St Helena : St Helena Budget Speech for 2012/13
Submitted by Saint Helena Herald (Public Relations Information Office) 31.03.2012 (Article Archived on 19.05.2012)
I wish to introduce a Bill for an Ordinance to provide for the services of the financial year 1st April 2012 to 31st March 2013.
Budget Speech 2012
I wish to introduce a Bill for an Ordinance to provide for the services of the financial year 1st April 2012 to 31st March 2013.
This will be the third and final occasion that as Financial Secretary I have the privilege of presenting the annual budget speech to Legislative Council. Since the first time I addressed Council back in March 2010, I note with considerable satisfaction that there have been many positive developments on the island and the future for St Helena now looks far more secure than it did only two years ago.
Part of the reason for this is external. The announcement on 3 November 2011 by the Secretary of Stare that a contract to construct the airport had been signed with Basil Read was a ‘game changer’. At last, St Helena has a real prospect of being able to earn money from the outside world, through the development of a viable tourist industry.
Part of the reason for the brighter future, however, is internal. This Council has taken many steps towards preparing St Helena for the opportunities which the airport will bring. Not all of these decisions have been easy or popular, but in my view they have all been necessary, if Saints are going to achieve greater financial independence in the future.
Outside St Helena, many places including the UK are continuing to struggle with very difficult economic conditions, high unemployment, pay freezes and stringent cutbacks in public spending. To a considerable extent, St Helena has been insulated from the worst of these unpleasant events, but nowhere is immune. We remain fortunate to have the strong financial backing of the UK Government, but it is not a bottomless pit. Both Government and the residents on St Helena will need to play their part in adapting to the knock-on effects of the tough conditions in the UK.
Madam Speaker, my main focus in this speech is on what the island has started on and must continue to do in order to turn the opportunity of financial independence presented by the airport into a reality. The 2012 budget is one of the steps in this process.
Review of 2011
First however, I would like to reflect on some of the main points from the past twelve months. Of course, the successful outcome of the airport contract negotiations stands out as the highlight of that period, and I would like here to pay a special tribute to Sharon Wainwright who worked so hard on behalf of St Helena to bring this about. Without her steadfast perseverance, I doubt whether we would have now got the airport, and it is a great sadness that she is not here to see her project come to fruition. I would also like to acknowledge the unstinting work of our previous Governor, Andrew Gurr, in keeping the airport in the forefront of UK Ministers’ and Officials’ minds throughout his term.
St Helena has had to do much to keep its side of the bargain to obtain agreement to build the airport. This was spelled out in condition four of the Memorandum of Understanding or ‘MOU’, which required St Helena ‘to implement the reforms needed to open the island's economy to inward investment and increased tourism’.
This Council, supported by the Administration, has achieved substantial progress against many difficult objectives associated with this condition. Examples include:
A revised Immigration Ordinance which makes it easier for people to enter, live, and work in St Helena whilst still protecting the interests of people living on the island
A revised policy on investment which focuses on facilitating investment to the island generally
Strategies for Headcount Reduction, Divestment and Rationalisation of the Public Service.
Progress on the Land Development Control Plan which will make land available for development in the right locations; and
A new system of land disposal, which will enable non-St Helenians to be acquire land on St Helena
These examples represent fundamental change in thinking, away from an inward-looking focus on managing decline, towards an outward-looking focus on engaging with the outside world to foster growth.
From the financial perspective, 2011 had many points of interest. Councillors will recall that we had ‘two’ budgets – the first one in March was a ‘rollover’ budget, caused by the delay in the visit of the Development Aid Planning Mission, and the second budget – the substantive one – did not take place until July. During the ‘rollover’ period, Government had to continue with the spending levels set under the 2010 appropriation ordinance. Despite these obstacles, a number of initiatives were introduced from 1 April 2011 which are transforming our economy, including:
The introduction of accrual accounting to replace the former system of cash accounting. This is a significant leap forward in public sector financial management, that will help Government to improve control over its revenue and expenditure and provide better management of its assets and liabilities;
Output-based budgeting, which places greater emphasis on what services Directorates deliver with the taxpayer funds they receive, rather than the previous focus on what inputs they spend the money on;
The Customer Service Centre has been established, enabling the public conveniently to carry out the majority of their transactions with Government at one central point;
Income tax reform has been introduced, which simplified the tax system, reducing the upper rate, doubling the personal allowance and removing much of the record-keeping burden on small businesses;
Tax incentives to farming and fishing – two of St Helena’s fundamental private sector industries. It is satisfying to observe that output from both of
these sectors has increased during the year, with more plentiful supplies of locally produced fresh food available in the shops;
Customs duty and wharfage reforms – which have simplified the previous two stage system of wharfage and customs duties, broadened the range of dutiable items and eliminated the higher 30% and 40% duty rates (except for vehicles);
Scrapping the hotel tax, which was an administrative burden on our fragile but important hospitality sector;
Introducing a 10% services tax on telecommunications and financial services, which has substantially broadened our revenue base;
Introducing withholding tax on interest received from Bank of St Helena, whilst removing other administratively onerous aspects of withholding tax; and
Introducing the Basic Island Pension, which has raised living standards for many over-65’s in the community, whilst allowing them to keep any extra money they earn from employment without loss of benefit.
Taken together, these changes are beginning to exert a powerful but subtle influence over our collective behaviour. As opportunities begin to appear, it is becoming more worthwhile to apply for a promotion, start-up that part-time business, or come out of retirement to do some part time work. More private sector jobs are being advertised, more loan applications for houses and businesses are being sought, all evidence behind the feeling that there is a ‘buzz’ starting to ripple through the community that will reverse the previous sense of slow, inevitable decline.
2011 Financial Out-turn and DAPM Settlement
Turning now to the estimated financial outcome of the 2011 financial year, I would like to highlight the following features:
At the end of February, eleven months through the financial year, our recurrent revenue was £117k ahead of budget at £25.57m, whilst recurrent expenditure was running £1.246m below budget at £25.364m. Whilst it is usual to see a spurt in expenditure towards the close of the financial year, given the size of the gap it appears unlikely that overall spending for the year will exceed the revised budget. One area where there has been considerably higher spending than originally budgeted is in overseas medical referrals, where the full year outcome is expected to reach £870k, compared to a budget of £542k. In the interests of patient care, SHG must meet these additional costs, but of course this places considerable strain on other areas which must provide offsetting savings. SHG has no discretion over the number of medical referrals so we are looking at whether alternative hospitals giving similar standards of care could bring this cost down.
One significant expenditure saving has been the reduction in subsidy required by the RMS, due to higher than forecast freight and passenger income. The positive effect of Basil Read’s mobilisation to the island can be clearly seen in these results.
Capital expenditure has again been lower than planned, due to continued capacity constraints.
This year the DFID team spent an extended period on island during February to negotiate a 3-year funding agreement covering 2012-13 to 2014-15. This was the first post-airport announcement visit by DFID, and involved a rigorous examination of all aspects of SHG’s operations. As a result of the visit:
Instead of the potential cut in the level of grant in aid, DFID has maintained last year’s level of budgetary support at £12.1m. DFID has also agreed to increase support for long term technical cooperation posts.
A significant adjustment has been made to the allocation of SHG expenditure to support economic development, as the highest priority on the island.
What this means in practice is that DFID is not immediately turning off the support ‘tap’ just because they have started to fund the airport project. However, it does mean that we will have to concentrate our funds on activities that will help to grow our private sector. Funding of £687k has been allocated to Economic Development. This will include funding that was previously earmarked for Tourism and SHDA, but will also include additional funding to establish Enterprise St Helena, the new body that will lead private sector development, headed by Julian Morris, the Chief Executive Economic Development.
The re-prioritisation of the SHG budget had to be carried out very quickly to fit in with the DAPM timetable. Quite a few areas of spending have been identified for reductions to enable funds to be re-prioritised elsewhere. During the new financial year, there will be an opportunity for Councillors to examine these cutbacks in more detail to see if they are both justified and achievable. Any fine-tuning of these decisions can then be undertaken through a supplementary appropriation at the mid-year stage.
Recurrent Revenue and Expenditure Plans for 2012
The emphasis in the 2012-13 budget is very much on ‘growing the pie’. The more we put towards developing our private sector now, the more everyone can benefit from sharing in a bigger pie in the future. That means that we have to be very selective about our recurrent expenditure decisions. However, that does not mean SHG will neglect essential front-line services, particularly Education and Health. For example, this year, Health will employ six full time doctors, up from four two years ago. Education will appoint two ‘School Improvement Partners’ – specialist teachers whose job will be to improve teaching standards at both primary and secondary level.
Caring for our fragile environment is also essential if the qualities which make this island so attractive as a future tourist destination are to be preserved. A significant increase in funding has been made to the newly established Environmental Management Directorate.
The Government also remains determined to ensure that no one is ‘left behind’ as the economy grows. The budget will continue to support low income households through raising benefits to provide protection from rising prices, with two increases scheduled or this year in April and October. Total funding allocated for social benefits has increased from £684k last year to £788k this year. Additional money is also being reallocated to SHAPE to assist them to provide work opportunities to up to ten clients from the former Community Work Scheme.
However, SHG Directorates will at the same time have to tighten their belts, to free up funds for our priority areas. A series of efficiency reviews of Directorates are being planned to identify opportunities to cut wastage and improve efficiency. In addition, the new Corporate Procurement section will become operational; with the purpose of improving procurement across SHG and realising better value for money from our procurement spend. Another productivity initiative is the combining of the former separate Customs and Tax Office organisations into a single entity, to be known as Her Majesty’s Customs and Revenue. This will involve cross-skilling staff as both customs and tax officers, and will lead to improved tax compliance together with better customer service.
Cutting expenditure is never straightforward, nor popular, but further efficiency improvement and headcount reduction in SHG remains essential if we are to be able to fund the high priority areas of Economic Development, Education, Health and Infrastructure, and free up staff to take up valuable new roles in an expanding private sector.
Pay and Benefits
I have already referred to the tough economic conditions facing the UK. The UK public service currently has a two year pay freeze in operation. Whilst we are very fortunate that our grant in aid funding from the UK has not been cut, we still have to make do with the same level as last year. Other costs meanwhile have continued to rise, limiting the scope to adjust SHG pay. Nevertheless, there is provision in this budget for a modest pay award to be made from 1 October 2012. More details of this will be announced later. In addition, there is also some provision to provide a ‘market forces’ supplement to attract and retain people with skills that are essential to SHG.
The level of basic island pension (BIP) will be increased by 4.7% with effect from 1 April 2012. A further increase is planned from 1 October, although the exact amount is yet to be finalised.
Current SHG pensionable staff who are members of the Defined Benefit pension scheme will see a number of changes to the scheme introduced from 1 April 2012. These changes will help to make the scheme more affordable to the island in the years ahead, whilst still providing staff with the opportunity to retire on up to two-thirds of final salary. The savings will be achieved primarily through raising the retirement age from 60 to 65 by 2023, and from reducing the rate at which pension rights are accumulated. In addition, the scheme is being enhanced so that staff who leave SHG with ten or more years’ service will have their pensions protected through cost of living adjustments. This will make it easier for staff to move between SHG and the private sector, giving greater labour mobility and helping St Helena to adapt faster to new opportunities. A further improvement to the scheme is the proposal to open the SHG pension scheme to non-pensionable staff with ten or more years’ service, bringing terms and conditions of all staff more closely into alignment.
Pension reform remains a major financial policy objective for Government. The ultimate goal being pursued, as described in the Callund report of 2007, is to reach the situation where there is an island-wide contributory personal pension scheme in place, so that all workers actively contribute to securing their pension needs over their working lifetimes.
Income Tax Reform
Madam Speaker, I said in my introductory remarks that this budget speech would focus on what St Helena has to do in order to turn the opportunity of financial independence offered by the airport into a reality. Reforming the income tax system to encourage investment by the private sector is an essential part of that jigsaw. The Income Tax Bill introduced during this sitting of Legislative Council focuses on providing those incentives to businesses. There are four main changes that will make it more profitable for all businesses, both local and offshore, to invest in St Helena. These are:
An Investment Tax Credit – that will provide a deduction from the business’s tax liability of 15% of the value of any additional assets imported to or constructed on the island;
Accelerated depreciation – which will enable a business to claim an additional 20% depreciation in the first year, bringing forward the rate at which it can write off its assets against tax;
Rollover relief on capital gains – which will enable a business to claim tax relief if it reinvests the proceeds of an asset sale back into a business; and
Unlimited carry-forward of losses – which will enable businesses to offset any losses it makes against future taxable profits for an indefinite period.
In addition, the rate of capital gains tax has been reduced from 25% to 10% and the scope of the tax has been restricted to sales of property, shares or businesses. The exemption for a principal private residence will remain.
One loophole that is being closed is the ability to offset business losses against income earned from employment. In future, such business losses may be carried forward indefinitely until they can be offset against tax on profits from the business.
As a result of these new investment incentives, the existing Approved Investor Scheme, the AIS, has reduced relevance and will close to new applicants from 1 April 2012. Existing AIS participants will continue to obtain the AIS benefits for the remainder of their validity period, but they will not be able to claim both AIS customs duty exemption and Investment Tax Credit for the same item.
Tax modelling shows that the investment tax concessions will reduce revenue in the second and third years of implementation. We can make up this revenue shortfall without compensatory increases in other taxes, by simply holding the current personal allowance steady at £7000 for the next two years. This will be sufficient to offset the investment tax concessions.
There are no changes to the standard rates of income tax and corporation tax this year, which remain at 25%. However, it is the recommendation of the tax reform working group that these rates be progressively reduced by one percent every two years until they reach a target level of 20%, making St Helena a more internationally attractive destination for companies, investors and skilled workers.
The tax system in every country has a powerful impact on the way its residents and businesses behave. A well-designed tax system encourages people to work, does not distort spending and saving decisions and encourages investing for the future, whilst a poorly-designed tax system can do just the opposite. While there is still room for further improvement, St Helena has come a long way towards building a tax system that really will support increased prosperity in the future.
The tax reform working group examined the current system of stamp duties to see whether it was consistent with the objectives of simplification and broadening the tax base whilst making the tax system investor-friendly. As a result, some modifications to stamp duties will come into effect from 1
April 2012. These include the introduction of a set of standard fixed fees for rental leases of:
£25 where the initial rent liability is less than £5,000;
£75 where the initial total rent liability is between £5,000 and £20,000; and
£250 where the initial total rent liability is over £20,000.
These standard charges aim only to recover costs of the registration process, rather than raise revenue.
Stamp duty on land sales and lease premiums will be treated as revenue sources and will continue to have a percentage rate applied to them. From 1 April 2012, this will be 1.5%. From 1 April 2013 this will rise to 2% and from 1 April 2014, it will become 2.5% and remain at that level thereafter.
Stamp duty on share transfers will attract a rate of 1% from 1 April 2012.
In each case, stamp duty is paid by the buyer, not by the seller.
There are no changes to the current ‘ad valorem’ rates of customs duties, which will remain at 20% on regular items and at 5% on a range of basic food and other necessities.
Specific duties will increase from today by 6.5% which is 3.2% below the inflation rate last year, to remove the effect of price rises stemming from last year’s tax reforms. This is in line with the commitments made during the DAPM settlement.
Duty on a 340ml bottle of beer below 4.5% alcohol will increase by 3p, while higher alcohol beer will rise by 7p. A 750ml bottle of wine will increase by 24p. A 750ml bottle of spirits will rise by 63p. A packet of 20 cigarettes will rise by 17p.
Duty on diesel will rise by 7p to 17p per litre. Duty on petrol will fall by 4p to 39p per litre. This is a combination of the staged equalisation of diesel and petrol duty, coupled with the 6.5% inflation adjustment to the specific duty.
Increases in a variety of tariffs are necessary in order to meet the increasing cost of providing services. Some of these changes will take place from 1 April, while others will be introduced later in the year so that the immediate impact on household budgets is reduced. Electricity tariffs will rise by 10% from 1 April 2012. Freight rates on the RMS will increase by 11%, whilst passenger rates will rise by 4%, but these changes will be held off until 1 July 2012. In recognition of the water quality problems being experienced by consumers at the moment, water tariffs will be held at current levels for six months until these problems are resolved and further investment in the water system has been undertaken.
It is important to remember that electricity, water and shipping services are still subsidised by the government to a substantial degree and that any subsidy takes away money that could otherwise be used to provide additional services elsewhere. Raising tariffs in line with inflation on an annual basis prevents subsidies from increasing further and eroding the supply of other vital services such as health or education, or limiting the funds available for pensions and benefits. It is SHG policy to reduce the level of general or untargeted subsidies over time, in order to ensure that subsidies go only to those who most need them.
SHG will be required by DFID to contribute towards approved capital expenditure plans from its accumulated reserves. Over the next three years, this will amount to £4.8m. I believe this is a reasonable requirement, given the generous contribution from the UK towards the airport and associated infrastructure. Major capital projects include two new generators for the power station, further upgrading of the water supply system and additional wind turbines.
The new passenger terminal on the wharf is close to completion, and the upper floor is already occupied by the Harbour Master and Her Majesty’s Customs and Revenue. When the lower floor opens later this year, arriving and departing passengers will enjoy much improved facilities compared to the current arrangements.
Funds are being used to renovate and expand the stock of Government Landlord Housing. Work is currently being carried out to create 11 additional units during 2012-13. Recently, a new draft housing strategy has been prepared which will assist SHG to meet the island’s varying accommodation needs.
In addition, DFID has agreed to fund additional capital investment on the RMS to increase its passenger capacity. This will involve the construction of 29 additional berths with an estimated cost of over half a million pounds. With increased demand for passenger berths on the ship expected as a result of airport construction, the additional berths will help ensure that acceptable levels of access to the island are maintained.
The role of Postmistress and Head of Customer Service Centre has been combined in a continued effort to obtain greater productivity and reduce costs. Another cost reduction measure has been to transfer philatelic sales to overseas clients to CASCO, our philatelic agent in the UK. Meanwhile, Saints and visitors to the island will still be able to purchase new stamp releases locally.
Madam Speaker, it would be a rare budget indeed that pleased everyone, since doing that would require unlimited resources. This budget, I believe, represents the best that this Council could achieve within the limited funds at its disposal. It provides help to those in society finding it hardest to make ends meet, while firmly setting its sights on the long term goal of delivering economic growth and financial independence. Not everyone will be happy where budget constraints have directly affected them, but private sector businesses should have much to celebrate in this budget. With the business opportunities arising from the construction phase of the airport, coupled with the generous tax incentives in this budget, there has probably never been a better time to invest in the island. I very much hope that business owners across the island will start to invest for the future, to the benefit of both themselves and those that they employ. The private sector is the key to the future of this island, and this budget aims to unlock the door to that future.
23 March 2012