MTFP Addition for 2017-19 - Report - 23 September 2016

Corporate Services Scrutiny Panel

MTFP Addition for 2017-19

Presented to the States on 23rd September 2016

S.R.5/2016

Contents

1. EXECUTIVE SUMMARY ............................................................................................................ 1
2. FINDINGS AND RECOMMENDATIONS ................................................................................. 3
3. INTRODUCTION .......................................................................................................................... 8
4. THE MTFP ADDITION ................................................................................................................ 9

1. The Financial Forecasts ........................................................................................................... 9
2. Return to Surplus ..................................................................................................................... 13
3. Contingency.............................................................................................................................. 14
4. Economic and Productivity Growth Drawdown Provision ................................................. 16
5. Contingency Planning ............................................................................................................. 17
6. Growth ....................................................................................................................................... 18
7. Reduction in savings target .................................................................................................... 19
8. Savings vs efficiencies ............................................................................................................ 21
9. Vacancy Management ............................................................................................................ 23
10. Increases in Expenditure ...................................................................................................... 24
11. Lack of Detail ......................................................................................................................... 26
12. User Pays and Additional fundraising mechanisms ......................................................... 26
13. Capping the charge ............................................................................................................... 28
14. Waste Charge ........................................................................................................................ 29
15. Proposals for States Payment of Rates and a Funding Mechanism ............................. 31
16. Funding the new Hospital..................................................................................................... 32
17. Does 20 still mean 20? ......................................................................................................... 33
18. Population Numbers used in the MTFP ............................................................................. 35

APPENDIX 1 – CIPFA REPORT ..................................................................................................... 37 APPENDIX 2 – MICHAEL OLIVER REPORT ............................................................................... 92

APPENDIX 3: PANEL MEMBERSHIP, TERMS OF REFERENCE AND EVIDENCE

CONSIDERED .................................................................................................................................. 126

1. EXECUTIVE SUMMARY

The Panel presents its report on the MTFP Addition for 2017-2019. Included as appendices are reports from the Panel's advisors, the Chartered Institute of Public Finance and Accountancy ("CIPFA") and Dr Michael Oliver of MJO Consultancy Limited.

The MTFP Addition contains some major new policies, in particular charges for the disposal of waste and for the provision of health care, which if approved will have lasting impacts on all islanders, beyond the period covered by the MTFP. It also seeks to move States finances from operating at an annual deficit, to a modest surplus by 2019.

Summary of key points:

• Income forecasts are overly optimistic and there is a lack of detail around savings, efficiencies and proposed charges
• The target for savings and efficiencies during the period of the MTFP Addition has been reduced from £90m to £77m.
• There is a very high level of vacancies across the States. Departments are receiving funding but the posts are not being filled.
• The Panel has therefore lodged an amendment to the MTFP Addition to bring the vacancy rate down to a more reasonable level of 3%. This would generate a saving of £35 million a year across departmental budgets, which means that the introduction of a health charge can be avoided. The balance of the saving would be put into contingency to give flexibility in case a genuine need for additional posts can be demonstrated.
• In the context of an ongoing drive to realise savings and efficiencies in the Public Sector, funding should not be provided to departments where vacant posts are being carried forward year on year.
• The Panel has looked closely at the income forecasts used in the MTFP, as these are critical to the planned levels of expenditure.
• The recent downgrade of income forecasts, although attributed to the impact of Brexit, follows a longer term trend over the last few years of downgraded forecasts.
• The Panel raised concerns about the prudence of income forecasts in its report on the MTFP in 2015 and is disappointed that it is yet again in the same position.
• There is insufficient detail on many of the savings and efficiencies outlined in the MTFP. CIPFA have commented that many appear to be "aspirational". This is disappointing given than departments have been afforded an extra year to work on the detail from when the MTFP was originally lodged in 2015.
• In light of the new charges and taxation measures included in the MTFP, it will be increasingly important that the States operates as efficiently as possible and targets its expenditure where it is most needed.

• Departments are due to receive funding for 2017 growth initiatives through approval of this MTFP.
• Growth funding should only be released where it can be demonstrated that departments have met savings targets. As the savings targets have been lowered (from £90 million to £77 million), it is difficult to assess whether the original targets set out in the MTFP in 2015 have really been met.
• A Waste charge is due to raise £11 million for the Department for Infrastructure by 2019, however planning for the charge is at a very early stage. The charge was first mentioned in the MTFP lodged in 2015, however a year down the line there is still no detail on the mechanics of the charge.
• A Health Charge is due to raise £7.5 million in 2018 and £15 million in 2019.
• Based on the detail provided in the MTFP, the Panel has found it difficult to equate the "charge" that will be paid by taxpayers with the specific service that they will receive.
• Our advisor, MJO Consultancy, has noted that the introduction of charges is a departure from the traditional method of funding public services through direct taxation.

"the introduction of new charging mechanismsis a departure for  the States of Jersey, which has traditionally raised money through taxation and social security contributions".

In Conclusion:

• The MTFP Addition and accompanying annexes is a substantial document. However, within this there is a significant lack of detail on key areas, particularly in light of the fact that an extra year has been given to the Council of Ministers to provide the detail.
• The Panel asked its advisor CIPFA whether there is sufficient information available in the MTFP Addition for States Members to vote with complete understanding of what it is they were actually voting for. CIPFA said they did not think there was sufficient information within the document.
• In their report, as regards the structure and process of the MTFP Addition, CIPFA comment that it is a  "comprehensive and robust framework" that  "in many wayscontains aspects of best practice" However, regardless of this, CIPFA go on to comment that:

"its overall utility as a platform for optimal decision making (tax and spend decisions) is significantly impaired by what we see as imprudent assumptions around Income Tax and a lack of rigour in the detail behind a significant number of efficiency saving proposals."

2. FINDINGS AND RECOMMENDATIONS

The Financial Forecasts Finding 1

The Panel highlights the fact that the financial forecasts were prepared prior to the BREXIT vote and in light of this, strongly believe updated forecasts should be used for the MTFP Addition.

Finding 2

The last BTS was published in March 2016 and will not be continued. Given the importance attached to the survey by the FPP and in the MTFP Addition, the Panel find this concerning.

Recommendation 1

The relevant funding be reinstated to the States of Jersey Statistics Unit in order for it to continue conducting the Business Tendency Survey.

Finding 3

The Panel finds it highly concerning that the Minister for Treasury and Resources did not recalibrate the income forecasts at an earlier stage and believe the reduction in interest rates and market trends currently speak for themselves. This is likely to result in higher drawings on the Strategic Reserve or mean the Island is running higher forecasted deficits well beyond 2019.

Recommendation 2

In light of repeated instances of downgraded income forecasts, the process by which income is forecast should be reviewed with immediate effect with the early involvement of the relevant Scrutiny Panel.

Recommendation 3

The Minister for Treasury and Resources must explain the full impact of the downgraded income forecasts and the measures he proposes to take to balance expenditure by 2019.

Return to Surplus Finding 4

The Panel is strongly of the view that achieving a surplus of £1.5m by 2019 was never achievable and will now not be achieved in light of the downgraded income forecasts.

Contingency Finding 5

Many of the items listed under Contingency in the MTFP Addition are not for unforeseen events and have already been designated for certain purposes. Such use of Contingency artificially distorts departmental budgets.

Recommendation 4

Contingency must only be used for money set aside for unforeseen events. Money already designated for specific purposes should not be held under contingency.

Economic and Productivity Growth Drawdown Provision  Finding 6

Part of the EPGDP has been used to support the budgets of External Relations and Digital, Innovation, Financial Services and Competition which in the Panel's opinion sits outside of the original intent for the Fund as set out in the MTFP 2016-19 and approved by the States.

Recommendation 5

On making any allocations from the EPGDP, the Minister for Treasury & Resources must send a copy of the Ministerial Decision and report, on the date of signature, to the relevant Scrutiny Panel for that department.

Growth Finding 7

The lowering of the savings and efficiencies target points to the fact that the target has only been met because the goalposts have been moved. As there is no certainty that the targets will not be adjusted again in future years, this makes it virtually impossible for the public or States Members to judge whether or not savings targets have actually been met.

Recommendation 6

Growth expenditure must only be released when savings and efficiencies targets can be demonstrated to have been met. As such, targets for savings and efficiencies must be fixed achievable and realistic in the timeframes envisaged.

Reduction in savings target Finding 8

The savings and efficiencies target has been reduced from £90 million to £77 million (including user pays charges).

Finding 9

The MTFP does not show the savings and efficiencies opportunities rejected by the Council of Ministers.

Recommendation 7

States Members should be presented with a detailed analysis of all of those areas that were rejected by the Council of Ministers which resulted in a reduced savings and efficiencies target.

Savings vs Efficiencies Finding 10

The direction from Ministers to Chief Officers to make savings and bring in efficiencies is not robust enough nor precise enough for an organisation of this size.

Recommendation 8

In order to tackle the "almost cultural acceptance" of non-achievement of savings targets, the Council of Ministers must provide stronger direction, leadership and clear policy statements in order to drive savings and efficiencies across the States.

Finding 11

There is a general lack of drive behind the savings programme with savings being made through simplistic departmental budget reductions rather than introducing fundamental structural change to deliver long term savings and efficiencies.

Recommendation 9

In order to bring about fundamental structural change to deliver real savings and efficiencies, recommendation 16 in CIPFA's report in relation to outcome based budgeting and additional zero based budgeting should be put in place by the time of the next MTFP.

"Outcome based budgeting and additional zero based budgeting should be used to complement the prevailing incremental approach."

Vacancy Management Finding 12

The vacancy rate of 12.9% across States departments is very high and this money is included in departments' annual budgets. The Panel questions whether this funding is really needed by departments if current service levels are deemed to be acceptable.

Finding 13

The level of vacancies across the States is significantly higher than UK levels. Finding 14

States Members are being asked to approve artificially increased levels of expenditure which include a high level of vacancies.

Recommendation 10

The ongoing vacancy rate for departments should be reduced to 3%

Increases in Expenditure Finding 15

Despite the savings and efficiencies being targeted within the Public sector for a number of years, overall expenditure to 2015 and also for 2016 has continued to rise year on year. This leads the Panel to question whether the level of savings and efficiencies will actually be achieved.

Recommendation 11

Detailed targets with realistic timeframes for public sector savings and efficiencies should be presented to States Members.

Recommendation 12

States Members should be presented with a detailed breakdown of performance versus targets every six months, explaining where and why targets have not been met for any reason.

Lack of Detail Finding 16

Despite being given an additional 12 months to prepare the MTFP Addition, there is a significant lack of detail within the document.

The Health Charge Finding 17

There is no clear link between the amount to be charged and the type and level of service that will be delivered to members of the public. Furthermore, there is no detail yet about how the money will be appropriately ring fenced and channelled to the Health Department.

Finding 18

The Panel is highly concerned with the lack of detail contained within the MTFP Addition with regards to the Health Charge. Given the absence of detail or link between usage and liability, the Panel finds it difficult to see how a "charge" for provision of Health services can be justified and that the argument for imposing this charge has not been adequately made.

Recommendation 13

The proposal for a Health Charge should be withdrawn unless the Council of Ministers can clearly demonstrate that there are no further savings and efficiencies that can be made within Public Sector expenditure.

Finding 19

The capping of the charge results in higher earners paying less as a percentage of their overall income than middle to lower earners. This is non-compliant with the tax principle of low, broad, simple and fair.

Recommendation 14

A complete review of the capping of all charges, both existing and proposed, should be carried out with the outcome of the review presented to all States Members by June 2017.

Waste Charge  

Finding 20

States Members are being asked to vote on a waste charge with no detail behind it. Finding 21

No studies have been carried out in relation to the impact of the Waste Charge on the tourism industry or any other end users.

Recommendation 15

Any proposals to introduce a Waste Charge should be abandoned until further consultation and studies have been undertaken and the results presented to States Members.

Proposals for States Payment of Rates and a Funding Mechanism Finding 22

An agreement has yet to be reached between the Comité des Connétable s and the Council of Ministers as to if, and how, a funding mechanism for the States' payment of Rates will be created.

Funding the new Hospital Finding 23

The Minister for Treasury and Resources has stated it is likely that a further charge will be levied on tax payers to fund the new hospital.

Finding 24

In light of the statement from the Minister for Treasury and Resources in relation to the likelihood of a future hospital charge and lacking any further detail, States Members are unable to fully comprehend the total additional charges that are being envisaged by COM over the life of this MTFP.

Does 20 still mean 20?

Finding 25

The introduction of new charges will increase the effective rate of tax for taxpayers.

3. INTRODUCTION

P.68/2016 Draft Medium Term Financial Plan Addition 2017 - 2019 (MTFP Addition) was lodged au Greffe on 30th June 2016 by the Council of Ministers. The MTFP Addition is in fact the second stage of the MTFP 2016 – 2019 which was lodged on 14th July 2015. The MTFP Addition provides the detail for spending limits for the years 2017 – 2019. These details were absent from the original MTFP 2016 - 2019 following an amendment to the Public Finance (Jersey) Law 2005 allowing the MTFP to be lodged in two stages.

As part of its evidence gathering in undertaking this review, the Panel engaged the services of the Chartered Institute of Public Finance and Accountancy (CIPFA) and also Dr Michael Oliver from MJO Consultancy. The Panel also wrote to various industry stakeholders and in addition to attending private briefings, also held public hearings with the Minister for Treasury and Resources and the Chief Minister.

Whilst each Scrutiny Panel has undertaken its own review of areas specific to its remit, the Corporate Services Scrutiny Panel has undertaken an overarching review of the key themes of the MTFP Addition.

This Report focuses on the key areas within the MTFP Addition that the Panel believe will have the most impact on taxpayers including the proposed introduction of a health charge and a waste charge.

4. THE MTFP ADDITION

As mentioned in the Introduction, following an amendment to the Public Finance (Jersey) Law, the MTFP Addition is the second part of the MTFP 2016 – 2019 which was lodged in July 2015.

CIPFA have focused on eight key areas which it believes to be critical to the effectiveness of the MTFP Addition. These are:-

• Delivery of key assumptions – tax yields
• Delivery of key assumptions – efficiency savings and measures
• Delivery of key assumptions – health charge and user pays
• Delivery of key assumptions – capital programme
• Operational service planning and financial strategy
• Base budgeting
• Forecasting
• Financial performance management

Although these areas are covered within the Panel's Report, more extensive information can be found within the CIPFA report attached as Appendix 1.

The Fiscal Policy Panel

The Fiscal Policy Panel (FPP) has endorsed the economic assumptions as presented in the MTFP Addition which are then used by the Income Forecasting Group (IFG) to inform the States income forecasts.

1. The Financial Forecasts

Following the result of the referendum in June 2016 where the UK voted to leave the European Union, the FPP was asked by the Minister for Treasury and Resources to consider whether the outcome of the vote to leave required it to update its advice which was included within the MTFP Addition. The FPP responded by saying it did not recommend any changes to the economic assumptions, from March 2016 and on review, did not believe there to be sufficient information available at the present time to make a coherent set of revisions. The FPP went on to say it was clear that the referendum result could have potential to impact on growth, inflation and monetary policy assumptions and risks have increased significantly to the downside.

On 30th August 2016, the FPP produced its annual report which included updated economic assumptions, some of which had been downgraded. Based on this new information, the Panel is extremely keen for the Minister to revise the income forecasts to reflect this change. The Minister explained to the Panel that the Income Forecasting Group (IFG) would be considering the revised assumptions and in light of this, would be reporting back to the Council of Ministers on 7th September 2016. The Minister went on to say that it is likely the forecasts would be revised and "I would be surprised if they are not"[1]

The Minister was keen to reiterate the fact that the FPP had recommended within its Report that the States of Jersey continue to implement the MTFP Addition in line with its previous advice given in March.

The forecasts for income and expenditure which the MTFP Addition is based on were made prior to the BREXIT vote. It appears that income forecasts will now be revised downwards, however it is not proposed to adjust expenditure in the MTFP Addition in light of this.

Page 183 of the MTFP Addition shows the Economic Assumptions provided by the FPP in March 2016. These assumptions indicate that interest rates are due to rise in 2017 to 0.7% based on the FPP central scenario however, the Bank of England has since reduced interest rates to 0.25% in August 2016. Prior to this reduction, the Panel asked the States Economic Advisor what the consequence would be on the income forecasts should interest rates be reduced:

Deputy S.M. Brée:

"If I may, one of the things that I think most people are considering is a vitally important bit of information. In a recent speech the Governor of the Bank of England stated, and I will quote his words here: "We may need to cut interest rates in the next few months. The markets themselves are indicating a downturn in interest rates." As the income forecasts are predicated on interest rates going up not down, then surely that is going to have an impact on your income forecasts. Do you not agree?"[2]

Economic Adviser:

"It is not quite as simple as that. First off, the profile for interest rates was that they would start to go up but, secondly, how that was factored into the forecast was that it would  not  impact  significantly  on  tax  revenues.so  changing  the  interest  rate assumption alone would not materially impact on the economic forecasts at this point in time"  

Deputy S.M. Brée:

"However, your income forecasts did not account for a downturn in interest rates, did it?"

Economic Adviser:

"That is correct, but also I would point out to you that what the Bank of England has said and the Governor has said is that they would look at all the options they have to support the economy"[3]

The  Panel  asked  the  Minister  for  Treasury  and  Resources  to  put  on  record  whether expenditure should be recalibrated in light of Brexit:

The Minister for Treasury and Resources:

"Well, the day after the decision by the U.K. to leave the European Union I spoke on the telephone to the chair of the Fiscal Policy Panel. I have asked for an update, if there is anything else we should consider doing, we have had that; the advice, very clearly says, at this stage it is too early to draw any conclusions as to what the impact of the U.K.'s decision is going to be"[4]

The Panel also reviewed the UK Business Confidence Monitor (Q3 2016), (a quarterly report published by ICAEW). This report showed that business confidence in the UK has moved into negative territory since Brexit.  

"Confidence, already on a firmly downward trend, has been further hit by Brexit. It now stands at -10.2, a fall from +0.8 last quarter. Since the referendum, some recovery in confidence is evident but only modest."[5]

The Jersey Business Tendency Survey (BTS) published by the States of Jersey Statistics Unit in March 2016 showed business optimism as broadly unchanged since December 2016[6]. Following the UK trend, it is possible that optimism will have declined following the Brexit vote.

This survey is usually published quarterly. Unfortunately, however, March 2016 was the last publication of this report, as due to a budget reduction the Statistics Unit is no longer able to conduct the survey. This is surprising, given the importance attached to the survey by the FPP in its reports and in the Economic Outlook section of the MTFP Addition.

Finding 2

The  last  BTS  was  published  in  March  2016  and  will  not  be  continued.  Given  the importance attached to the survey by the FPP and in the MTFP Addition, the Panel find this concerning.

Recommendation 1

The relevant funding be reinstated to the States of Jersey Statistics Unit in order for it to continue conducting the Business Tendency Survey.

The Survey of Financial Institutions – GVA and productivity 2015, published by the Statistics Unit, shows that total GVA of the Finance sector declined by 1% in 2015[7]. As the Finance Sector is a large component of overall GVA, this lead the Panel to question the likelihood of achieving the 2.3% growth in GVA predicted in the original economic assumptions. One of the Panel's advisors, MJO Consulting, put together the table below to show the differences between the economic assumptions in the MTFP Addition compared with the FPP's annual report.

Table 4.  Differences between economic assumptions in MTFP Addition and FPP's

2016 Annual Report[8]

For the purposes of clarity, the Panel has highlighted in red the areas that have decreased against those used within the MTFP Addition.

During its final MTFP Addition hearing with the Minister for Treasury and Resources on 2nd September 2016, the Panel reminded the Minister of its recommendation for the first part of the MTFP which was lodged last year. The recommendation was to adopt "an income forecast  between  the  lower  and  central  scenarios  outlined  by  the  Income  Forecasting Group", however, this was rejected by the Council of Ministers. The Panel stand strongly by this recommendation and believe that had it been accepted, more realistic income and expenditure levels would have been set within the MTFP Addition.

2. Return to Surplus

The Summary of Financial Forecast table below contained within the MTFP Addition[9] shows the financial position in 2019 as being £1.5 million in surplus (amended downwards slightly from the 2015 forecast). This is 0.2% of the total income forecast and the Panel believe it will be a challenge to meet this target. The Panel's advisor from CIPFA has stated that: "Given that the year on year increase position on States Income as formulated by the Income Forecasting Group (IFG)(irrespective of containing expenditure)is 4.2% for 2017, 5.5% for 2018 and 4.7% for 2019, the full delivery of the financial plan to outturn a modest surplus of £1.5m by 2019 depends on this level of income being generated. In context, this

will be extremely challenging with significant inherent risks of non- achievement..."[10]

The Panel asked the Chief Minister and the Minister for Treasury and Resources what they thought of this challenging figure to bring about such a small surplus:

Deputy J.A.N. Le Fondré:

"with such a small surplus and with all the volatility that comes with the Brexit vote, the slightest downturn in income could put the M.T.F.P. into deficit. Does the Chief Minister not agree that in order to deliver a balanced M.T.F.P. financial plan by 2019, it would be prudent to plan for a much higher level of surplus?"

The Chief Minister:

"No, it would not be prudent to plan for a higher level of surplus, and I think the Chairman knows why, because the assumptions throughout are prudent"[11]

Deputy J.A.N. Le Fondré:

"Minister, page 44 of the M.T.F.P. gives a summary of the position and shows a surplus at the end of 2019 of just over £1.5 million. can you confirm you will judge the success of the M.T.F.P. on the basis of that financial forecast, on the fact, in other words, that the financial position at the end of 2019 will be at least £1.5 million?"

The Minister for Treasury and Resources:

"What the Council of Ministers set out to do was to balance budgets by 2019. What this plan shows is that we have made significant investment in the key areas of priority that we have identified, health and education, and that although the figure is not particularly large, nevertheless it is showing a balance by 2019"[12]

Finding 4

The Panel is strongly of the view that achieving a surplus of £1.5m by 2019 was never achievable and will now not be achieved in light of the downgraded income forecasts.

3. Contingency

The MTFP Addition contains various amounts allocated to contingency. Contingency funds are universally understood to be for unforeseen items of expenditure, however the Panel is concerned that a number of lines within the Contingency Allocations table in the MTFP Addition[13]appear to have been "earmarked" already and therefore do not fall under the category of contingency.

It was explained to the Panel by the Treasurer of the States that a number of the areas labelled as "contingency" were not contingencies in the true sense of the word and were in fact allocations for specific areas controlled by the Treasury, thus reinforcing the Panel's view that these should not sit under contingency allocations:

Treasurer of the States of Jersey:

"It is a more general description of contingency which says we are going to hold the fund centrally and control them"[14]

On questioning further, the Panel established that true contingencies are around £7m (being the AME Contingency and the DEL Contingency detailed in the table above).

4. Economic and Productivity Growth Drawdown Provision

One of the contingency allocations is the Economic and Productivity Growth Drawdown Provision (EPGDP). According to the MTFP Addition, this is "designed to support new initiatives that will have a positive impact on economic and productivity growth"[15].

The proposal in the MTFP 2016-19 was for £5 million to be allocated to this provision (which is generally referred to as a "fund") in each year of the MTFP[16].

The Panel has had concerns around the governance arrangements for this fund since it was originally announced. In its report on the MTFP 2016-19, S.R.6/2015, it highlighted the recommendation of the FPP that:

"strong governance measures should be put in place to control how the £20 million is allocated".[17]

The fund opened in March 2016 and the Panel was provided confidentially with the terms of reference. The fund is in relatively early stages, so it is perhaps too soon to draw conclusions, however the MTFP Addition notes that it is unlikely that the full £5m will be allocated in 2016. The amount allocated to the fund in 2019 has been reduced from £5m to £3.5m. There is no explanation provided in the MTFP Addition, so the Panel asked the Minister for Treasury and Resources about this:

The Minister for Treasury and Resources:

"Well, the view was taken by the Council of Ministers that, first of all, this fund or drawdown provision, I must make it absolutely clear what it is, was going to be £18.5 million instead of £20 million, which is effectively the difference you are referring to, and the belief was that the sums for 2016, 2017 and 2018 were appropriate and that we could reallocate some of the additional money for 2019 rather than leave it in that fund because we felt that it would not necessarily be required. It is still £18.5 million"[18]

Also, within the annual £5m allocations in the fund, a proportion has been earmarked to protect the budgets of the External Relations Department and the Digital, Innovation, Financial Services and Competition Team within the Chief Minister's Department, which otherwise would have been subject to savings targets. The justification for this is that protecting these budgets will offer better support to the economy that other new initiatives, particularly post-Brexit.[19]

While this justification may be a valid reason for deferring savings in those departments, it does not fit with the stated aim of the EPGDP fund to support "new initiatives" or the explanation of the fund given to the Panel by the Minister for Treasury and Resources at a quarterly hearing in February 2016:

The Minister for Treasury and Resources:

"If  departments  have  made  a  saving,  sorry,  and  then  are  seeking  to  use  this particular fund to replace a saving that has already been made, that clearly would be disqualified"[20]

It appears very clear that a proportion of the fund is being used for different purposes than originally envisaged, which might lead to questions around the governance controls for the fund. The Panel notes that the FPP have stressed that it is important that these funds are focused on "medium term policies that help raise productivity and increase the underlying rate of growth".[21]

Finding 6

Part of the EPGDP has been used to support the budgets of External Relations and Digital, Innovation, Financial Services and Competition which in the Panel's opinion sits outside of the original intent for the Fund as set out in the MTFP 2016-19 and approved by the States.

Recommendation 5

On making any allocations from the EPGDP, the Minister for Treasury and Resources must send a copy of the Ministerial Decision and report, on the date of signature, to the relevant Scrutiny Panel for that department.

5. Contingency Planning

The Minister for Treasury and Resources and the Treasurer of the States have told the Panel that the MTFP Addition contains flexibility with various contingency measures outlined in section 15 (page 120). This is particularly important in light of Brexit and if income does not reach the levels forecast.

One of these measures is to defer growth in 2018-19. However the impact of this would mean, amongst other things, that the annual inflationary rise given to the Health and Social Services Department to maintain an equivalent standard to other jurisdictions, or the growth funding for School demographics (i.e. maintaining service levels in light of a predicted rise in children entering schools) would have to be held back.

Other proposals within contingency planning include increasing income through the EPGDP Fund (although as mentioned earlier, this Fund is still in its early days and it is not clear how any initiatives will lead to tangible economic growth) and increasing taxes in the annual budgets.

[22]4.6 Growth

The MTFP Addition details proposals for "Additional Funding for Pressures, Demographics and Growth" (p61). This is funding bid for by departments which falls into one of three categories: maintaining existing standards, projects already committed to or new initiatives.

This funding is referred to as "growth expenditure" in the Public Finances (Jersey) Law 2005 and the release of this funding to departments has to be approved annually by the States through the budget.

In the MTFP Addition, States Members are being asked to approve the allocation of 2017 growth expenditure to departments (see table below)

22

Growth for 2018 and 2019 is detailed in the table above and a separate central allocation for those years is included in Summary Table D of the MTFP Addition. Central growth totals £10.4m in 2018 rising to £20.5m in 2019. The release of this funding will be voted on by the States through the 2018 and 2019 budgets (together with the amounts for 2018 and 2019 detailed in Figures 24 and 25).

One of the contingency elements of the MTFP is that growth expenditure could be withheld in the event that income forecasts are not met or savings targets are not delivered. This should also act as an incentive for departments to deliver the savings and efficiencies required of them.

The Panel had understood that growth expenditure would only be released if departments met their targets for savings and efficiencies. Page 63 of the MTFP states:

"if either savings or income forecasts fail to reach the proposed targets the level of additional funding will need to be revisited"[23].

On questioning the Minister for Treasury and Resources on this, it transpired that there is a greater degree of flexibility in relation to the delivery of savings targets and that growth could be released even if targets are not met. This will be a decision for States Members to take when approving the budget each year:

The Minister for Treasury and Resources:

"I mean the importance here is, about the growth, that we have retained the growth for 2018 and 2019. It is ultimately going to be dealt with through the budget so, yes, it is the decision of States Members and they can decide whether or not they feel it is appropriate that that  growth  is  distributed  or  not  and  it  could  be  a  whole  raft  of circumstances.''[24]

The way that savings are realised is through the removal of the relevant amounts from departments' annual budgets. This requires departments to live within the lower budget amount, however they are not obliged to deliver the saving/efficiency exactly as detailed in the MTFP as long as they find other ways of operating within their budgets.

In considering the growth expenditure for 2017 (Figures 24 and 25), which is due to be approved  through  the  MTFP  Addition,  the  Panel  notes  that  this  is  being  allocated  to departments on the basis that income forecasts have been met and savings for 2017 have already been delivered through removal of the cash from the departments' 2017 budgets (as shown in Appendix 2 and Appendix 3 of the MTFP Addition).

However, it should be noted that the savings contained within the MTFP Addition are lower than those originally set out in the MTFP 2016-19, as a result of a reduction by the Council of Ministers in the overall savings target from £90m to £77m. The original savings target for 2017 (excluding benefit changes) included in the MTFP 2016-19 was £56m[25] This target has now been reduced to £48.2m in the MTFP Addition[26]

7. Reduction in savings target

Within the MTFP 2016 – 2019 which was debated last year, a package of measures totalling £90 million was presented in staff and non-staff savings. This figure has now been reduced to £77 million (including £4 million of user pays charges).

The reason given by the Council of Ministers for the figure of £90 million not being met is as follows:

"Last year we set ourselves a target of £90 million in savings and efficiencies. It became clear that delivering such a target over this time frame would have a disproportionate impact on the community. We took these concerns into account, as well as the better than forecast income in 2015 and the likely distributional impact of the planned proposals. We decided to extend the time frame to enable departments to find efficiencies to meet the target, thereby helping  to  minimise  the  impact  on  islanders. This  means  departments  will  continue  to restructure and reduce costs but over a longer period. Service reviews are still underway and  further  efficiencies  will  come  as  the  public  sector  adopts  a  culture  of  continuous improvement and reaps the benefits of technological change and office rationalisation..."[27]

It was a strong recommendation of both the Panel and its advisors in the report on the MTFP published in 2015 that appropriate impact studies or distributional analysis be undertaken on measures to be included within the MTFP Addition and that these studies be made available to the States Assembly. It would appear that the use of distributional analysis informed the policy decisions which are included in the MTFP, however there is no detail of measures which  were  not  deemed  acceptable  by  the  Council  of  Ministers  on  the  basis  of  the distributional analysis. It is therefore difficult to assess the decisions made by the Council of Ministers in accepting or rejecting options for savings.

Recommendation 7

States Members should be presented with a detailed analysis of all of those areas that were  rejected  by  the  Council  of  Ministers  which  resulted  in  a  reduced  savings  and efficiencies target.

The Panel wanted to delve further and asked if the figure of £90 million was over optimistic:

The Connétable of St. John :

"Effectively, the savings, if I can use the term, there is slippage in producing the savings that were originally targeted of £90 million. Does this mean that the original £90 million target was unrealistic?"

The Chief Minister:

"I do not think it ... it was challenging. We were quite clear about it being challenging. The F.P.P. said it was challenging"

The Connétable of St. John :

"The target for savings and efficiencies has decreased from £90 million last year to £73 million this year. The impression this gives is that you have taken your foot off the pedal, if I can use that term. Is this true?"

The Chief Minister: "No"[28]

8. Savings vs efficiencies

The MTFP Addition makes reference to savings and efficiencies which are to be targeted throughout the life of the Plan. The Panel found it difficult to ascertain what defined one from the other and asked for an explanation from the Minister for Treasury and Resources:

Deputy J.A.N. Le Fondré:

"Can you clarify the difference between efficiencies and savings?..." The Minister for Treasury and Resources:

"There are clearly many different definitions from different people, but savings typically would involve the ceasing of a service, the cutting of a service, however you want to phrase it, whereas efficiency would be continuing the same service but in a more efficient, cost-effective way, so with less people, utilising technology, perhaps going cross-departmental and so on and so forth, providing the same or a better outcome, but at less cost. That is what we are seeing in terms of the overall savings/efficiencies, the vast majority are efficiencies, not savings"[29]

The Panel is interested as to how the savings and efficiencies would be delivered without any effect on front line services. When asked, the Chief Minister gave the following response:

The Chief Minister:

"We have thought  very carefully throughout this process about trying to deliver efficiencies that would not affect frontline service delivery, and you will see there is a breakdown between those that may affect, where services may need to be stopped, and that amount is very small. The vast majority is efficiencies and that takes time. We have said to departments that they will continue to need to deliver efficiencies

throughout the next M.T.F.P. as well because all organisations - and the States is no different from that - need to continue to make efficiencies"[30]

The Department for Treasury and Resources has  a carry forward mechanism to carry forward genuinely unused resources between financial years. Although CIPFA state they have no reason to believe that Treasury and Resources do not challenge this process, "it does not extend to resources which departments have a fair idea will not be spent within the forthcoming financial year, or in year, for example the level of outstanding vacancies"[31] Vacancy management is discussed in more detail later in this report.

CIPFA make the point that there does not seem to be enough challenge for Chief Officers to make budgetary savings as there is a lack of options available to them in order to make the required changes.

"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, there appears to be almost a cultural acceptance that there will be a significant element of non- achievement"[32]

CIPFA do not see any evidence of a "burning platform" and in general there is a lack of drive behind the savings programme. CIPFA met with a number of senior officers and comment in their report that although extensive departmental work has been carried out, there is still "a lack of overall precision on the extent of planned service re-engineering/re-provisioning that needs to take place before the proposed/required quantum of saving is delivered"[33]

Based on this lack of rigour, concerns were also raised by CIPFA with regards to a potential for salami sliced' budgets to be produced.

Recommendation 9

In  order  to  bring  about  fundamental  structural  change  to  deliver  real  savings  and efficiencies, recommendation 16 in CIPFA's report in relation to outcome based budgeting and additional zero based budgeting should be put in place by the time of the next MTFP.

"Outcome  based  budgeting  and  additional  zero  based  budgeting  should  be  used  to complement the prevailing incremental approach."

9. Vacancy Management

According to information received from the Department of Treasury and Resources provided to  CIPFA,  the  Panel  notes that the  number  of  vacancies  across  the  States  of  Jersey currently run at 12.9%. These vacancies are included within each Department's expenditure budget and the funds are allocated annually.

The Panel understands that there will always be a level of vacancies throughout such a large organisation, however CIPFA have commented that the figure of 12.9% is "exceptionally high"[34]. When questioned, the Minister for Treasury and Resources agreed "it is on the high side and some work is being done"[35]

The Panel has calculated that 12.9% of the total States wage bill in 2016 of circa £361 million equates to close to £46 million. Within their Report, CIPFA have stated that across the UK, public bodies generally run vacancies of between 3% - 5%. CIPFA highlight the fact that the 2010 Comprehensive Spending Review for UK Central Government to 2014/2015 prescribed a freeze on vacancy recruitment which allowed Departments to be fully stripped of any  vacancies and  in some cases subjected to a further 3%-5%  efficiency savings reduction.

On  States  staffing  levels  overall,  CIPFA  have  commented  "...Despite  the  voluntary redundancy scheme, overall staffing FTE numbers are only forecast to show a net reduction of 57.6 FTE"[36]

10. Increases in Expenditure

Despite  the  savings  and  efficiencies  being  targeted  within  the  public  sector,  overall expenditure has continued to rise year after year up to 2016. This is demonstrated by the following graph provided by the Panel's advisor, MJO Consultancy:

37

The  justification  behind  and  rationale  supporting  the  introduction  of  new  charges  and taxation  measures  as  contained  within  the  MTFP  Addition  is  questionable  when  the evidence over the last few years shows the States have been unable to cut its costs. The objective of the Public Sector Reform programme is to reduce costs within the States, however actual expenditure has increased by £43.5m in 2014, almost £20m in 2015 and £18m in 2016.[38]

The rise in expenditure in 2016 is followed by projected real terms falls in 2017, 2018 and 2019, as demonstrated by the following graph:

39

Whilst the reduction in expenditure is welcomed, these cuts will need to be delivered on the back of demonstrable savings and efficiencies from within the public sector, if the new charges and taxation measures are to be in any way justified. The Panel echoes the recent comments by the Fiscal Policy Panel that "making savings and efficiencies in the public sector is now critical"[40].

11. Lack of Detail

In 2015, an amendment to the Public Finance Law (Jersey) 2005 was approved by the States allowing the MTFP to be brought in two stages in order for further detail to be provided in this Addition. However, despite this, an appropriate level of detail is still missing and the States are being asked to approve a spending plan without any detail of some of the key components. These include the health charge, the waste charge and the States payment of rates which have been discussed in detail earlier in this Report.

CIPFA has said within its Report "the core rationale being that a year was required for departments to work up the detailed estimates beyond 2016. We were expecting the MTFP2 Addition to yield significant detail covering the £90 million of Staff and non-staff efficiency savings from the original £145 million of structural deficit'"[41]

During its review of the MTFP Addition, the Panel has found the detail provided to be at a relatively high level with little in the way of linear information for States Members to follow. Following a conference call with its advisor, CIPFA, the Panel asked if, in CIPFA's opinion, there was sufficient information available within the MTFP Addition for States Members to vote with complete understanding of what it was they were actually voting for. CIPFA said they did not think there was sufficient information within the document.

At its hearing with the Minister for Treasury and Resources on 2nd September 2016, the Panel asked if any further detail on the savings and efficiencies would be given to States Members prior to the debate on the MTFP Addition. The Minister informed the Panel that he did not consider there was a lack of detail and the information was clear enough for its purposes. The Minister went on to say that States Members would receive briefings leading up to the debate and could ask questions of the Minister and his colleagues. The Head of Financial Planning added that the MTFP was a 3 year plan and it was reasonable that some more detail would need to be worked through.

12. User Pays and Additional fundraising mechanisms The Health Charge

The States is being asked to approve the introduction of an income based Health Charge to raise £7.5 million in 2018 and £15 million in 2019. Due to a reported improved financial position, these figures have changed since the MTFP 2016 – 2019 from original proposed figures of £15 million in 2018 rising to £35 million in 2019:

Chief Minister

"These figures differ from last year as the financial position has improved. Income in 2015 was higher than forecast, partly due to a change in accounting policy and this effect will  continue  into  future  years.  This,  and  the  2016  budget  measures,  have enabled us to reduce the amount that needs to be raised through a health charge from £35 million in 2019 down to £15 million"[42]

The Panel asked how the charge would be ring-fenced:

Deputy K.C. Lewis :

"A charge is supposed to be for a specific service. It would appear that the health charge is just to plug a hole in the health budget"

Chief Minister

"The proposal is that that health charge would go into a fund which is administered by  Treasury  and  delivered  under  certain  criteria  into  health  and  social  services provision"[43]

The whole system of collecting the charge via ITIS is, in the Panel's opinion, confusing and misleading and indeed the Panel's advisor has raised the question as to whether the term "charge" should be used rather than "tax":

"Given that there is no linkage between usage and liability, the term charge is inaccurate as it is in effect a tax (perhaps no different from the LTC contribution)" [44]

13. Capping the charge

It is proposed that the health charge will be collected in the same way as the Long Term Care charge which is deducted at source through ITIS and capped at £162,500. Those earning more than £162,500 will pay a lower percentage of their income towards this charge than many people in the income brackets below the cap. The Panel views this as non- compliant with the tax principle of low, broad, simple and fair.

45

Deputy K.C. Lewis :

"Why  should  someone  earning  over  £162,500  pay  a  lower  percentage  of  their income for this charge..?"

The Chief Minister:

"The bit that it takes out of the tax system is you have got the marginal rate, you have got 30 per cent of people who are not paying tax, so it gives that relief to the lower earners, and then you have got this 15 per cent of people who are paying at the 20 per cent rate. So the 20 per cent rate people are going to be paying the full 0.5 per cent and the full 1 per cent in 2019. All those people on the marginal rate will be paying less than half a per cent and paying less than 1 per cent, and I do not think that is really well understood. We have brought the cap in to mirror the contributory system because  what  we  are  trying  to  do  is  show  that  we  are  contributing  towards  the increasing costs of health care"[46]

The  Panel  also  asked  the  reason  why  the  charge  was  not  being  implemented  as  a percentage across the board to make it fairer and more equitable.

The Chief Minister:

"we are bringing together the 2 systems and we are asking people to contribute a little bit more. Some would say we should just have gone down the tax system. Some would say we should have gone on the G.S.T. (Goods and Services Tax) system but what we do is because we think it is a rounded hole, and we have looked at the economic advice on this, mirroring the system of the long-term care charge, which brings together both contributory and tax system, that is the best way forward"[47]

The Panel asked if a review of the cap charge should be carried out and was informed that the Department of Social Security have already stated publically that they are reviewing the whole of the Social Security system, including the caps with a complete review being undertaken over the next couple of years.

14. Waste Charge

The MTFP Addition is proposing a new liquid and solid waste charge. The charge will raise £3m in 2018 rising to £11m in 2019. This is higher than the estimate in MTFP 2016-19 of £10m in 2019.

The MTFP Addition sets out the background and rationale for the charge but does not provide the detail as to how the charge will be implemented. Proposals setting out the detail will be brought to the States in 2017.

It  is  intended  that  the  charge  will  only  be  levied  on  commercial  waste.  The  Panel  is concerned that commercial waste operators collecting waste on behalf of Parishes will be liable for the charge which will potentially increase Parish Rates thus ultimately transferring the burden onto households. The Chief Minister assured the Panel that the charge would not be levied in such cases. However, the Panel is of the view that without the detail it is impossible to ascertain how this will be achieved.

It is likely that the waste charges will result in higher prices for consumers. The Distributional Analysis accompanying the MTFP states that:

"such charges should encourage businesses to manage their waste more efficiently but are still likely to feed through into higher costs to some degree"[48]

The charge is likely to be of particular concern to Jersey's tourist industry. In evidence submitted to the Panel, the Chamber of Commerce commented that:

"at a time when the island's government and Visit Jersey are doing all they can to support the  tourism  industry,  businesses  in  this  sector,  such  as  hotels,  restaurants  and  visitor attractions are likely to be some of the most affected by the tax."[49]

The Panel is also concerned that the charge will hit small local operators as much as larger businesses. The distributional analysis accompanying the MTFP Addition also highlights that hospitals and schools could face higher bills from the liquid waste charge but that the impact is uncertain as there is not sufficient information available at this stage[50].

Various arguments have been provided in favour of the charges, including that most other jurisdictions already have user pays charges for liquid and solid waste, that it will encourage more recycling and that it is a mechanism for taxing businesses who otherwise do not pay tax in Jersey. The Panel considers that justification of new taxes and charges through comparisons  with  other  jurisdictions  cannot  be  used  as  Jersey's  tax  structure  is  very different. Furthermore, despite the justifications put forward for the charge, the fact remains that this charge will mean that businesses will be paying for a service which is currently provided under general taxation and therefore will mean that any business that does pay tax will effectively be paying twice for the disposal of waste.

When discussed at its recent hearing, the Panel queried whether, with the new user pays charges being proposed, the Island's tax system was broad and fair. The Minister explained that compared to other jurisdictions, the Island's tax system was very broad and simple with the Treasurer of the States adding that waste charges already exist elsewhere. The Panel then made the point that inheritance tax and capital gains tax (to name a few) also existed in other jurisdictions and would these also be introduced in Jersey to which the Minister replied "of course not"[51]

15. Proposals for States Payment of Rates and a Funding Mechanism

It  is  proposed  within  the  MTFP  Addition  that  the  payment  of  Parish  rates  on  States properties will be implemented together with a funding mechanism to fund this payment. It is estimated that the States liability to Parish rates will be approximately £900,000 per annum. Assuming this proposal is adopted, the Rates (Jersey) Law 2005 will need to be changed and the necessary amendments will be included in the 2017 Budget with the States payment of rates to commence in 2017. The Department for Treasury and Resources has made a growth bid of £900,000 in 2017 in the MTFP Addition to meet the payments of these rates however, this only covers 2017 and an income stream will need to be found for 2018 onwards.

The Council of Ministers has considered options for a compensating income stream and although it favours an increase in the non-domestic Island wide rate, the current rates system contains no mechanism for revaluation with rateable value of property locked in value largely based on notional rental values  from 2003. The Council of Ministers  is currently working with the Comité des Connétable s and the Island's rates assessors to bring forward a suitable proposal for an income stream.

The Panel has written to the Comité des Connétable s asking what its position is on the introduction of this charge and the possibility of a consequential increase in Parish rates. The Comité states it has written to the Minister for Treasury and Resources commenting on general matters within the MTFP Addition however, in relation to the issue of States payment of Rates, comments as follows:-

"The Comité has not, therefore, taken a view on the proposals although it has always been of the view that the Connétable s should not take money from ratepayers to enable States Departments to pay their rates but rather Departments should regard rates as a utility bill and seek savings, or raise funds, to meet its liabilities. Connétable s are also mindful that ratepayers of rural parishes saw their rates almost double when the IWR (island wide rate) was first  introduced  so  a  further  increase  is  likely  to  be  opposed  and  it  could  impact negatively on the lower quintile of domestic property. If an increase in the IWR is targeted at businesses, given that rates as a proportion of rents are significantly lower in Jersey that most of the United Kingdom, such an increase would adversely affect small businesses"[52]

Based on this information from the Comité des Connétable s, the Panel cannot see how a funding mechanism will be put in place to fund the income stream required. The Panel is furthermore concerned that the cost will ultimately be borne by the tax payer.

16. Funding the new Hospital

One of the proposals within P.82/2012 Health and Social Services – A New Way Forward was for the Council of Ministers to co-ordinate the necessary steps to bring forward for approval proposals for the priorities for investment in hospital services and detailed plans for a new hospital (either on a new site or a rebuilt and refurbished hospital on the current site). This process has been ongoing with the preferred site option due to be debated by the States later this year. The indicative capital cost estimated for the future hospital provision is in excess of £465 million. The income stream necessary to fund the hospital has not yet been decided however, the MTFP Addition states:

 "A Special Fund, specific to funding the new hospital, is likely to be proposed. The extent to which external funding, possibly in the form of a bond is used will determine the extent to which an income stream is required to service that debt, most likely in the form of additional taxation"[53]

The Panel asked the Minister for Treasury and Resources if a further income based charge to fund the hospital was imminent and why the funding mechanism was not included within the MTFP Addition:

The Connétable of St. John :

" We are apparently, as has been hinted at, being asked to approve a further charge for the building of the hospital in 2017. Should this charge not be included in this M.T.F.P?"

The Minister for Treasury and Resources:

"First of all, I am not sure that I was hinting, I think I was fairly straightforward about it. I did not mention 2017 with regard to hospital funding either, but nevertheless we will need to come back. Three things need to happen. First and foremost, the site, which has been identified, needs to come to the States, there needs to be approval by the States for the feasibility  work  that  needs  to  be  undertaken  for  the  funding  of  that,  and  thirdly,  quite understandably, the States needs to consider the funding mechanism and option and that will all come forward in the period between now and the end of the year" "The funding arrangements for the hospital are yet to be clarified. I have spoken publicly about this and about the possibility of a blended solution in that regard"[54]

The Panel believes that States Members are being put in a difficult position by being asked to approve a new health charge without any detail, following which, a further charge could be enforced to pay for the new hospital, again with no detail. It was originally suggested to the Panel that further detail on the funding options would be provided prior to or alongside the  MTFP  debate.  However,  this  detail  has  not  yet  been  forthcoming  and  the  Panel understands that any detail may not be provided until the budget debate towards the end of this year.

17. Does 20 still mean 20?

The introduction of additional charges on the tax payer seem to suggest that the 20% tax rate applied in Jersey may no longer be sustainable. Taxes should, by definition, be imposed upon a taxpayer (an individual or legal entity) by a State or the functional equivalent of a State to fund various public expenditures. The additional charges being proposed within the MTFP Addition mean that the "effective" rate of tax levied on by some taxpayers might be higher than 20%.

The Index of Average Earnings 2016 report produced by the Stats Unit has the average weekly earnings of full-time equivalent (FTE) employees in Jersey in June 2016 at £700 per week. This works out at £36,400 annually[55].

In order to assess the impact of the proposed health care charge when considered alongside the existing tax rate, long term care charge and social security contribution, the Panel has looked at the position of a single taxpayer liable for (a) the marginal rate and (b) the standard rate of income tax (based on someone with a salary of £70,000 which just falls into the standard rate band). The overall rate of tax for a standard rate (single person) taxpayer will now be 22%. If Social Security contributions are included, the total proportion of salary paid to the government approaches 28%.

The calculations will of course change in other scenarios, for example for couples or those with children and do not take into account other measures within the MTFP such as the waste charge or other user-pays charges. It should be noted that for self employed persons, the total proportion of salary payable to the government will be significantly higher.

56

Since the introduction of the Zero/Ten tax system in 2008, personal tax has made up an increasing part of the total tax income for the States. This is shown by the graph below produced by the Statistics Unit. Without increasing the headline 20% rate of tax, other measures for raising the amount of personal tax have had to be found to balance income with expenditure.

57

The Panel questioned the Minister for Treasury and Resources on the sustainability of the zero ten tax regime:

56 Panel calculations based on worked examples available on www.gov.je 57 States of Jersey Statistics Unit

Deputy J.A.N. Le Fondré:

"Is it not really just the case that the Zero/Ten income tax structures that we have got are starting to creak, we are finding various ways of bringing in other income? What is the view in terms of perhaps we should be introducing a new headline rate of tax instead?"

The Minister for Treasury and Resources:

No, it is not creaking. You can see that revenues are continuing to rise. I think the issue is they are not rising at the same rate that they were previously, whereas we have significant additional pressures, largely around the ageing population. This is not, as we have said, a Jersey issue, it is happening in many other places as well. That is why the priorities, in particular in health, and why there is £40 million additional investment going into the Health Department to deal with those pressures. So you have got rising costs, income rising, but not as fast as it previously was, and pressures, I may say, that put that income line at risk. We are having to make sure that we have flexibility to adjust to that"[56]

18. Population Numbers used in the MTFP

The Panel is concerned about the population numbers that have been used to formulate the MTFP. The area of population is one the Panel has raised frequently at its quarterly hearings with the Chief Minister, with additional concern around the absence of a current, updated population policy for the Island. The Panel has been told the existing policy is currently being used and is still good for business. This was confirmed in a quarterly hearing with the Chief Minister in June of this year:-  

Deputy J.A.N. Le Fondré:

" when do you think a new population policy will be implemented? Because from what I am hearing that is at least a year and a half away after it is expired, so just give us a ballpark figure, is it 2 years away from now..?"

The Chief Minister:

"No, the title might have expired but the actual policy is still good for business and that policy is a robust policy of trying to say yes to licences that are going to bring value to our community and no to those that we think are not and you have got a planning assumption underlying that"[57]

Part of the formulation of the MTFP requires statistics from the Statistics Unit with the latest population figures shown below:

The latest Jersey Resident Population Estimate 2015 report published in June 2016 shows that during 2015:

• the resident population increased by 1,700 people
• net inward migration accounted for 1,500 of the increase
• natural growth (the excess of births over deaths) accounted for 220

Total net inward migration of 1,500 in 2015 comprised of approximately:

• 400 net inward licensed' employees and their dependents
• 1,100 net inward registered' employees and their dependents

During the last 10 years, the resident population has increased by 11,700 people with net migration accounting for three-quarters (75%) of the total population growth over the last 10 years.

These numbers are significantly higher than the "base assumption" of 325 - 350 which has been used in the MTFP Addition.

The Panel asked the Assistant Chief Minister what target figures the MTFP Addition is based on:

Senator P.F. Routier:

There is no target. There never has been a target for population. We have always worked on the process of each department makes an assumption of what services they are going to provide and what the demands are going to be on their service. Every department is different.

The Panel is highly concerned that there is no consistency across the States in terms of planning public services for a particular level of population. The base assumption of 325 per annum net migration which is referred to in places in the MTFP is evidently incorrect and a higher figure needs to be used which is based on up to date population estimates. Basing significant expenditure plans on inaccurate figures means that the Island could be storing up trouble for itself in the future, even if not in the period of this MTFP. As the MTFP 2016-19 acknowledged:

"It does, however, mean that the capacity of services and infrastructure to accommodate long term growth in Jersey's population is being eroded faster than intended."[58]

APPENDIX 1 – CIPFA REPORT

Corporate Services Scrutiny Panel MTFP II Addition 2016 – 2019

August 2016

CIPFA (Chartered Institute of Public Finance and Accountancy)

77 Mansell Street

London E1 8AN

Phone: 020 7543 5600

CIPFA FINANCE ADVISORY SERVICE  37 Email: stuart.fair@cipfa.org

Contents

1. Executive Summary

1. In May 2016, the States of Jersey commissioned CIPFA Business - Finance Advisory (the commercial arm of the Chartered Institute of Public Finance and Accountancy) to support the work of the Corporate Services Scrutiny Panel in the Review of the Medium-Term Financial Plan (MTFP) II Addition submission (MTFP II 2016 – 2019).
2. The MTFP II Addition document recognises an imbalance between operating income and expenditure and highlights a revised forecasted profile on Operating Surpluses/Deficits – moving from an overall deficit of £91m in 2016 to a modest surplus of £1.5m in 2019.

Key findings

3. The MTFP II Addition is a comprehensive and robust framework and should have the modelling capabilities that would allow a highly effective medium term financial strategy to be set to 2019. In many ways it contains aspects of best practice that should allow the model to be an exemplar for other jurisdictions to follow. However, regardless of the MTFP model's obvious strengths in design and coverage, its overall utility as a platform for optimal decision making (tax and spend decisions) is significantly impaired by what we see as imprudent assumptions around Income Tax and a lack of rigour in the detail behind a significant number of efficiency saving proposals.
4. The main issues arising from our review include: Income

• Income growth forecasts of 2017 – 4.2%, 2018 – 5.5%, 2019 – 4.7% and 2020 – 5% do not appear to be realistic in context (even before any uncertainty arising from the UK Brexit referendum) with prevailing and expected economic conditions over the medium term period. We understand that revised core assumptions provided by the Fiscal Policy Panel will be used by the Income Forecasting Group in providing a downward revision of income figure, however, there are no plans to change the MTFP II submission. Failure to incorporate any known changes in the expected operating environment within financial strategy further reduces the utility of MTFP II

Efficiency Savings

• A significant number of efficiency savings proposals contained within the MTFP II Addition submission are not sufficiently advanced in construction, lack granularity and are aspirational/expectational. As relevant legislative provisions of Public Finance (Jersey) Law was specifically amended to allow for the detail on efficiency savings to be fully constructed over a further period of a year to June 2016, this lack of granularity is disappointing

• A lack of consistent service planning seemed to indicate that for some departments the MTFP process itself was a proxy' for this critical bottom up' base planning process
• If the June 2016 level of funded vacancies (12.6%)are sustained there is the potential for savings' to be generated without significant additional effort running counter to the transformational change agenda on public sector reform

Charges  

• The revised Health Charge is a tax levied on income rather than a charge levied on usage, is not directly routed to the Health Account and appears to provide an additional source of income
• The proposed charge for Commercial Waste estimated to raise £3m in 2018 and £11m in 2019 contains little detail on how these figures have been constructed and it is understood that there will be some complex issues to resolve prior to implementation including industry affordability issues in the context of potential economic retrenchment
• If further efficiencies were generated as part of the reform agenda including significantly reducing funded vacancies, the requirement to raise additional income sources could be potentially avoidable

Financial Management

• Our assessment of the MTFP Addition against relevant components of the latest version of CIPFA Financial Management Model (V4) highlighted some scoring improvement on the 2015 position. Whilst the overall MTFP framework is stronger (the MTFP II Addition provides a robust framework for financial strategy to be formulated) there are a number of financial management processes that require to be strengthened including budget setting. We believe the States would benefit from a more outcomes based/zero based approach on budget setting in addition to significantly strengthened forecasting. In terms of improving the effectiveness of financial management arrangements associated with MTFP II we have proposed 23 recommendations

5. Overall the structure and scope of MTFP II Addition still provides the capability to provide real insight into factors impacting financial strategy and should allow decision makers with the platform to create an optimal medium term financial strategy. However, this is fully predicated upon the model having robust core assumptions and transparency in the demonstration of resource provision against service needs. The MTFP II 2016-2019 has a number of real strengths however key components within the model appear to be aspirational rather than being based upon detailed and prudent assumptions, to the extent that the utility of MTFP II as currently constituted is seriously compromised. With continuing service delivery and investment pressures including the affordability/funding decisions related to the new Hospital Project, all in the context of a potentially uncertain economic outlook, the value of an effective MTFP cannot be understated. An effective MTFP can be readily achieved if MTFP II is recalibrated to reflect a more realistic position on specific key assumptions underpinning Income, Efficiency Savings and Charges. In doing so potentially unpalatable decisions on tax, spend and the level of reserves will not go away and the forecasted trajectory on deficits may indeed appear to be even larger and more prolonged, however the States will be able to base its decisions on a more robust financial strategy that can only lead to better outcomes.

2. Background

1. In May 2016, the States of Jersey commissioned CIPFA Business - Finance Advisory (the commercial arm of the Chartered Institute of Public Finance and Accountancy) to support the work of the Corporate Services Scrutiny Panel in the Review of the Medium-Term Financial Plan (MTFP) Addition submission (MTFP II 2016 – 2019). The additional submission builds upon the MTFP II 2016-2019 which was lodged in July 2015 adding detailed estimates for 2017, 2018 and 2019 including budget lines where planned efficiency savings have been identified as well as an update on financial strategy building upon the latest activity outturns and profiles on financial performance. This briefing paper highlights high level issues that we believe merit Scrutiny Panel consideration in advance of the Assembly debate on 27 September 2019.

Our Approach

2. Our approach to this independent review has sought to draw together a wide range of evidence including work carried out on the original submission – MTFP II 2016-2019 together with addition submission and supplementary material sourced from Scrutiny Panel Hearings, meetings with officers and further documents sourced from these meetings. Best practice on Financial Strategy, Budget Setting and Financial Performance Management have been derived from the latest version (version 4 – July 2016) of the CIPFA Financial Management (FM) Model. Our comments are made on material which was made available before the UK's referendum on continuing membership of the European Union.
3. As the original submission contained only control total information for 2017, 2018 and 2019, the MTFP Addition required to be amended to accommodate a more detailed position which was subsequently lodged on 20 June 2015. Article 8A of the Public Finances (Jersey) Law was specifically amended to allow for significant service reengineering and consequential change to line by line departmental estimates within an addition submission. Within our review of this change we expressed some initial concerns whilst recognising the requirement to accommodate the background work in formulating a detailed MTFP submission:-
4. As the original submission contained only control total information for 2017, 2018 and 2019, the MTFP Addition required to be amended to accommodate a more detailed position which was subsequently lodged on 20 June 2015. Article 8A of the Public Finances (Jersey) Law was specifically amended to allow for significant service reengineering and consequential change to line by line departmental estimates within an addition submission. Within our review of this change we expressed some initial concerns whilst recognising the requirement to accommodate the background work in formulating a detailed MTFP submission:-

"We had some initial reservations around this proposal - 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 would negate the benefits of the MTFP and significantly reduce its utility."[59] However, notwithstanding the impact on the MTFP we fully acknowledge the rationale for the amendment (the revised planning work to restructure services would be insufficiently advanced by the time of the required submission) although we recommended that such a change be limited to a one off' event with a strict time clause on the amendment being applied.[60]"

5. Whilst  the  addition  submission  is  extremely  comprehensive  and  the  product  of significant work, it effectively re-states the 2015 submission in that changes are made to  relevant  annual  control  totals  with  only  limited  detail  on  a  reduced  scope  of required efficiency savings. In essence the MTFP II 2016-19 has been revised and an opportunity has been taken to relax expectations to identify some £145m of funding measures as contained within the Council of Ministers' Executive Summary of MTFP II. This was originally split as follows:-63

• Staff and Non Staffing savings - £90m
• Holding benefit spending at 2015 levels - £10m
• Implementing a Health Charge - £35m
• Introducing a user pays' charges for liquid and solid waste - £10m

6. A reduced headline figures of £77M from £90m is highlighted along with a more relaxed/gradual profile which assumes the challenges reflected in achieving actual delivery64:

7. Proposals for a Health charge of £15m in 2018 originally extended to £35m in 2019 have been modified downwards to £7.5m and £15m respectively on account of an "improved Consolidated Fund position". Commercial waste charges are expected to raise £3m in 2018 and £11m in 2019.
8. The  addition  attempts  to  balance  significant  critical  additional  investment  (This financial plan moves funds into the agreed priority areas. Health and Social Services

will be receiving additional annual funding of almost £40 million by 2019; education will be receiving £11 million of additional funding every year from 2019. £168 million has been allocated to capital projects over the four years of the plan, including £55m for school buildings, £43m for sewage works and £21m for IT systems.)65 with a shallower profile in cost reduction and additional income generation. The rationale for this is based on an interpretation of the Fiscal Policy Panel's Pre-MTFP advice without any apparent assistance from any distributional analysis:

"The advice of the Fiscal Policy Panel in its Pre-MTFP report was for the States to address any structural deficit with sustainable measures by 2018/2019. The Fiscal Policy Panel also advised that care should be taken to ensure that the range and timing of the measures minimises the risk to the economic recovery, which in the early stages, may involve using the States Reserves.

The Council of Ministers has interpreted this advice to mean that there should be a phased introduction of the sustainable measures which should be carefully planned and implemented over the four year period to 2019."[61]

9. In this context our report on the original submission advocated clear immediate action to recalibrate overall expenditure within income:-[62]

1.17  Rather than awaiting for further macro-economic advice it is submitted that strong and immediate action needs to be taken to recalibrate overall expenditure with income. Within our report on the MTFP II016-2016 we had concluded that:

"Proposed total income of approximately £2.94 billion including some £35 million of a Health Charge is incorporated the MTFP submission against what would be approximately £3.11 billion of total net expenditure. By any definition, 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.

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 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."

10. Whilst  it  is  recognised  that  the  MTFP  Addition  represents  a  valid  opportunity  to update core assumptions, the submission has clearly went with the original intention of  highlighting  the  detailed  budget  measures  required  to  recalibrate  income  and expenditure  and  indeed  beyond  marginal  changes  to  key  baseline  parameters. Updating financial strategy to accommodate the very latest intelligence on service activity/developments arising from on-going performance management arrangements is good practice.

Forecasted Operating Surplus

11. Appendix 12 of the MTFP Addition document highlights a revised profile on Operating Surpluses/Deficits – moving to a modest surplus of £1.5m in 2019 with consequential integrated impacts on Strategic Reserve and Consolidated Fund balances. This profile of deficits changes to a the project £1.5m surplus in 2019 from running an overall £91m deficit in 2016 as follows:

12. Although the final position is not dissimilar to that original submitted in 2015 – see below - there are significant differences in the profiled deficits for 2017 as well as the actual 2015 position itself – see comparable table below.

13. In  order  to  achieve  a  return  to  surplus  the  forecasted  income  and  expenditure positions requires to be realised. Given that the year on year increase position on States Income as formulated by the Income Forecasting Group (IFG)(irrespective of containing expenditure)is 4.2% for 2017, 5.5% for 2018 and 4.7% for 2019, the full delivery of the financial plan to outturn a modest surplus of £1.5m by 2019 depends on this level of income being generated. In context, this will be extremely challenging with significant inherent risks of non- achievement.

Strategic Reserve – Estimated Changes to Fund Balances

14. The MTFP Addition projects an estimated 2016 Strategic Reserve Fund Balance of £743m  down  from £771m  in  2015  and  a  2019  balance of  some £819m  68  which represents a 5.7% reduction from the June 2015 forecasted position as contained within MTFP II:

15. Both points in time are well adrift from the corresponding MTFP II 2015 submission69 position  suggesting  a  significant  number  of  adjustments/changes.  As  with  the Operating  Deficit/Surplus  forecast,  reliance  on  the  revised  core  assumptions  are considered to be integral to the achievement of these forecasts. It is difficult to fully track the downward adjustments, some are substantial, and it would be appropriate to acquire a reconciliation of both positions:

16. Expected deficit outturns returning to marginal surplus in 2019 has an obvious impact upon  reserves  and  this  is  partially  illustrated  within  the  reducing  balance  on  the Strategic Reserve. Given the sustained imbalance between income and expenditure it is critical that prevailing MTFP assumptions are robust.

68 MTFP Addition - Figure 40 – Estimated balances on the Strategic Reserve 2015 - 2019 69 MTFP II016-2019 Figure 37 – Estimated balances on the Strategic Reserve 2013 - 2019

3. Assessing the MTFP2 Addition Submission

1. The CIPFA Financial Management Model (FM) Model 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. In July 2016 CIPFA launched  its  latest  version  of  the  model  which  sets  the  standard  on  the  latest advances in best practice Public Financial Management including the internationally based Public Expenditure and Financial Accountability programme (PEFA). In relation to  the  2015  submission,  we  assessed  the  MTFP  II  together  with  aspects  of  the prevailing  FM  operating  environment  against  relevant  components  of  the  CIPFA Financial Management Model. We have updated our 2015 assessment taking account of the MTFP Addition submission of 30 June 2016. Where there has been FM Model changes arising from the latest version we have applied a mapping that allows a full comparison and tracking.

Assessing the strength of MTFP II – 2016-2019 using the CIPFA FM Model

2. Our assessment has been based upon applying the most relevant statements of the latest version of the CIPFA FM Model version 4 together with relevant supporting questions to the MTFP Addition. Using relevant components of the FM Model specific testing was applied to highlight the strength of the following attributes:

• Construction of the MTFP including the Addition submission
• Assessment of Key Assumptions used within the MTFP II Addition
• Performance Monitoring and Reporting of the MTFP II Addition
• Overall effectiveness in the utilisation of the MTFPII Addition

3. The relevant statements that were considered appropriate to the assessment of the strength of MTFP I were applied in the same manner for MTFP II and reconfigured to fully  align  with  version  4  of  the  FM  Model.  These  Statements  (9  in  total)  were categorised between Primary Statements where we would expect the fundamental attributes of good practice to exist within MTFP II Addition, including at a granular level, testing the strength of some of the important assumptions. Each statement is supported by questions which seek to cover a range of relevant evidence which assists with the scoring. Scoring rises in increments of 0.5 from 0 to 4 within a determination as follows:-

4. As with our previous assessment we will represent the scoring for reporting purposes at a high level with a "traffic light" (RAG Rating) approach with the following ranges:-

Evidence

5. Primary sources of evidence consisted of:-

• Document  Review–  the  MTFP  II  Addition  submission/subsidiary  plans  and workings
• Attendance at Scrutiny Panel Meetings including transcripts
• Reports received from stakeholders
• Meetings with Senior Finance Staff in Treasury & Resources and Departments

6. It should be recognised that this assessment work is carried out on a restricted set of evidence  and  should  be  seen  as  specific  to  medium  term  financial  planning  and associated financial management issues relating to MTFP II rather than an indicator of the overall strength of financial management capability at the States of Jersey. Having carefully considered all the relevant available evidence, our scoring for each of our relevant eight statements in relation to MTFP II Addition is as follows (the relevant MTFP I positions are also displayed):-

Statements of Good Practice

7. Each statement is underpinned by a range of questions that are used to assess the available relevant evidence in detail. Our high level comments for each of the eight statements in scope are outlined below.

Leadership - Delivering Accountability and Supporting Performance

8. For the Leadership Financial Management Dimension and Delivering Accountability Financial Management Style, statement L3 relates to the basic requirements of setting a robust annual budget within an existing financial strategy which fully correlates to organisational objectives and outcomes. Scoring has improved in this area from the point  of  the  September  2015  MTFP  II  submission  assessment  to  2.5.  Four  key supporting questions to this statement:

• Is the annual budget setting and allocation process based on sound evidence of costs and income together with an assessment of sensitivities to external and internal influencing drivers of change?
• Are taxes, fees, charges and other sources of income including transfers set in accordance with  a  robust  fiscal/  financial  strategy  in  full  alignment  with  the  delivery  of  strategic objectives and outcomes?
• Does  the  budget  process  demonstrate  that  resources  are  allocated  in  alignment  with strategic objectives and facilitates the conversion of strategy into the operational delivery of outcomes?
• Is the board/management team responsive to changes in financial assumptions impacting performance and adapt decision making to deliver corrective action?

9. L4 relates to setting a robust MTFP based on strong operational service planning. Whilst Departments have worked hard to deliver efficiency saving strategies there is still a general and consistent lack of granularity on service planning. Service Planning should weld together operational service objectives/targets with financial resourcing requirements. Relevant supporting questions are:

• Are operational plans fully aligned with the medium-term/longer-term financial plan?
• Does the medium-term financial plan draw together realistic estimates of funding to support the achievement of strategic objectives?

10. In terms of the expected trajectory of income embedded within the MTFP Addition submission  we  have  significant  concerns  about  some  basic  assumptions  used  – principally in relation to Income Tax.

Processes – Delivering Accountability and Supporting Performance

11. Scoring for PR1 (formerly PR8) is still well below the average global scoring position of

2.8. Key supporting questions include:

• Is the budget setting process accrual based and formulated upon a bottom up approach?
• Does the budget setting process incorporate aspects of outcomes based budgeting, targeted zero based budgeting and/or activity based costing approaches?

12. As  outlined  within  our  2015  report  -  the  key  issue  with  regards  to  this  specific statement is whether or not the budgets produced are robust. Given the current level of vacancies (12.9% at June 2016) and the resourcing of approved' structures within base  budgets  (which  may  be  set  beyond  resourcing  requirements  to  deliver  the current level of service) it cannot fully be said that budgets are formulated in a way consistent with the aims of this statement.

13. PR6 relates to the way that information on assets and liabilities are used to inform strategic decision making. Whilst there are apparently robust systems in place to monitor  asset  condition  and  calculate depreciation  etc,  it  is  still unclear  how the depreciation actually informs strategic decision making or how the expected asset sales and estates rationalisation will fully profile over the MTFP. We are aware of ambitious current plans to rationalise office estate and the work of Jersey Holdings, however we are not aware of how robust the financial implications are arising from this corporate initiative. Much has been said about the States having a strong balance sheet, in terms of asset base or net assets – "Strong balance sheet - The balance sheet has grown further in 2015 with an increase in the net asset balance of £166 million to £5.9 billion, largely as a result of investment returns and the revaluation of property, infrastructure and strategic investments."[63] "Jersey is well placed to respond, not only to opportunities that arise from BREXIT but also challenges, particularly during any period of uncertainty impacting States revenues, having plans to balance the books, a history of fiscal discipline, a strong balance sheet and low debt".[64]
14. Whilst there are a number of high value assets, the bulk of the valuations of most of the infrastructure assets would not be readily realisable through a definable market. A more accurate position can be found within the detail and graph represented on page 133 of the Draft MTFP II Addition:

"The Balance Sheet, as at 31st December 2015 includes £3,443 million of property, land and infrastructure assets and £361 million of Strategic Investments such as Jersey Post, Jersey Telecom etc." Figure 51 – States Balance Sheet as at 31.12.2015[65]

15. It is worth noting that the fund balances as at 31 December 2015 was as follows

• Strategic Reserve - £771.4m
• Consolidated Fund Unallocated – £64.7m
• Stabilisation Fund - £0.006m
• Social Security (Reserve) Fund - £1.3bn

16. Against the background of major capital investment commitments in respect of a new Hospital,  Sewage  Treatment  facility,  public  sector  reform  investment,  Pension liabilities of £400m, External Bond of £250m[66] and revenue income failing to keep pace  with  expenditure,  the  relative  strength of  the  balance  sheet  will  be  further tested. Scoring in this area has improved as evidence suggest that there is now more of a strategic focus on balance sheet management.
17. PR11 (formerly PR12) specifically relates to the formulation of medium-term financial planning.  The  scoring  is  reflective  of  the  work  undertaken  in  aligning  strategic priorities with departmental resourcing however there is still more to do for the plan to fully facilitate fiscal discipline and deliver a dynamic and effective business plan. Core assumptions relating to Income Tax are considered to be optimistic at best, base estimates  are  largely  incrementally  rolled  forward  and  a  high  proportion  of  the expected  efficiency  savings  are  largely  aspirational.  Within  2015,  prevailing  Public Finance (Jersey) law was changed to allow the submission of more granular estimates for years 2017, 2018 and 2019. There was a clear expectation that such changes would be founded upon operationally related plans for the delivery of efficiency savings underpinning MTFP II through to 2019. The MTFP II Addition has only partially delivered on this expectation. Whilst scoring has undoubtedly been significantly improved to 2.5 from 1.0 (1.0 was largely based on the incomplete MTFP) it is still lower than what we would expect to see given the background to the original MTFP.

18. PR11 builds upon a previous statement PR9 (which was not previously assessed) and relates to the quality of forecasting and the ability of forecasting to directly inform decision making – "Forecasting processes and reporting are well developed and supported by accountable operational management. Forecasting is insightful and leads to optimal decision making."
19. Strong forecasting capability is critical to the formulation of the MTFP. Key supporting questions to this statement include:

• Is the base data used for forecasting considered to be robust?
• Are forecasts based on a thorough knowledge of cost/income drivers and activity behaviours e.g. latest intelligence on tax yield/income trends, etc.?
• Are the appropriate quantitative/qualitative techniques and sensitivity analysis used within decision support modelling of forecasts?
• Are assumptions stress tested' and validated for risk and uncertainty?
• Are the appropriate techniques used and challenge provided to counter behavioural aspects of forecasting including optimism bias?

20. Our evidence on performance management reporting and existence of volatility on key parameters between MTFP II submission and the original 2015 MTFP II Addition suggests that more precision on forecasting is required. Examples include components of income such as Other Income and elements of Income Tax. Some forecasts appear to be aspirational rather than based on robust assumptions and we did not find any evidence that key assumptions were subject to significant stress testing/risk assessed.
21. Consistent underspending to profile on capital expenditure suggest that there might be potentially sub optimal budget behaviours in play which negatively impact accurate forecasting. Given the extent of the sustained level of vacancies and the extent of carry forwards this may be an issue across revenue activities in as much real service resourcing needs may be obscured by a combination of over provision of budgets and behaviours designed to ensure such resources are maintained over time, regardless of immediate and direct service need.
22. PR12 (formerly PR13) concentrates upon the assumption that the States systematically focusses on opportunities to improve value for money in its operations including cost reduction. This covers both business as usual and investment programmes. The MTFP process itself delivered a variable level of savings across departments. Relevant supporting questions include: