Budget Speech 2018

Below is a copy of my budget speech delivered in Tynwald today – some minor differences in delivery on the day and slightly reformatted for publication

Thank you Mr President

When looking at this years budget I thought it appropriate to look back a year and see how it compares to the budget presented then by the Treasury Minister, as well as looking at some of the statements and proposals made as part of the budget speech. Last year I said was a placeholder budget, and that this year would be the defining budget of this administration. So lets see how this administration is choosing to define itself.

Firstly i’d like to talk about some of the new initiatives in the budget

Although i’d be much more welcome of the £7,500 mentioned by the Chief Minister in his speech – increasing the personal allowance by £750 is a sensible small step – it will provide marginal relief to some people (with a maximum potential benefit of £300 for married couples) but in reality most people will see much less benefit than this – and what benefit they do see will be largely eaten away by the increases in government fees and charges and the rising cost of living. For single parents, for young workers this maximum benefit is halved. So this is a good headline but has little more substance than that.

The changes to nursing expenses relief are welcome and extending the benefit in kind on cycling to electric bikes looks to simply be correcting an oversight in the original policy from last years budget.

One of the new initiatives I do welcome is the additional funding that has been announced for the pre-school credit system – we are in real need of additional support for families with young children and although this is a positive step in the right direction 20 hours a week is not going to be enough to help people into full time employment. We must also remember that this support is targeted at pre school children only, government needs to be doing more to support families with children of all ages, through after school facilities and support for childcare for the under 3’s

PENSIONS

The new pension triviality limit being increased to £100,000 is a step towards greater pension freedoms but the new pension scheme proposed does raise a few concerns.

Originally we were promised pension freedoms at least equal to those in the UK – and this is where the proposed scheme falls down. Whilst the tax benefits of the scheme might be better than you’d get in the UK the level of freedom is not.

UK pensioners can access as much of their pension as they like, when they like – with a portion of each withdrawal being tax free – but the proposed Isle of Man scheme restricts the initial withdrawals to either 40% of the total fund or the entirety of the fund. There isn’t any flexibility until after this first withdrawal. So this doesn’t encourage people to draw their pensions in a responsible manner – in fact quite the opposite.

People with UK pensions cant even transfer directly into this scheme, and there is a charge of 10% of the pension pot should anyone want to move an existing Manx scheme over.

I expect that the scheme would primarily be used by people that want to withdraw their entire pension fund in one go – so in reality it will be higher earners that can benefit from this new scheme and the new 40% tax free portion, whilst those with smaller pension pots wont have this same advantage.

I am a firm supporter of pension freedoms but this scheme certainly doesn’t bring us to the same level of pension freedoms as the UK. This scheme was worked up without properly engaging with the pension providers – have any pensions providers signed up to actually provide a product that fits with this scheme? Or is the Treasury Minister just hoping that providers will do so?

Why is the Treasury Minister creating a two tiered pension system – where those who have pensions that are under the triviality levels don’t get the same level of tax relief as those who have enough to make it worthwhile accessing the newly launched scheme.

Turning to the 5 year plan

5 YEAR PLAN

Despite what is written in the budget document this plan – was not approved by Tynwald last year. Last year Tynwald approved a one year budget – not a 5 year plan – and Treasury would do well to be clear on what they are asking this Hon Court to support.

Even taking into account the emptying of the public sector pensions reserve the Treasury are still forecasting a surplus in the year the pensions deficit hits the revenue budgets. The public sector pensions reserve is also expected to last one year longer, and the predicted impact on revenue budgets has come down.

Comparing the actual spend this year to the budget for the year shows that there is an unexpected net surplus over the budgeted amounts of around £15 million that Treasury have put straight into reserves.

So just looking at the 5 year plan we can see that not only are Treasury forecasting that the Island is on target to rebalance its finances this last year the Island has done better than anticipated.

PAY CAP

So why then are we looking at another austerity budget? I agree that we should be constraining expenditure where possible but this budget goes beyond that and continues to impose a dangerous and inappropriate 1% pay cap that risks causing significant damage to front line services.

This was highlighted last year during the budget debate by a number of Hon Members – by the Department of Education in the budget document itself – and nothing has changed in the intervening year. If Treasury insists on applying a pay cap then it should be directed at roles that are not essential to the provision of front line services. as the Hon Member for Ayre and Michael Mr Baker has previously stated there should be a differentiation between costs that represent ‘cost of sales’ or ‘overheads’ and at present this is a sledgehammer policy being used when what is really needed is something much more focused.

But what really concerns me about this policy is it is sending a clear message that this government has no intention of paying it’s employees at least a living wage – for how can this happen at the same time as capping pay costs by 1%. At the very least any cost increases associated with paying a living wage should be excluded from the pay cap.

I would like a clear statement from the Chief Minister on this issue – is it his intention to introduce a living wage for Government employees or not.

My Hon Colleague Dr Allinson has talked extensively about wage stagnation in both the public and private sector – and this is something that urgently needs addressing to ensure that working people see an improvement in their daily lives.

POLICE

One area that really concerns me is the budget for the Constabulary – with a budgeted increase of only £173k, representing an increase of 1.3%.

Sit back Hon Members and absorb that figure – inflation is currently running at between 3.8 and 6.4 % depending on which figure is used – so this is another year where the police force is receiving a real terms cut in it’s budget.

This is despite a stark warning from the Chief Constable who said in his last annual report:

I am as certain as I can be that this, when considered with an increase in criminal damage and an analysis of the demands that the Constabulary has faced during the year, this offers the first real evidence that the reduction in the scale and scope of neighbourhood policing is now being felt. I have predicted for a number of years that there would be consequences to the reduction of front-line services. Those consequences are now being seen.

The Chief Constable went on to say

The Constabulary is effectively living hand-to- mouth and its resourcing is almost constantly stretched.

Why has the Council of Ministers not taken heed of this warning? Why are we looking at yet another year of real terms cuts to our essential front line services – this is putting community policing under threat, its making the challenge of dealing with financial crime even more difficult – yet despite being warned that the police force is living ‘hand to mouth’ this years budget shows no recognition of that whatsoever.

Is this the direction of travel that Hon Members want? A police force that is being forced into an ever downward spiral because Council of Ministers aren’t willing to ensure that they are adequately funded. The police on this island do incredible work under increasingly difficult circumstances and they are not getting the support that they deserve from their government.

It is not too late to turn this around – the final warning from the Chief Constable was clear when he said:

The situation is by no means critical, but it could become so unless remedial action is taken.

This was last year Hon Members – how long are we expecting to wait before this Government takes the action that is needed to safeguard this vital public service?

As a minimum we need to be providing funding adequate to allow for the recruitment and retention of more police officers – as well as ensuring sufficient funding for training. Low level, community policing is an important part of delivering the police service that the public expect – and it also has a positive impact on our crime rate – and this should be at the core of the budget setting process for the Department of Home Affairs.

HEALTH

The issue of inappropriate budgets is not restricted to the Police force – the budget for the Health Department is set to be an actual reduction on the probable spend for this year. Treasury have identified that the probable spend for this year would be in the region of £218 million but the budget proposed for next year is lower – at £216 million.

The Treasury Minister has already announced an increase of £6m in the health budget – but when we all know last years budget was £9.5 million less than required this is not exactly good news. There is no point talking about increasing budgets without taking account of what was actually being spent.

Now the Health Minister will say this is enough funding, that the savings initiatives started by his predecessor will deliver savings that not only address the £2m deficit created by this budget but also will address the impact of any inflation. So all in all, and assuming the lowest rate of inflation applies, the Health Service must be targeting savings of something in the region of £8.7 million compared to the current year in order to hit this budget.

The target announced today is only £7 million and so I am interested to hear his assessment and how he plans to make up the difference. I wonder if the Health Minister can let me know the last time the Department of Health managed such a substantial reduction in its budget in a single year?

The Treasury Minister last year was clear when he said:

If we are to face up to our challenges we must be realistic.

Clearly, if the Department is to effectively manage its budget and continue to provide these essential services then it must have a meaningful target to manage within;

Taken together with the current years supplementary vote Health has had additional funding in the region of £30 million over three years. The Treasury Minister seems to be using this as an argument to say “they’ve had enough” and yet

When moving for the external review of the health service last month the Treasury Minister succinctly highlighted the issue that his budget fails to address:

He said:

In a nutshell, the problem is at present there is no clear evidence upon which to conclude whether the budget is too low or whether our Health and Social Care Services are not appropriately designed and/or efficiently delivered.

I wonder then what new evidence has come to light in the last month that now allows the Treasury Minister to cut the budget for health – down from £218m to £216m. Surely if we don’t know what the real costs are then we should be basing the budget on what is actually spent – at least until such time that we have answers to fundamental questions about what the health service should cost.

Why bother calling for an external review of the health service if we are already at a stage where the Council of Ministers can reduce the voted spend by £2 million?

Be under no illusions Hon Members – this isnt a ‘real terms cut’ like is being applied to the police force – it is an actual reduction of voted spend compared to the current year probable expenditure.

There is no way that this can be spun – £216 million is less than the probable spend identified in the budget of £218 million.

Now the health minister might well say that his department wont need all the voted supplementary funding – or that he is absolutely confident that his department will be able to operate within the proposed reduced budget. Although I suspect not confident enough to put his own job on the line

But irrespective of any of this the problem lies with the direction of travel this budget outlines for the health department – by restricting funding CoMin is essentially trying to ‘play hardball’ with another vital core service and this is not acceptable. Yes the DHSC needs fundamental reform, it needs to find efficiencies and demonstrate clear cost controls – but consider this:

The Treasury Minister has previously outlined that over the next 5 years the health service could be facing cost increases of £60 million – that’s around £12 million a year – but for some reason his budget doesn’t tie in with those figures – as i’ve already outlined the budget is a reduction on the probable spend for this year. The external review wont be finished until the end of this next financial year and so it wont contribute to the savings in this budget

So which is it – is the Health Service expecting significant cost increases year on year as he outlined last month when arguing for an external review, or will the savings plans already in place deliver enough to meet this reduced budget?

It seems like the Minister is trying to persuade us that both of these opposing statements are true – depending on what he needs from this Hon Court at the time.

PROMISES MADE

So how has this year gone? Seeing as we are relying very heavily on the promises and statements made by the Treasury Minister it is only right that we look back at what was promised last year and how government has delivered.

In his last budget speech the treasury minister announced his intention

“That Treasury will work to bring a scheme to Tynwald later this year seeking to adopt innovative approaches to enabling regeneration and leveraging our position in combination with the private sector to unlock potential development sites and, in doing so, injecting a confidence and vibrancy into our economy.”

Where did that initiative go?

We were promised a soft drinks levy that would apply from 1st April 2018 – and yet this budget delays this by another year.

We were promised that class 2 national insurance would be abolished from 1st April 2018 – and following the UK pushing this date back a year I queried the Treasury Minister on his plans.

In response, he stated in another place that

the proposed changes to abolish Class 2 National Insurance contributions and increase Class 4 National Insurance contributions with effect from 6th April 2018, which I announced in my Budget speech in another place, were taken independent of any decision announced by the UK government.

And yet in this budget we are seeing these changes delayed by a year to match up with the UK – so was this decision made independent of the UK as we were told, or is it subject to the whims of a Westminster government?

Lastly, we were promised that

“by the end of the parliamentary year we will have clarity on what specific actions are required to meet the savings target”

And I am glad that the Treasury Minister will be returning to this Hon Court later in the year to meet this commitment.

So on promised initiatives the Treasury Minister is one for four

BUDGET REFORMS

What about reforms to the budget process? As has already been highlighted the Treasury Minister has been in the past a vocal proponent of changing the budget process – and yet this is now his second budget and we have seen no changes made. No engagement with the public and no new approach.

We still have an ‘all or nothing’ proposition – we still have a capital programme that we are being asked to vote on as a block, with minimal information.

This is a capital programme that government is consistently failing to deliver – the Treasury Minister can announce whatever size of capital programme he wants but if Government fails to deliver this then it is simply meaningless – can the Treasury Minister please outline what specific steps he will be taking to ensure the capital programme will be delivered on target

What can we expect from this year?

(Apologies Hon Members – i’ve just thrown myself, I’ve written a small section here about how in his speech the Treasury Minister outlined a number of welcome new initiatives) but the only genuinely new initiative I noted was the potential introduction of workplace pensions.

All I can say here is that the treasury minister has once again announced prospective changes to the budget process and some potentially forthcoming initiatives but when his past promises remain unfulfilled how can we have any faith in his proposals this time around?

MISSING INITIATIVES

So far we have a budget which has not really delivered on last year’s promises, real terms cuts to core front line services a real reduction on probable spend for the NHS and minimal new initiatives.

This budget is supposed to be a budget of substance – but I fear that we risk devaluing that word by applying it here. We are an island of substance, an economy of substance but this budget is not substantial.

As the Hon Member Mr Baker has set out – Tax policy (and i’m not just talking income tax) is an important part of any economic strategy – and yet it isn’t being used to support those areas which the programme for government identifies as priorities – where is the tax system supporting people relocating to the island, where is the support for employers, for those studying at university, for those struggling to make ends meet, for hard working families? Other than the continuation of past policies – some of which are of dubious value

The only changes to tax policy are minor tweaks that wont have any material impact on people, on companies or on the economy as a whole.

Even the proposed increases in social security aren’t any greater than inflation – and so those people who are already struggling this year aren’t going to be any better off. The Treasury Minister has outlined that inflation is expected to run at just over 3% – yet his budget does nothing to try address the impact of inflation on those people who are relying on state benefits just to get by.

This includes people reliant on the state pension – so when the treasury Minister states that an increase of 3%or 3.3% is “broadly in line with inflation”- but what he means is “less than inflation” which is running at at least 3.8% and up to 6.4% according to Cabinet office figures.

The Chief Minister seems to think that increases that are outstripped by inflation are still ‘helping people on low income’- which is a bizarre claim to make – if the cost of living is outstripping growth in income people will inevitably be worse off as a result of this budget. Please note that the increase in personal allowance actually only helps those who are already in the tax net – people who are already earning less than £12,500 a year (or £25,000 for a couple) will be no better off as a result of this change – and will undoubtedly be worse off as a result of this budget.

In his speech the Treasury Minister outlined that this budget contains measures that are aimed at helping low and medium earners – but I can’t see how that is the case?

In his summing up the Treasury Minister repeatedly referred to the increase in the personal allowance as the main evidence of support – but as i’ve already outlined this will provide only marginal benefit when set against the rising cost of living and the rising cost of accessing government services.

He referred to increases in EPA and the state pension as evidence of support – but when this ‘support’ being offered is less than inflation and which will undoubtedly be eaten away by further increases in government fees and charges how can it truly be categorised as support. I echo the concerns raised by Mr Speaker in that we still have no clarity on what these fees and charges may be.

And so despite the fervour with which the Treasury Minister made these claims I don’t see that this budget is setting out to help low earners or middle earners at all – in fact it’s difficult to see exactly who will really benefit from the tax and welfare policies in this budget.

The tax burden still falls primarily on working families, on middle and lower earners – and this budget does nothing to change that. The narrowing of our tax base is a real threat to the long term sustainability of public services.

The anti avoidance measures announced are welcome, but they really don’t address a number of core issues – they don’t address some common tax planning strategies and I don’t see a real willingness to engage on this front.

I am concerned that this budget demonstrates a real lack of vision from this government – making a choice not to use tax policy to incentivise and support the economy, not to use tax policy to help employers or workers and really just not doing much at all. It is my view that government as a whole is firmly committed to supporting the economy but that it does so in spite of Treasury imposed restrictions.

I’ll give an example – the TT.

It is widely accepted that the TT generates economic benefit for the Island – but this year the TT will receive little to no funding from Treasury. Instead surpluses generated from the registries will be used to fund the costs of the Department for Enterprise in hosting the TT. Net taxpayer funding for the Department will only be £24,000.

So this money brought into the Island by the registries can’t be used to reinvest in the economy – it cant be used to reinvest in the newly launched Agencies.

This budget has one aim – addressing the pensions deficit, and everything else seems to have been subordinated beneath that overriding goal.

DIRECTION OF TRAVEL

Mr President – Government has had this same approach for the last 5 years. Seeing as Treasury are happy to take credit for the Island’s economic growth then they should be equally willing to take responsibility for it. Hon Members may have noticed the absence of a budget favourite this year – 5 years of austerity finally broke the back of 34 years of unbroken economic growth with last year being the first time in over three decades that the Island saw a reduction in it’s GDP. The last census showed an exodus of younger families from the Island and

I firmly believe that both of these were direct results of the approach taken by the last government – an approach that this government is choosing to continue.

This approach is centred around Spending cuts (which the Minster calls ‘strong cost controls’) and increases in fees and charges – and any changes to tax rates or national insurance seem to be completely off the table. And yet there is so much potential here.

Choosing not to use this powerful lever of public policy is government trying to rebalance the budget with one had tied behind its back – and I urge the Treasury Minister to seriously reconsider this approach.

The current approach is delivering nothing more than a managed and steady decline in front line public services – we are now seeing the impact of 5 years of this approach and it is a great surprise to me that this government is continuing with it. Some Hon Members have talked of stability – but there is a fine line between stability and stagnation.

I am not for a moment advocating uncontrolled spending, but we should be realistic about what public services cost to provide and we have to be willing to pay for them. This Island is a fantastic place to live and work but too much a focus on the bottom line risks undermining the quality of life that we have.

PRIORITIES

Part of the problem is that government seems to be unclear on its priorities when it comes to funding – especially when it comes to capital funding. Treasury has allocated £27 million pounds to heritage railways over the next 5 years. Set against real terms cuts to almost every department and real terms cuts to every single welfare benefit bar nursing care contributions.

I’ll let Hon Members make their own minds up about whether this government has its priorities straight

CONCLUSION

At the start of this speech I asked how this government is choosing to define itself. Hon Members may note that I have been talking throughout about this government – rather than simply the Treasury – and that is because aside from tax policy Treasury are in many ways reactive – often they can only respond to the requests and policy priorities of the other departments, and so this budget is defining this Council of Ministers as a whole. If a Minister doesn’t ask for support Treasury wont be in a position to provide for it ad so it would not be fair to lay this budget’s flaws at the feet of the Treasury Minister alone.

Hon Members we have before us a budget that is setting out a reduction in NHS funding, real terms cuts for an already stretched constabulary, the continuation of pay restraint, more fee increases that will put pressure on those struggling to get by and welfare and pension increases that are outstripped by inflation. There is nothing in this budget that working people can be glad about

This is a budget of broken promises and lacking in vision. It is not a budget of substance and it does a great disservice to people who are working their hardest to provide for their families to pretend that it is.

Hon Members – Think hard about where you stand – are you willing to support a budget that threatens to cause long term damage to the constabulary? That risks providing inadequate support for the NHS? That fails to support people who are just trying to get by? For pushing the burden of paying for public services onto an ever narrowing body of working middle earners?

In good conscience I cannot.

Thank you Mr President