‘Financial position is becoming precarious’

THE Budget for 2023 is presented against a longer-term backdrop of a significant structural imbalance in States’ finances. The expenditure pressures set out in this budget are indicative of underlying trends, and there is little scope for raising additional revenues through the existing tax system.

The 2023 Budget projects a surplus of £33m. which may appear at first glance to be a positive position. However, the surplus only takes into account revenue expenditure. It is an unavoidable fact that we must spend funds on capital – both routine replacements of £15-20m. per annum, plus major investment projects. Although the level of this kind of expenditure will fluctuate from year to year, if we assume that it averages £76m. (in line with the 2% of GDP target), this surplus of £33m. would become a deficit of £43m. This is our structural deficit which is real and present today.

The only way we are able to fund our agreed capital expenditure programme during this term – which the States has agreed and which totals £528m. – is by using reserves accumulated in prior years. When these are exhausted, there is no way of replenishing them, or of funding our capital expenditure other than by borrowing, which would need to be repaid through raising additional income.

The accumulated reserves are invested and generate returns which are credited to General Revenue. The surplus for 2023 includes an estimated £27m. of investment income – the majority of which arises from the reserves set aside for capital investment. Once we have spent those reserves, which we are planning to do in the medium term, we will no longer have that accompanying investment income.

In addition, the rate of return on our investments can fluctuate significantly due to the volatility in worldwide investment markets. The current forecast for 2022 investment return is nil. If this proves to be the case in 2023, or there is an investment loss, the operating surplus could easily become a deficit. This emphasises how precarious the States’ financial position is becoming.

It is clear from the budget rounds in this term that expenditure pressures are increasing for existing services – even beyond the rises projected in the Funding & Investment Plan. This is particularly marked in the budget of the Committee for Health & Social Care, where the 2023 recommended cash limit of £212m. is an increase of £24m. (12.7%) over the adjusted 2022 cash limit of £188m.

This means that the deficit may grow at a faster rate than expected, leading to our reserves being depleted sooner. As well as this pressure on the cost of existing services, there is significant demand for expansion to services and the introduction of new ones – this is manifested in the £25.7m. of additional expenditure required in 2023 to deliver on the aims of the Government Work Plan and fund previously agreed service developments.

Finally, a number of our unincorporated trading assets are currently operating at a deficit – and we are having to move from a purely ‘user-pays’ to a partially ‘taxpayer-funded’ model.

This further increases the amount of taxation income required. The States has recently agreed that General Revenue will fund Guernsey Waste’s trading deficit, and this budget includes a provision of £6.2m. for funding the deficit of the Guernsey Ports.

These matters were not included as cost pressures in the Funding & Investment Plan, and therefore also increase the size of the deficit.

The above sets out the position on General Revenue only. In addition, the Social Security Funds are forecasting a deficit, before investment return of £14.5m., in 2023.

The Core Investment Reserve is our only long-term reserve, the capital value of which is only available to be used in the exceptional and specific circumstances of severe and structural decline or major emergencies.

In 2020, £50m. was transferred from the Core Investment Reserve to part-fund the impact of the Covid-19 pandemic on General Revenue. The States has a policy for the target balance of the Core Investment Reserve being 100% of General Revenue income in order to provide sufficient protection. The balance of the Core Investment Reserve at the end of 2021 was £178.9m., which represents 29.4% of the 2023 General Revenue income budget. An amount of approximately £430m. would need to be added to this reserve to attain the target balance of 100% of General Revenue income, but appropriations can only be made if the budget moves back into an overall surplus position.

The States is operating a structural deficit today which is only being sustained by the use of reserves built up in the past. This means that actions have to be agreed in the very near future in order to maintain a sustainable financial position.

Proposals will be put forward as part of the forthcoming tax review and decisions cannot be delayed any further. It is clear that small incremental changes to existing taxation will not address the challenges that are being and will be faced.

It is unavoidable – there needs to be a fundamental change in our taxation system giving a significant and ongoing upwards shift in the amount of revenue raised.

The only alternative to raising substantially more through taxation would be commensurate reductions in expenditure. If the States does not agree a package of taxation measures to address the deficit in January 2023, there will need to be proposals to cut expenditure as part of the next budget – maybe reductions of up to 10%. This would inevitably lead to hard-hitting and unpopular cuts to existing services and remove the capacity to introduce new services.