LEGISLATIVE COUNCIL: 27 MAY 2003: BUDGET PROPOSALS
A meeting of the Legislative Council (Budget Session) took place at 0915 on Tuesday, 27 May 2003 in the Court and Council Chamber of the Town Hall. Prior to the commencement of the proceedings, H. E. the Governor, Mr Howard Pearce inspected a contingent of the Falkland Islands Defence Force.
The Budget meeting began with prayers by the Rev. Paul Sweeting of Christ Church Cathedral and the oaths of office for the new Chief Executive, Mr. Chris Simpkins and the new Commander British Forces, Jamie Gordon.
H. E. the Governor Mr. Howard Pearce’s speech will be published separately, as well as the Motion of Thanks and Questions for oral Answer. Following is the Budget section, including the proposals.
CA: Orders of the day, Bills. The Appropriation Bill 2003. This Bill requires a first reading.
DH: Mr. Speaker, Honourable Members
TB: The Bill will be read a first time.
CA: A bill for an ordinance to provide the service of the financial year commencing 01 July 2003 and ending on the 30 June 2004.
DH: Mr. Speaker, Honourable Members, the purpose of this bill is to authorise the withdrawal of £42Million 412 thousand 290 from the Consolidated Fund for the service of the Financial Year beginning 01 July 2003. The Schedule to the Bill summarises the appropriation. £32.9 Million is allocated to the operating budget which represents estimated expenditure, net of internal charges, of £1.3Million, Capital Charges of £3.3 Million. £4.8 Million is allocated to the Capital Budget, which represents estimated expenditure, net of internal charges, of £500,000.00. £4.7Million is allocated to fund transfers and transfer payments.
The Draft Estimates for 2003/04 reflect the budget policy approved by Executive Council. This followed a budget process, which has already been exhaustive. Honourable Members have examined priority-based and Islands Plan based budget solutions from managers in detail in two separate meetings of the Standing Finance Committee. And, amendments have been incorporated at each stage. The Opportunity has therefore been taken to condense the budget figures to a summary format in one document. The Document includes an extract from the Annual Accounts for information and a copy of the Appropriation Bill for use as reference.
At this stage, I should draw attention to the Budget Strategy for 2003/04. The main aim of the strategy was to generate a surplus of £2Million and produce a Consolidated Fund balance of 2.5 times Annual Operating expenditure, excluding Capital Charges. In order to achieve this, it was necessary to plan restrictive expenditure in two main areas by 1. Limiting Operating Expenditure to around £37Million, by continuing to absorb inflation through efficiency savings with the aid of the Priority-based budget process and 2. Limited Capital Expenditure for the next three years to £15Million. This strategy will need to be repeated next year to get the Consolidated fund balance as close as possible to the Islands Plan target of 3 times Annual Operating Expenditure, excluding Capital Charges, by 30 June 2005.
As usual, before dealing with the detail of the 2003/2004 Budget, I will briefly review the current Financial Year. The Draft Estimates show that the out-turn at 30 June 2003 is expected to result in a budget deficit of £2.7 Million, compared to a surplus of £2.3Million forecast a year ago.
The reason for this £5Million variance is due to supplementary appropriations approved during the year amounting to £5.2Million. This includes £2.6Million for carry-overs, under-spends in 2001/02, mainly for on-going Capital Schemes. At this time last year, it was forecast that the balance of the Consolidated fund as of 30 June 2002 would amount to £81.8Million. Sue mainly to the under-spend on the Capital Schemes I just mentioned, the actual balance of the Consolidated Fund as of 30 June 2002 amounted to £84.8Million an improvement of £3Million.
At 30 June 2003, it is estimated that the balance of the Consolidated fund will amount to £82.1Million. this is close to the budget strategy target of 2.5 years’ worth of Operating Expenditure, excluding Capital Charges, and is an appropriate point to start the report on the 2003/04 Budget.
Total Revenue for 2003/04 is forecast at £49.6Million and the submissions for total expenditure are inserted at £47.6Million to produce an estimated Budget Surplus of £2Million.
Operating Revenue is inserted in the Draft Estimates at £48.8Million, which is £1.6 Million higher than the revised estimate for this financial year. This is judged to be a realistic forecast, provided economic stability can be sustained. Dependence on the major contribution - £24Million – on the sale of Fisheries Licences, remains a concern. We were reminded of the fragile nature of the Fishery last season, when the lowest ever catch rates were recorded. This was reflected in the revenue from the sale of Fisheries Licences in 2001/2002, which amounted to only £21.3 Million, compared to £27.5Million for the previous Financial Year. Fortunately, this year’s catch rates have returned to an acceptable level. And, based on this, the forecast of Fisheries Licence revenue for next year is £24Million. This is £2.7Million more than last year’s action.
Another major source of revenue, which shows a significant reduction compared to previous years is investment income, where £3.9Million is inserted in the Draft Estimates. This reflects the lower returns expected from prevailing depressed interest rates in the financial markets. Three years ago, income from investments amounted to £5.5Million.
The Draft Estimates of Operating Expenditure total £37.5Million. This is £600,000.00 higher than the revised estimate for the current Financial Year. However, it should be noted that provision for pay awards amounting to £400,000.00 has been included. In addition, the Health Service Budget now includes a realistic figure of £400,000.00 for Medical treatment overseas. There have also been significant increases of £256,000.00 in Further Education Fees and £386,000.00 in charter fees for Fisheries Protection. A provision of £200,000.00 has been allocated to the Islands Plan reserve so that growth initiatives can continue to be supported, as and when they are developed throughout the year. This is considerably lower than the allocations agreed in the last few years, reflecting the Budget provisions already approved and the need to maintain a £2Million overall Budget Surplus. Obviously, all these additions have had a mitigating affect on the savings which would otherwise have resulted from the priority-based budget exercise.
Notwithstanding these additions, reductions totalling £474,000.00 have been made from the Islands Plan based budgets as originally submitted.
Fund Transfers of £800,00.00 and transfer payments of £3.9Million are included in the Draft Estimates. Fund Transfers have reduced by £150,000.00 in the current year as a result of the decision to reduce the subsidy to the Retirement Pensions Fund. Transfer payments have increased by £95,000.00 in total. This is made up of changes in several areas as agreed at the Budget Meeting of the Standing Finance Committee in March.
The proposed Capital Expenditure for 2003/04 is £5.3 Million. At this stage, no account has been taken of any carry-over from under-spends from this year. For the purpose of calculating the Consolidated Fund balance, and the appropriation required, it has been assumed that the total budget will be spent in the current year. This is to prevent the appropriation of an uncertain amount that would probably have to be adjusted later anyway. It is intended to submit a Supplementary Appropriation Bill for the actual amount of carry-over required as soon as possible after the year-end.
In support of the Budget Strategy, Executive Council has approved the policy of spending a maximum of £15Million if the Capital Receipts over a 3-year period for Capital purposes. It should be noted the greater effort has been dedicated to establishing the 2003/04 estimate than to subsequent years. The projections are made for financial planning purposes only. Further work is required to firm up the projections within the £15Million ceiling. Currently the Net Capital Programme for the next three years totals £13.8 Million. When I report back from Select Committee, I will provide an overview of what the Capital Programme for next year contains and what, If any, changes have been made.
At this juncture, I must point out that there are possible cost pressures from contingent liabilities for which no financial provision has been made in the estimates. For instance, provision has been included for a study on the management and removal of asbestos. But we are unable to anticipate what funding might be required as a result of that study. This could be a significant expenditure item. Furthermore, no financial provision is included in the estimates for contingent liabilities set out in the statement to the annual accounts. In the event any of these liabilities materialise, it will be necessary to reconsider expenditure priorities.
Adversely, and more comforting, is the potential additional income which might accrue from the sale of shares in Stanley Services Limited and the allocation of moneys from the EU for project or budgetary support. As the incidents of receipt uncertain, this income has not been taken into account. This precludes an unnecessarily optimistic view of Government finances from being formulated.
There are also initiatives identified in the Islands Plan for which no specific funding is allocated beyond the £200,000.00 Islands Plan reserve portion. For example, the re-development of core communities in Camp and the development of the deep water port will require funding in excess of this provision in order to achieve their objectives. Alternative sources of financing beyond the sources I just mentioned are therefore pre-requisite.
Turning now to Revenue Measures:
It is proposed to increase Customs Duty on Tobacco Products by 10% in line with the Health of the Nation Strategy. These increases would, for example, add another .16p on a packet of 20 cigarettes and an extra .50p on a 50g pouch of tobacco. This would raise additional revenue of £29,000.00.
No increase was applied to the Customs Import Duty Rate on Alcoholic beverages last year. An increase of 3% is now proposed in line with inflation. This would raise an additional £11,000.00. These increases would, for example, add an extra .1p on a litre of beer and an extra .26p on a litre of spirits.
It is proposed that Harbour dues be increased by 3% in respect of all vessels over 15 tonnes with effect from 01 January 2004. Additional revenue from this source is estimated at £40,000.00.
It is proposed that Customs Services and Clearance fees be increased from 01 July 2003, using the approved formula based on full cost recovery.
To keep pace with inflation, it is proposed that the Annual Vehicle Licence Fee should be increased by 5% with effect from 01 July 2003 as follows:
On Motorcycles, from £33.00 to £35.00
Light Vehicles, such as Land Rovers, cars and agricultural tractors from £77.00 to £80.00
Heavy Vehicles – that is vehicles exceeding 3400 kg from £121.00 to £127.00
Heavy Vehicle Trailers from £27.50 to £29.00
In view of the fact that Government Housing Rents are lower than the private sector, the policy in recent years has been to increase rents not more than the rate of inflation. A review was carried out last year and all properties were assessed using a points based system to determine their relative rental values. Overall, rents were increased by a maximum of 10% but the increases were staggered depending on current rent levels compared with assessed relative rental values. It is recommended that this process be continued and that points based rents will increase by 5% - a maximum of 10% for those properties significantly below the points based level with effect from 01 July 2003. It should be noted that this increase will not immediately apply to sheltered housing, which is already subject to a stage increase.
Water Charges: The policy previously approved was that water charges be set to recover the cost of water and that all commercial properties should be charged on a meter basis from 01 July 2001. At this stage, no further adjustments to charges are proposed, since the costs are essentially covered by revenue. In November 1998, Executive Council approved in principle the metering of domestic properties and requested the Director of Public Works to report in due course on its practicality and a programme for implementation. The study has now been completed. Based on figures provided by the Public Works Department, it is estimated that this would involve capital costs of £619,000.00. In addition, annual recurrent costs would amount to £68,000.00. This annual cost equates to over £60.00 per property. That is 35% of the current charge of £175.00 for domestic users. In conclusion, although metering water supplies would be more equitable, it is doubtful whether it can be financially justifiable. Unless there are significant reductions in water usage, and commercial water usage has changed little since meters were installed, a significant increase in water charges would result. It is therefore proposed that the current system of fixed annual charges for domestic users should continue.
The budget for Electricity supply for 2002/03 was set to make a surplus of £58,000.00. Even when depreciation was taken into account, the service was self-financing. The tariff for the current year continued at .13p per unit, assuming that fuel, which is the predominate factor in determining the eventual cost of electricity production, would cost an average of .245 pence per litre. The current price to the Power Station is .27p per litre and there has been a slight increase in the number of units sold. Therefore, the gross profit resulting from electricity production is likely to be slightly reduced from that originally estimated. Assuming that the fuel price remains stable, there is no need to increase the current tariff for electricity, as the service should still break even. A 3% increase in fuel costs approximates to a .01p increase in the tariff. It is therefore recommended that the current tariff of .13p is unchanged unless the annual average price of fuel rises above .29p per litre.
The Postage rates were last revised from 01 July 2002 and a special Christmas Card Postage Rate was introduced last year. The Postmaster intends to review rates every two years and a review will not be forthcoming this year. No changes, therefore, are currently recommended.
In the absence of a Private Sector initiative, due to the small economy as a scale, the undertaking service continues to be performed by the Public Works Department. The cost per funeral is estimated at £800.00. The charge per funeral was last increased from £450.00 to £500.00 with effect from 01 July 2001. To continue the move to full cost recovery, it is proposed that the charge be increased to £550.00 with effect from 01 July 2003.
There are no proposals to adjust rates of Income or Corporate Tax or Income Tax Allowances, as those rates form part of the comprehensive review of the Taxation Policy Framework, which has already been out for public consultation. Executive Council agreed that any revision needs to await the outcome of that review.
Embarkation Tax was originally introduced at a rate of £10.00 per passenger with effect from 01 January 2000. The rate was increased to £20.00 with effect from 01 March 2002 to recover the additional costs of airport security. It is therefore recommended that this charge remains unaltered.
Passenger Tax has been levied at £10.00 per passenger for 3 years. An increase is not proposed at this time. However, in the event that it becomes necessary to fund port security measures, it is recommended that this levy is increased in order to recover those costs. This would follow the principle applied in respect of embarkation tax.
I now turn to Specific Benefit Proposals:
It is proposed that the weekly rates of retirement pension contributions and benefits be increased as follows with effect from 01 January 2004.
Employer Contribution, from £8.50 to £9.50
Employee Contribution from £8.50 to £9.50
Self-employed Contribution from £17.00 to £19.00
The Voluntary Resident Contribution from £17.00 to £19.00
The Voluntary Overseas Contribution from £21.40 to £22.40
The Standard Rate Pension from £100.00 to £102.00 per week
Married Couples Supplement from £56.00 to £57.00 per week
The contributions are paid into the Retirement Pensions Equalisation Fund and pensions are paid out of this fund. These proposed increased rates of contribution are insufficient to maintain the value of the fund. Provision of £450,000.00 per annum is currently made in the estimates to transfer to the fund to make up for the funding short-fall. It is proposed that this subsidy should be reduced to £300,000.00 in the knowledge that this would require a compensating increase in the contribution rates as proposed.
It is also proposed that the earnings threshold for the Contribution Assistance Scheme should be reduced from £15,000.00 to £8,320.00 per annum with effect from 01 January 2004. This would bring the threshold down. It is considered that income opportunities to the Camp community have improved since the scheme was introduced with effect from 01 January 2001. The revised threshold will be more reasonable and it should still be adequate to provide assistance to those contributors living and working in Camp who need it. It is estimated that this would enable the Budget Full Account Scheme be reduced from £188,000.00 to £100,000.00.
As a result of the proposed increase in Retirement Pensions, the Maximum ex-gratis pension would increase from £90.00 to £92.00, in order for it to remain at the agreed 90% value of a retirement pension.
It is proposed that a Christmas Bonus should continue to be paid to all resident pensioners at the equivalent rate of one week’s pension.
As Public Service Pensions increase under the old final salary schemes, in recent years have exceeded inflation, and having regard to continuing low inflation, no further increase is proposed.
The system and scope of Social Payments are currently under review. As a result, the consideration of the re-introduction of a Living Allowance is the subject of a separate policy paper, which is currently out for public consultation. Subject to that consultation, on further consideration, it is anticipated the Living Allowance will replace the Means Tested Benefits currently in place.
In the event a decision is delayed, or the introduction is not approved, it is proposed that existing means tested and non means tested welfare allowances should be increased by approximately 3.5% with effect from 01 July 2003.
A Winter Fuel Allowance of £150.00 per annum was introduced for pensioners in 2001. The rate of allowance was based on the Kero price of .34p per litre delivered and 50% of the cost of heating a home during the three winter months. The Allowance was increased to £200.00 in 2002 to effectively assist with a further months supply of fuel. Although the Kero price is currently .33p per litre, it is proposed the Winter Fuel Allowance should not be reduced pro rata and that it should remain at £200.00 for the 2003 winter.
The Fostering Allowance was increased from £10.00 to £20.00 a day in 1999 and it’s proposed that it should remain at £20.00.
The Child Allowance is currently £53.50 per month per child. It was last increased from £52.00 with effect from 01 January 2003. No further increase is recommended at this time. The annual cost of the Child Allowance is estimated at £345,000.00.
It is intended that the Draft Estimates of Revenue and Expenditure should reflect in monetary terms the strategy and policies of Government as determined by Executive Council in support of the Islands Plan. I am pleased to be in a position to present a well-balanced budget. As mentioned previously, this follows a tremendous effort and the most thorough process that I have had the pleasure to be involved in. The outcome demonstrates the commitment from all those managers and Honourable Members involved to ensure the continued financial well-being of the Islands.
With trends of decreasing revenue in real terms, and the pressure of ever-increasing expenditure, the need to undertake a more rigorous budget processes are obvious. The priority based budget exercise used this year has provided a sound foundation for updating options at each service level within available revenue resources in subsequent years.
The former Chief Executive, Mike Blanch, who initiated and drove the Priority Based Budget Process forward, provided a sound piece of advice to Managers – "Think the unthinkable." Some Managers did just that and now they think how I think all the time.
Without my Deputy, Keith Padgett, who took on board the management of the process, I would not be in the position to be able to present the Budget today. Even I have lost track of the number of reports and papers Keith has churned out since he kick-started the process in August last year. Many thanks to Keith for all that hard work. I’m sure he enjoyed it, really.
I am also grateful to Heads of Department and other Managers for putting so much effort into the budget process this year and to Treasury Staff for all their assistance. Many thanks to each and every one of you.
Mr. Speaker, this concludes my budget presentation.
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