Wednesday 25 September 2024
Statement under Rule 10(3)
Sir,
I have undertaken to regularly update the States on the latest financial position. I did this during the Accounts debate in July referencing the position at the end of April. Further, I provided a brief update at the beginning of this month as part of my general update. Therefore, Members are aware of the developing position for 2024. We are now in receipt of the numbers to the end of August, and it's therefore timely to update the States ahead of the publication of the Budget and our thoughts turning to 2025.
Since my last update, I'm afraid to say we've received some more unwelcome news, which I will start with:
The Revenue Service has received what's called an ' error or mistake claim' from a bank relating to previously assessed tax years back to 2018 which amounts to £15m. I should stress that this claim is still subject to rigorous and detailed checking by Revenue Service staff meaning that the quantum may change. Notwithstanding that, we must now make provision for this ahead of any repayment.
Now, I have no doubt that there will be suggestions that the Revenue Service has made an error - we have already been asked whether they have 'over taxed' the bank. However, I want to stress that this position is not one of the Revenue Service's making. The issue is in the bank's historic tax calculations which could not reasonably have been picked up by the Service.
I should also stress that this amount will not have an impact on the forecasts for future years. Officials from the Revenue Service have been in dialogue with the bank in question to ensure that the estimated assessment on which current year tax is being paid reflects its latest actual position. Therefore, I am as confident as I can be that there will be no further unpleasant surprises.
So, an already challenging year has now become £15m worse. The general revenue budget for this year anticipated a small operating surplus of £11m which has now turned to a forecast outturn of a £24m deficit. When the trading entity losses are added to this, it takes the deficit to £30m for general revenue alone. If we also consider social security income and expenditure, the overall operating deficit for 'core government' is now forecast at £46m. To be clear, an element of this deficit is 'one off' in nature and does not impact 2025 and future years.
In terms of social security, the budget was for a combined operating deficit of £14m with the forecast now expecting a deficit of some £16m. This is being caused by a small shortfall against anticipated contribution income and a slight increase on expected benefit payments.
As I said earlier, the forecast for general revenue is now for an in year operating deficit of £24m versus the agreed budget of an £11m surplus. The total deterioration is £35m of which £23m relates to 'one offs'. Breaking this down, revenue income in the first eight months of the year is just over £26m short of the budgeted position.
Income tax makes up £25m of this shortfall. The majority of this has arisen due to the bank refunds and adjustments which I have already outlined. But there are also shortfalls in other company tax and income tax from individuals. By the end of the year, we are forecasting that income tax will be £30m below the budgeted position.
There is also a shortfall on customs duties in the year to date of just under £3m. Now this is expected to improve by the end of the year due to the timing of imports and stockpiling ahead of duty changes. However, we are still expecting an adverse variance of about 1% or £1.5m by year end. Document duty is still looking healthy in the year to date at £1.7m ahead of budget, largely as a result of one exceptional transaction. By year end the receipts are forecast to be more in line with budget.
Overall, then, by the end of December, income is expected to be some 5%, or £32m, short of budget. However, I am confident that the majority of this bad news relates to 2024 and does not impact the ongoing position of the States.
Turning to expenditure, Committees, Authorities and Departments have collectively underspent by approximately £4m in the year to date. This is a similar value of underspend to that I reported for the end of April. However, this position is still masking the very real pressures being felt once again in health and social care with that area having now overspent in the year to date by nearly £2m. As I reported in July: 2024 has seen an exceptional call on the budget reserve, with the whole of the general provision having been committed in the first four months of the year. This was due to several urgent and unplanned projects requiring funding.
The Committee has also since had to authorise further unavoidable funding from the budget reserve meaning it is now overcommitted. However, this has been done in the knowledge that the balance held for GWP initiatives has not been used as quickly as Committees had anticipated and is unlikely to be utilised in full this year.
Looking at the forecast for expenditure overall - with the health position set to deteriorate to an estimated £4.5m overspend by year end, several other Committees facing expenditure pressures, and the calls on the budget reserve already mentioned - it is currently estimated to end the year just under £2m over budget.
Now I should point out that experience of expenditure forecasts would suggest that not everything that is planned for this year will actually be delivered and so expenditure could well be lower than forecast. The final element of the financial jigsaw is the losses of the States' trading assets, in particular the Ports.
As part of the 2024 budget, the States agreed to fund those losses in relation to the Ports, Guernsey Waste, and the Dairy to a value of £5m through general revenue. The States Trading Supervisory Board has reported that the losses are now forecast to be higher at just over £6m.
Sir, I think it would be remiss if I were not to mention the GDP estimate for 2023 which was published yesterday. Members will have seen that GDP grew in nominal terms to £3.5bn. However, elevated levels of inflation means that this level of growth was lower than the change in retail prices. So, in real terms, our economy contracted by 2% in 2023. This is a swing from real-terms growth of 4% in 2022.
Given our economy is small and much of the activity is concentrated in a small number of larger companies, this kind of volatility is not uncommon even if it is disappointing. There were downward contributions from several sectors, but the largest reduction came from banking activity. This follows an unusually strong performance in 2022 as a result of a number of factors, including changing interest rates.
It is most certainly not all bad news with growth in other sectors including investment, insurance and accounting, private sector health and entertainment. With falling inflation rates in 2024, some of the pressure on real growth rates will have receded but realistic prospects for real terms growth this year remain limited.
Sir, all Members of this Assembly know that my glass is generally full if not overflowing. Unfortunately, 2024 has seen some of this drained - 2024 has highlighted the frailty of the States' financial position. It's shown how little resilience we have. And the GDP numbers have underlined the need to have a sharp focus on our economy and its growth.
All of this, along with the exhaustive work we have been doing to prepare the budget, has shown P&R that it's time to make some tough decisions. We need to address this lack of resilience; we need to stabilise our base to be able to invest for the future - for our infrastructure and for growth. But, while our challenges remain, we shouldn't forget that we're in a strong position to make these decisions:
We have very little in terms of 'national debt'- estimated at less than 9% of GDP for 2024 - and what we have is responsibly structured. We continue to have an extremely low tax base, which gives us room for manoeuvre. And, we tax our population less than the UK, less than Jersey, and less than the Isle of Man.
That doesn't take away from the serious challenges we face, but they are the same challenges faced by virtually all of the developed world. In some places the demographic pressures are already far more severe - a warning of what we could face if we aren't smart, and don't take these issues seriously and soon. So, the current financial situation means we can no longer avoid taking important decisions. P&R will be publishing its budget in less than 2 weeks' time. In it we will be putting forward proposals that seek to address the position we are in and which we believe will make a positive difference. Time is rapidly running out and now is the time for this States to make the changes we need.