Good afternoon and thank you for inviting me here again - on a day that started with news from an official survey that the UK’s life satisfaction ratings are at a record high. It's great news that people in the UK are happy, despite the Paradise Papers, BREXIT and spiralling private and public debt. But more importantly how are you? The important people in the engine room of Jersey’s economy!
I’m going to speak about public finances, about taxes, about our current fiscal position and, importantly, about what the future looks like. After that I hope you are still happy!
I’m going to give you a little background on the Medium Term Financial Plan and its progress before talking about how the upcoming budget, to be debated on Nov 28th, fits into that vision. Long term planning is critical and I believe Jersey is one of the few places to take it seriously.
Governments don’t tend to be very popular, and certainly not those who are prepared to make sometimes difficult decisions involving change. Change that is necessary to set the foundations for longer term security and prosperity.
One past example of this was the necessary change in our corporate tax structure to zero-ten, including the introduction of GST, that secured our most productive industry, Financial Services. Also the significant contribution it makes to Government coffers, not to mention the 13,200 jobs.
I should at this point briefly touch on the media frenzy over what’s been dubbed the ‘Paradise Papers’. Although Jersey was only briefly mentioned towards the end of an hour long Panorama program that mainly focussed on Ireland, Bermuda, the Isle of Man and the UK, it was certainly unwanted attention.
We have spent many years ensuring that Jersey has the highest standards of regulation and transparency and we are acknowledged as such by international organisations such as the OECD and the IMF.
Let me be clear, Jersey does not want abusive tax avoidance schemes operating in the Island and expects financial services providers to abide by a voluntary code that they will not take on such business. The claims from the Panorama program are being fully investigated, but we have no reason, at this stage, to believe there has been any wrong doing.
It appears from Apple statements that they notified tax authorities in the EU, Ireland and U.S. about what they were doing at that time.
Long term planning
Now getting back to today’s topic: making sometimes difficult decisions to prepare for an ever changing future or, oing nothing and pursuing a spend, spend, spend agenda for short term popularity.
This Government under Senator Gorst wasn’t prepared to take the easy option that would ultimately leave our children and grandchildren to pay the bill. That’s neither fair, nor responsible or sustainable.
When this Council of Ministers took office, we set out to tackle many of the difficult issues that others have not been prepared to face. Issues, like many western economies, amplified by the ticking time bomb of aging demographics. Our focus was to find acceptable ways to fund essential investment in priority public services, such as health and education, as well as infrastructure, while at the same time balancing our budget by 2019.
Other countries fund investment and consumption with eye watering levels of debt. At the beginning of this Government's term in late 2014 we started with what was effectively a base budget shortfall of £28m by 2019 – all things remaining equal. We quickly identified the need to be investing an extra £62m per year by 2019, principally across health and education.
We also allocated £55m per year for depreciation by 2019. Those three figures added up to £145m and you will recall were presented by the media, in a sensational headline that read ‘£145m black hole in public finances’.
There was never going to be any ‘black hole’ because we made it clear that this was a planning figure that would require funding from savings, efficiencies and some revenue raising measures.
There are few places that are prepared to limit their public spending to what they can afford but I am committed to maintaining that mantra.
The investment in improved public services that we wanted to make was therefore developed as part of a package of measures, contained within the MTFP 2016-19, ultimately approved by the States Assembly. This package of measures included revenue raising elements, such as new charges for health and waste, and some ‘user pays’ fees.
Critically - it required a more efficient public sector to reduce costs by £74m as a mixture of efficiencies, savings and wage restraint. There was a further £4.5m of user pays charges. The plan included investment to drive economic growth to increase revenues through growing tax receipts. It was made clear at the outset that if any of the revenue raising measures were not achieved then either other compensating measures would be required or the investment would be delayed or removed.
You will be aware that having passed the package the States Assembly then went on to reject the health charge and later delayed the waste charge. However this MTFP was different from the previous one.
Medium Term Financial Plan
First we capped departmental expenditure up to 2019 to instil fiscal discipline.
Secondly, we did not award all the growth money to departments up front, as was done in the first MTFP. Instead we made it clear that ‘growth’ or ‘investment’ would only be allocated each year, as part of the budget process, and that it would depend on departments delivering their promised savings, efficiencies and user pays charges.
So what’s the current state of play?
Maintaining a strong economy is critical to sustaining and growing jobs and revenues. From the onset of the financial crisis the Jersey economy, like most others, had not grown between 2008 & 2013 and had seen thousands of job losses.
Getting Islanders back into work was a key objective and by 2015 we were investing almost £7m per year into Back to Work and Employment initiatives. Slowly the position improved, and by 2016 we saw the third consecutive year in which the Island’s economy grew in real terms.
We saw unemployment at its lowest for 8 years. We saw more jobs being created with employment figures showing the highest number of people in work - ever.
Of course Governments don’t deliver growth – ‘you’ the business community do. But Government does have an important role in ensuring the right environment for business to have the confidence to invest and grow.
We continue to provide funding for Jersey Finance, Digital Jersey, Jersey Business, Visit Jersey and others to support and promote businesses of all sizes across sectors. We are a business friendly island where Financial Services is and will remain our most productive industry.
Since the financial crisis that started in 2008/9, the make-up of the industry may have changed.
There are now fewer jobs in banking but more in funds and trusts. But the important point is that the total number of people employed in financial services as a whole is back to previously high levels of more than 13,000.
The consistently low interest rates have affcted banks’ profits and our productivity figures. And we need to improve our productivity in order to support economic growth. That means more trade: maintaining our strong trade links with European markets after we leave the EU, as well as seeking new opportunities for trade and investment with fast growing emerging economies.
Productivity is the elixir that raises incomes and living standards. It is one of our clear priorities to make every learner more skilled; every worker more productive; every business more competitive; and every public service more efficient.
That is the route to higher wages, higher quality public services, and a brighter future. We must remain open to the talent, the ideas and the capital that has driven the success of our economy in the past, and will drive it in the future. We must recognise the immense value of small and medium sized businesses, many in the traditional sectors, who are the heartbeat of the economy and importantly the social fabric of our community.
Those businesses are amongst the 80% or more who employ 5 or fewer people.
Later this week the Chief Minister will be hosting the 29th British-Irish Council Summit meeting here in Jersey. This is the fourth time the BIC Summit has been held in Jersey and one of the main topics is the approaches being taken by the Member Administrations to the creative industries. We can learn from each other as we build our digital sector for the future.
A strong economy is essential to help ensure that public finances remain strong. Our 2016 results show we are in a good position.
- total income increased by £392m (35%) mainly through excellent investment returns
- general revenue income increased by £45.1m, of which £30.4m was from increased tax revenues
- gross expenditure was down for the first time in years and we virtually achieved the target of balanced budgets in 2016 - three years ahead of target
- our investments grew: the Strategic Reserve by 13.5% (£104m) the Social Security Reserve Fund by 19% (£254m)
- this resulted in a much improved States balance sheet, increasing by £373m in the year, representing an improved net asset position of £6.2 billion
However we cannot expect to benefit from exceptional investment returns each and every year. This good news does not mean the end to our fiscal challenges or a relaxation of fiscal discipline and pay restraint,
Growing reserves is not money for revenue expenditure. Instead the majority of this growth sits in our social security funds to help fund future pension pressures. This is good for long term stability and sustainability. It demonstrates sound stewardship of Jersey's public finances. It’s an approach I am determined to maintain and is at the heart of Budget 2018.
A key element of our Medium Term Financial Plan was to reform the way we deliver services - to become more efficient and use technology - to deliver £74m in savings and efficiencies by 2019. And we are on target to make the savings. By the end of 2016 we had saved £34 million, and by the end of this year we will have saved another £14 million.
Most of that has been through becoming more efficient rather than by cutting services. We also recognised that all government services can't be free, or heavily discounted, to everyone at the point of delivery. So departments are seeking to recover some costs by introducing £4.5m of user pays charges over the period.
This year's budget proposes £10.2m of revenue raising measures. In part, the revenue from this budget, if approved by the States, helps to offset the States decision not to implement a health charge, which in itself was an integral part of the Medium Term Financial Plan's investment for health.
The loss of the health charge and the delay in the waste charge means we are having to withhold £2.1m of planned growth in 2018. We will be consulting on the proposed waste charge and plan to bring back another proposal next year.
I know how popular this subject is, but Jersey is one of the only places that does not make any charge for the removal of waste – this doesn’t seem reasonable. Without a waste charge, or alternative revenue raising measures, planned investment of £11.75m in 2019 should not be allocated in next year’s budget.
Long term plan
Part of our strength is in our longer term planning. We look for the challenges ahead and prepare.
- how many places have a funded social security reserve fund – currently containing £1.7 billion?
- how many places are planning for their ageing demographics?
- how many have set up a long term care scheme to help people fund the care they may need as they get older?
- how many have an income support system? Our version of the UK’s controversial universal credit system was set up almost ten years before the UK tried to simplify its own benefits.
Turning to the critical issue of reform and modernisation of the public sector. Since 2012 our reform programme has been making inroads into a public sector that developed piecemeal – department by department, section by section – over many decades.
There have been a number of change and efficiency programs dating back to the Fundamental Spending Review of 2004, which delivered £35m of savings. This was followed by the Comprehensive Spending Review of 2011 which delivered a further £63m over the following three years. And now the current Public Sector Reform program, which is embedded in the MTFP 2016-2019, is aiming for £74m of savings and efficiencies by 2019.
How is the current reform program performing?
Well, since the start of 2015 we have reduced full time staff by more than 600. Priority areas are also recruiting key staff, for example in health, to treat more patients in the community and to help transform the way the service works.
Today we have announced the first phase of the workforce modernisation program affecting 5,100 employees. We are proposing the biggest change to pay, terms and conditions for a generation – 10 sets of terms and conditions and 75 pay grades reduced to a single set of terms and conditions and 10 pay grades. The new system will be fairer - employees doing the same kind of work will be treated in the same way across the organisation.
It will result in one workforce working for one government – people will be able to move easily from one department to another. This is an integral part of our reform programme and will make it easier to deliver further efficiencies. A lot has been done to reform the public sector but there is much more to do.
I’m sure you’ve heard that a team of four interims is here to prepare the ground for our new Chief Executive, who takes up his post full time in January. Charlie Parker has an impressive track record of delivering change, efficiencies and positive improvements in public services. His arrival will lead to some necessary structural changes for the public sector as we move into the next phase of modernisation.
This phase needs to be delivered quickly. Speed is something that as an organisation we have not always been good at, partly due to our structure. We must be able to move quickly, adapt to changing circumstances and quickly prioritise resources across the organisation. We need to put our money where it's most needed – without unnecessary bureaucracy slowing us down.
That will require changes to the Public Finances Law to streamline accountability and responsibility, giving the new CEO effective control of the civil service across all departments.
Turning now to the main Budget measures: the budget builds on the Medium Term Financial Plan
It raises £10.2m, but it also supports working families by increasing tax allowances. It supports the economy in the short term, and it asks businesses and future High Value Residents to contribute a little more.
We are proposing a 2.5% increase in the personal tax free income allowance for working age people. That will benefit 35,000 households – reducing a single person’s annual tax bill by £91 and a married couple or civil partnership by £156. This will take Jersey’s personal tax free income allowance to £14,900. That’s £2,400 more generous than the Isle of Man, £3,400 more generous than the UK and £5,225 more generous than Guernsey.
We are also proposing to increase the second earner’s allowance by £850 to £5,850, eliminating the disparity in allowances between married and cohabiting couples, where both partners are earning. This will encourage more to join the workforce and help reduce migration pressures and it will benefit at least 12,000 households.
For High Value Residents, we are increasing the minimum annual tax payable from £125,000 to £145,000. Turning to Company tax we are broadening the 0-10 definition for financial service companies. This will bring more companies into the 10% tax rate, raising an additional £3 million per year.
We are proposing to tax retailers' profits above £500,000. This will raise an estimated £5.7 million a year from around 20 businesses, of which at least 75% are not locally owned.
And finally Capital: we are allocating £58 million for capital projects in 2018.
I believe that this is a balanced budget. It helps to maintain our strong public finances that are the envy of many other places. It helps us to be able to invest in key public services.
We face a number of pressures, including aging demographics and economic challenges. Funding for public services in the future can be delivered through taxes, borrowing, or stronger economic growth. Only one of those choices is a long-term sustainable solution for Jersey. Higher taxes will slow growth, undermine competitiveness, and cost jobs. I want to keep taxes as low, broad, simple and fair as possible.
We are already borrowing for specific, defined projects – affordable housing and a new hospital. We have firm plans in place to repay that borrowing without the need to ask taxpayers to contribute directly. However - borrowing to fund ongoing consumption is simply asking the next generation to pay for something that we want to consume now, but are not prepared to pay for ourselves. That is not acceptable.
So we remain committed to controlling spending, growing our economy and reaching broadly balanced budgets by 2019. Stronger growth is the only sustainable way to deliver better public services, higher real wages and increased living standards.
We are avoiding any structural deficit – by cutting costs, becoming more efficient, recovering the cost of some services and making sure we can invest in the services islanders care about. I am determined that we will continue in this vein.
And if we do – our books will balance by 2019 and we will have a strong foundation to meet the challenges and opportunities that will emerge. I strongly believe that we can continue delivering economic security, opportunity to all and a positive future.