Tempus fugit. Doesn’t time fly? It has been over 15 years since the Financial Transformation Programme (FTP), Guernsey’s version of austerity, began. Five years later when it finished it was claimed to have made just over £29m. of recurring savings, against a target of at least £31m.
The promise of transformation
We were both elected halfway through the programme and sat on the Public Accounts Committee (PAC) that reviewed it in 2015. We concluded that it was too early to tell whether the investment of £15.5m. (including £5m. to consultants Capita) had represented value for money, and that the job was far from over. Savings may have been real but overstated in places, sustainability was unproven, the contract had been poorly drafted, and the cultural transformation, which had been the original ambition, remained incomplete.
PAC went on to say, ‘It would appear to be a focus on savings of a more tactical nature, to meet annual reporting targets, rather than on those reflecting the original genuine transformation agenda of the FTP.’
Deja vu all over again
There are only two deputies still left from when the FTP began, one of them being the treasury minister who launched it and the treasury lead now (Parkinson), and only five from when it finished, including the treasury minister then and until recently the treasury lead (St Pier) and the one responsible for its oversight (Collins 2012-2013). The vast majority of deputies in the current Assembly can therefore be forgiven if they didn’t have a sense of deja vu when, in January this year, they supported an amendment which brought in a ‘structured public service efficiency programme that targets a 1% real-terms annual reduction in baseline public expenditure for the years 2027, 2028, and 2029 (with 2026 as the baseline year). However, dear reader, for us it felt very much like Groundhog Day.
Reading the blurb, or explanatory note as it is formally called, attached to the amendment, it certainly sounded familiar. We were told, ‘It is imperative that savings are sustainable, long-term, and repeatable, avoiding short-term measures that could cause wider damage.’ We also heard that, ‘This is not intended to be a uniform 1% reduction imposed across all budgets. It is proposed as a nuanced, targeted approach, intended to deliver effective and sustainable savings.’ Those words could have been taken directly from the original fundamental spending review, the FTP. So, here we go again.
Clearly the intention is well meaning, and it helps the argument for bringing in new taxes if government can show it looks like it is trying to keep its costs down. But is this really the right way to go about it?
To help answer that question let’s look at how successful the FTP was in building ‘effective and sustainable’ savings.
What did the FTP actually deliver?
Back in 2015, as part of PAC’s report, KPMG analysed some of the larger claimed savings. Let’s look at a few of them:
The move to a single head of Law Enforcement. Still in place, for the time being anyway.
The creation of a Joint Emergency Services Control Centre. Again, still in place but not without hiccups along the way and at much greater cost than originally planned.
The transformation of primary education by moving away from single-form entry schools. It led to the closure of St Andrew’s Primary and St Sampson’s Infants. Future considerations of primary school closures, which there are bound to be with so many more single-form reception classes today, should look at how transformational these changes were and the savings made.
The introduction of a Federation of Guernsey Secondary Schools. Well, we are still living through the flip flops on this one. And at what cost?
The creation of the Shared Transactional Service Centre. Known as the Hub, it has changed the way the States deliver a few back-office functions, such as income management and vendor services. This was not without substantial issues on set-up but could generally be deemed successful. It would be interesting to know how much was saved year on year following this project, and to what extent it met the original aims.
The air subsidy project. This removed Aurigny’s subsidies, firstly on the Gatwick and Southampton routes, and then on all of them, with savings of £731,000 banked. However, the report warned that the States might be required to provide additional support to the airline, which was historically loss making. As we now know, the States has continued to bail out Aurigny and write off its losses. Oh, and we paid Capita £47,496 for the privilege. On top of that we are now subsidising another airline for an undisclosed amount, which is quite likely to increase its losses.
At the end of the programme, the treasury minister declared that the FTP left Guernsey ‘far better equipped to face the longer-term challenge of ensuring the ongoing financial sustainability of public services.’ However, within a year the deficit was growing again, and a decade later the structural deficit had reached £56m. It is now £77m., albeit that some of that is due to a change of assumptions. We have also just learnt that the underlying funding gap for 2025 was £50m., with the States needing to sell £123m. of investments to pay for capital and other commitments. So, perhaps the best you could say is that it was a bit of a curate’s egg – good in parts – but it failed in its overall aim of a balanced budget.
We were also told that FTP was just the beginning, with the next phase, public sector reform, being approved by the States in 2015. The ‘people’ element of the proposals was meant to enhance organisational performance measurement and management. Later we were told 200 jobs would go. It’s difficult to compare years due to a change of accounting standards, but in 2015 the States employed 4,347 people (excluding controlled entities) at a cost of £213.7m. with the recently published 2025 accounts showing 5,298 people employed in core government at a cost of £333.8m. (plus another £21m. in employer insurance contributions it pays to itself). Well, that went well didn’t it?
FTP Lite
This now brings us back to the 1% real terms savings that came from the manifesto of Forward Guernsey, telling us that ‘things are neither sensible nor sustainable.’ Those words again.
So, has this new target got a better chance of success than the FTP, or will we see baseline revenue expenditure continue its inexorable rise?
On the face of it, it should be easier. The £31m. target for the FTP was 10% of gross revenue expenditure of £310m. in 2008, to be achieved over five years, so about 2% every year. The new target requires a 1% saving against an indicative baseline of £678m. gross revenue expenditure every year, but as it is a real terms saving, it is assumed that this is netted off inflation. The latest RPI and RPIX figures, which measure inflation, currently stand at 4%. In other words, budgets will increase by inflation minus 1%.
Not only that, but they could increase even further without committees having anything to do with it. So very Yes Minister.
How come? Well, there you need to understand the black art that is the States of Guernsey budgeting process.
1% of what?
Let’s start at the beginning. Every year, as committee budgets are being put together, the pay bill for the next year is estimated based on current salaries and projected staff changes. No allowance is made for potential pay increases that are negotiated with the unions by P&R, acting as employer. Given staff costs make up just over half of committee expenditure, this is not an inconsiderable sum that needs to be factored into the annual budget. Here we come to one of the infamous money pots held by Treasury that is never disclosed other than as one line at the bottom of the annual budget, and which many deputies would be forgiven for not knowing about or understanding – the Budget Reserve. For 2026 it’s around £16m. This is basically a sum of money that Treasury can decide to draw on when needed, and when a committee comes with its begging bowl. Think former US Defence Secretary Donald Rumsfeld and his famous quote. It covers known knowns, known unknowns and unknown unknowns. Pay rises are a known unknown. It’s known they will happen, but not by how much until hands are metaphorically shaken. So, an amount of money is set aside in the Budget Reserve in order that the money can be used to pay salaries.
Of course, it makes sense to budget for something you know will be needed, even if you don’t know precisely what that will be. That’s well understood in the accounting world. It’s once the terms are agreed and the increase becomes a known known that things get interesting. At that time, committee budgets are uplifted for the increase in pay costs by Treasury. What’s the problem with that you may say? It’s just going from one pot to another. There isn’t really a problem, until you get savings targets that the States have approved. Due to the timing of the pay increases, the savings target is applied to the existing pay levels, not the adjusted figure arising from the pay deal in that year. In other words, if pay deals at least match inflation, the savings target is lower than 1% on the revised budget.
As we keep on saying, it isn’t simple, even when trying to make things simple. It’s therefore understandable if some deputies will be scratching their heads over it. There are lots of variables of course. There may be below inflation pay increases, or multi-year pay deals that could alter things. But committee budgets are unlikely to reflect three years of 1% real terms savings unless it is made explicit they will need to absorb the pay increases.
The hard part: making savings real
The next question is, how easy would that be?
A small committee like Employment & Social Security may manage to do it, but what about the Committee for Health & Social Care (HSC) where pay costs make up 60% of the budget? We know that non-pay costs are challenging enough to reduce, as seen by the reaction to suggesting pensioners pay for their prescription charges and for those in hospital to pay bed and board recently. The first things that usually go are grants of course, as they’re easy to do without government thinking too much about what it does and how it does it. They’re also often a false economy.
For real savings to be made it will require a reduction in pay costs. Again, that may be easier for some committees more than others, such as HSC that is facing growing demand and whose services are stretched. However, given it is by far the largest committee of the States and has the largest workforce, it would be impossible to make the overall savings target without doing so. Reducing agency staff will help, which appears to be happening, but the numbers of budgeted staff is still higher than those actually working in health and care, with vacancies across the sector.
Now, there was a little wheeze used to make ‘savings’ in the FTP where the budget line for pay was cut on the assumption that not all posts would be filled. It might be tempting to do the same this time around. However, this ‘vacancy factor’ as it is called does not make real savings, as was pointed out at the time, and we all know that it is real savings that are needed now, not clever accounting tricks.
A different way forward
The fundamental flaw in target-driven savings programmes is that they start with the numbers rather than the services. Experience suggests the better approach is to begin by examining what government does, what outcomes people need, and whether services could be delivered differently or, in some cases, not at all. If the model is right, the finances tend to follow.
The FTP was not the right approach, and nor is the ‘FTP lite’ being adopted now. Neither is zero-based budgeting. What is required is a fundamental services review.
That way you can look at what people are experiencing regardless of the committee providing it and avoid some of the failures of the FTP where a ‘saving’ to one committee led to a greater cost to another and why cross-committee savings never really happened. That is the only way to really reset the cost of the public sector. It will have to deal with difficult issues for sure but has a better chance of success than what has been done to date. But only, and here is the caveat, by including the community in the process.
The final reckoning
PAC warned in 2015 that the lessons of FTP needed to be embedded in any future change programme. That did not happen. Confidence in government is fragile and it’s all well and good to say you’re looking to make savings to ease the passage of tax increases but another when it is obvious from history that they’re not going to be effective or sustainable. A change in approach is required and its required now. Otherwise, there is a risk that in another decade’s time we will once again be discussing a new efficiency programme and wondering why the last one did not work.
