Falklands : Falklands Appropriation Proposals for 2011/2012
Submitted by Falkland Islands News Network (Juanita Brock) 25.05.2011 (Article Archived on 08.06.2011)
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 2011
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 that the global economic downturn had a huge impact on international financial markets. Economies throughout the world were affected and many governments are still struggling to maintain their fiscal and financial stability. Interest rates remain at an all time low and the market recovery is still fragmented. The projections for investment returns in the Government’s budget, whilst improved on the last couple of years, therefore remain cautious.
3. The Government has significant financial reserves; built up during the years of prosperity, from fishing licence fees and associated industry activity. Although those reserves were not totally immune to the impact of stock market and interest rate declines, the impacts were limited by our investment policies, which value security above speculative high returns. I am happy to report that the value of our balances is now greater than the pre-downturn levels.
4. Secondly, for the first time in some years, the Illex season was a relative success. The final revenue figures are not yet available but we can be confident that the eventual total will significantly exceed our original projections. Nevertheless, as a result of the recent history of the industry a cautious approach has been taken for future years’ projections.
5. Finally, I must make 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. However, the current activities are generating significant income for local businesses and also for the Government. In formulating the Government’s budget for next year I have recognised that additional income will accrue from taxation and other direct receipts; but that is all. I have made no assumptions about future oil prosperity. That would be speculative and imprudent.
6. In any financial year the actual levels of spending and revenue raised will be different to those originally estimated. Honourable Members approved an operating budget deficit of £1M for the current financial year. I am pleased to report that I anticipate a significant budget surplus at the end of this year as a result of the net impacts of the areas I have mentioned.
7. 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. The Financial Management Report presented to the Standing Finance Committee in April showed that Net Liquid Assets at the end of this financial year are projected to be in excess of £100 million, which represents 2.6 years worth of operating expenditure. This means that our long-standing budget target for maintaining useable balances will be achieved.
8. In operational terms, the Government has been in a fragile budgetary position for some time. In the medium term, increases in expenditure projections outstrip the anticipated increases in revenue. I have presented recent deficit budgets to the Legislative Assembly in response to the challenge of balancing the economy. We need to promote our economy rather than allow stagnation to take hold and this means developing new policies and priorities and nurturing new industries and opportunities. Inevitably this will result in some redirection of Government funding but we will also need to raise additional funding or reduce expenditure. We still have a way to go before I can be confident that future Government finances will be stable and affordable.
9. This is an appropriate point to start my report on next year’s budget. The revised Medium Term Financial Plan (MTFP) strategy approved in April 2010 sought to reduce the government’s reliance on volatile illex licence fee income, whilst recognising that the precipitous decline in international markets would have an impact on the government’s revenues.
10. Honourable Members’ continued aim is for economic stability including achieving at least a balanced budget each year. This strategy continues to ensure that Net Liquid Assets will be at least 2.5 times the operating budget.
11. The budget projections I am presenting to the Assembly this morning meet the MTFP targets but for 2011/12 only. Additional work will need to be undertaken over the coming months to identify options to reduce the future deficit projections.
12. Moving on then to specifics – In the Bill, the total appropriation requested from the Consolidated Fund amounts to £45,466,270. The schedule to the Appropriation Bill shows how this figure is allocated to each department. In addition the budget includes internal charges of almost £1 million. Total operating expenditure for 2011/12 therefore amounts to £46.4M
13. Operating revenue for 2011/12 is forecast at £46.5 million. This produces a projected budget surplus for next year of just over £100,000. As I mentioned a moment ago, this surplus is forecast for one year only and the balanced budgets of the MTFP have not yet been met for the remaining four years of the Plan.
14. The operating revenue for next year is estimated to be £4.1 million more than the original estimate for this year. The main reason for this is revenue relating to oil exploration activities. The revenue forecast includes fisheries licence fee income inserted at £12.6 million with Illex licence fees included at £1.7m; a similar level to the original budget for this year. The volatility of Illex catches in recent years continues to cause difficulties in forward planning however licences continue to form a significant percentage of Government revenues at just under 30% of the total amount.
15. This brings me to the draft estimates of operating expenditure totalling £46.4 million. Following the adjustments made at recent budget meetings of the Standing Finance Committee, this figure represents an increase of £3 million on the original estimate for the current year. This figure is the result of discussions between Treasury staff and departmental managers, and several days of debate by Honourable Members. During the process, detailed consideration was given to savings proposals, additional spending proposals and several new service options, which are all subject to approval by the Budget Select Committee. I will elaborate further on the increase on Friday.
16. The draft estimates for transfer payments amount to £3.9 million. This is £1 million less than the original estimate for the current year. As usual, Honourable Members were faced with some difficult choices. There are some differences from what was approved for this year but the amounts proposed represent a balance between what was requested and what the government can afford to pay.
17. Fund transfers remain unchanged from last year at the level of £3.9 million and will be used for the same purposes.
18. Moving now to proposed capital expenditure for 2011/12. The draft Capital Programme totals £10 million (or £7.7 million net of capital receipts). This expenditure will be met from the Capital Equalisation Fund. A further £2.3million is projected for the subsequent two years. Therefore, the net capital programme for the next 3 years totals £10 million. This is within the £12 million 3 year rolling programme strategy on which the annual contribution to the Capital Equalisation Fund is 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.
19. I now turn to revenue measures and I’ll start with a brief mention of the Retail Price Index. The latest RPI figures, as at the end of March, show an annual inflation rate of 7.4%. However, a significant element of the current RPI figure relates to the impact of increasing oil prices and the RPI figure is therefore somewhat distorted. Partly to take account of this, and partly as an attempt to limit the inflationary cycle, a general revenue inflationary increase of 3% has been factored in for next year. I would ask you to note however that this has not been universally applied to all fees and charges since many are based, or are moving towards, a ‘user pays’ pricing structure.
20. All departmental fees and charges have been subject to review and a variety of increases is included in the draft budget. 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.
21. In line with the Health of the Nation initiatives, it is once again proposed to increase customs import duty on cigarettes by significantly more than inflation. The duty on cigarettes, tobacco and cigars will therefore increase by 12%. These increases will, for example, add an extra 44 pence to a packet of 20 cigarettes and 95 pence to 50 grammes of tobacco. However, this year no increase is proposed in the duty on alcoholic beverages.
22. An inflationary increase in vehicle licence fees of 3% is proposed. This would, for example, increase the fee for a Land Rover or Shogun from £110.25 to £113.50. It is also proposed that the fees for vehicle registration, drivers licence, driving test and firearms licence should be increased by the same percentage.
23. House rents in Stanley are generally still 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 will be 5%. In order to provide consistent protection to low income tenants it is proposed that the allowances under the rent rebate scheme will also be 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. Given the recent increases in fuel prices it will be necessary to increase these charges by 16% to recover the full costs of provision.
24. A policy of full cost recovery of water charges was established 3 years ago. Under that policy the projections for 2011/12 incorporated a 3% increase and that is now proposed.
25. For a number of years part of the costs of community services such as street lighting, street cleaning and the maintenance of open spaces have been recovered through the domestic service charge and commercial refuse collection charges. In order to further improve equity and transparency, Honourable Members are minded to introduce a commercial community service charge to recover a proportion of these costs instead. It is envisaged that the commercial refuse collection charge will reduce when this is implemented. However, due to legislative drafting resource limitations, it will not be possible to introduce this cahnge until 1st January 2012. . Therefore no changes are proposed at present to the current commercial refuse collection charges.
26. The domestic property service charge is currently £396 per annum with a 50% reduction for pensioners. As I mentioned earlier this charge includes an element relating to community services charges. However, the main costs relate to water supply and refuse collection. In order to reflect the proposed increases in these areas and continue the move towards cost recovery, it is proposed that the service charge is increased to £426. 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.
27. 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. To continue to work towards cost recovery, a 20% increase for 2011/12 is now proposed. Since this is a significant increase, and it is the last step in the ‘break-even’ increases, it is also proposed that this rate will be maintained for the next 2 years.
28. Inflationary increases of 3% are proposed for harbour dues and customs clearance fees to recognise the general increase in costs.
29. The cruise vessel passenger levy is normally reviewed a year in advance. This reflects the advance notice requested by the tourism industry due to the impact on cruise operators. The last increase took effect from 1 July 2009. No increase was agreed last year and no increase is proposed from 1 July 2012. It will remain at £18 per passenger for vessels arriving in Stanley and £6 per passenger for vessels arriving elsewhere in the Islands. Keeping the levy the same 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.
30. In addition, no increase is proposed in the embarkation fee which will remain at £22 per person as set three years ago.
31. Continuing on the tourism theme, the industry has requested advance notification of any increases in FIGAS fares. An increase of 10% in passenger fares was approved for 2011/12 when the current year’s budget was agreed and the General Manager has proposed a further 10% increase with effect from 1 July 2012.
32. Postal charges are currently reviewed every 2 years and the last changes were introduced from 1 July 2010. No further increase is therefore proposed this year.
33. 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 or tax thresholds. In addition, no changes are proposed to the current rates of Medical Services Tax. This is intended to maintain stability in the tax regime
34. Moving now to pay, pension benefits, pension contributions and social payments:
35. Members are well aware that the provision of effective public services depends on having efficient and motivated staff. Given the budgetary difficulties that exist, there is a strong argument for a pay freeze in Government. However, we recognise the effect that this would have on recruitment and retention and indeed on the morale of the government workforce. It is therefore proposed that a basic 3% cost of living award will be paid to all government officers with effect from 1 July. In order to assist lower paid staff in particular, a minimum increase of £450 per annum will be paid to those in full-time employment, with a pro-rata equivalent for part-time workers. This means that anyone working full-time earning less than £15,000 a year will get more than the basic 3%.
36. A review of the Retirement Pension Fund is still awaited from the Government Actuary’s Department. However, 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.
37. Firstly, it is proposed that contribution rates should be increased from 1 January 2012. 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 3.7% in order to close the gap between the two rates. This would increase the employer and employee rates to £14.00 per week and the self-employed rate to £28.00 per week. No increase is proposed in the earnings limit threshold. It is proposed that it will remain at £180 per week.
38. Secondly, it is proposed that all pension payments, including retirement pensions, public service pensions and Falkland Landholdings pensions, should increase by 3% in line with the government cost of living award.
39. 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.
40. It is similarly proposed that the winter fuel allowance for pensioners should be continued and that the income threshold should increase by 3%.
41. It is proposed that all welfare allowances, attendance allowances and fostering allowances will be increased by 3% to maintain their value in real terms to some extent.
42. No changes are proposed in the family allowance of £60 per month for each child and the allowance will continue to be taxable.
43. Finally, I am pleased to propose an amendment to the procedure for winding up the Holiday Credit Scheme. It was resolved some years ago that the scheme would be wound up by 30 June this year. By that date participants will have had 3 years to either use their accumulated balances or cash them in at 50% of face value. As previously announced any outstanding balances will be forfeit. However, the amendment proposed will allow participants that are under the age of 16 at that date to retain their balances until they reach their 16th birthday. They will then be allowed a year to make the same choice as their parents and older siblings, that is to draw the full balance as a contribution to travel or take 50% of it as cash.
44. In summary, I am pleased for the first time to be able to present a budget that shows a budget surplus. It is a small surplus that in no small part is the result of additional revenues from oil exploration activities. As I mentioned earlier, I have placed no reliance on future oil related revenue streams. However, the’ windfall’ revenues from exploration activities have allowed me to present a budget that includes significant economic investment proposals, in addition to maintaining existing levels of service wherever possible. I will outline further details of planned expenditure in my report on the Budget Select Committee when the House resumes on Friday Afternoon.
45. Mr Speaker, the proposed budget includes carefully considered increases in fees and charges, and incorporates expenditure proposals that will be linked to departmental business plans and the Islands Plan. Through these documents we will monitor progress and achievements against planned targets.
46. The end result is the culmination of the whole machinery of government, working together for the benefit of our country and our community. I would therefore like to take this opportunity to say thank you to everyone involved!
47. I would also like to pay tribute to Honourable Members who once again devoted a huge amount of time to the budget process. In the course of many meetings we endured spirited debate and hard fought compromise. I would like to thank the Assembly members for their diligence and their enthusiastic participation in the process.
48. As ever, I relied very heavily on my colleagues in the Treasury for pulling the whole process together (and for once again keeping the day to day processes running throughout the budget cycle). In particular I must thank Nicola Granger. She carried out all the number crunching and was the prime author of most of the many budget reports that Members received over the last few months. She will be leaving the Islands on Friday for a well-deserved holiday. I would also like to thank my PA Margaret Butler, for her secretarial support during the budget process.
49. In closing, I would take a final opportunity to stress that, without changes in our approach or management of public expectations, government costs will continue to rise. We are taking steps to address this but there remains much still to do. We need to re-establish a healthy financial position for FIG. We must ensure that responsible budget strategies and financial plans are followed and that, as a society, we live within our means. There may be potential wealth from oil in the future but we cannot rely on that and we would be foolish to assume that oil will come to the rescue. On the other hand, it would be pre-emptive to implement major savings proposals or revenue raising initiatives until we see if the current exploration programme is successful. We still have a potentially strong resource base without oil and we need to ensure that we can finance the services that our residents deserve. The choices may sometimes be challenging but I am confident that there is a stable financial future for the Islands. It is a question of balance.
50. Mr Speaker, this concludes my budget presentation to this house and I beg to move that the bill be read a second time.
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