Deputies teeter on a perilous tightrope with island's savings

HOURS were spent in the States last week discussing how to spend the limited amount of spare cash the island has got.

That the amount of time spent talking about spending vastly outweighed the amount spent last month on the States fiscal plan demonstrates where deputies' minds are.

Largely there has been a positive message coming out about Guernsey's economic situation, even news that GDP fell 2.6% was batted off with a relaxed shrug by the Treasury minister.

But there are some worrying signs that show just how perilous the tightrope being walked at the moment is.

Much faith has been put in the financial transformation programme to deliver on savings - this were earmarked in the first three years for new services.

We heard last week that it had in its first year made the enormous dent of £0m. by last month, and will only produce £200,000 by the end of the year.

It is a somewhat deflating figure, but no worries, the team is still going to deliver a reduction in spending by £31m. in 2009 terms over the total five-year timeframe - it's just the big money will come later - and with it are no doubt the most unpopular decisions and the ones most likely to be baulked at by States members looking either to protect their political legacies or their political futures as the election looms.

By what some regard as a sleight of hand, Treasury is using money saved outside of the FTP, mostly its own, to plug the gap in funding the £1.75m. of new services already agreed - nothing like making the rules up as you go along. What it means, though, is that the money put aside for new services in 2011 has fallen from an expected £6.75m. to over £4m.

There are two key and delicate strands to Guernsey's plans to do away with its approximate £39m. deficit - no relative growth in States expenditure, and steady economic growth.

So what does the evidence of the last year show?

Spending grew by some 7% and the economy faltered.

And this year?

We will know more when the Budget is released, but Health and Social Services has already announced a £2m. to £3m. overspend: the States Budget hovers around £300m. so there already is a potential 1% growth in expenditure.

Of course we do not know what is happening elsewhere at the moment, but it is easy for the deficit to remain if members become complacent and release the brakes as 2012 looms.

Treasury minister Charles Parkinson said that the fiscal forecasts published with the States Strategic Plan were based on the first-quarter tax information.

'We have quarter two and the overall forecast deficit for the year is not very different from the forecast in the SSP which is £39m.,' he said.

Chief Minister Lyndon Trott has said this can be explained by capital spending - £23m. being put into the capital reserve and £16m. of capital allocations - leaving the revenue deficit as zero.

But Deputy Parkinson said the States had made a very sensible commitment to a level of capital investment.

'We're incurring the deficits and they are very real deficits even if the expenditure is capital expenditure,' he said.

'The economy contracted we think by 2.6% in 2009, that would have an effect on States revenues but generally Guernsey survived the recession much better than most places, so a large majority of the deficit is structural.'

This hints that the stark warnings early in 2009 of needing to find new taxes to fill a cyclical deficit of up to £30m. have softened, if not completely gone away.

'In the SSP the business case forecast assumes we can contain public expenditure with no real increase and the economy will grow from 2011 onwards at a reasonably healthy rate, with those assumptions the SSP forecasts is the structural deficit will be eliminated by 2015, but it will be a real challenge to deliver these policies particularly that of zero growth in States revenue expenditure given the history.'

There is a downside case in the SSP of no economic growth until 2012 and States expenditure to grow by 1% in real terms - 2009 gives an indication of where the States is at now.

It would leave the deficit at £56m. in 2012 and the amount of money put aside in the contingency reserve to help exhausted.

'What this model shows is that the States scenarios are very sensitive to both the rate of economic growth and growth in public expenditure,' said Deputy Parkinson.

There was growing unease among deputies about the link between savings expected from the FTP and spending on new services.

Given it had not delivered what had been spent this year it was simply adding to the structural deficit, they argued.

Even if the savings did turn up - and as argued before they will prove difficult, as the election gets closer - many of the new services require funding in perpetuity.

Guernsey is in many ways in a sit and wait mode on some key issues. We are watching what happens in Europe over zero-10 - what will the results mean for income?

We are watching what happens in the UK and Jersey over States employees final salary pensions schemes - the indication from last week was any review of terms and conditions that this will include will take more than two years anyway.

We are looking for something major to happen with the financial transformation programme.

There were some hints of action slipped into the debate last week.

Treasury and Resources is in the midst of shedding 18 posts and on target to make savings of £1.5m. this year, if the States agrees at Budget time Commerce and Employment's budget will be cut from £13m. to £11.5m.

The financial position of the States is steadily improving, Deputy Parkinson said in debate last week, and the outurn in 2010 likely to be better than anticipated. Let's just hope deputies do not start tripping off the tightrope.