the Minister that the issue regarding price comparisons was one which indeed arose with every Budget and asked whether something could be done to ensure that there was greater agreement between Government and industry regarding the veracity of the information available. The Minister advised us that he intended to correspond with the industry to ask for alternative suggestions regarding Impôts. He also advised that he had asked the Channel Islands Competition and Regulatory Authorities (CICRA) to investigate the issue.[52]
25. The Minister's efforts are welcome as this is not an ideal situation in which the Assembly (and the public) is placed: arguments about pricing in which it is difficult to determine the true nature of costs in Jersey and how they compare to costs elsewhere. There needs to be clarity and certainty regarding the facts in order that decisions on the Draft Budget (both this year and in future years) can be made on an informed and evidential basis. The Minister should therefore continue his efforts to resolve the situation.

KEY FINDING

26. There  are  irreconcilable  differences  between  the  Minister  and  industry  regarding prices and price comparisons. This is unhelpful.

RECOMMENDATION

27. The Minister for Treasury and Resources should resolve differences with the industry in respect of price margins and comparisons for alcohol and tobacco and should update the Assembly by July 2014 on results of his work.

Duty-Free Consumption

28. Another argument raised during our review was whether the Impôts increases would cause greater consumption of duty-free purchases. We were advised by the Channel Island Tobacco  Importers  and  Manufacturers'  Association  (CITIMA)  that  41%  of  the  tobacco consumed in the Island is purchased duty-free.[53] We understand that figure was derived from a survey of 250 people who smoke and who were asked where they purchase their tobacco. According to the Liberation Group, the tobacco proposals would push even more people to consume duty-free purchases.[54] The Chamber of Commerce highlighted that duty free  allowances  should  potentially  be  examined  in  order  to  address  this  problem  but highlighted that "the issue with that is if you cannot police 200 as your limit how can you police 50, which was the suggestion."[55]
29. The Draft Budget acknowledges that there have been reports that many locals and tourists have turned to duty-free sources of tobacco. However, there had reportedly been no change in this trend in 2013 and, whilst there was some impact on revenue yield, there was neither evidence nor intelligence' that commercial quantities of cigarettes were being smuggled into the Island.[56]
30. At our hearing with the Assistant Minister, we were advised that the industry's figures in respect of duty-free consumption could not be verified or challenged although we were told that over 1,000 people had been stopped over the last two years with tobacco in excess of their duty-free allowance. We were advised that there was no evidence, however, of large numbers of people bringing in excess of their duty free allowance of alcohol.
31. Again, it is somewhat unhelpful that claims from the industry (regarding the level of duty-free tobacco consumption) cannot either be countered or verified. It would be preferable if the situation could be resolved, if possible, through the collation and presentation of data on the matter.

KEY FINDING

32. Industry figures for how much tobacco consumed in the Island is purchased duty-free cannot be verified or denied by government.

RECOMMENDATION

33. The Minister for Treasury and Resources should consult the Chief Statistician and Economic  Advisor  about  whether  any  work  by  the  Statistics  Unit  could  help  to address the question of how much duty-free tobacco and alcohol is consumed in the Island.

Other Impôts Proposals

34. In terms of VED, we asked the Assistant Minister what impact VED had made on consumer choice and were informed that "hopefully consumers will buy more environmentally friendly vehicles."[57] The Draft Budget itself acknowledges that "it is not known the extent to which the introduction of VED has influenced consumers' decisions on vehicle purchases."[58]

8. GROWTH ALLOCATIONS

1. Part (b) of the Draft Budget proposes the appropriation of £2.21 million and £1.46 million of growth expenditure for 2014 and 2015 respectively.
2. The process for the agreement and allocation of growth expenditure is set out in the Public Finances Law. There are effectively two stages:
   1. In the MTFP, the States approve overall limits for growth expenditure that can be allocated in each of the years of the MTFP; and
   2. In the Annual Budgets for those years, the States allocate that funding for the following year to individual items.

4. The spending envelopes for growth in 2014 and 2015 were agreed in the MTFP and were the result of an amendment we lodged to the MTFP (when initially lodged, the Draft Budget had included no specific allocations for growth). The amounts available for growth allocations were reduced by subsequent amendments from the Council of Ministers and Chief Minister.
5. Under Article 10(1) of the Public Finances Law, the Minister is obliged to inform the Assembly of the amounts intended to be allocated to growth expenditure. The Minister met this obligation with the presentation of  Medium Term Financial Plan Compromises and Central Growth Allocation 2014 (R.114/2013) in which he set out how he would propose the allocation of £2.21 million and £1.46 million of growth money in 2014 and 2015 respectively. The Draft Budget reflects those proposals and indicates the schemes to which the funding will be allocated. The following Departments are due to benefit:

• Chief Minister's Department
• Home Affairs
• Social Security
• Transport and Technical Services

£410,000 in both 2014 and 2015 £50,000 in both 2014 and 2015 £750,000 in 2014 and £1 million in 2015 £1 million in 2014 alone

5. The effect of these proposals is that the relevant Departmental expenditure limits for those Departments affected will be increased by the amounts concerned for the years in question. The schemes to which the funding will be provided mirror the provisional list which was provided in the MTFP with one minor exception within the Department of Home Affairs.
6. The provision for growth funding was originally provided for in the Public Finances Law in order to allow States Members some influence over future spending allocations (once the MTFP had been agreed). Thus, the report accompanying P.97/2011 (which amended the Public Finances Law) stated that "the growth allocation also provides an annual opportunity

for a States Member to influence the allocation of funding to emerging pressures or priorities within the overall States spending limits."[59]

7. The Minister's proposals were therefore open to amendment by any Member who might have felt that the funding should be put towards a different scheme. That will not occur in the Draft 2015 Budget, however. The Public Finances Law allows the Minister to propose, and the States to allocate, growth expenditure more than one year in advance. As many of the schemes included within the Minister's proposals are recurrent through 2014 and 2015, the proposals for growth allocation will effectively see allocation of all of the expenditure. There will therefore be no remaining growth allocation for 2015 left to decide upon by the time the Draft 2015 Budget is prepared and debated.
8. Following our review of the MTFP in 2012, the Minister undertook to enhance the financial reporting mechanism used for States expenditure. Within that, he undertook to report specifically on the use of growth allocations and, for each growth item, would report:

1. Amount approved in the MTFP;
2. Amount spent to date;
3. Amount to be returned to the consolidated fund as not needed (if any);
4. Brief details of how the money was spent;
5. Outcomes anticipated from the expenditure; and
6. Actual outcomes achieved.[60]

If the Assembly approves the Minister's proposals in respect of growth allocations, we therefore anticipate that the Quarterly  Corporate Reports considered by the Council of Ministers will include specific monitoring of the growth items to which funding is granted (as already occurs for those items of growth' agreed within the MTFP itself).

KEY FINDING

9. There will be no growth allocations to debate in the Draft 2015 Budget as all growth monies  for  2015 will,  if  the  Minister's  current  proposals  are  adopted,  have  been allocated in the current Draft Budget.

9.  2014 CAPITAL PROGRAMME

Overall Spending Envelope and Programme

1. Part (c) of the Draft Budget asks the Assembly to approve, in accordance with Article 10(3)(d) of the Public Finances Law, "a capital head of expenditure for each of the capital projects for States-funded bodies to be started or continued in 2014 [] totalling £88,892,000."
2. Under the Public Finances Law, the total amount for the Capital Programme must not exceed the envelope which was agreed in the preceding MTFP. In the MTFP, the Assembly approved capital spending envelopes of £88,892,000 and £77,341,000 for 2014 and 2015 respectively. The Draft Budget therefore respects the envelope agreed in the MTFP for 2014.
3. In the MTFP, an indicative programme for 2014 was provided. Some changes to that programme were made by the time the Draft Budget was lodged on 8th October 2013, as the accompanying report to the Draft Budget makes clear. Those changes are:

1. Funding of £8,188,000 for additional primary school accommodation rather than £15 million for a replacement school';
2. £1.55 million for Sports Strategy Infrastructure (not covered in the MTFP);
3. £10.2 million for Phase 1 of the Future Hospital (not covered in the MTFP);
4. £0.5 million for Future Hospital Planning rather than £2 million;
5. £6,657,000 for the T&TS Infrastructure Rolling Vote rather than £10,657,000;
6. £10.1 million for Phase 1 of the Liquid Waste Strategy rather than £3.1 million; and
7. £1,252,000 for Fiscal Stimulus and Parish Projects (not covered in the MTFP).

4. Some of these changes relate to the proposals for the three major capital projects which we shall cover in the next chapter.
5. Departmental capital expenditure (not including housing) is intended to be £66,692,000 whereas the corresponding amount in the MTFP was forecast to be £57,502,000. As a consequence, the estimate for capital expenditure on housing has reduced from £31,390,000 to £22,200,000. We questioned the Minister on why this was so and were advised that the Department of Treasury and Resources was now operating on the basis that housing would be incorporated as of July 2014. Consequently, enough capital expenditure had remained allocated for the first part of the year but afterwards, it was expected that the newly incorporated Housing Association would fund its own capital

expenditure (for which explicit States approval would not be required).[61] We are uncertain whether this means that housing capital expenditure will therefore effectively fall out of the table describing capital expenditure.

6. We are also therefore uncertain what this will mean for the 2015 Capital Programme which the Minister will propose as part of the Draft 2015 Budget. In the MTFP, the Assembly agreed to a spending envelope of £77,341,000, of which £45,873,000 would be for Housing Funding. If the housing element were effectively to disappear once incorporation occurs, but the overall spending envelope for capital expenditure were to remain at approximately £77.3 million (as described in the MTFP), this would suggest that the Minister will have greater scope to bring forward further proposals for 2015 for other Departments beside Housing beyond those which were indicatively shown in the MTFP for that year. That would be dependent, however, upon the identification of further funding sources for such additional proposals as the expenditure could not be undertaken without requisite funding being available.
7. The FPP has recommended that "further work should be undertaken on the nature of the capital programme, in particular distinguishing between spending to maintain and renew existing infrastructure and spending on new or enhanced infrastructure."[62] This chimes with comments we received from the Education and Home Affairs Scrutiny Panel. The 2014 Capital Programme includes £1.55 million for Sports Strategy Infrastructure. Whilst welcoming the investment for improved sports facilities, the Panel has also advised us of its concerns that a large part of this investment merely enables the States to catch up on its relative neglect of maintenance of sports facilities in recent years.

Funding Sources

8. We noted the change in anticipated housing capital expenditure in 2014 when considering the funding sources for the Capital Programme for that year. There have been slight changes from what was shown in the MTFP. For instance, there is now funding of £3 million due to come from the Currency Fund which was not anticipated at the time of the MTFP. We were advised that the Minister is under no obligation to maintain the same funding sources for the Capital Programme as that shown in the MTFP.

Economic Impact

9. One question we sought to address was how much capital expenditure would in fact impact upon the economy in 2014. This is a question also relevant in the longer term to the three major capital projects of Housing, Hospital and Liquid Waste but we shall deal with the matter here. The allocation of funds is not the same as the funds actually being used. In that regard, we were advised that "a substantial part" of the 2014 Capital Programme would be spent and that all projects listed for 2014 would at least be started.
10. We were informed that, in response to FPP recommendations made in 2012, the Department of Treasury and Resources had provided the FPP with a report to show the economic impact of anticipated capital expenditure. From the FPP's perspective, we were told, capital expenditure was taken to have an economic impact when a tender for a project was awarded. On that basis, we were advised that the economic output for 2014 (not including States Trading Operations) was expected to be £110 million, comprising £49 million on major capital projects; £23 million on the Departmental programme; and £37 million brought forward from previous years. The relevant figures for 2015 and 2016 were expected to be £138 million and £166 million respectively. We were also informed that a new reporting mechanism for the Council of Ministers on capital expenditure had been developed which would include reporting of whether local contractors had been used for existing capital projects.[63]
11. The Institute of Directors highlighted the need for the construction industry to be supported, due to its role within the economy:

"We are not seeing the projects being passed in order to generate the construction industry moving on. In relation to the unemployed, a lot of them are low skilled and the construction industry, after the fulfilment industry have gone, must be an obvious outlet for these people."[64]

12. The Chamber of Commerce also emphasised the need for the economic impact to be felt within the local economy and for it not to be lost elsewhere:

"What we would want to see is given that the budget is a considerable investment, we would want to see some parameters, some way of guaranteeing that that money does flow into the local economy and does not support, say, the U.K. (United Kingdom) economy in terms of importing labour or supplies."[65]

The Chamber welcomed the close to £90 million of capital expenditure which would be allocated for 2014.

13. The need for the Capital Programme to make some economic impact was highlighted by the FPP's  report,  in  which  the  FPP  was  critical  that  capital  expenditure  in  2012  had  only amounted to £36 million – only half of what had been anticipated at the time of the FPP's previous report. This consideration included an examination of £27.1 million of additional funding which the Assembly had agreed in 2012 to provide to the Department of Housing, essentially as a fiscal stimulus measure, but of which only £12 million had been spent. The FPP's statements are borne out in the Financial report and Accounts for 2012. The FPP has therefore  recommended  that  this  situation  not  be  allowed  to  re-occur  and  has  also recommended that "any bottlenecks and barriers" be identified and addressed.[66]
14. The FPP has also recommended that the Capital Programme be examined in order to determine which elements are new and which relate to refurbishment or renewal of existing assets. The results of such an examination would help to clarify whether there is a structural deficit within the States' finances.
15. CIPFA has highlighted concerns regarding capital expenditure for 2014, given the track record for 2012 and advised that the "impact would be predicated upon the way that such budgets are constructed and the strength of the underlying assumptions used," CIPFA had previously advised us in a similar vein during our review of the MTFP.

KEY FINDING

16. As the FPP has highlighted, and as the 2012 Accounts make clear, capital expenditure in 2012 did not reach the levels which had been promised. There was a failure to deliver  the  fiscal  stimulus  which  the  Executive  had  set  out  to  achieve  and  an opportunity was therefore lost.

RECOMMENDATION

17. The 2014 Capital Programme should be examined to determine which elements are new and which relate to refurbishment or renewal of existing assets in order to clarify whether there is a structural deficit within the States' finances.  
18. In our review of the MTFP in 2012, we recommended that the Annual Budgets for 2013, 2014 and 2015 should provide sufficient detail on individual capital projects, including the revenue consequences of those projects. This recommendation was accepted at the time by the Minister, who stated that "the Annual Budgets for 2014 and 2015 will include details of revenue implications of capital projects."[67]
19. Whilst the Draft Budget provides details for the individual projects listed on the 2014 Capital Programme, we have not found descriptions of the revenue implications of those projects (including any general statements of whether or not there would be any such implications) except in the case of Ash Cells and La Collette Headland (albeit no figures are attached to the revenue implications identified for that project). No revenue implications are listed amongst the Financial and Manpower Implications within the Draft Budget.

KEY FINDING

20. The Minister accepted a recommendation from the Scrutiny Review of the MTFP that the  Draft  Budget  provide  revenue  implications  for  the  2014  Capital  Programme. However,  the  Draft  Budget  does  not  indicate  such  implications  for  each  of  the projects on the Programme.

10. MAJOR CAPITAL PROJECTS

Introduction

1. For  some  time  prior  to  the  Draft  Budget's  publication,  the  Minister  for  Treasury  and Resources made it clear that, alongside the Budget's more commonly seen proposals (such as taxation), he would bring forward proposals in respect of three major capital projects: housing, the hospital and liquid waste.
2. For the Housing Project, the Minister is proposing that up to a maximum of £250 million be borrowed externally. For the Hospital Project, he is proposing that investment returns from the Strategic Reserve be used over a ten-year period to fund a replacement hospital at a cost of £297 million. The first tranche of that (£10.2 million) is listed amongst the 2014 Capital Programme. £10.1 million is included in the 2014 Capital Programme for the Liquid Waste  Project. The  report  accompanying  the  Draft  Budget  indicates  that  a  spending envelope of £75 million has been identified for the construction of a new sewage treatment plant but the overall funding mechanism is not proposed as part of the Budget proposition. Nevertheless, the Draft Budget indicates what the funding mechanism for the Liquid Waste Project  could  entail:  future  Capital  Programmes  are  proposed  for  use  alongside  some internal borrowing from the Currency Fund.
3. The Institute of Directors welcomed the medium- to long-term impact of the construction projects and expressed its pleasure that consideration had been given to major capital projects.[68] The Chamber of Commerce made similar comments.
4. Our advisor from CIPFA was complimentary of the overall work undertaken by the Minister and his Department in identifying funding options for the three projects, advising that "in respect of all three projects we are satisfied that Treasury and Resources have properly explored all alternative funding options – indeed we would commend the work that has been undertaken  in  this  regard." Nevertheless,  CIPFA  highlighted  some  specific  matters  in relation to the projects which we shall cover below. CIPFA advised that innovative funding options had been considered and noted that one of the attributes of the Draft Budget was that the three major projects could have a significant economic impact.

KEY FINDING

5. Although there are some questions regarding the details of the proposals, the Draft Budget displays some welcome long-term thinking in respect of the funding of Major Capital Projects.

The Housing Project

6. Part (e) of the proposition seeks States approval for external borrowing of up to £250 million. This is in keeping with the provisions of the Public Finances Law in respect of the Budget, as Article 10(3) of the Law allows for the Minister to propose borrowing as part of the Budget. The Minister confirmed that no further decisions beyond the Draft Budget would be required of the Assembly for the Housing Project to proceed.
7. The Draft Budget makes reference to previous decisions taken by the Assembly in respect of housing and, indeed, a number of significant matters have already been settled upon. With the adoption of The Reform of Social Housing (P.33/2013), the Assembly agreed that States- owned housing should be incorporated. Alongside that proposition, Members had been provided with further information on the proposals in  States of Jersey Housing Transformation Programme: Full Business Case (R.15/2013). The proposals were subjected to review by the Health, Social Security and Housing (HSSH) Scrutiny Panel (see Housing Transformation Programme Review (SR6/2013)).
8. The material in P.33/2013 and R.15/2013 contained references to external borrowing and, as we were advised during our public hearings, it should therefore not come as a surprise to see that the Minister has proposed such a funding mechanism for the Housing Project. Indeed, Paragraph 3.62 of  The Reform of Social Housing (P.33/2013) stated that "the Minister for Treasury and Resources has subsequently indicated that the States of Jersey may, for major investments such as social housing, which have long term benefits and a defined income stream, decide to borrow in order to finance the project."
9. Our advisor from CIPFA had the opportunity to consider the 30-year financial model developed by external advisors and used by the Department of Housing for the Housing Transformation Programme. He has stated that "this is a well-developed Financial Model which is industry standard in construction. We would consider this model to be robust and are of the view that this model should provide a solid basis for the company moving forward." CIPFA therefore indicated its support for the proposal, albeit with some comments in specific areas.
10. For instance, CIPFA has indicated some concerns with the assumption "that there is no additionality in terms of funding required by the taxpayer for this proposal" and it does not agree with that assumption. For the assumption to work, CIPFA advised us, "there requires to be the condition that the net migration to the additional tenancies from the Private Sector will not be replaced by fresh Private Sector tenancies and consequential Income Support Housing Component." CIPFA do not see this as a likely scenario and believes additional spend on the Income Support Housing Component will be required.

11. The Draft Budget explains the options available in terms of external borrowing. It is apparent that the preferred option is for the borrowing to be done through the issuing of a public rated bond. The HSSH Scrutiny Panel reported in SR6/2013 that bond lending was preferable to bank lending.
12. The President of the Chamber of Commerce advised us that he was not opposed to the idea of external borrowing to fund the Housing Project. He stated that, from his perspective, there did not appear to have been much debate around alternatives, however.[69]
13. The Housing Project would require the States to secure a credit rating. At our public hearing with the Minister, we were informed that work was almost complete on securing a credit rating and that, once secured, it would mean Jersey was in a similar position to many other jurisdictions in having a credit rating and it would provide a statement of confidence in the Island's public finances. The Minister was confident that an AA+ rating could be secured for the Island:

"From the extensive discussions that we have had, we have got a very strong interest from lots of the world's biggest financial services companies in this bond and that came into sharp focus to me with meetings that I had with the Director of Financial Services in Washington, where all the financial services community was there."[70]

The Hospital Project

14. Similarly to housing, the Assembly has already made decisions in respect of the Hospital Project, a fact to which the Draft Budget refers.
15. In October 2012, the Assembly approved Health and Social Services: A New Way Forward (P.82/2012) which sought the re-design of health and social care services in Jersey. Part of the proposals was for a new hospital, further information on which was provided at the time in Hospital Pre-Feasibility Spatial Assessment Project: Interim Report (R.125/2012). In that report, it was stated that the potential cost of a new hospital could be between £389 million and £431 million (rising by approximately £60 million if other measures proposed in P.82/2012 were not implemented). P.82/2012 and R.125/2012 built upon the work undertaken by the Department of Health and Social Services through both a Green Paper and a White Paper. That work was reviewed by the HSSH Scrutiny Panel.
16. The vision expressed in the report accompanying P.82/2012 was for the delivery of "a new hospital, built to modern standards, within the next ten years." A preferred solution would be identified by the end of 2013 and detailed work undertaken in 2014. A preferred solution has been identified and the proposal is for a split-site solution involving redevelopment of both the existing hospital site and the Overdale site.

17. In Part (f) of the Draft Budget proposition, the Minister is seeking States approval for the transfer of £10.2 million from the Strategic Reserve to the Consolidated Fund for the "planning and creation of new hospital services in the Island." Approval is also sought for an "exception" to be made to the policy underlying use of the Strategic Reserve in order that it can be used for this purpose.
18. Work on the Hospital Project is still at a relatively early stage; we understand that it has been subjected to a Pre-Feasibility Study' and that is it now due to undergo a Feasibility Study'. We anticipate that the Project will be subjected to further review in due course by the HSSH Panel. We were advised that the running revenue costs for the projects have yet to be finalised. CIPFA has therefore recommended that "full operational costs are fully evaluated and the consequences considered against the overall MTFP financing capability in respect of the appropriate Health and Social Services Budgets."
19. Nevertheless, given the provisions of Part (f) of the Draft Budget, there were a number of issues that we considered in respect of the Project:

1. Was the use of the Strategic Reserve for this purpose justifiable?
2. How had the spending envelope for the Hospital Project been decided upon?
3. What impact would there be on the Strategic Reserve?

20. The Minister has indicated that borrowing would not be an appropriate funding mechanism for the Hospital Project as, unlike the Housing Project, there are limited opportunities for an income stream to finance any debt incurred. The use of existing resources' has therefore been chosen as the preferred option.
21. The Strategic Reserve is established by Article 4 of the Public Finances Law in which it is stated that the fund is a permanent reserve and should not be used "to defray directly expenditure of the States." Transfers to and from the Reserve are permissible under the Law and Part (f) of the Draft Budget is therefore proposed in accordance with Article 4(3) and 10(3)(f) of the Law.
22. The Draft Budget helpfully provides information on the history of the Strategic Reserve. It was created in 1986 and, over the years, has seen capital transfers to it of £177,175,224 and transfers out of £60 million. The Strategic Reserve has not been used, however, since 1999 and there has been an apparent hardening since that time of the position taken by the Assembly in respect of its use.
23. For the first years of its existence, there was no policy underlying the use of the Strategic Reserve beyond what was laid out in statute. Under previous public finances legislation, however, provision was made for the Finance and Economics Committee of the time to propose uses of the Reserve and it was under that provision that transfers out of the Reserve were agreed during the 1990s. That provision was removed with the introduction of the current Public Finances Law in 2005.

24. With the adoption of Economic Growth Plan (P.38/2005), the Assembly agreed that a new framework would be developed for the Strategic Reserve in which it would be "clearly reserved for use only if the Island faces a major shock to its economy."[71] The report accompanying P.38/2005 acknowledged that the uses to which the Strategic Reserve had been put during the 1990s had not been in keeping with the purpose for which it had been established. The report therefore stated that the Reserve would be "solely for the purpose of protecting the standard of living of future generations in the Island when the economy faces severe structural decline or a natural disaster. It would be off-limits for all other purposes and this could be made clear from the outset. The circumstances in which the Strategic Reserve could be accessed would be set out clearly in advance."
25. A policy was subsequently agreed for the Strategic Reserve with the adoption of Establishment of a Stabilisation Fund and Policy for Strategic Reserve (P.133/2006). That policy was subsequently amended with the adoption of Strategic Reserve Fund: Use for Bank Depositors' Compensation Scheme (P.84/2009). The Draft Budget refers to both in asking for an "exception" to be made to that policy.
26. The Minister has previously stated that he would not favour the use of the Strategic Reserve for one-off expenditure. In answer to an oral question in March 2012, for instance, he indicated that there was no reason to amend the existing policy. When he appeared before us at a public hearing, the Minister acknowledged that he had changed his mind in that regard and that he would not have done so if the Assembly had not tackled the deficit; if there were not more confidence in the economic outlook; and if investment returns on the Strategic Reserve had not performed so well.[72]
27. None of the submissions or testimony we received from other stakeholders or interested parties commented at great length on the proposed use of the Strategic Reserve. One member of the public who contacted us spoke against the proposed use, arguing that it would be better to have borrowed over the longer term (e.g. 50 years) and that the Strategic Reserve "should be allowed to grow and to be used for the purposes it was intended." Another correspondent, however, agreed that use of the Strategic Reserve would be appropriate for the Hospital Project. The Chamber of Commerce stated that use of the Reserve in this way was "an idea worth progressing" although there were questions to be

addressed regarding the anticipated investment returns (see below)[73] whilst the Institute of Directors advised that use of the Strategic Reserve "looks like an imaginative way of dealing with a problem and if the investment returns can be achieved then it certainly looks like a viable option." With "enough checks and balances," the Institute considered the use of the Strategic Reserve might be a risk worth taking.[74] CIPFA has highlighted that the proposed use could be seen to challenge the legal position, as set out in the Public Finances Law. Nevertheless, CIPFA also described the proposal as "an innovative solution" which was relatively low risk and appropriate. CIPFA agreed with the FPP's conclusion, however, that the proposal could not be described as cost free' from the public's perspective, despite statements in the Draft Budget that there would be "no new cost to the tax payer."

28. The FPP covered the proposed use of the Strategic Reserve in its report, expressing some concerns at the proposed use of the Strategic Reserve and stating that before any decision on whether to use the Reserve or not was taken, "the States should clearly define the purpose of the Strategic Reserve and set out conditions for its use, including how borrowing from the Reserve would be dealt with."[75] Under the Public Finances Law, the Minister is able to propose transfers from the Strategic Reserve at any time; it does not need to be done at the time of the Draft Budget.
29. It is apparent that the proposal to use the Strategic Reserve is not in keeping with current policy; the Draft Budget's request for an exception' to be made highlights that. The FPP has expressed some reservations as it could set a "worrying precedent." We understand that the legal position allows the Minister to propose transfers out of the Strategic Reserve and that once transfers are made to the Consolidated Fund, the legal provision that the funds not be used to defray directly expenditure of the States' no longer applies. It is ultimately therefore a political matter, rather than a legal one; a fact which highlights both the need for clear policy about the use to which funds from the Strategic Reserve should be used and the risk that a precedent might be set. CIPFA has advised us that it has seen similar moves elsewhere where "organisations start out to use investment performance [from reserves] to fund recurring expenditure which has, through the twin pressures of funding retrenchment and service growth expectation, led to the organisation utilising the capital component of such reserves and significantly diminishing the value of the reserve." In CIPFA's words "when it is gone – it is gone." Politically speaking, there is therefore a risk that the use of the Reserve in this way could set a precedent for further calls for its use. We raised this point with the Minister who advised us that he would not be in favour of other one-off uses.

KEY FINDING

30. The  Panel  supports  the  FPP's  findings  and  recommendations  in  respect  of  the Strategic Reserve that matters should be resolved before any transfers from the Reserve are agreed and highlights the risk that a precedent could be set with its use for the Hospital Project.

RECOMMENDATION

31. The Minister for Treasury and Resources should ensure that the purpose and optimal size of the Strategic Reserve and the conditions for its use are clearly defined before seeking  approval  for  a  transfer  from  the  Strategic  Reserve  for  use  towards  the Hospital Project.
32. In the Draft Budget, the Minister indicates that a spending envelope of £297 million has been identified for the Hospital Project. At his public hearing with us, he emphasised that the word agreed' should not be used in terms of the spending envelope; rather, in determining that figure, the Minister was "setting out what we expect to be the envelope of funding for the hospital." During the Pre-Feasibility Study, some numbers had developed (see Paragraph
    15. "which we did not think were affordable."[76]
33. Nevertheless,  we  were  advised  that  the figure  of  £297 million  would  cover  new  build, refurbishment  of  existing  facilities,  accounting  cost  and  some  short-term  theatre requirements and that allowance had also been made for contingency and optimism bias. Our advisor from CIPFA has highlighted that a 5% contingency has been included, as well as a 10% optimism bias (equating to £21 million). Optimism bias involves adjustments to the estimates  for  a  project's  cost,  benefits  and  duration  to  take  into  account  an  inherent tendency to be over  optimistic. The Minister  was confident that the Project would be delivered in the spending envelope that had been set out':

"Our message to the Health Department is that is the budget and that is the budget that has got to be worked within. I was uncomfortable and not prepared to agree a budget that was £450 million."[77]

34. The  Institute  of  Directors  expressed  some  doubt  as  to  whether  the  Project  would  be delivered within budget.[78] Our advisor from CIPFA has highlighted that the methodology used to construct the spending envelope substantially matches the HM Treasury Green Book; however, points raised in HM Treasury's Supplemental Green Book' Guidance did not appear to be present. Such guidance, we were told, recommends optimism bias of 51% for specialist projects such as the Hospital Project and a duration timeline excess of 39%.

CIPFA indicated the work undertaken by W.S. Atkins during the Pre-Feasibility Study had been industry standard and robust; however, it would be dependent upon the "accuracy of the specification in terms of meeting the clinical resources required to deliver the appropriate health outcomes." A 10% optimism bias would, in CIPFA's view, potentially prove to be inadequate.

35. CIPFA ultimately concluded that "we do get the impression that overall project specification has been tailored to an acceptable cost envelope that can be financed through the Strategic Reserve." This raises the question of whether the costs had been established on the basis of what was affordable or on the basis of what was required from a clinical and health perspective. CIPFA had indicated that, in its view, the project currently remains "more aspirational than fully specified and costed."
36. There does therefore appear to be at least some doubt regarding the spending envelope for the Hospital Project as although a sum has been identified (and it is a sum in which the Minister  reportedly  has  confidence),  it  has  not  been  agreed'.   The  different  scenarios presented in the Draft Budget for the Hospital Project all assume a spending envelope of £297 million.

KEY FINDING

37. The spending envelope of £297 million for the Hospital Project may not represent the final figure.

RECOMMENDATION

38. The Minister for Treasury and Resources should provide the Assembly with scenarios regarding the Hospital Project which assume a higher spending envelope than £297 million.
39. In monetary terms, the Draft Budget only seeks approval for the transfer of £10.2 million from the Strategic Reserve to the Consolidated Fund for subsequent use as part of the 2014 Capital Programme. It is anticipated, however, that the Minister will return in due course with proposals to transfer much larger sums in order that the remainder of the Hospital Project can  be  financed.   The  Minister  advised  us  that  he  currently  anticipates  two  further withdrawals to make up the necessary funding. The first of these would be brought as part of the Draft 2015 Budget, unless there was an opportunity to bring it forward earlier.
40. The  Minister  subsequently  explained  that,  in  theory,  the  Assembly  could  approve  one transfer and not the other, however undesirable that might prove to be in practical terms.[79] It would appear advisable, however, for break points' to be built into the Hospital Project.

KEY FINDING

41. The  Panel  welcomes  the  Minister's  intention  to  provide  break  points  during  the Hospital  Contract. All  withdrawals  from  the  Strategic  Reserve  require  States approval.
42. It is proposed that investment returns from the Strategic Reserve be used to fund the Hospital Project over a ten-year period.
43. As of May 2013, the Strategic Reserve stood at £720 million, an increase of some £170 million since mid-2010 and the inception of the Common Investment Fund. The Draft Budget reports that the capital level of the Strategic Reserve therefore stands at £117,175,224, although  taking  real  term  growth  into  account,  that  level  could  be  taken  to  stand  at approximately £230 million. The FPP has indicated that there may be other ways of viewing and  establishing  the  capital  element  of  the  Strategic  Reserve.   Given  that  the  policy underlying use of the Strategic Reserve is for the capital to be used, there does need to be clarity about how much of the Reserve is indeed to be viewed as capital.
44. Both the Chamber of Commerce and the Institute of Directors questioned the anticipated investment returns on the Strategic Reserve. The Draft Budget explains that 10% returns have been achieved over the past three years and states that an average return of 5% has been assumed for the period over which the Strategic Reserve is to be used for the Hospital Project. In terms of sensitivity analyses, the Draft Budget also sets out the possible status of the Reserve were returns of 2% or 10% achieved, or if there was a desire to complete the Hospital Project within five years, rather than ten years. The analyses are all based upon the spending envelope of £297 million.
45. The Chamber of Commerce advised us that investment returns would not remain static each year and asked how, in a bad year', it would be funded. The Chamber also advised us that: