Falklands : Director of Public Finance Presents Falklands' Budget 2010
Submitted by Falkland Islands News Network (Juanita Brock) 26.05.2010 (Article Archived on 09.06.2010)
The purpose of this bill is to authorise the appropriation of monies from the Consolidated Fund for the next financial year. Before I set out the details, I would like to say a few words about the background in which this budget was prepared.
THE APPROPRIATION BILL 2010
Mr Speaker, Honourable Members
1. The purpose of this bill is to authorise the appropriation of monies from the Consolidated Fund for the next financial year. Before I set out the details, I would like to say a few words about the background in which this budget was prepared.
2. Firstly, everyone will be aware of the global economic downturn of the last couple of years and its impact on global financial markets. Economies throughout the world have been affected and many governments are struggling to maintain their fiscal and financial stability. Interest rates are at an all time low and the market recovery is still somewhat uncertain. The projections for investment returns in the Government’s budget are therefore cautious.
3. Secondly, the Illex season has once again proved to be disappointing. This year a comparatively large number of jiggers came to fish in our zone but the catches were small. As a result the amount of fishing licence income is not as high as we had hoped. This means that a cautious approach will need to be taken for future years’ projections.
4. Thirdly, a new Assembly was elected last November. Naturally the new Assembly has its own policies and priorities. The Government has been in a fragile budgetary position for a while and, in order to accommodate those new policies and priorities, a measure of redirection of funding (and some new funding) has been applied.
5. Finally, it would be unusual if I made no mention of the oil exploration activities that are underway in the waters around the Falkland Islands. Whilst I hope that these efforts bear fruit in the future, no account has been taken of any income that might arise from oil discovery. The current activities are generating income to local businesses and the Government. The Government’s income, in the form of taxation and other direct receipts, has been recognised; but that is all. To make any assumptions about future oil prosperity would be speculative and imprudent.
6. Notwithstanding these factors, the Government built up significant reserves during our years of prosperity from the fishing industry. Although those reserves have not been immune to the impact of stock market and interest rate declines, unlike most countries, we do have a significant cushion to help us through. However, it is my intention to limit the use of that cushion and to move towards a position of a balanced budget as soon as possible. Unfortunately, that has not proved possible for the forthcoming financial year.
7. The total appropriation requested from the Consolidated Fund in the Bill amounts to £42,414,800. This is made up of operating expenditure (including transfer payments) totalling £38.5M. This figure is net of capital charges of £3.5 million and internal charges of almost £1 million. A total of £4.9 million is allocated within the operating budget to transfer payments and a further £3.9 million is allocated to internal fund transfers. The schedule to the Appropriation Bill shows how these figures are further allocated.
8. As usual, before dealing with the detail of the 2010/11 budget, I will briefly review the current year. The latest outturn projections indicate that there will be a budget deficit at the end of the current financial year of £5.7 million. Excluding the effect of depreciation, it is estimated that the operating deficit will amount to £2.2 million. This can be compared to the budget deficit of £1.7 million, as forecast a year ago. The main reasons for this shortfall are:
A reduction of £2.4 million in fishing licence fees and
A reduction in customs revenues of £600,000
Offset by a transfer from the Insurance Fund of £1.5 million and
An increase in tax revenues of £1.2 million
9. I mentioned a transfer from the Insurance Fund as a variance in the current year. I would now outline a change that is proposed regarding the use of this fund. It was established in 1990 to self insure certain government assets and personal accident liabilities. Annual contributions have been made by several departments and the Fund also receives returns on its investments. The maximum statutory balance on the Fund is currently set at £25 million and that maximum has been reached. Since the Fund is considered to be adequate to meet potential liabilities, it is proposed that the statutory maximum should be increased annually by RPI to maintain its value in real terms and that the excess be used to fund external insurance premiums. This will benefit the operating budget position and prevent excess balances being set aside in the fund.
10. Net Liquid Assets are the modern equivalent to the balance on the Consolidated Fund, which was historically used as a comparative measure of the Government’s useable reserves. It is estimated that the Net Liquid Assets at the end of this financial year will be £86 million, which represents 2.4 years worth of operating expenditure. This is slightly less than the budget target of at least 2.5 times the annual operating budget and the main reason for this shortfall is the reduction in the value of the investments. However, it is anticipated that the value of our investment portfolio will recover in due course and that recovery will reinstate the approved strategic ratio.
11. This is perhaps an appropriate point to start my report on next year’s budget. The Medium Term Financial Plan (MTFP) strategy approved in February 2009 sought to reduce the government’s reliance on volatile illex licence fee income, whilst recognising that the precipitous decline in international markets has impacted on the government’s revenues.
12. Honourable Members have stated that their aim is for economic stability and this includes achieving a balanced budget as soon as possible. However it was recognised that this would be unlikely for the 2010/11 financial year. Therefore the MTFP strategy was revised to allow a budget deficit of £1M for one year only (in line with the previous MTFP) followed by at least balanced budgets in all future years. This strategy continues to ensure that Net Liquid Assets will be at least 2.5 times the operating budget.
13. The budget projections I am presenting to the Assembly this morning meet those aspirations for the next five years and I am confident that our traditional prudent approach to fiscal management, will allow us to meet the full objectives of the strategy in due course.
14. Moving on then to specifics – Operating revenue for 2010/11 is forecast at £42.3 million and total expenditure (excluding depreciation) is estimated at £43.3 million. This produces a projected budget deficit for next year of £1m. This deficit is forecast for one year only and the budget will be back in surplus the following year. These forecasts therefore meet the parameters set in the MTFP I referred to earlier.
15. The draft estimates of operating revenue for next year show an increase of £47k on the original estimate for the current year. The main reasons for this are decreases in income from fishing licence fees offset by additional income from taxation. The revenue forecast includes fisheries licence fee income inserted at £12.4 million. Despite recent falls in licence fee revenues, they remain the government’s main source of revenue and represent 30% of the total amount. After another poor illex season, the amount included for illex licence fees next year has again been reduced to £2.5m. Despite the lack of catches, the high level of jiggers in the zone this year was encouraging and this figure is felt to be achievable, assuming there is continued interest in the fishery.
16. This brings me to the draft estimates of operating expenditure. A total of £43.3 million including internal charges, transfer payments and fund transfers is inserted. Following the adjustments made at recent budget meetings of the Standing Finance Committee, this figure represents an increase of £746,000 on the original estimate for the current year. This final figure is the result of a long process of discussions between Treasury staff and departmental managers, and several days of debate by honourable members. During the process, and starting from a base of expenditure projected at this time last year, detailed consideration was given to savings proposals, additional spending proposals and new service options, which are all subject to approval by the Budget Select Committee.
17. The draft estimates for transfer payments amount to £4.9 million. This is £200,000 more than the original estimate for the current year. Once again, Honourable Members have been faced with some difficult choices. There are variations on individual schemes and, in some cases, the amounts proposed represent a balance between what was requested and what the government can afford to pay.
18. Fund transfers of £3.9 million are included in the draft estimates. This is slightly lower than the original estimate for the current year since the transfer to the Pensions (Old scheme) Fund will be reduced as anticipated. The remainder will be used for the same purposes in the same amounts.
19. Moving now to proposed capital expenditure for 2010/11. The draft Capital Programme totals £10.4 million (or £8.3 million net of capital receipts). This expenditure will be met from the Capital Equalisation Fund. A further £3.6million is projected for the subsequent two years. Therefore, the net capital programme for the next 3 years totals £11.9 million. This is within the £12 million 3 year rolling programme strategy on which the annual contribution to the Capital Equalisation Fund was based. It should however be noted that the projections for future years are not ‘approvals to spend’ at this stage and further work will be required to firm up the figures and the schemes themselves.
20. I now turn to revenue measures and I’ll start with a brief mention of the Retail Price Index. The latest RPI figures show an annual inflation rate of 0.3%. The RPI figures in recent years have been dramatically affected by oil prices. The price of oil dropped back over the last year but has risen again in recent months. The most recent annual figure is therefore somewhat distorted. As a result of this distortion the most recent quarterly RPI figure of 0.7% has been employed this year. However this has not been universally applied to all fees and charges since many are based, or are moving towards, a user pays pricing structure.
21. All departmental fees and charges have been subject to review and a variety of increases is included in the draft budget. Some have been reviewed on a cost recovery basis and others on an inflationary basis. The Finance Bill includes a list of those subject to legislative change and the others were set out in various reports to Executive Council. Full details will be available to the public in due course, but I will outline some of the more important areas. It is perhaps from this point that most people will be more interested in my speech!
22. To allow revenues to keep pace with inflation, and in line with the Health of the Nation initiatives, it is once again proposed to increase customs import duty on cigarettes and alcohol by significantly more than inflation. The duty on cigarettes, tobacco and cigars will increase by 10%. The increase in duties on alcoholic beverages has been limited to 3%. These increases will, for example, add an extra 34 pence to a packet of 20 cigarettes, 72 pence to 50 grammes of tobacco and 32 pence to a litre of spirits.
23. An increase in vehicle licence fees of 0.7% is proposed to keep pace with inflation. This would, for example, increase the fee for a Land Rover or Shogun from £109.50 to £110.25. It is also proposed that the fees for vehicle registration, drivers licence, driving test and firearms licence should be increased by the same percentage.
24. House rents in Stanley are generally significantly lower in the public than in the private sector and therefore the policy in recent years has been to increase rents for government properties by more than the rate of inflation. It is proposed that the general rent increase for government houses be 5%. In order to provide consistent protection to low income tenants it is proposed that the allowances under the rent rebate scheme are also increased by 5%. There are some tenants in flats who are provided with communal heating schemes. The charge for this is recovered with their rent on a monthly basis. As a result of the impact of previous increases, and efficiencies in operation of the heating systems, there is no need to increase this element to maintain cost recovery.
25. A policy of full cost recovery of water charges was established as part of the 2008/09 budget. Under that policy the projections for 2010/11 incorporated a 3% increase and that is now proposed.
26. A similar policy on the charge for refuse collection from non-domestic properties was also established, so that the service would break-even by 2012/13. Under the policy the projections included a 10% increase for 2010/11. Again, this increase is now proposed. This will result in an annual charge of £134 for a wheelie bin and £407 for a large bin.
27. The domestic property service charge is currently £372 per annum with a 50% reduction for pensioners. This charge includes recovery of some of the costs relating to community services such as street lighting, street cleaning and the maintenance of open spaces. However, the main costs relate to water supply and refuse collection. In order to reflect the proposed increases on these areas and continue the move towards cost recovery, it is proposed that the service charge is increased to £396. The 50% reduction for pensioners will continue. It should be noted that the service charge is payable by tenants of government housing and that the rent rebate scheme also covers this charge. To ensure that householders on low incomes are afforded equitable protection, it is proposed that the allowances under the service charge rebate scheme should also be increased appropriately.
28. Until 2008, the prices for the supply of quarry products to the private sector had remained static for several years. At that time the Director of Public Works proposed a staggered increase in prices in an effort to allow the quarry to break even. The proposed increase for the supply of quarry products for 2010/11 was 10% and this remains the proposal.
29. Last year the efficiencies from the wind farm allowed a 1.5p per unit reduction in electricity charges. Although there are still uncertainties in fuel prices, it is evident that further efficiencies are being gained from the wind farm, particularly following its expansion. As a result it is now proposed that the electricity price should reduce by a further 1p per unit to 16.5 pence per unit with effect from 1 July 2010. This is a reduction of 5.5% and the unit price will allow Stanley Power Station to retain a modest surplus to allow reasonable price fluctuations to be accommodated. Assuming that fuel prices and exchange rates don’t conspire against us it should be possible to provide further fuel savings and potential unit price reductions for the future.
30. No increases are proposed for harbour dues and customs clearance fees. This is partly because the scale of charges for harbour dues was recently extended, which significantly increased the charges for the larger passenger vessels that now visit the Islands. It is also a recognition of the impact on local fishing companies.
31. The cruise vessel passenger levy is normally reviewed a year in advance and this reflects the advance notice requested by tourism industry representatives due to the impact on cruise operators. The last increase took effect from 1 July 2009. No increase was agreed for this year and no increase is proposed from 1 July 2011. It will remain at £18 per passenger for vessels arriving in Stanley and £6 per passenger for vessels arriving elsewhere in the Islands. Keepingthe levy at the same level is intended to make a small contribution to offset the increasing costs being encountered by the cruise vessel industry, and hopefully alleviate some of the impacts on our local tourist-related enterprises.
32. In addition, no increase is proposed in the embarkation fee which will remain at £22 per person as agreed two years ago. However, this will be monitored to ensure that the total amount raised achieves full cost recovery.
33. Continuing on the tourism theme, the industry has requested that it be notified of any increases in FIGAS charges in the same way as is done for passenger levy (that is, a year in advance). An increase of 10% in passenger fares was approved for 2010/11 when the current year’s budget was agreed and the general Manager has proposed a further 10% increase with effect from 1 July 2011. It should be noted that neither of these increases will apply to the residents of the outer islands. The capped local rate will remain at £50 for those residents and will not increase next year.
34. Governments generally review tax rates and tax allowances periodically; usually annually. At this stage, I am pleased to confirm that no changes are proposed to the current form and structure of the tax system and there will be no changes to tax rates in order to maintain stability in the tax regime. However, Honourable Members have recognised that additional revenue will be needed to maintain the provision of services, particularly essential services such as health and education. Two specific measures are therefore proposed:
35. Firstly, in order that everyone makes a contribution to the provision of health services, it is proposed that a Medical Services Levy be reintroduced with effect from 1 January 2011. This will be payable by the employee at 1% of gross earnings and by the employer at 1.5%. It is estimated that MSL will raise £660,000 a year, which is a useful contribution to ever increasing healthcare costs. This revenue will be included within the health budget in order to partially offset the net cost of the service.
36. Secondly, it is recognised that the income tax regime in the Falklands is generous compared with many countries. The tax thresholds are high and therefore significant numbers of people do not pay tax or pay low levels. It is therefore proposed that the personal allowance be reduced from £14,000 a year to £12,000 with effect from 1 January 2011; reinstating this to the original cash level when the current tax regime started. Similarly, the lower rate tax band will be reduced from £13,000 to £12,000 a year. Together these threshold reductions will raise an additional £600,000 a year
37. Postal charges are currently reviewed every 2 years and the last changes were introduced from 1 July 2008. It is now proposed that the overseas airmail rates will be increased by 5p each, with effect from 1 July. These increases are necessary to recover the external costs involved. The price of a standard airmail letter for example will rise to 70p. No increases are proposed for local postage rates or overseas surface mail but the special rate for Christmas cards will be discontinued to compensate for the loss of revenue resulting from keeping the rates at current levels.
38. Moving now to pay, pension benefits, pension contributions and social payments:
39. Members are well aware that the provision of effective public services depends on having efficient and motivated staff. They are also aware that no pay award was made last year. Given the budgetary difficulties that exist, there is a strong argument for the continuation of a pay freeze. However, we must recognise the effect that this will have on recruitment and retention and indeed on the morale of the government workforce. It is therefore proposed that a 1% cost of living award will be paid to all government officers with effect from 1 July.
40. A review of the Retirement Pension Fund was carried out last year by the Government Actuary’s Department. Unfortunately we have not yet received the final report from that review but, in the meantime, a package of measures is proposed to improve the long term position of the Fund, whilst recognising the increased cost of living for pensioners.
41. Firstly, it is proposed that contribution rates should be increased from 1 January 2011. The voluntary overseas contribution rate would be increased to maintain contributions at the full actuarial rate. The resident rates of contribution would increase by approximately 8% in order to close the gap between the two rates. This would increase the employer and employee rates to £13.50 per week and the self-employed rate to £27.00 per week. No increase is proposed in the earnings limit threshold. It is proposed that it will remain at £180 per week.
42. Secondly, it is proposed that all pension payments, including retirement pensions, public service pensions and Falkland Landholdings pensions, should increase by the same percentage as the government cost of living award, that is 1%.
43. It is proposed that the Christmas Bonus, equivalent to one week’s pension, should continue to be paid to those pensioners in receipt of a retirement or ex-gratia pension who reside in the Falkland Islands.
44. It is similarly proposed that the winter fuel allowance for pensioners should be continued and that the income threshold should increase by the RPI increase.
45. It is proposed that all welfare allowances, attendance allowances and fostering allowances will be increased by 1% to maintain their value in real terms.
46. Following the publication of the White Paper on Wealth Related Payments, Child Allowances were increased last year but made subject to means testing relative to the family income. The new Assembly members have a different view on means testing to their predecessors and consider that it is fairer for everyone to be treated the same. As a result, means testing is to be discontinued with effect from 1 July. The family allowance will remain at £60 per month for each child but, in order to recognise that need is related to wealth, the allowance will be taxable from the start of the new tax year in January 2011.
47. Similarly, the White Paper on Further Education Funding also contained a proposal to means test the ‘pocket money’ element of the grant made to our Further Education students. Again it is proposed that the means tested element of this will be removed. Instead a weekly allowance of £30 is proposed to be paid to all Further Education students. This is broadly equivalent to the Education Maintenance Allowance that is paid to UK students. It is anticipated that this will be administered by the relevant college in the same way.
48. I am unfortunately once again disappointed that I have not been able to propose a balanced budget. Income from fishing licence fees (illex in particular) continues to challenge the forecasting process but, as I have already mentioned, the projected reduction in investment returns in the short to medium term was a major factor in this year’s budget process. Also, it is inescapable that, without changes in our approach or changes in public expectations, government costs will continue to rise. We are trying to address this but there remains much still to do. On a positive note; it is satisfying to see that our gradually maturing economy is producing additional tax revenues. To an increasing degree, this is helping our overall fiscal situation. The proposed budget includes carefully considered increases in fees and charges, and incorporates expenditure proposals that are linked to departmental business plans and the Islands Plan. I have proposed a budget that meets the revised Medium Term Financial Plan over the next five years, with increasing optimism for the future.
49. That this is so is not really down to me but rather to the whole machinery of government, working together for the benefit of our country and our community. I have been involved with producing public sector budgets for over 30 years (9 of these with FIG) and each year new challenges arise. This year was particularly challenging (as those involved will be aware) so, thanks to everyone involved!
50. I also pay tribute to Honourable Members who devoted a huge amount of time to the budget process. For many of them it was a new and probably not a very pleasant experience. Some have been through it before but I doubt that the finances of government were as demanding in their previous terms as elected members. In the course of many meetings we had some spirited debates and some hard fought compromises had to be made. I would like to thank the Assembly members for their diligence and their enthusiastic participation in the process.
49. As ever, I relied very heavily on my colleagues in the Treasury for pulling the whole process together (and for keeping the day to day processes running throughout this extended budget cycle). In particular I must thank Nicola Granger, She has carried out all the number crunching, kept track of all the adjustments in her amazing spreadsheets and is the prime author of most of the many budget reports that Members have discussed over the last few months. I would also like to thank Margaret Butler for her secretarial support during the long budget process.
50. In closing, I would stress that we need to re-establish a healthy financial position for FIG. We must ensure that responsible financial plans and budget strategies are followed and that, as a society, we live within our means. There may be potential wealth from oil in the future but we are not reliant on that and we would be foolish to assume it is inevitable. Without it we still have a strong resource base and we need to ensure that we can finance the services that our residents deserve. The choices may sometimes be challenging but there is a stable financial future for the Islands. It is a question of balance.
51. Mr Speaker, this concludes my budget presentation to this house and I beg to move the first reading of the bill.