Good afternoon, and thank you taking the time to attend. I am told that today was the fastest ever selling Chamber lunch, which means I should either be flattered or apprehensive.
Over the next few minutes I am going to put the 2015 Budget into context, explain the financial forecasts and what we are doing to respond to them. I will also look forward to the next Medium Term Financial Plan and how we plan to secure growth, jobs and reform.
I want to leave as much time as possible for questions.
Since the publication of the financial forecasts there has been a lot of talk about what they mean. I have been thinking very hard about how best to explain this and after my visit to Jersey Dairy to learn about their export plans, I concluded the best analogy was weather forecasts.
There are long-range weather forecasts, and there are medium and short-term forecasts, all of which are updated regularly. A long-range forecast tries to second-guess the effect of things like the position of the jet stream - of course they are, at best, predictions. Medium term and short-term weather forecasts are more accurate.
Financial forecasts are similar - they become more accurate and reliable the shorter-term they are.
An experienced farmer will make plans according to the long-range forecast and then adapts those plans as shorter-term, more accurate forecasts become available. Decisions - on when to plant, when to fertilise, when to bring out the irrigation pipes – will all change according to the latest information, while keeping a close eye on expenses.
A prudent Treasury Minister will also change plans based on new information, backed up by independent advice.
Medium Term Financial Plan
The Medium Term Financial Plan (MTFP), which set spending for 2013-2015, was based on an independent forecast done in March 2012. This forecast was based on information from the IMF, the UK Office for Budget Responsibility and our own Fiscal Policy Panel (FPP).
In March 2012, none of these organisations anticipated the extent or scale of the second wave of the financial contagion and Euro-crisis. All leading economies saw downgrades, and some saw very serious deterioration in their public finances. As an open economy, dependent on exports, external events beyond our control were always going to have an effect on our forecasts.
We made it very clear in the MTFP debate in October 2012 that our income would be affected, but the right decision was to stick to our spending plans:
- because we were in a position to insulate islanders from the effects of the crisis
- because it was right to put fertiliser and irrigation into the economy
The remarkable fact is that our income for 2011, 2012 and 2013 held up in line with the original March 2012 MTFP forecasts:
- through an improved investment strategy, which invested surplus cash more wisely
- through a number of one-off settlements of tax
- because of the sheer resilience of our financial services sector and tax receipts
The work of our forecasters did not stop in March 2012. The forecasts have been updated annually since. At each budget for the last three years an updated long, medium and short-term income forecast has been published.
The 2015 Budget includes a forecast, which shows that the impacy of the global contagion has now emerged. In May 2014 our independent forecasts were published. They predicted that income would fall by £30m in 2014 and £50m in 2015.
Budget 2015 proposes ways to deal with that drop in income:
- we are not borrowing to deal with it
- we are not increasing taxes to deal with it
- And we are not reducing our capital spending
While maintaining the vast majority of our revenue spending plans to support health, jobs and education, we are asking departments to deliver a 2% savings target in 2015 through efficiencies.
There has been some misunderstanding regarding the potential fiscal gap, so let me clarify:
- property taxes are not going up
- GST is not going up
- our corporate tax regime will not be changing - because they don’t need to
Our independent Fiscal Policy Panel’s advice is that the budget measures are correct, and that we should continue to support the economy during the recovery, this year and next. That means putting money into the economy, which benefits local businesses and supports employment.
The budget maintains the important capital spending, keeps firms busy and puts money into the pockets of more than 80% of taxpayers through a marginal rate tax cut.
Because we made the difficult decision in 2010, to head off a projected £100m deficit, we have protected our balance sheet. That means we can stick the plan we set in 2012.
In fact, we have done more.
From 2013 to 2015 we have capital spending of £274m – on roads, sea walls, primary schools, better States premises, new operating theatres, mental health and other Hospital facilities.
Another unseen investment is Philip Street Shaft, which when completed this year, protects town and local business from flooding.
And while it’s perhaps not the most palatable thing to talk about over lunch – we are funding the much-needed replacement sewage system.
On revenue expenditure, a lot has also been achieved.
The Chief Minister was very clear that jobs were to be one of our major priorities. The 2012 MTFP provided investment of £20m for projects like setting up Jersey Business, creating more places at Highlands College, and establishing Trackers and Apprenticeship schemes.
On top of that, a further £19 million of targeted support was provided to fund the highly successful Back to Work scheme.
We need to remember that quite apart from the financial contagion affecting employment, we lost 1000 jobs through the removal of LVCR.
Without these actions, unemployment would have been significantly higher. Instead, unemployment is coming down.
The last three years have seen annual Health expenditure increase to more than £200 million, a rise of more than £30 million.
That is in addition to £300 million for the new hospital, to upgrade theatres, adult and children’s homes and essential equipment.
Kate Barker, a member of our FPP, has today published a King’s report on the challenges that all governments face on healthcare. While there is a lot of debate in Jersey about healthcare funding, it is reassuring to see that many of the recommendations in that report are already underway through the investment I have just described.
The FPP encouraged investment in the economy during the downturn to take up spare capacity and stressed that this should not be limited to the Consolidated Fund alone.
The MTFP has achieved this capital spending, as the FPP advises, by identifying alternative sources of funding, including investment returns on the Common Investment Fund, Infrastructure Investment from the Currency Fund and dividends from our utilities.
Treasury's Assistant Minister, Deputy Eddie Noel, tells me that accountants are accused of knowing the price of everything and the value of nothing – well we know the value of this infrastructure.
The infrastructure investments we have made have created jobs, improved islanders’ lives and left a lasting legacy for the future.
Another major initiative has been our work on housing. Working alongside Housing Minister Deputy Andrew Green, I have secured fixed, low interest capital, to invest in our affordable housing stock. Some have questioned the decision to issue the housing bond. Most other governments borrow to fund consumption.
We have borrowed to invest in housing, which produces rents and produces a return at a higher rate than we borrowed at. This means we can recycle that money to build more houses - that is why it was the right thing to do.
Chamber has described this budget as a ‘wake-up call’ and for those who have perhaps been asleep, I agree. I, the Chief Minister, many of our colleagues and our officials, have certainly NOT been asleep. We have been planning ahead and preparing for the next MTFP - on the basis of lower income.
Like that farmer, we have to look at our expenses and income and make prudent decisions to prepare our economy for the future. I believe that short-termism has been at the heart of many of our past problems and many of the problems that governments face today.
Jersey has a proven track record of good financial management. I want the States to approve the 2015 Budget, which is part of these long-term plans, plans that are working.
Economic growth and diversification
The big debate for the next MTFP is how to fund essential investment and balance our books. I want to be clear about my position on deficits.
The next two MTFPs must ensure that as the economy recovers, revenue is greater than expenditure. One of the ways to meet spending plans is through economic growth. I understand that it is not government that delivers economic growth – but real people and businesses.
There is fierce international competition and business needs the right support from government, including:
- the best investment environment
- the right, stable tax system
- access to a skilled workforce
- conditions for enterprise and innovation to flourish
- the appropriate regulatory rules
- good infrastructure
- ministers who go out into the world and help to sell their services
Entrepreneurial, high value, innovative, productive, competitive businesses are the backbone of all successful economies. The Treasury has always responded favourably to proposals that boost Economic Growth. I don’t think there is a single request that I have refused from the Economic Development Minister. The Innovation Fund is just one small example of where we have delivered support for EDD.
I would encourage Chamber members to re-read the Economic Adviser’s important report on economic growth - particularly the challenge of productivity. We ALL need to work together to deliver improved productivity, diversification and growth agenda.
Financial Services have not only been the main economic driver of our economy, but also the sector that has undergone the most seismic external changes. We have been right to respond, and dedicate time and energy to this agenda. We’ve worked extremely hard to win back support from the UK for what Jersey can do for their own economy:
- we have issued a Capital Economics report that clearly explains the value of Jersey to the UK
- we commissioned the McKinsey review, which provided the basis for new strategies
- we published a Financial Services Policy Framework earlier this year
- we have a plan and it is working
It is only a few months ago that Standard and Poors gave us a AA+ credit rating. Not only do I want to maintain this rating, but I want to see that rating improve in the years ahead, to a AAA+.
We will see continuing pressure on employment in some of the financial sectors. The challenge remains to create as many new jobs as possible in the growth areas. For example, we have tremendously exciting opportunities in alternative finance, funds, and in maintaining our pre-eminent position as the world’s leading trust centre.
One of my first decisions in this term of office - backed by the Council of Ministers - was to invest in fibre and digital. There have been issues in rollout - change is always difficult - but the product has to be delivered. Affordable digital infrastructure is absolutely vital to deliver the health care, e-government, education and economy of the future.
No-one is more enthusiastic or optimistic about the digital sector than I am. Digital services are revolutionising the way we live and work, and are beginning to revolutionise our ideas about money.
I warmly welcomed the first regulated Bitcoin fund to Jersey - we are paving the way.
FinTech is a sector that holds significant opportunities for us. The challenge for Jersey is to leverage our financial services expertise and work with our growing digital sector, and that’s why FinTech is so exciting and important.
We need to innovate in areas where we already have specialist financial services expertise. We need robust regulation, but that regulation must be pro-innovation. I am confident that we can deliver this with our new relationships with Jersey Financial Services Commission, which will be brought together in a new memorandum of understanding, due to be signed shortly.
Whatever the sector, business needs the confidence that government will do its bit to promote their services to the outside world. That’s why investment in external relations is so important and why I spend time supporting this activity around the world, and through our London office.
Inward investment is another key economic driver. In the 2011 Budget I proposed a change to the tax system to attract new High Net Worth residents from all sectors. Previously we were encouraging a small number of people to move here. The problem was they left their businesses outside Jersey.
We wanted to persuade them to bring their businesses with them, and create new jobs. We set a target of 15 per year. Last year we saw 14 individuals and their families moving to Jersey. This year, so far, we have already approved 14 applications.
While it has taken time, the new policy is working, and I congratulate Locate Jersey’s Wayne Gallichan and Kevin Lemasney and their team for the excellent work they are doing - particularly with Jersey Finance.
Over the next year we must put more effort into growing the economy, creating employment and accelerating the reform of government. We are now working on the next Medium Term Financial Plan which will set spending for 2016-2019.
The process for the MTFP is: -
- the States agree the Strategic Plan
- by this time next year the States will debate MTFP2
Before the budget debate, we will be publishing a review of the different options for meeting the spending challenges ahead. This is intended to provide information and policy options for the next Council of Ministers. It is not designed to make decisions for them.
Right now, the immediate task is to secure approval for the Budget 2015, which I hope I have explained.
We must not be deflected by short-termism, and neither, dare I say it, by elections. They are an opportunity to explain our policies.
Change is always difficult, but just as I said in my closing remarks to the MTFP in October 2012 – we have reasons to be confident, we have reasons to be optimistic.
With hard work and without complacency we can deliver the strong, vibrant economy of the future that we all want to see, and the caring society it will fund.
We have an opportunity for 2015 to be a turning point. If we stick to our plans, 2015 will a year of investment, of growth and of celebration of everything that is important in Jersey.
We should look forward to celebrating 70 years of Liberation, and hosting the best Island Games in the history of the event.
I would like to end by saying that I still want to hear more from the business community, particularly from Chamber Members, about how we can improve on Budget 2015.
There is still time to attend a public meeting or to arrange a private discussion before the Assembly debates the budget on 23 September. I would urge all of you who feel strongly about these issues to do this.