Facing economic Armageddon

IT IS a grim economic climate for Treasury minister Charles Parkinson to be presenting his first Budget in.

But, as he said, there is no point sugar-coating the situation – Guernsey is heading for a recession which, although not expected to be as severe as the UK, could last up to two years.

And with that comes doubts about just how well the principles of zero-10 can stand up to the situation – one of the key factors in it is, after all, economic growth.

So at face value, things are already not looking good.

But then look behind the headlines and delve into the finances a bit more and there is a ticking time bomb just waiting to go off.

It is a snowballing combination of the States needing to plough some £7m. more into the public sector pension pot, any increase needed in Social Security employer contribution or grants, funding for strategies approved by the House but for which the money has never been identified and the grey area of unspent balances which are being exhausted.

Revenue is under enormous pressure.

The increase in expenditure could total in excess of £15m., which, unless real terms growth in income receipts exceeds the Government Business Plan target of 3%, would result in a requirement to transfer £35-40m. from the contingency reserve to balance the Budget.

And this is one of the reasons why so much is invested in the fundamental spending reviews Treasury hopes to have completed by Budget time next year.

Islanders will have little stomach for increased taxation until it is demonstrated that government is being run as efficiently as it can be and is involved in the right areas.

'Difficult decisions will have to be made by the States to realise the efficiency savings that are required to help create the financial headroom to fund new priorities and essential services,' it says in the Budget report.

'The involvement of private sector providers to deliver States services, ceasing or reducing current offerings or reallocating budgets from one line of provision to another may not be particularly pleasing or politically popular. However, the elimination of waste, avoidance of duplication and identification of cashable savings that will fund future and more pressing priorities provides a counter balance to what is a strong argument.'

As part of the review, department cash limits will be re-examined from square one.

And then there is that area of States spending that is not documented properly – the unspent balances.

In a way they are the department's own stash of cash, the money left over from the year before, normally because of posts being unfilled.

Some departments will fight tooth and nail to keep control of them, but it is an unsustainable way of managing States finances.

In years of plenty, they accumulated, but now they are being used increasingly to fund ongoing revenue commitments - some £6m. of the £10m. budgeted use of unspent balances in 2009 relates to ongoing expenditure.

They will be largely exhausted by the end of next year, said Deputy Parkinson.

And then what?

'Departments have unspent balances largely due to staff shortages. What they do with that is up to them at the moment – they can choose to spend it on capital projects, revenue projects,' he said.

'Each department that has unspent balances has an extra budget over which they have complete control. Their spending plans don't get approved by the States and I don't think that is conducive to good financial discipline.'

He points out that, in the commercial world, subsidiaries would not be allowed to run budgets outside that of the group.

Treasury wants control at the centre.

Deputy Parkinson and his team have a hard road ahead of them.

And that is not to mention the £400m. capital projects spending wish-list that needs to be prioritised and the expectations to be met.

No one foresaw the economic Armageddon that has unfolded this year around the globe.

We are about to find out just how robust the economic and taxation strategy really is and how much stomach government has for tough decisions.