Dealing with the deficit

19 March 2010

Dealing with the Deficit

Mr Vice-President, Ladies and Gentlemen, may I start by saying that the relationship between the Treasury and the Chamber is one which I value a great detail.

It is important to have critical friends, particularly friends who share a passion for Jersey and the Island’s future.  I have been in the States for 11 years.

The working relationship with Chamber has never been more positive and constructive.  I hope it is still that way by the end of my speech this lunchtime!  I say that because some of what I have to say may not be popular.

But my job as Treasury Minister is not to be populist; I have to make difficult decisions and balance the interests of a variety of people and interest groups.

I passionately believe politics is about constructing – not deconstructing. And the challenges are not merely my problem, they are our problem. I can’t solve them by myself, I need help, advice and support.

I want to start by saying that whilst there are challenges from where I sit, from everything I see, I am very confident about our ability to deal with challenges and our future. I’m optimist, not complicit.

Economic context

My arrival at the Treasury has coincided with one of the greatest periods of uncertainty of modern times.  The first downturn of our fast-moving global world; we have seen the sharpest fall in global economic growth for 60 years. The good news is that the financial crisis has not turned into a global depression.  Our central estimates of the contraction of the economy have provided accurate.

The employment market is weak and people have lost their jobs. The unemployment rate in Jersey has risen to 2.7 per cent or about 1,200 people.  That’s a lot lower than the UK’s 7.8 per cent or Germany’s 8.2 per cent.  But those figures are meaningless if you’ve just lost your job.

Fiscal Stimulus

Fear of unemployment was one of the main reasons I took the unprecedented decision to take a Fiscal Stimulus Plan to the States last May. It has funded:

• £5m worth of training with more than 100 additional places at Highlands
• a States apprenticeship scheme
• a scheme to get young people into work – the Advance to Work initiative. So far 93 young people are gaining meaningful training and work placements. I attended the presentation evening last week and it is probably one of the things I am most proud of. Individuals who would have undoubtedly ended up out of work were it not for the fantastic partnership between the Fiscal Stimulus and Skills Board and employers
• £3m of direct support for business for Jersey Enterprise Services and a boost for Jersey Finance’s vital marketing programme
• £6m in essential civil infrastructure projects
• Urban Renewal projects; repairing the Western cycle track and road infrastructure including the work on Victoria Avenue which is on budget and necessary, and overdue upgrades to our elderly sewerage system. 
• over the coming months £26m will fund construction and maintenance work including a £9m redevelopment of Le Squez and planned refurbishment of the Clinique Pinel and Rosewood House Dementia Unit
• I have already announced £2.6m to Jersey Hospice Care to extend facilities. The States funding is being matched pound-for-pound by the charity’s efforts
• also, I’m pleased to say that this morning I gave a green light for a partnership between Economic Development and Durrell which will see £3m extra investment in a new visitor centre. Half of which will be funded by fiscal stimulus money and half by Durrell’s own fund-raising efforts.

All these projects, through wage packets of hundreds of local workers, are injecting money into the local economy every time those workers spend in shops, garages, restaurants and so on. Spending, or, as I would prefer to describe it, investment, is both necessary and positive.

I say that because I have struggled to explain to some colleagues, the need for both a fiscal stimulus and a spending review.

What is different about the fiscal stimulus is that not only would this have been impossible to agree in the old committee system – it is temporary and will provide a better base from which to recover once the economy starts growing again.

On the other hand, the spending review is about controlling States expenditure to help tackle the ongoing deficits from 2012 onwards.

As far as public finances are concerned our income has fallen primarily as a result of the economic downturn, but has been exacerbated when the States did not agree the duty increases I asked for last year.

The numbers are: - £64m in 2010; £72m in 2011, and £53m in 2012.  The deficits in the short-term, can and are easily being funded from cash.  The advice I have from the independent Fiscal Policy Panel is that this is sensible.

However, in the longer term, just as we have done successfully in the past, we need to work on closing the gap and rebalancing the books for 2012 and beyond.

For that reason – I have three streams of work underway.

• firstly, to reduce expenditure; the Comprehensive Spending Review
• secondly, we need to grow the economy; by improving productivity and driving new business
• thirdly, depending on the success of the first two options (and like every finance minister around the world) the need to consider tax increases.

I am not being overly optimistic when I say that our problems are more than manageable.

We start from a position of significant strength; we will easily fund our deficits in 2010 and 2011 entirely from cash in the Stabilisation Fund, which is what it was set up for.

Our deficit of £64m amounts to around 1.5 per cent of our GVA. This compares with Germany’s deficits of 5.6 per cent, France’s of 9 per cent and the UK’s, which is ten times ours. If Alistair Darling were giving this speech today, he would be telling you that Jersey expects a deficit of £600m this year and a debt that could rise to more than £4b in coming years.

While comparisons are fraught with difficulties, I also wish to say that 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 0/10, much higher levels of corporate tax are paid per capita here than in virtually any place in the world – including other Crown Dependencies.  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.

Where the money goes

The difficulty I have with many of my colleagues in the House is that they want to spend 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 deficit would rise to £170m.  That is why I am very serious about the need to constrain, reduce and reallocate spending.

However – quite apart from the politics – this is going to be challenging. Contrary to Jersey folklore, I have yet to find legions of over-paid fat cat civil servants, relaxing behind their desks in their voluminous offices, waiting to claim their gold-plated pensions.

The reality is somewhat different. More than 70 per cent of States spending is on Health, Social Security and Education.  Most public sector workers are dedicated and hard working.

Of the £92m of additional growth allocated in the last five years, £40m (that’s 43 per cent) has gone to Social Security.

£74M (80 per cent) of the new money went to three social departments. Areas such as early years education, better children’s services, paying the reciprocal health agreement and more nurses.

I also must be honest and say that the States has delivered tens of millions of efficiencies. I’m not convinced that all the cuts have necessarily been in the right areas, the relatively easy efficiencies have been made.

The next wave of cuts, which is possible and must be achieved, is going to be more difficult.  The plan is to deliver £50m in recurring savings by 2013. This target of 10 per cent over three years is reasonable in comparison to those achieved by other countries which have squeezed their spending.

We brought in the best brains to advise us on how to run a successful spending round.  The lessons were:

• define very clear tax and spending limits at the offset so everyone involved understands the framework.
• keep the reviews simple and focus on the big budgets.
• allow no exceptions – all departments have to be part of it as efficiencies are possible everywhere.
• avoid complicated inter-ministerial reviews that promise better cross-departmental working – they can often burn time and resources 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 – I’m sure they will think corporately.

The decision-making will be in two phases.  Firstly the 2011 savings are to be confirmed by the States in the Business Plan in September. Then the 2012 and 2013 limits will be set out in December’s budget. By mid-April all departments will propose how to achieve 2 per cent savings next year. By the end of July, all departments must submit additional five per cent and 10 per cent savings proposals for 2012 and 2013.

Between now and September, we are running separate, detailed reviews of the four big spending departments: Health, Education, Social Security and Home Affairs. To help give teeth, independence and credibility to the process – I have appointed a number of Spending Commissioners to sit on the review teams.  These very senior independent, Islanders will chair reviews and assess all the savings proposals made by departments. 

There is going to be considerable engagement with interested parties; States Members, department management teams, staff and union representatives have all been briefed on the process.

Many teams across the States have already started meeting to discuss their response to the targets.  The message I am sending out is that this is the opportunity to take a fresh, radical look at the way departments deliver services to the public. Nothing will be ruled in or out – proposals to outsource, joint ventures; all sensible ideas will be looked at.

In addition, where it is appropriate, departments must look at their lower priority services and consider scaling them back, stopping them or, if tax-payers should not be subsidising them, introducing charges.

User-pays charges will be looked at on a case-by-case basis but they cannot be offered up as efficiency savings.  It is clear that in an organisation with more than 50 per cent of its budget allocated to salaries, this level of spending cannot be achieved without some reduction in staffing levels.

I am studying the proposal from the Public Accounts Committee for deeper, faster cuts.  This initiative is helpful in recognising the need to make savings. But my preliminary view is that CSR’s longer timescale is more realistic.

And whilst I welcome a debate on public finances – up until last week the Assembly has spent nearly 90 per cent of its time this year on backbencher propositions – it’s time to concentrate on the things that really matter.

I also believe that if I am to be successful in cutting spending – I am going to have to find the cash for necessary restructuring. For example, I am considering recruitment freezes and a temporary voluntary redundancy scheme to allow departments to restructure sooner rather than later. Anyone leaving will of course receive a fair exit package and assistance to find a new career in the private sector.

I am not afraid to make bold moves to cut spending and keep Jersey working.  The Comprehensive Spending Review is also be accompanied by a strengthening of financial management.  This is something that Ian Black and I have been working on for some time.  Whilst Ian is away, the reins are being capably held by the interim Finance Director Hugh McGarel-Groves, who is here today.  Improved finance management and will drive better decision making.

My hope is that we end up with a public sector that is focused on the efficient provision of services.  I don’t underestimate the task, and to succeed we need to engage. Engage staff with ideas and harness them, and engage with unions as partners in the necessary process of reform.

The more difficult thing to say is that even if savings targets are met and the economy begins to grow again, it may not be enough.

I accept there are some areas of expenditure for which new money will have to be found. For example, whilst I am asking Health to deliver its services more efficiently, investment in that department is likely to increase as a result of continuing health improvements.

In addition, the Social Security Minister and I are determined to put in place a long-term residential care scheme along with other measures for an ageing society.

Just as every other finance minister has to do, I have to consider how, and to what extent, taxes may need to be increased, albeit as a last resort, and what the effects would be. I will be publishing a consultation paper on the options for taxation in May.

Business taxation

We are also continuing to review our business tax regime, to ensure that we adapt to a changing world.  Whatever changes we consider to 0/10, our system needs to be internationally acceptable, sustainable, competitive, and above all should protect the Island’s economy and preserve tax neutrality.

This work is still at a relatively early stage and there is a lot more to be done, but I am working closely with my colleagues in Guernsey and the Isle of Man to undertake a thorough review.  We need to get the right answer for all the islands.

Conclusion

I hope what I’ve said today hasn’t left you feeling that Jersey can’t cope with these challenges.  We can and we will. This is an opportunity. It’s a chance to come up with innovative ideas, to find dramatic ways to reorganise the public sector, to make sure we are all working as effectively as possible and making the best use of taxpayers’ money.

I never forget – its taxpayers’ money the States are spending and I want to ensure every penny is spent where it’s needed.

A forward thinking island must always be ready to look at itself… to change… and to reinvent.

We have dedicated, hard-working people in our public sector with lots of good ideas and I am confident they will find solutions.

I also sincerely hope that Chamber members will help by taking parting in realistic, active debate on the real choices we face.

Mr Vice President, economically-speaking, the world has had a long, tough winter, but there are shoots growing on our south-facing cotils and I have no doubt that both the Jersey Royal and Jersey will thrive long into the future, as long as we are prepared to work positively to construct that successful future together.