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Dealing with the deficit - managing the future

21 April 2010

Good afternoon. The title of my talk is Dealing with the Deficit - Managing the Future and over the next few minutes I am going to take the opportunity to set out our latest forecast for public finances, the scale of the expected deficit, how it compares to other places, and how I plan to deal with it.

I will also make some observations on how, as an Island, we are going to deal with the future. I will be frank; over the last couple of years, the role of Treasury Minister has not been the easiest of jobs! 

Apart from the extraordinarily difficult domestic political environment – something which has to change – there has also been a backdrop of a sea of numbers turning from black to red. It would have been easy to get dispirited or disillusioned.

But I am not. Far from it. Despite the turmoil, I think the Island is in remarkably good shape. Whilst there are undoubtedly challenges ahead and some reasonably tough decisions to make, I want you to know that I am very confident about our future.  More so than at any point over the last 18 months.

Perhaps people might expect me to say confident things  – but I believe I can say them with some justification. Over the last 18 months we have had some very strong reports on our performance.

The Foot Review was a very strong assessment of Jersey’s policies, we had the amazingly strong IMF report and only two weeks ago a very positive report from the Justice Committee Select Committee.

All these reports – written by well respected individuals and organisations unconnected with Jersey – have, in my view, given ringing endorsements of the Island and its policies.

From a business and financial point of view, I am not only confident that the Island can and will continue to prosper, but that the deficit - which does need to be put into the context of the problems in other places - can and will be tackled. In fact an alignment of circumstances means we have never had a better opportunity to promote change for the better and position ourselves for future growth.

This might not have been the situation if the financial crisis had turned into a global depression. But the indications are that it has not. A number of the leading global economies appear to be returning to growth. That is important for Jersey. But it is clear the emerging recovery is still fragile. That’s why care is needed.

Fiscal stimulus

In May last year I took the unprecedented decision to take a £44 million discretionary Fiscal Stimulus Plan to the States and I believe it has made a difference.

We have invested in skills training during the downturn.
Millions of pounds are being injected into local businesses through the programme of necessary investment in roads, (frustrating for all of us at times!) essential civil infrastructure, housing, schools and health facilities. 

This is in addition to the £3m of direct support for business for Jersey Enterprise and a boost for Jersey Finance’s vital marketing programme.

Economic context

Despite this action, the Fiscal Policy Panel forecasts that Jersey’s economy declined by 5% in 2009. And although the economy is expect to return to growth during the year, overall, there is expected to be a 2% decline overall this year. 

This has been translated into a forecast deficit of £64m in 2010, £72m in 2011 and £53m in 2012.  However, before anyone gets too depressed… our £64m deficit amounts to around 1.5% of our GVA. To put it in the context of EU countries, the equivalent in France is 9% and in the UK, the deficit amounts to 14 % of GVA.

More than that, we, unlike most other countries, are funding our deficits in 2010 and 2011 entirely from savings in the stabilisation fund, which was set up specifically for this purpose. 

Jersey is facing these challenges from the firm base of a strong economy, significant financial reserve and crucially, without the hangover of debt which will hamper growth in other places. I say this as our former Chief Minister is present.

But our strength has not happened by accident. So I don’t think I am being overly optimistic when I say that our problems are manageable, but they need tackling. So what am I doing?

Firstly, the Comprehensive Spending Review will result in a plan to reduce States expenditure by 10% over three years. Secondly, we are working hard to improve productivity and boost growth. This includes for example delivering on Esplanade Square. Finally, and only then, will we consider tax increases 

Where the money goes

The difficulty I have with many States members… is they want to spend more money.  I understand that. Most members who get elected genuinely want to improve the lives of Islanders and providing better health or education services generally costs more money.

But the problem is that if spending increases, the structural deficit gets worse. If States spending goes up at the same rate over the next five years as it did over the last two, then the annual deficit would rise to £170m. That is why I need to be, as difficult as it is to say, very focused about the need to constrain, reallocate and reduce spending. 

I also want to say that these comments are not a reflection on the work of our public sector employees. The vast majority of public sector workers are dedicated and hard working. Some work in very challenging circumstances and attract unfair criticism from a minority of elected Members.

The acceptance of the 2% pay award for 2010 and 2011 is welcome and, if I may say, does show real responsibility and understanding by the Civil Service Association and I do hope that other pay groups will follow.

But back to spending. The difficulty is that 70% of spend is spent on four departments. Of the £92m of additional new money allocated in the last five years, £40m has gone to Social Security.
I understand some IoD members may say that the Income Support system is now too generous – but the reality is that the additional money has been targeted to lower income families with children.

Savings already made

There has been some commentary about the levels of savings delivered by the States in previous years.  The truth is some efficiencies have been delivered.  Notably £17 million pounds of growth was funded by savings in last year’s budget savings.  The problem was the States then spent more money and didn’t agree with the tax raising measures of raising duties, this made the deficit worse. But back to savings again, that doesn’t mean we cannot do more – we must.

Most of you in the room, in the non-States sector, are also expected to deliver savings and efficiencies every year. In the States we are going to have to ask what we can stop doing, and re-assess the way we do things to ensure we are getting the best from taxpayers’ money

The Comprehensive Spending Review is asking the public sector to be more flexible, reconsider priorities and to work out how to do things more cheaply and to stop providing services that taxpayers shouldn’t be funding.

The next wave of cuts are certainly going to be more difficult than the last ones, but I am confident the savings are possible and must be achieved.

The plan is to find annual savings of £50 million by 2013. I believe this target of 10% over three years is tough but reasonable in comparison to those achieved by other countries.

We brought in the best brains to advise us. Drawing on experience of similar spending reviews in the UK, Canada and France and other countries such as Korea, and in particular from the experience of Richard Hughes who led the last UK CSR and has since been seconded to the IMF where most recently he worked with the French government on the Revision des Bien Publiques

The lessons are:

  • Define very clear tax and spending limits at the outset so everyone involved understands the framework
  • Keep the reviews simple and focus on the big budgets
  • Allow no exceptions – no sacred cows  –  all departments have to be part of the savings review
  • Avoid complicated inter-ministerial reviews that promise better cross-departmental working – but they can often burn time and resource and deliver little

I am very pleased to say that ministers have all signed up to the process. Some are sceptical it can be delivered, but the evidence that I have is that ministers are acting corporately.

User-pays charges are being looked at on a case-by-case basis and are additional to the savings targets. This will provide, at the decision-making stage, a choice between reducing or stopping lower priority services or continuing them and recovering their cost.

The actual decision-making will be in two phases. By 5 pm yesterday all departments had to submit their proposals to achieve 2% savings next year.  These had to be signed by each minister.

By 31 August all ministers have to submit their proposals as to how they are going to meet the additional 5% and 10% savings proposals for 2012 and 2013.

After debate internally, and I am sure we are going to find examples of some unacceptable proposals, the 2011 proposals will be published in July and debated in September as part of the 2011 Business Plan.

The 2012 and 2013 spending limits will be brought forward and debated alongside this years Budget in December.This means that for the first time the States is being asked to actually confirm three year spending limits.

At the same time the CSR is proposing, alongside these three-year tougher limits, much greater flexibility for departments to manage budgets between years and to provide contingencies for unforeseen expenditure.

Between now and September: 70% or most States expenditure is focused on four main departments. For that reason we are running major reviews of Health, Education, Social Security and Home Affairs.
To help give independence and credibility to the process, I am setting up – as employed by other jurisdictions  –  a governance structure for each review involving the appointment of independent spending commissioners to sit and chair these reviews.

I have also committed to engage with States members, Scrutiny Panels, department management teams, staff and union representatives.

Many teams across the States are already working on how to achieve these targets and it is only through working with our staff that we will achieve the CSR objectives.

It is important that our workforce feel that this is something that they are being involved in and therefore have some ownership of, rather than just feeling that this is being imposed on them as a death by a thousand cuts.

On the contrary  –  the message I am sending out is that this is the opportunity to take a fresh, radical look at the way States departments deliver their valued services to the public. An opportunity to harness and listen to the ideas and solution from staff at the front line.

Nothing will be ruled in or out – proposals will look at alternative service provision, joint ventures and all sensible ideas will be considered.

It is clear that in an organisation with more than 50% of its budget allocated to salaries, this level of saving cannot be achieved without some reduction and change in staffing levels. The States Employment Board has agreed to consider a rigorous approach to vacancy management and a temporary voluntary redundancy scheme to allow departments to restructure sooner rather than later.

After discussions with the Council of Ministers I hope to be able to bring these proposals to the States in the next few weeks. We are also looking at how we can improve co-operation with Guernsey.

I have studied carefully the proposal from the Public Accounts Committee for deeper, faster cuts.  And although this initiative is helpful in recognising the need to make savings – my view is that the CSR’s longer timescale is more appropriate. Reducing expenditure too quickly, at a time when the economy is still likely to be fragile, is likely to hamper the return to growth. Our plan is a measured one with a profile of savings over three years – not two – which increase as the economy is due to strengthen.  

What I do welcome is a debate in the States.  Up until Easter, the Assembly spent nearly 90% of its time on backbench propositions. It’s time for the States to concentrate on the things that really matter

I also acknowledge that making savings at this level is going to require initial investment to facilitate the changes required to deliver this scale of savings. If I am to be successful in cutting spending, I will have to find invest-to-save funding to deliver necessary restructuring. So there are challenges.

And, as difficult as it is to say it, a successful spending review alone cannot deal with the deficit.  We will look at spending levels and savings first, but it’s fair to acknowledge that the balance – which is not going to be achieved by economic growth either – is going to have to be met by taxes.

Here is where we need an honest and realistic debate. And this is the fundamental choice that firstly ministers, then States Members, will have to give their views on.

Comparisons are fraught with difficulties; we do spend less as a share of the economy than comparable jurisdictions. And we all certainly pay much less in personal tax. Even after zero/ten, much higher levels of corporate tax are paid per capita here than in virtually any place in the world, including Guernsey and the Isle of Man

This is the model our economic prosperity is built upon and if we tinker with it we risk undermining the foundations on which our success is built. But I have to look at tax.

I have started a review of Jersey’s fiscal strategy. In May I will be launching a consultation on various tax scenarios on GST, income tax and Social Security and I hope many people will contribute so we can take their views into account when preparing budget proposals later this year
Planning for the future is also involving a thorough review of our business or zero-ten taxation regime. We are working closely with colleagues in Guernsey and the Isle of Man to find the right answer for all the islands.

Whatever changes we consider, if any, our system needs to be internationally acceptable, sustainable and competitive.  Above all it should protect the island's economy and preserve tax neutrality.

Treasury re-structuring

The Fiscal Strategy Review and Comprehensive Spending Review is also to be accompanied by a strengthening of the Treasury and Resources Department.

As I announced last summer, there is a restructuring of the whole finance function across the States. If money is to be managed better – financial management needs strengthened. And as far as Resources is concerned, which includes Property and Procurement, these vital central functions are being strengthened in order to generate significant savings for all departments in better office utilisation and purchasing.

With over half a million square feet of office space and a billion pounds of property assets and over a hundred million in non-staff costs, I am determined to lead by example and deliver significant savings over the next few years. Albeit I acknowledge investment will be required to achieve this.

I hope what I’ve said this lunchtime hasn’t left anyone feeling that Jersey can’t cope with the relatively minor – compared to other places – challenges ahead.  I believe we can.

But while I believe the States is capable of making the right decisions on spending, I will  argue that other things have to change in the States.

There are some who believe ministerial government is not working. While there are without question improvements to be made, I would argue the uncovering of poor performance of some States departments – including mine – is actually happening because there are no longer any hiding places. That is a good thing. The days of the cosy committee club, where everybody was part of government and it was everybody else’s fault, are rightly over.

We need an even clearer separation of the important roles of ministers and Scrutiny.  The role of backbenchers is to pass legislation, budgets and, importantly, to hold ministers and their policies to account. 

I would welcome an IoD view on whether – ten years after Clothier was published – it would be appropriate for an independent review of how the new system of government is working, to be carried out ahead of the elections next year.  The message I have for this IoD is that this is not only a matter for politicians.

Despite the worst economic crisis, as I have said we are in very good shape. Better if not better than most. I hope the Comprehensive Spending Review will be considered as an opportunity; a chance to come up with innovative ideas, to find dramatic ways to reorganise the public sector, to make sure we are working as effectively as possible and making the best use of taxpayers’ money, to have a constructive debate about tax and spending.

A forward-thinking organisation must always be ready to look at itself… to change… and to reinvent. My hope is that we end up with a public sector that is focused on the efficient provision of services.

Ladies and gentlemen, I believe in Jersey, I believe ultimately in the States of Jersey and I believe in our prosperous future. Thank you.


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