MTFP - 2016 -2019 - Report - 2 October 2015

CONTENTS

1. EXECUTIVE SUMMARY.........................................................................................................1
2. KEY FINDINGS AND RECOMMENDATIONS.........................................................................4
3. INTRODUCTION.....................................................................................................................9
4. EXPENDITURE AND INCOME FORECASTS.......................................................................10

1. The Fiscal Policy Panel (FPP) ...............................................................................................10
2. The Financial Forecasts – Income.........................................................................................11
3. Proposed States Income Targets 2016 - 2019.......................................................................17
4. Proposed Total States Net Expenditure for 2016 - 2019........................................................18
5. Departmental Spending Limits...............................................................................................20
6. Capital Programme................................................................................................................20
7. States Assets.........................................................................................................................21

5. CENTRAL CONTINGENCY ALLOCATIONS........................................................................23

5.1 Economic and Productivity Growth Drawdown Provision.......................................................26

6. SAVINGS AND USER PAYS ................................................................................................27

1. Proposed Sustainable Funding Mechanism for Health...........................................................28
2. User Pays charges ................................................................................................................29
3. States Payment of Rates.......................................................................................................31

4. Non Staff Savings..................................................................................................................32
5. People Savings......................................................................................................................32
6. Top Line Savings...................................................................................................................35
7. What if the savings are not made?.........................................................................................36

7. BALANCING THE BOOKS...................................................................................................38
8. APPENDIX 1 DEPARTMENTAL FRAMEWORK ..................................................................39
9. APPENDIX 2: ADVISOR'S REPORT – CIPFA......................................................................40
10. APPENDIX 2: ADVISOR'S REPORT – MJO Consultancy ..................................................71

11. APPENDIX 3: PANEL MEMBERSHIP, TERMS OF REFERENCE AND EVIDENCE

CONSIDERED............................................................................................................................105

1. EXECUTIVE SUMMARY

The Panel presents its report on the MTFP 2016 – 2019 ("MTFP2"). It has received advice from the Chartered Institute of Public Finance & Accountancy (CIPFA'), and also Dr Michael Oliver. A summary of key points is as follows:

• States Members are being asked to approve income forecasts totalling £2.9 Billion.
• The income forecasts are considered to be optimistic.
• States Members are being asked to approve the principle of a health care charge (tasked with raising £35 million per year),
• States Members are being asked to approve a mechanism to raise taxes in order to pay for the States to pay Parish rates.
• No detail has been given as regards these new income raising measures.
• States Members are being asked to approve expenditure totalling £3.1 Billion.
• There is no detail given as to any components of the expenditure for the years 2017, 2018 or 2019.
• States Members are being asked to approve a total of £148 million described as Contingency / Central Allocation.
• No detail has been provided as to the constituent elements making up the central allocation / contingency amount, for the years 2017, 2018 or 2019.
• There is also reference to user pays charges (including a charge for liquid waste) designed to raise £10 million annually from 2019.
• There is no detail as to how the liquid waste charge will be raised.
• The treatment of liquid waste is already paid for by Islanders through general taxation.
• No studies have been completed to analyse the distributional impact on Islanders of any of the new measures contained in the proposed MTFP.
• A very simple estimate indicates that the additional amount to be charged to each Household will be just over £1,000 per year.

Our advisers have made the following remarks about the proposed MTFP:

• There has to be a material change in the alignment of income and expenditure if there is to be a reasonable prospect of achieving a balanced budget' position over the four year period.
• At this stage within the cycle, running a four year MTFP based on only one year of detail and three years of control totals, with no reasonable detail for these three subsequent years, negates the benefits of the a medium term financial plan and significantly reduces its utility.
• Although a key attribute of a medium term financial plan is the provision of stability, it is clear that a combination of imprudent assumptions used within MTFP1 and lack of agility in adapting to a deteriorating financial position has driven the creation of a range of measures designed to counter emerging deficits.
• Strategic Financial Planning is in recovery mode rather than setting a stable financial strategy that delivers robust financial performance. At worst, using specific reserves to fund core expenditure and creating measures which are in effect short term tactical solutions without due focus being applied to causal drivers is not going to create the necessary conditions that will successfully recalibrate financial strategy for the medium and longer term.
• Much has been said about Jersey's "strong" balance sheet positionNo matter how strong' the States net asset position appears to be - there is not an infinite timeline which would allow it to continually support/maintain a low tax/high spend jurisdiction especially with significant investment needs to cover demographic pressures.
• In respect of MTFP 2 the targeted £145 million of savings, charges and other measures by 2019 is highly ambitious and there is an acknowledged risk of non-achievement. Although MTFP 2 provides for an element of contingency, should such targets fail to be achieved, there is a lack of precision and definition on alternative options.
• In our view (CIPFA) there appears to be almost a cultural acceptance that there will be a significant element of non-achievement. It is our view that a number of key assumptions, principally around Income Tax and Savings targets including £70 million of People savings invite an unacceptable level of risk.
• The introduction of a Health Charge and User Pay strategy scheduled to bring a combined additional income of £45 million per annum in 2019 is considered to be insufficiently developed at this stage to validly incorporate within a meaningful plan designed to eliminate the structural deficit.
• The Panel's independent expert advisers CIPFA use a Financial Scoring Model that is the "gold standard" globally for best practice on Financial Management in the Public Services and is used extensively in North America, the Middle East and Australasia.

• CIPFA has stated that the scoring of this MTFP is significantly lower than what they would see in most of the organisations they work with. The Panel compared the total scoring used by CIPFA for MTFP 2012 – 2015 to MTFP 2016 – 2019 and was concerned to find that a number of these had deteriorated.
• This is consistent with the findings within the Comptroller and Auditor General's Report – Review of Financial Management dated 2nd April 2015, whereby a theme of poor financial management was considered to be prevalent with recommendations to reinforce a culture of collective responsibility for financial management issues by the Council of Ministers and the Corporate Management Board.

In Conclusion

• There is insufficient detail provided in the MTFP 2016-19 regarding the planned expenditure by the Council of Ministers for the years 2017, 2018 and 2019, and significant uncertainty about the associated income forecasts.
• The Panel recommends that in the absence of adequate detail with which to inform its decision, the States Assembly should only approve expenditure and income for 2016 at this time. It concludes that the Assembly will only be suitably informed to make such significant spending decisions for those years by waiting for the details to be provided in the Addition to the MTFP, which is to be lodged by 30th June 2016.

2. KEY FINDINGS AND RECOMMENDATIONS

Income Forecasting Group (IFG)

Finding 1

Whilst we fully endorse the intention to strengthen the IFG, the Panel is concerned that with all the members of the IFG being civil servants with one exception, it remains short of the wide breadth of knowledge required to enable it to produce accurate and meaningful forecasts that adequately take into account particular local conditions. (Page 10)

Recommendation 1

The Panel strongly recommends that membership of the IFG should consist of a broader base, which should include an equal split between private and public sector representation. (Page 10)

Income Forecasts

Finding 2

There are still significant risks in running the MTFP 2016-19 income tax yield estimates as currently presented, and the Panel and its advisers remain unconvinced about the validity of assumptions used to predict Income Tax, with predicted increases of 4.5%, 5.3%, 5.6%, and 4.1% respectively for 2016 – 2019. (Page 14)

Recommendation 2

Based on expert advisor opinion, the Panel strongly recommends that the Island's current tax regime is challenged and reviewed in advance of the lodging of the next MTFP. (Page 15)

Finding 3

In order to fully deal with the issues highlighted within this report and allow for the setting of a robust financial strategy, there needs to be a cultural acceptance within the States of the underlying factors that have had a negative impact upon the 2015 Budget Setting process and the need to pursue a strategy of recovery and stability. (Page 16)

Recommendation 3

The Panel recommends adopting an income forecast outlining a point between the lower and central scenarios outlined by the Income Forecasting Group. (Page 16)

Finding 4

There is a high level of uncertainty around the range applied to income forecasts and they are not sufficiently prudent. (Page 17)

Recommendation 4

The Panel recommends that the revised income line should be used to inform expenditure levels in the June 2016 addition for the years 2017, 2018 and 2019. (Page 17)

Finding 5

There is insufficient detail provided in the MTFP 2016-19 regarding the new income raising measures by the Council of Ministers for the years 2017, 2018 and 2019. (Page 18)

Recommendation 5

The Panel recommends that, in the absence of adequate detail with which to inform its decision, the States Assembly should not approve income forecasts for the years 2017-2019 at this time, but should await the details to be provided in the Addition to the MTFP for the years 2017, 2018 and 2019 which is to be lodged by 30th June 2016. (Page 18)

Proposed Expenditure for 2016-19

Finding 6

The total amount of expenditure the States Assembly is being asked to approve is approximately £3.1 billion for 2016 – 2019. (Page 20)

Finding 7

There is insufficient detail provided in the MTFP 2016-19 regarding the planned expenditure by the Council of Ministers for the years 2017, 2018 and 2019. (Page 20)

Recommendation 6

The Panel recommends that in the absence of adequate detail with which to inform its decision, the States Assembly should only approve expenditure for 2016 at this time. (Page 20)

Recommendation 7

The Panel recommends that the States Assembly should await the details to be provided in the Addition to the MTFP for the years 2017, 2018 and 2019, which is to be lodged by 30th June 2016, before taking any decision to approve expenditure for those years. (Page 20)

Capital Programme

Finding 8

The States capital projects programme has the potential of creating a high level of risk of a build-up of inflationary pressure in Jersey's economy and creating bottlenecks within the local economy. (Page 21)

Recommendation 8

States capital projects should be managed in a timely manner taking into consideration the consequences of the local economy and the prevailing economic conditions. (Page 21)

Finding 9

The Panel is concerned that no financial implications for the new hospital are referred to within this MTFP. (Page 21)

Recommendation 9

When plans are brought forward for the new hospital or any other significant capital projects, there should be full recognition of the effect of life cycle costs and any other revenue or capital impacts made within the relevant MTFP. (Page 21)

Central Contingency Allocations

Finding 10

A sum totalling £148 million has been included as a central allocation/contingency figure in the MTFP 2016-19. (Page 25)

Finding 11

No detail has been provided as to how the figure being put forward for contingencies for 2017, 2018 and 2019 has been calculated. (Page 25)

Finding 12

It is unclear whether the £19 million identified for "extraordinary items" in 2016 is discounted from the contingency allocations provided for subsequent years. (Page 25)

Finding 13

The safeguards around contingency do not do enough to stop the Council of Ministers declaring unspent contingencies as a saving. (Page 25)

Recommendation 10

Beyond the extraordinary items' identified for contingency allocation in 2016, stronger safeguards should be implemented to ensure all other spending from the central contingency allocation receives advance approval by the Assembly. (Page 26)

Recommendation 11

Controls should be in place to require States Assembly approval to release contingency expenditure, no more than one year before the period to which it relates. (Page 26)

Savings and User Pays - General

Finding 14

The £40 million of non-staff savings being proposed includes £10 million to be raised through user pays charges. (Page 27)

Recommendation 12

The Council of Ministers should not, within any MTFP, present figures which conflate savings with user pays charges. (Page 27)

Savings and User Pays: Health Funding Mechanism and Liquid Waste Charge

Finding 15

If the States approve Summary Table A, they would, in effect, be approving the introduction of a health care charge. (Page 29)

Finding 16

If the States approve the MTFP 2016-19, they would be, in effect, be approving the principle of raising £10 million from Islanders through additional user pays mechanisms. (Page 29)

Finding 17

Within the MTFP 2016-19, it is the clearly stated intention of the Council of Ministers to introduce a user pays liquid waste charge as a significant contributor to the £10million identified to be raised through new user pays charges. (Page 29)

Finding 18

The cost of the removal and treatment of liquid waste is currently paid for by Islanders through general taxation. (Page 30)

Finding 19

Each household will be asked to contribute in the region of £1,000 per year if the healthcare and £10 million user pays charges are contained in this MTFP are implemented. (Page 30)

Finding 20

The Panel is concerned that no impact studies have been completed regarding income, expenditure, tax and user pays. (Page 31)

Recommendation 13

The Panel strongly recommends that appropriate impact studies are carried out and presented to the States Assembly in advance of the lodging of the MTFP 2016-19 Addition. (Page 31)

People Savings

Finding 21

No impact studies have been undertaken with regards to the effect these changes will have on the economy and overall unemployment in the Island. (Page 33)

Finding 22

Insufficient consultation has been carried out with the Unions specific to the £70 million of proposed people savings. (Page 33)

Recommendation 14

The Panel strongly recommends that appropriate impact studies are carried out and presented to the States Assembly in time for the lodging of the MTFP 2016-19 Addition. (Page 33)

Finding 23

It remains the case that it would be prudent of the Council of Ministers to assess the affordability of the employer's contribution cap within the context of an employer's contribution which is lower than 16% or 16.5%. (Page 35)

Top Line Savings

Finding 24

The top slicing approach to savings adopted by the Council of Ministers will result in no real transformational change and offers little drive to change the culture of spending within the States. (Page 35)

Finding 25

The pattern of year end spending within the States of Jersey is indicative of undisciplined spending, with budget holders spending to avoid loss of budget rather than focusing on managing their costs. (Page 36)

Recommendation 15

Treasury and Resources must assess the reasons behind the pattern of year end spending and put measures in place to ensure that the culture of spending to avoid loss of budget, instead of budget holders managing their costs in a disciplined manner, is brought to an end. (Page 36)

What If The Savings Are Not Made?

Finding 26

The Panel and its advisers have significant concerns as to whether the total identified savings contained within the MTFP 2016-19 will be achieved within the envisaged timeframe. (Page 37)

Recommendation 16

The Minister for Treasury and Resources must ensure that growth expenditure is only released when the prescribed savings targets contained within the MTFP 2016-19 have been achieved, regardless of any additional income raised. Additional income is not a substitute for achieving the approved savings. (Page 37)

Balancing the Books

Finding 27

It is important that any measures taken by the Council of Ministers to ensure a positive balance is maintained on the Consolidated Fund do not impact on the delivery of the £145 million of measures needed to balance the books. (Page 38)

3. INTRODUCTION

P.72/2015 Medium Term Financial Plan 2016 – 2019 (MTFP 2') was lodged au Greffe on 14th July 2015 by the Council of Ministers, having originally been due to be lodged by the end of June 2015, with a debate date of 6th October 2015. It might be noted that the Annex to the MTFP was only presented to the States Assembly on 24th July, and a Corrigendum to Figure 18 was issued as late as 17th September 2015.

This delay in lodging and difficulty in accessing information prior to this added significantly to the already extremely challenging timetable provided for scrutiny of such an important and complex Proposition, effectively leaving ourselves and the other Scrutiny Panels the task of conducting the bulk of our work in August, with all of the difficulties that month brings with the inevitable absences across the board due to the holiday period. The timing issue is one that Scrutiny will continue to take up with the Council of Ministers to ensure appropriate time is provided for the necessary scrutiny that should be undertaken of such an important document.

Despite these circumstances, the Panel has now completed its Review and is pleased to present its report. We have been grateful for the assistance of two independent expert advisors during the course of the Review, Mr Stuart Fair of CIPFA and Dr Michael Oliver of MJO Consultancy. Both advisors worked on MTFP 1 and, as with that Review, each has focused on discrete aspects of the plan. Their reports are attached in full as Section 9: Appendix 2 and Section 10: Appendix 3 respectively.

In addition, the Panel produced a framework of questions which it circulated to all other Scrutiny Panels. This has led to cohesive working across Scrutiny Panels resulting in a consistent approach to the Review. Panels were given the opportunity of tailoring this framework to suit the Department's needs. The question framework is appended to this Report (Section 8: Appendix 1).

It might be noted that the MTFP was intended to represent a significant development in the management of public finances. Before the first MTFP in 2013, debates about spending had taken place on an annual basis, but MTFP 1 set spending limits for three years with the aim of providing Departments with greater certainty and increased flexibility in the management of their budgets.

However, as a result of the 2015 amendment to the Public Finance Law (P.42/2015 Public Finances (Amendment of the Law no.2) (Jersey) Regulations 201-), although MTFP 2 establishes the frameworks for income and expenditure for four years from 2016 – 2019, the detail is only given for 2016. An "addition" to this MTFP will be lodged in June 2016 where the detail for 2017, 2018 and 2019 is due to be provided, and the Panel will undertake a further Review as that information emerges.

4. EXPENDITURE AND INCOME FORECASTS

A Ministerial Decision establishing the Income Forecasting Group (IFG) was signed on 15th December 2014. This group replaces the Income Tax Forecasting Group (ITFG) and allows it a wider remit to cover all States income as opposed to just income tax. When established, it was proposed the IFG would be more formalised within a structured reporting framework and with formal minutes being made available to the Council of Ministers. The members of the group are:-

• Treasurer of the States of Jersey
• Comptroller of Income Tax
• Director of Financial Services
• Chief Officer, Economic Development
• Chief Officer, Social Security
• Advisor, International Affairs
• Deputy Director of Tax Policy
• States of Jersey Economic Advisor
• An external person appointed by the Minister for Treasury and Resources (presently Mr

K. Keen)

The objective of the IFG is to produce an absolute minimum of two forecasts each year on all States  income from  taxation  and  social  security  contributions  which  will  be  informed  by economic  assumptions  endorsed by  the  Fiscal  Policy  Panel  (FPP).   The  IFG  reports are presented to the Minister for Treasury and Resources in advance of the Council of Minister's consideration.

1. THE FISCAL POLICY PANEL (FPP)

The FPP was formed in October 2007 to make recommendations on Jersey's fiscal policy to the Minister for Treasury and Resources and the States with reference to:

• The strength of the economy in Jersey
• The outlook for the Jersey and world economies and financial markets
• The economic cycle in Jersey

• The medium and long term sustainability of the State's finances
• Transfers to, and from, the Strategic Reserve and Stabilisation Fund

The FPP has endorsed the economic assumptions presented in April 2015. The Panel is concerned that following publication of its annual report in September 2015, the FPP presented a new set of economic assumptions which had not been allowed for in the draft MTFP. At its meeting with the FPP and the States of Jersey Economist, the Panel was told the impact of these figures would be used for the next IFG report which would not be published prior to the debate on the MTFP. The Panel is concerned that these updated figures may show a decrease in the income forecasts The States of Jersey Economist, however, has informed the Panel that such information should not be used in isolation and that the associated figures would need to be put into the forecasting model for the results to be known.

Concern was also expressed by both of the advisors to the Panel as to the robustness of the income forecasts being applied; excerpts of which are noted below.

"Looking back at actual spend and income positions covering the first MTFP (MTFP1), there are significant negative variations on both income and expenditure which highlight the vulnerability of the strength of assumptions used within MTFP1. Within the last two years the overall financial position of the States has continued to deteriorate. Financial performance reporting for the first two quarters within 2015 highlights a widening gap between tax yields against profiled estimate."[1]

"The outcomes expected for income tax revenues have been significantly adrift from those predicted at the start of the MTFP 1 process. MTFP 2 begins from the premise that total income will be £20 million adverse compared to the 2015 Budget (the bulk of which will be made up of personal income tax). It is instructive to consider the deterioration in income forecasts since 2012."[2]

The FPP published a pre-MTFP Report in January 2015 and an annual report in September 2015 commenting on the MTFP, as drafted. Within its report in January 2015, the FPP suggested a risk of a flat trend for GVA and productivity growth from 2018 onwards. It goes on to say future fiscal trends should be tested against a trend rate of real economic growth of 0% a year. It is within the recommendations of the FPP Report that Jersey should develop a plan that will address any structural deficit by 2018 and 2019.

It should be noted the FPP is supportive of this draft MTFP and consider its four guiding principles from the Pre-MTFP Report in January 2015 have been followed during its development.

2. THE FINANCIAL FORECASTS – INCOME

On review of the income forecasts, the Panel is very much of the opinion there is a high level of uncertainty around them and do not believe they are on the side of prudence. The Panel is concerned too much reliance is placed on income and economic forecasts to balance the books and has doubts as to how these will be realised. The Panel also notes the previous Corporate Services Scrutiny Panel addressed the reliance on income and economic forecasts as a concern in the previous MTFP Report. There is also concern from the Panel that the MTFP is setting the income and expenditure envelope for 4 years without giving the granular detail.

CIPFA have stated within their report "it is difficult to draw consistencies between the FPP's Jersey Annual Report September 2015 narrative on expected growth and the relevant GVA, Company profits, employment average earnings metrics with the income base estimates used to produce the revised income tax estimates."[3]

The Panel raised the question of what the consequences would be for the Island's finances should the actual income not meet the forecasts during its hearings with both the Chief Minister and the Minister for Treasury and Resources:

The Connétable of St. John :

If I may, Minister, if as with the previous M.T.F.P., actual income does not meet the forecasts, what is your plan B for raising the level of income required to fund the proposed Medium-Term Financial Plan?

The Minister for Treasury and Resources:

Of course, the solution would not just be to raise the amount of income. There would be other options, to increase the level of savings, perhaps, being delivered, or to look at other matters, which could include charges, which indeed would be a revenue-raising issue, which is part of the question you have just raised. So, charges or fees would be one option to be considered. Boosting economic growth, which is the reason that a sum of £20 million has been put aside over the term of the particular plan.''[4]

The lack of a detailed Plan B concerns the Panel and in respect of this response, it believes for these figures to be realised, there does not seem to be any option other than the introduction of the user pays charges as detailed within the draft MTFP or the raising of income tax. User pays charges are discussed in more detail later in this report.

The Panel considers there to be too much dependence on the IFG and other experts when making the forecasting assessments with little or no flexibility to move from this process. When questioned, the Minister for Treasury and Resources advised the Panel:

"we have the independent Income Forecasting Group to make assessments, and they go through a set process. The key, as I have already alluded to, is that the assessment they have made, looking at all the various parameters, the impact on the economy and the economic performance of the Island, likely revenues such as income tax you were referring to, have been fed into their model and fully assessed, and they believe that that central forecast is prudent and conservative"[5]

The  Executive  uses  models  to  determine  the  forecasts  and  relies  upon  the  work  of  the Economics Unit. Forecasts are described as a range to allow for sensitivities from a low point to a high point. It is the mid-point which is used in the MTFP to indicate the intended income. Figure 18 on page 47 of the draft MTFP (as below) shows the assumed income forecast to 2019 as taking the middle point. The Panel recommends a more prudent position would be to take the midpoint between the middle and lower forecasts as the working assumption. This is supported by the advice received from our advisers.

This  Panel's  advisor,  MJO  Consultancy made  reference  in  his  report  to  a  more  prudent forecasting range and states "Despite the income tax forecasts from MTFP 1 being below the bottom of the range, barring a significant economic disaster it is perhaps too cautious to plan expenditure over the lifetime of MTFP 2 using these (i.e. £440 million in 2016, £451 million in 2017, £462 million in 2018 and £471 million in 2019). One approach which might be adopted is to take the mid-point between the lower range and the central line of the income tax forecast as the income tax' contribution to total States income for the period and aggregate this to the other (unchanged) central scenarios"[6] Compared to the central MTFP 2012 – 2015 forecast, Jersey's income tax is now forecast to be cumulatively £95 million lower for 2014 and 2015 based on the central forecast from the IFG in May 2015.

Figure 18 – Forecast range of States Income to 2019 (June 2015)[7] (Version as originally lodged in July 2015)

The Panel suggested using a lower range of forecasting with the Minister for Treasury and Resources to which he responded:

"The forecasting already contains 3 points, the higher, the middle (the midpoint) and the lower. So the feeling is that that is perfectly prudent"[8]

The Department of Treasury and Resources has been required to issue a Corrigendum to the draft MTFP, as Figure 18 should show the mid-point forecast at £793 million (as per Summary Table A), i.e. the figure for 2019 the States Assembly is being asked to approve. The originally lodged  table  above  showed  a figure that  was minus  the  £53  million  for  the  proposed Sustainable Funding Mechanism for Health and the payment of States rates on property. The Panel draws attention to the fact that up until the Corrigendum was issued on 17th September 2015, there was a danger that States Members may have been under the impression they were not approving the health charge totalling £50 million for the period, when the opposite is the case. The updated figure 18 is shown below, and the significant difference in the draft MTFP forecast line is clear to see.

The Panel also notes the advice of both of its independent expert advisers with regard to the issue of the current tax regime in Jersey.  CIPFA informed us:

Much has  been  said  about Jersey's  "strong" balance  sheet position  – this was a strapline' within the Minister of Treasury and Resources narrative to the 2014 Annual report and Accounts. No matter how strong' the States net asset position appears to be - there is not an infinite timeline which would allow it to continually support/maintain a low tax/high spend jurisdiction especially with significant investment needs to cover demographic  pressures.  Given  the  potential  requirement  to  now look  at  User Pays/Benefits/Charges, significant unsupported investment in a new Hospital project and expected challenges in re-engineering and transforming services within an exceptionally tight timeline, it is essential that as part of the formulation of overall financial strategy, that the States of Jersey revisit/challenge prevailing tax policy and objectively consider all tax raising options, however unpalatable this may appear politically.''[9]

Similarly, MJO Consultancy, when summing up his report, concludes that:

A final note of caution is needed. The advisor fully recognises that Jersey has long enjoyed low rates of tax but a combination of falling revenue and increased government expenditure  has  transformed  the  fiscal  framework.  If  the  structural deficit  is  not eliminated  by  2019  and  it  proves  impossible  to  reverse  the  increase  in  public expenditure, the temptation to draw on the Strategic Reserve will be strong. Rather than drawing on the reserves, tinkering with tax rates and allowances or introducing additional user pay charges, it is strongly recommend that there should be a root and branch review of the tax system as currently configured.''[10]

Figure 18 – Forecast range of States Income to 2019 (June 2015)[11] (Updated September 2015)

The Panel's advisor, MJO Consultancy also says:

"The current downward cycle is particularly protracted for Jersey and whilst there are signs that economic growth for 2014 will be positive for the first time since 2007, these forecasts  would  caution  against  the  expectation  of  persistent  healthier  income  tax receipts for the Treasury."[12]

The advisor has produced an alternative graph showing a more prudent income forecasting line which is explained below.

Figure 5. New suggested income line, 2016–19)[13]

850

800

750

Higher Scenario

£m  Central Scenario

Lower Scenario

700  Suggested income line 650

600

2016  2017  2018  2019

"There are various other combinations that might be adopted between the lower and higher scenarios in Figure 5 but the point being made is that this introduces an income contingency'  whereby  the  central  scenario  remains  in  place  but  for  expenditure purposes, the new suggested income line is used for expenditure purposes. If income receipts are above the new line, then they could be used to begin to replenish the Strategic Reserve or Stabilisation Fund. The economic assumptions indicate that there will be steady rates of economic growth over the lifetime of the MTFP. This will also give the Council of Ministers (a) an added incentive to control expenditure and (b) afford them with the opportunity to replenish reserves which have been used over the past decade during a period of economic growth"[14]

The Panel also had reason to doubt the level of certainty on the forecasts due to the draft MTFP using a plus/minus range of 9% as opposed to 5% as in the previous MTFP. The Panel believed 9% showed a bigger range of forecasting which could be viewed as showing a degree of uncertainty in the forecasts overall. When questioned about using this higher range, the Minister for Treasury and Resources informed the Panel that the fact that 9% was used was

"coincidental"[15]. He went on to say that the IFG had looked at the amount of time used for the forecasting (4 years) and as time passes, the risk associated to the longer time horizon.

The Minister for Treasury and Resources did not deny there was a level of uncertainty and explained to the Panel:

"So the further out you go, the greater the level of uncertainty. So consequently, the forecasting group that has looked at this, and it has been through the F.P.P. (Fiscal Policy Panel) as well, has concluded that it would be very sensible that as the time goes out, the forecasts will reflect the fact that there is a greater level of uncertainty. The fact that it is 9 per cent is just coincidental. Nobody has chosen 9 per cent as a figure"[16]

3. PROPOSED STATES INCOME TARGETS 2016 - 2019

Section (a)(i) of the Proposition, is asking the States to approve the intended total amount of States income for each of the financial years 2016 – 2019, as set out in Summary Table A and being the central forecast of the States income forecast range for 2016 – 2019 as shown in Figure 18[17].

The Panel wishes to draw attention to Summary Table A and the fact that not only will the States Assembly be approving income of £2.9 billion, it will in effect be approving a total of an additional £53 million made up of the proposed sustainable mechanism for health and the offset of the States payment of rates. The proposed sustainable funding mechanism for health is discussed later in this report.

The Panel believes it "unreasonable" for the Council of Ministers to make such a request of the States Assembly to approve new methods of levying income from Islanders for 2017, 2018 and 2019 without any detail as to where those figures are going to come from, or the impact upon Islanders. Whilst the Panel understands income is a forecast, total expenditure will also be set over the draft MTFP period and in the current, unpredictable economic climate, the Panel believes the reliance on the central income forecast could be imprudent. The Minister for Treasury and Resources told the Panel:

"Obviously we had a debate with you as a panel about the timing, there had been a request for April. If you remember we have settled on June from a lodging perspective, so these details - and this is the key - the devil of course is always in the detail and that will come back when it is lodged in June next year for debate by the States Assembly. So the States will have the opportunity to see those details at that particular point"[18]

4. PROPOSED TOTAL STATES NET EXPENDITURE FOR 2016 - 2019 Section (a)(ii) of the Proposition asks the States to approve:

the total amount of States net expenditure for each of the financial years 2016 – 2019, being the total net revenue expenditure and the total net capital allocations, as set out in Summary Table B.''[19]

As with income forecasts above, the Panel wishes to draw attention to Summary Table B and the  fact  that  the  States  Assembly  will  be  asked  to approve  in  excess  of  £3.1 billion  in expenditure without the details for 2017, 2018 and 2019.

The Public Finances (Jersey) Law 2005 states that the funding agreed for 2017 to 2019 cannot be spent until it has come back to the States Assembly and is agreed. The Panel quizzed the Treasurer of the States on this area at a recent public hearing:

Treasurer of the States:

"Can I just make a clarification on the Public Finances (Jersey) Law that for 2017 to 2019 by not agreeing individual cash limits there is no mechanism by which 2017 to 2019 can be spent until such a time as further States approval is given.

Deputy J.A.N. Le Fondré:

But what will happen is that a proposition will come back which says that you have approved the overall total and now here is the detail in the department. But we have effectively still signed up to the spend.

Treasurer of the States:

Yes, but the States will, at that point, have the option or otherwise to approve or not the individual line by line numbers.

Deputy J.A.N. Le Fondré:

So you are saying that actually the States can amend the total spend for 2017 and take off £50 million if it wished to, for the sake of argument?

Treasurer of the States:

No, the law ... well, it can reduce, yes.

Deputy J.A.N. Le Fondré: Can it increase?

Treasurer of the States:

Yes, it can increase ... the law, I will have to go through in some more detail but it is quite prescribed under the circumstances as how that can happen in terms of increasing, or when that can happen. It links to deterioration in income forecast, for example.

Deputy J.A.N. Le Fondré:

But if we look at the expenditure that we are ...

Treasurer of the States:

You are setting the limits, yes, you are setting the limits but that does not, in itself, give authorisation for any of that to be spent. This is about planning. It is say, and it comes with the economic advisory, to deliver a balance which yes you can go for a higher or a lower income figure which would have a knock on effect to the higher or lower expenditure but given the plans of the Council of Ministers it infers - well more than infers - a figure therefore for expenditure to be in place by 2019. But it is setting it at a total. The question related to are we giving the authority to spend or are the States going to give the authority to spend. They are not giving the authority to actually spend the money until the detail comes back line by line in cash limits"[20]

The Panel's advisor, MJO Consultancy stated:

"One major concern is that the expenditure cuts are highly aspirational without sufficient granular detail to judge whether they can be achieved (that is, other than simply by not providing cash to Ministerial and Non-Ministerial departments. It is unclear whether further counter-cyclical spending is apt for an economy which appears to have undergone structural change and which is more in need of a major productivity revival.

In the short-run the capital expenditure (if delivered according to the plan in the MTFP) might provide a boost to economic growth but there is also the possibility that if the economy is growing more quickly, it will lead to bottlenecks, overheating and inflation""[21]

5. DEPARTMENTAL SPENDING LIMITS

An amendment to the Public Finance Law enabled the Council of Ministers to bring the draft MTFP to the States Assembly into two parts. This allowed for an addition showing departmental expenditure limits for 2017 – 2019 to follow in June 2016. This draft MTFP includes details of the  States  income  and  expenditure  for  2016  – 2019  together  with  detailed  departmental allocations for 2016 only. This is covered in more detail later in this report.

Overall departmental expenditure for 2016 amounts to £697,214 million net with an additional sum of £37 million in contingencies. This figure does not include approximately £27 million for net capital allocations. The Departmental expenditure essentially amounts to that which will be spent by the 10 Executive Departments, the States Assembly and its services, the 10 non Ministerial states funded bodies and the Jersey Overseas Aid Commission. It was not within this Panel's remit to consider the spending levels of each Department however, the Panel supplied each Department with a framework of questions covering growth pressures, growth bids, staffing, sources of income, capital projects, services, carry forward and contingencies, savings, user pays charges and other sources of income. This has led to a cohesive working across Scrutiny Panels resulting in a consistent approach to the Review.

6. CAPITAL PROGRAMME

Within Summary Table B, the States Assembly is being asked to approve approximately £168 million of investment in capital programmes. It should be noted the proposed new hospital has not been included within this figure. However, the Panel is concerned to note comments from its advisor, CIPFA, stating:

"the significant lack of consistency in profiled spending – particularly in final quarter of the financial year (40% in 2014 and 33% in 2015) does not indicate a controlled and co- ordinated approach being taken to the management of the capital programme."[22]

During its presentation to States Members, the FPP discussed the "bottlenecking" of capital projects. One of its recommendations states:

"the States should plan how it will deliver capital projects to reduce the risk of a build- up of inflationary pressure in Jersey's economy. To avoid the need to change the timing of important projects or make adjustments to other spending or income, the States should consider whether resources could be imported cost-effectively from outside the Island to reduce any bottlenecks within the local economy."[23]

The FPP goes on to say:

"it is important that the consequences for the local economy are managed taking account of the prevailing economic conditions." [24]

7. STATES ASSETS

The States Assembly is being asked to approve Summary Table J – Intended Strategic Reserve Transfers for 2015 – 2019. This table lists "Transfer from Consolidated Fund – Asset Disposals" of £20 million in 2017 and £20 million in 2018. The Panel is unclear as to what these proposed asset disposals are and sought clarity from the Minister for Treasury and Resources and also the Chief Minister:

Deputy S.M. Brée:

"Yes. Going back to summary table I, if I may, one thing that I believe needs further clarification. Will you detail exactly what the asset disposals as detailed in summary table I totalling £40 million relate to?

The Minister for Treasury and Resources: In due course, yes.

Deputy S.M. Brée:

So just to confirm, at this present time you cannot provide this panel, or indeed other Members of the States Assembly with the exact details as to which assets have been identified for sale and yet you are asking us to approve this M.T.F.P. without any prior knowledge whatsoever of those assets?

Deputy S.M. Brée:

Will you, Minister, provide details of what those assets are prior to the debate?

The Minister for Treasury and Resources:

Well, if you look at summary table J you will see that the £40 million is spread over the years from 2017 to 2019 and we have stated several times that the detail in relation to that second phase is going to come back to the States; it will be lodged next June. You will have the detail in advance of that"[25]

The matter was also addressed at a separate hearing with the Chief Minister:

Deputy S.M. Brée:

"Chief Minister, will you kindly explain what the asset disposals as detailed in summary table I and again in summary table J totalling £40 million relate to?

The Chief Minister:

I would like to be able to, but I do not think the details of those have been agreed yet, and I think they will be coming in the second stage, unless Treasury is further advanced than we are aware of"[26]

The Panel again raises its concern around the lack of detail within this draft MTFP.

5. CENTRAL CONTINGENCY ALLOCATIONS

DEFINITION of 'Contingency'

A potential negative economic event which may occur in the future. In finance, managers often attempt to identify and plan for any contingencies that they feel may occur with any significant likelihood.[27]

The  Proposition  asks  the  States  Assembly  to  approve  the  amount  to  be  allocated  for contingency for the financial year 2016 as set out in summary Table D.

Summary Table D below shows the central contingency allocation for 2016. Although it shows contingency running at £37 million, the Panel was informed that approximately £19 million of this was classed as extraordinary items.

Summary Table D

The Minister for Treasury and Resources:

"Well part of this we have covered before, certainly with regard to the economic growth. We have got £5 million in there for economic growth. There is £5 million in each year but in the year in which you are referring, where there is £37 million in total, we have got the economic growth, we have got also the Committee of Inquiry at £4 million - that is not a usual item - which bolsters the figure, and we have also got the redundancy provision, I think is the other one, which makes £19 million in total. So effectively you have £19 million greater level of central contingency than you would normally have, based on those extraordinary items that I have just referred to"[28]

The Panel raised this with the Minister and asked that if £19 million was for exceptional items for 2016, why then does the total net revenue expenditure not reflect this for 2017, 2018 and 2019. The Panel was informed that it would be the decision of the States Assembly in agreeing the figures for 2017 to 2019 within that total. The Panel pressed for further clarification on this at its Public Hearing with the Minister for Treasury and Resources:

Deputy J.A.N. Le Fondré:

"But if one assumes that there is £37 million in this year ... well, there is £37 million in 2016, all things being equal, is it not reasonable to assume that there is a similar level of contingency going forward for 2017, 2018, 2019?

Treasurer of the States:

It is not unreasonable among another range of possible things that would not be unreasonable.

Deputy S.M. Bree:

in producing the figures, the headline figures for 2017, 2018 and 2019, what level of contingency have you included? Is it £37 million per year or not?

Assistant Minister for Treasury and Resources:

That is entirely up to the Council of Ministers to decide how it is divvied up. The States will agree the bottom line. What will come forward will be the detail for 2017, 2018, 2019.''[29]

The Panel is concerned that the safeguards around contingency do not do enough to stop the Council of Ministers declaring unspent contingencies as a saving. The Panel is aware that a contingency is exactly that, a contingency, and is not really meant to be spent otherwise however, when the Panel asked the Minister for Treasury and Resources what he thought of the concept of using unspent contingencies as a saving he replied that although he would be unsupportive of it, he did accept that;

potentially, politically it could be done.'[30]

CIPFA discuss within their report the significant improvements in the control of carry forwards since their previous work on the previous MTFP where they highlighted that in some cases carry forwards were being utilised to mitigate following year efficiency savings targets, they comment that "there is still evidence that sub optimal budget behaviours are arising – particularly at year end."[31]

The Panel also found a lack of clarity around how much of a contingency fund was being carried forward year on year. From what the Panel understands, because the figure of the contingency has not yet been agreed, it may in fact be lower than shown in Summary Table D for future years. However, the Panel also draws attention to Figure 16 – Summary of Financial Forecasts for draft MTFP 2016 – 2019, which indicates that contingency and central allocations of approximately £37million per annum for the entire period of the plan is provided for in this MTFP, totalling approximately £148 million. This table is shown below.

Figure 16 – Summary of Financial Forecast for draft MTFP 2016 – 2019

5.1 ECONOMIC AND PRODUCTIVITY GROWTH DRAWDOWN PROVISION

The Council of Ministers is proposing funding of £5 million be created in each year of this MTFP period that could be drawn down:

if new economic growth and productivity initiatives can demonstrate they cannot be funded from existing resources and that have a strong rationale that they can have a positive impact on productivity and can be allocated additional funding.'[32]

Although the FPP is supportive of this provision, within its Report in September 2015 it states:

strong governance measures should be put in place to control how the £20 million is allocated.'[33]

Throughout its evidence gathering for this Review, the Panel was made aware that a Ministerial Oversight Group would be incorporated to decide how the allocation of the £5 million per year would be distributed. Although membership of this group has not yet been finalised, the Panel has learnt it will be an Officer and Ministerial group to include the Chief Minister, the Minister for Treasury and Resources and the Minister for Economic Development.

The Panel questioned the Minister for Treasury and Resources asking how the performances of that spend would be assessed before releasing each tranche of funding. The Minister informed the Panel:

"the money was there for one off projects to hit the objectives outlined during the period of the MTFP".[34] The Minister went on to say "in terms of controls, broadly that work is yet to be finalised."[35]

This response concerned the Panel as it believes in effect the States Assembly is being asked to approve up to £20 million over the life of the MTFP yet no processes are in place to monitor the spend. However, the Minister did tell the Panel that details of these processes will be made available to the States Assembly prior to the debate on the MTFP. [36]

6. SAVINGS AND USER PAYS

On presentation of the draft MTFP in July 2015, the Minister for Treasury and Resources made the following statement:

"Taking  into  account  our  latest  income  forecasts  and  our  planned  programme  of investment in priority areas, we need to find a total of £145 million by 2019. This plan outlines how we will fund our priorities and balance our budgets by 2019"[37]

Throughout its evidence gathering and information received from the Department of Treasury and Resources, the Panel understands the £145 million deficit will be funded as follows:-

• £50 million sustainable funding for Health
  • £15million to be introduced by 2018
  • £35million to be introduced by 2019
• £40 million non-staff savings to include:-
  • Social Security Benefits
  • Grants and Subsidies
  • Other non-staff costs
  • User pays/charges*
• £70 million people savings to include:-

• Pay restraint
• Vacancy management
• VR/CR
• Performance management
• Service Re-design/LEAN/egov/mergers
• Outsourcing
• Regulation
• Stop doing

The Panel believes the calculation of £40 million non-staff savings to be incorrect and wishes to clarify that this is not a £40 million saving but in fact includes £10 million of new charges levied on Islanders. The Panel considers this to be to all intents and purposes a new form of taxation.

1. PROPOSED SUSTAINABLE FUNDING MECHANISM FOR HEALTH

The Panel was alarmed that there did not seem to have been an independent impact study carried out as to the figure of £35 million proposed for the sustainable funding for health or indeed the impact this user pays charge would have on the tax payer. The Chief Minister informed the Panel that this was the figure that would be used for investment into health and any advice was taken from individual departments with regards to how much could be saved. The Panel was also informed that the amount of money needed to be spent links into P.82, the Redesign of Health and Social Services:-

The Chief Minister:

"Well, if you are talking about the amount of money that is needed to be spent then that comes out of the redesign of health and social services, P.82 and the work that KPMG did about the extra money that would be needed, but that is not directly the extra charge that we are proposing. The amount of money has got independent expert advice behind it that we are going to spend on health but not a quantum of what the charge would be, so the balance is just normal taxpayer money"[38]

The Chief Minister went on to say the FPP would be looking to see what effect taking that money might have out of the economy. The Panel queried that the FPP is not an expert in health charges and therefore would be unable to assess what the actual charge should be. The Chief Minister explained there was work that KPMG undertook around P.82 regarding the extra money that would be needed to sustain the health system. However, he went on to explain that this was not directly the extra charge that was being proposed.

Deputy J.A.N. Le Fondré:

"So the quantum of the charge is the balance over and above the sum that was required as identified through KPMG, effectively?

The Chief Minister: Yes.

Deputy J.A.N. Le Fondré:

KPMG have identified, for the sake of argument, £100 million or whatever it is. We have got £65 million in the normal funding. The difference is £35 million. That is what we have got to spend. I am talking in principle.

The Chief Minister:

I am not sure it is quite that exact but it is that sort of ... yes"[39]

As mentioned previously in this report, the Panel is concerned of the lack of impact studies that have been carried out as to the final figure of this charge and how it will affect each household financially. The work is yet to be completed, as acknowledged by the Minister, which means that the States Assembly is being asked to approve £50 million for the life of the MTFP without any detail.

As the Panel could not obtain any detail regarding the proposed sustainable funding mechanism for health and how it would affect households financially, it has calculated a very basic sum based on the number of households in Jersey (@ 43,300 as at end of 2013) divided by the £35 million per year proposal for the health charge. The Panel has also added the £10 million of new income due to be levied on Islanders as user pays to try and obtain a complete picture of additional per annum charges to Islanders. The result is approximately £1,000 per household additional charge.

• Number of Households @ 43,300[40] - £45* million/43,300 = £1,039

*£35million proposed health charge and £10 million user pays

2. USER PAYS CHARGES

As previously mentioned in this Report, approval of the draft MTFP in its present form is through the Summary Tables. P.63/2003 was approved by the States Assembly in 2003, requiring that all new user pays charges introduced by Committees of the States (subsequently Ministers) must receive prior in principle approval by the States Assembly. The Panel still has concerns as to the implementation of these charges and the cost to Islanders. There is also doubt as to what  alternative  plan  the  Council  of  Ministers  has  should  the  user  pays  charges  not  be approved by the States Assembly when brought back for debate. When questioned, the Chief Minister told the Panel:

"We then have to think of other ways of delivering those changes or we then have to have a conversation about do States Members not want to invest in health into the future, do we not? So there is no easy answers here"[41]

The  Panel  has  not  seen  any  evidence  that  the  Council  of  Ministers  has  considered  the implication of the savings targets not being met or the user pays charges not being approved. The Panel believes this puts the Island in a vulnerable position with no alternative other than to use the strategic reserve fund or raise taxation.

Within its Report presented in September 2015, the FPP highlights the risks to achieving the draft MTFP. One of the risks discussed is that the proposed changes in the draft MTFP may not be sustainable, and the FPP recommended:

"as details of the proposed package of measures to meet the 2016 MTFP addition are developed attention should be given to ensure that they are sustainable, including their potential distributional impacts."[42]

The Panel has itself, on various occasions, highlighted concerns around the lack of impact studies that have been carried out in taking the decision to propose the changes. The Panel publicly  asked  the  Chief  Minister  if  he  could advise  what  studies had  been done  on  the distributional consequences of the proposed savings plan and charges contained within the draft MTFP:

Deputy J.A.N. Le Fondré:

" Chief Minister, I would like to move on to, if I may, the F.P.P.'s annual report, issued by them in September 2015, and just talk about a couple of the risks to achieving the Medium Term Financial Plan that they have highlighted. The first one that really I want to ask about is the fact that one of the risks is the proposed changes may not be sustainable. They are talking here about the distributional consequences. Can you advise us what studies have been done on the distributional consequences of the M.T.F.P.?

The Chief Minister:

I cannot add anything to the answer that I gave last time I came before you. Those studies are being undertaken. Of course the details of everything that might be done are still being worked on but we have certainly started analysing with regard to benefit changes. You have got the health charge to come in on the other side of things as well, so that work is being done, but it is not complete at this time.

Deputy S.M. Brée:

So the studies on the distributional consequences will not be available until the additions in June 2016. Is that correct?

The Chief Minister: Yes.

Deputy S.M. Brée:

And yet you are asking the States Assembly to approve the draft M.T.F.P. without knowing what the distributional consequences may be. Is that correct?

The Chief Minister:

Well because we are not asking the States to decide on all the individual measures. We are asking the States to agree the bottom line so I would expect the States when they are looking at the individual measures for 2017, 2018 and 2019 to have due regard to the distributional analysis and that will inform part of the decision making process..." [43]

3. STATES PAYMENT OF RATES

Continuing with the theme of user pays charges, the Panel has issues with the proposed mechanism for payment of States rates. Again this seemed to be in a very embryonic stage, yet the States Assembly is being asked to approve a charge of £1 million per year which would be forwarded onto the tax payer. The Panel believes that seeking approval of these types of charges is unreasonable at this stage, especially given the lack of detail and clarity as to (a) how they will be collected and (b) what the funds will specifically be used for.

The Panel raised both areas with the Minister for Treasury and Resources:

Deputy S.M. Brée:

"You are not prepared to give us any indication at the moment?

The Minister for Treasury and Resources:

No, because that again is an area that has got to be worked up"[44]

The Panel also questioned the Chief Minister about the matter:

Deputy J.A.N. Le Fondré:

"So in short, that a taxpayer somewhere, or a group of taxpayers somewhere, is likely to be asked to pay or fund for the States paying rates?

The Chief Minister:

Well, we will have to raise the extra revenue, yes.

Deputy J.A.N. Le Fondré:

It has not being caught up in the efficiency savings that you are going to achieve?

The Chief Minister:

That is not the proposal, no"[45]

The Panel is concerned that this charge will be passed on to Islanders and has lodged an amendment to the draft MTFP proposing the £1million per year is allocated from central contingencies. The Panel is also proposing that the charge is brought forward from 2017 to 2016.

4. NON STAFF SAVINGS

The Department of Social Security has proposed to save £10 million by 2019 by implementing changes to the benefits scheme. A Ministerial Order has been made to implement the change that jobseekers under the age of 25 living at home with Parents who do not qualify for income support will no longer be eligible to receive their benefit. The Panel understands that no impact study has been carried out on the changes to benefits and is worried that those affected by this change will have to deal with an already saturated job market due to the impact the voluntary and compulsory redundancies will have on the Island. The Panel is also concerned that such an important decision, representing a fundamental change to the benefits system, was taken by Ministerial Order rather than a decision by the States Assembly.

5. PEOPLE SAVINGS

Within the term of the draft MTFP, there is a proposal of £70 million to be made in people savings. The Panel enquired as to what impact of redundancy studies had been undertaken with regards to what impact these changes will have on the economy and the overall unemployment on the Island. The Panel was alarmed to learn that no such study had been carried out.

The Panel enquired of the Chief Minister as to what talks had been held with the Unions with regards to these people savings. He responded:

"we have had a long process of consultation with the unions over the last probably 18 months to 2 years. We have signed up a framework agreement with them about modernisation and workforce redesign. Of course, we did not consult I think in the way that you are suggesting, which is why I was trying to probe what it was you were actually driving  at,  about  the  number  that  we  would  be  targeting  for  staff  savings  or reprioritisation"[46]

The Chief Minister also informed the Panel that it was no surprise to hear that Unions are concerned about what the implications might be for their members.[47]

During the drafting of this Report, the Panel has learned the Unions are proposing industrial action due to the implications these changes may have on their members.

CIPFA make the point that Figure 46 on page 126 of the draft MTFP illustrates a net downward reduction on staffing of only 0.21% which is not even one quarter of one percent on the overall 7,276.9  -2015 staffing FTE structure. This produces an indicative 2016 FTE position of 7,261.6 which is:

"hardly the stuff of significant service redesign and down-sizing."[48]

It has been recognised by CIPFA that there has been significant recent work carried out to identify options for reducing payroll costs including reshaping the workforce, deployment of pay restraint, voluntary/compulsory redundancy and service redesign. However, the actual impacts are only at an early stage and there is considerable uncertainty as to the level of potential to change the size and composition of the overall manpower establishment. Such uncertainty is reflected within CIPFA's scoring detailed within their Report which can be found appended to this Report.

The Panel would like to draw attention to the bar graph as shown as Figure 8 detailing average earnings in both the Public and Private Sector, as provided by its advisor, MJO Consultancy and wish to draw attention to the significant difference between the private and public sector.

Figure 8. Average earnings in the public and private sector, 1998–2015, per FTE (2013

prices)[49]

Public Sector  Private Sector  Difference (Public > Private)

£50,000  

£40,000  

£30,000  

£20,000  

£10,000  

£0  

1998  1999  2000  2001  2002  2003  2004  2005  2006  2007  2008  2009  2010  2011  2012  2013  2014  2015

Due to the large earnings differentials between the public and private sector there are clearly implications for income tax receipts if cuts in higher paid jobs in the public sector are made as part of the £70 million in proposed staff savings. Economists could well assume that displaced workers  from  the  public  sector  will  gain  jobs  in  the  private  sector  but  existing  market imperfections suggest that this will not happen without significant retraining of workers (the finance sector currently already requires more highly skilled workers than are available in the Jersey workforce).[50]

It is important to consider these issues through a piece of economic research which examines the impact of staff savings but also the benefit cuts and the wider distributional consequences  of  the  social  and  economic  reform  of  the  public  sector.  There  are legitimate  concerns  to  be  addressed  that  disadvantaged  groups  in  society  on  low incomes might be affected as well as higher earnings, where the impact might be felt through falling house prices.''[51]

Noting the differential in earnings between the public and private sector, the Panel also draws attention  to  the  need  for  ongoing  assessment  of  the  matter  of  public  sector  pension contributions. Our adviser has recommended that in view of the uncertainty about long-term fiscal sustainability:

the recommendation by the Corporate Services Scrutiny Report (S.R. 4/2014) on the affordability of the proposed employer's contribution cap should be examined within the context of a lower employer's contribution than 16% or 16.5%.''

6. TOP LINE SAVINGS

As part of the 2015 budget measures to balance the budget, Departments were asked to make 2% savings from their annual expenditure for 2015. These savings are now recurring in 2016 and contribute towards the required savings for the MTFP. Departments have also identified further savings for 2016 and work is ongoing to identify targets for each area for 2017 – 2019. The granular detail of these savings will be presented in the MTFP addition due in June 2016. The Panel has been informed by CIPFA that they would expect to see MTFP 2016 - 2019 based on service planning and corporate strategies covering the full 4 year period with direct linkages to departmental business plans overlaid by corporate strategies.[52]

Although the Panel understands the importance for savings to be made, it has concern that the arbitrary "top slicing" of Departmental budgets is illogical. The Panel is of the opinion that some Departmental spending should be considered more essential than others and this top slicing approach will therefore have an effect on front line services. The Panel believes that an overall study should have been carried out within Departments to see exactly where savings could be made, with the possibility of some Departments being able to save more than others.

Within  its  report,  CIPFA  have  commented  on  the  expenditure  patterns  being  shown  by Departments at each year end. They illustrate a "hockey stick" pattern associated with period 12 of expenditure and illustrate this with a table showing the relationship between expenditure met in period 12 of both 2014 and 2013 and the average period expenditure covering periods 1- 11 for key areas of non-payroll expenditure:

CIPFA go on to say:

"Such a pattern of spending behaviour is indicative of budget holders managing their budgets (spending to avoid loss of budget) rather than managing their costs. Such behaviour can negatively impair strategic financial planning capability"[53]

7. WHAT IF THE SAVINGS ARE NOT MADE?

Within its Report published in September 2015, the FPP has stated:

"the  implementation of  the £145  million  of proposed  measures  looks  challenging particularly as they are very dependent on unspecified future staff and other savings"[54]

If these savings are not achieved, the lack of a Plan B will bring the Island into an even bigger, structural deficit. The Minister for Treasury and Resources told the Panel:

"Quite simply, there are undertakings from departments to make savings, efficiencies, and redesign services. By the way, these efficiencies will not happen without redesign. It is absolutely critical. If those savings are identified, are not delivered on, then the growth funding will be withheld, or the option is available to withhold growth funding, so there is a degree of control over it"[55]

The Panel asked the Minister how confident he was that the savings would be achieved. The Minister informed the Panel that he was aware the plan put in place would be challenging but:

"without  doubt  I am  confident  that by working  together  States  Departments  can deliver on what has been laid out..."[56]

The Panel asked the same question of the Chief Minister to which he responded:

"the particular measures that we are proposing in the first part are not delivered then we will need to look for other measures to deliver them but the important thing is that we are committed to ensuring that we do not have a structural deficit by 2019. So if any one particular measure is not delivered then we will have to look at other measures to make up the difference. So it is not about the structural deficit potentially getting any bigger, it is if we do not have sufficient measures in place for that quantum then there will be a structural deficit but this plan is based upon the premise that we put measures in place to make sure there is not a structural deficit"[57]