OPINION: ‘We do have real challenges which we must face up to’

I would like to thank Mr Rose for taking the time to write his letter to the Press and for setting out his thoughts about the Bailiwick’s structural deficit and how we deal with it. However, as a fellow chartered accountant and vice president of the Policy & Resources Committee, I felt there were several assertions made in that letter that needed to be addressed.

• Poor forecasting

The budget (which begins being prepared up to six months in advance due to the need for proper engagement with committees across the States) is based on the best information, indicators and forecasts available at that time.

Given his professional background, Mr Rose will appreciate that there is an inherent difficulty in forecasting income tax receipts as there is a significant time delay between profits and investment income being earned and tax liability assessed and paid, for all receipts apart from those relating to employment. However, looking back at revenue income receipts versus budget in the five years prior to the Covid-19 pandemic, the average variance between the two was 3%. Clearly, this is not perfect but shows that the estimates made for budget setting purposes are reasonable.

Revenue expenditure is easier to forecast, and each year’s out-turn tends to be very close to budget – the average variance is about 1%.

Taken as a whole then, the average forecast error in the overall operating deficit over this period was less than 1% of revenue income (0.6%, £11m.).

• The £85m. deficit is not real

Let’s be really clear here, we are already in a deficit position. The surpluses generated are not enough to cover necessary capital and revenue expenditure which is set out clearly in the Funding & Investment Plan within the Government Work Plan: States Meeting on 21 July 2021 (Billet d’Etat XV) – States of Guernsey (gov.gg).

When our budget is under pressure the money dedicated to capital spend is typically the first thing to be reduced because we cannot stop providing health care and education when we have a bad year. However, while capital expenditure can be temporarily deferred, this is not sustainable as ongoing investment is required in our vital infrastructure.

I would add that it is not only us saying that we’re going to have a large deficit – the government actuary has advised a £34m. per annum additional revenue requirement for the Social Security schemes. Some of this is to continue funding expenditure which is already being incurred in paying pensions and other benefits. This deficit is currently being ‘hidden’ by the substantial reserves built up in the past. Furthermore, we know that there will be growth in health-related expenditure due to the ageing population.

Although we are modelling on a deficit of £85m., the actual deficit could be a lot larger if the States continues to add in new costs and, let’s face it, there is always the demand for more. In fact, we are reforming our public service as we speak with the challenging aim of being more efficient and improving customer service and this is intended to deliver significant savings which we factor into our modelling.

Without these reforms, the forecast shortfall is another £10m. worse.

• The States shouldn’t be employing more people

Most of the projected increase in the public sector workforce is not in professions which will compete with private sector pay. As I have said in the past in my previous role as HSC president, we are going to need more nurses, doctors, care workers and health care assistants to look after all of us as we get older. Contrary to popular opinion, the majority of those employed by the States are not civil servants but frontline workers – 1,256 FTEs in nursing and medical roles in 2020 – 27% of the total; teaching staff, blue light services, and customs staff account for a further 26%; and public service employees account for 11%.

A global workforce crisis in healthcare is on the horizon. By 2030, the WHO estimates there will be a global shortage of approximately 18 million health workers – 20% of the workforce needed to keep healthcare systems going.

As Mr Rose says, there is indeed a risk that we won’t be able to find these people, but the need will still be there, so there’s a risk we’ll end up paying more for them to meet demand. The alternative will be a reduction in the quality of life for many if we don’t. But then the make-up of the workforce is likely to change over the coming decades as artificial intelligence becomes more mainstream and jobs that may traditionally have been the highest paid, such as in accountancy and law, disappear and those most valued will be in the creative and, indeed, the caring sectors.

Listen to more from Deputy Heidi Soulsby, alongside Age Concern chairman David Inglis, on the latest Guernsey Press Politics Podcast:

• The States have a zero population growth policy which is part of the problem

The States’ central assumption is not zero population growth – our medium-term forecasts assume a net annual inward migration of 200, with the longer-term forecast being assumed to be 100.

There is a population review currently being undertaken that is looking at the contribution that population growth could make. However, the level of population growth that would be necessary to eradicate the need for any tax rises will probably be neither practical or desirable unless people are willing to accept a future for Guernsey which looks very different, and much more urbanised, than it does today. Neither will it solve the underlying problem.

Would a 20% increase in the population really be better than paying more tax? And are there really that many high earning people who would want to move here anyway, even if we had the jobs for them?

• The financial position of the States is much better than we think

Again, Mr Rose misunderstands the assumptions that have been made. The total usable reserves referred to have already been taken into account in the financial planning projections. Indeed, this is what gives the States some headroom over the next few years to plan and phase the introduction of any revenue generation changes. Most of the non-restricted reserves are planned to be used, in addition to extra borrowing being taken on. Again, this is set out in the Funding & Investment Plan within the Government Work Plan.

Our investment reserves are also a key consideration in our credit rating. If we use them all we may find that our borrowing options would become limited and much more expensive.

We are also already using our social security reserves – the combined operating deficit on these funds in 2020 was nearly £37m. and that is growing every year. Our forecasting includes a managed draw-down of part of these funds, which will be used to support future pension payments and long-term care. But, without an increase in contributions, they are projected to run out of money entirely by the mid-2030s.

• We should put our social housing on the balance sheet, borrow against it and use this to fund services

The States owns approximately 1,650 units of social rented housing. Unless they are no longer used to house the most vulnerable in our society, their value (as social housing) has been independently calculated at no more than £200m.

Of course, the States can borrow and the Funding & Investment Plan includes such a proposal. This is without needing to use our assets as security – the benefit of being a self-governing jurisdiction. However, any borrowing needs to be serviced through the payment of interest and the capital repaid. This would not be free money.

The suggestion that we mortgage our social housing to raise money to pay nurses, teachers, policemen and others over the next 14 years without a plan for how we will repay it is irresponsible. For our own houses, taking out a loan in the hope that something will come along to enable us to repay it would probably result in the bank repossessing it. Even if we were able to repay the debt (although it would be more likely that it would have to be re-financed) how would we continue to pay those essential workers from year 15? This is not responsible or realistic planning. It is truly ‘kicking the can down the road’ and should not be the way we manage our public finances.

Fifteen years in public policy terms is not that long. Assuming there was a decision made on the tax review this summer, it will take at least two years to prepare and probably another five years beyond that to complete the phased implementation. That takes us to at least 2030, during which time the States will still need to use reserves and borrowing to support continued investment in infrastructure. This is the responsible way to use the reserves which have been carefully built up in good times by our predecessors.

The tax review is looking to solve a very difficult problem. And while I’ve dissected Mr Rose’s response here, I don’t want to be overly critical. His input is welcome because we want to hear all ideas and suggestions. We just need to make it clear where the suggestions don’t stack up, even if they are superficially attractive because they seem to make the problem go away.

We do have real challenges which we must face up to and I’d encourage anyone looking for more information to go to ourfuture.gg and help us as we try to find a solution to one of the most important issues facing us today.