Jul 05 - Full Text Of Leader Of The Opposition Daniel Feetham's Budget Speech
Mr Speaker, it is an honour for me to rise to deliver my fourth Budget speech as Leader of the Opposition and my ninth overall.
Unhappily, Mr. Speaker, this year we find ourselves debating these estimates of revenue and expenditure against the backdrop of a BREXIT vote at the referendum and potentially the single largest threat to our economic model since the closure of the frontier and, in my view, in the history of democratic Government in Gibraltar.
While on this side of the house we have every faith in the ability of our community to overcome adversity it is important that this debate takes place within a framework of sober analysis, prudence and realism.
We are after all debating what the Government, for example, has spent and what it intends to spend; the way the Government intends to fund that spending; the size of our reserves and public debt today and in the future.
That debate must above all take place in the context of a probable BREXIT and the uncertainties that Gibraltar currently faces. No one wants the United Kingdom to leave the EU but our economic contingency plans must proceed on the basis that BREXIT is not only possible but probable.
Our economic model, Mr. Speaker, is one that is based largely on the ability of commercial entities to passport their goods and services into the European Union. It is a model that we have spent many decades developing and selling to customers. It is a model that we must do everything that we can to protect. The Financial Services sector that is built on those foundations provides over 4,643 jobs on the last figures we have. The Tourist sector that also benefits from free movement of people provides many thousands of jobs. The hotel and restaurant sector alone accounts for 1,763 jobs. Nearly 2 million people visited Gibraltar last year through our EU border. Over many decades, we have sold investment into Gibraltar by emphasizing an attractive lifestyle: a job and home in Gibraltar, a second home or easy access to Spain. The gambling and betting activities sector, where those are real factors, employs 3,205 people.
Behind those numbers, there are, of course, real people, with real families. And it is for the sake of those real people and those real families that we must ensure we leave no stone left unturned in our attempts to protect them, in this situation.
And of course, Mr. Speaker, each sector the economy is not hermetically sealed from the next. The success of the private rental and home ownership sector is directly linked to the success of (amongst others) the financial services and gaming sector. The ability of the Government, through tax revenue, to continue to provide year on year increases in health and in our caring services, is also dependent on those jobs. Less jobs, less revenue, less expenditure. In March 2012, our expenditure on health was £75 million; in this budget expenditure on health has increased this year according to forecast outturn to £107.2 million. That represents an increase of 43% over four years. Everyone wants the best possible health service. To do that we need to continue to prosper as we have done over the last three decades.
When I make that analysis of jobs, revenue and expenditure, I am also mindful of the fact that at a macro economic level, half of our GDP is accounted for by jobs in the economy. As at the end of March 2015, there were 26,144 jobs in the economy; a rise of 7.1% since March 2014. Much of that rise is in construction but it feeds directly and indirectly into economic growth and, therefore, the Hon. The Father of the House is right to be cautious in terms of GDP projections in the uncertain world we live in post the BREXIT referendum.
Gibraltar’s size and agility makes us able to react to events quickly and that is a huge advantage at this time. Our dependence on certain sectors and a particular economic model together with growth based on public spending may make us significantly susceptible to a downturn. Its one of the reasons the Hon. Gentleman and I were concerned about a BREXIT vote.
And that is why Mr. Speaker, for all my criticisms of the Government about spending and public debt over the last four years, it is my duty to steer a careful line between honest assessment in the public interest with the need to maintain confidence and to work with the Government in order to attempt to steer Gibraltar to calmer waters.
To do otherwise, would constitute a dereliction of duty and it is not what I am in politics for. The quid pro quo, however, has to be that those dealings with the Government must be based on an open, transparent and non-partisan basis where initiatives on the future of Gibraltar are not made unilaterally by the Government. Future generations of Gibraltarians will not forgive us were we to place party before country in this situation.
It is, therefore, a difficult budget speech that I deliver today balancing as I must objective observation of the state of our public finances, which is one of my principle duties against a very difficult backdrop with the need to provide the hope that will underpin confidence at this difficult time.
We cannot, however, divorce this debate from reality.
Mr. Speaker in my view, our focus as a nation has to be the retention of confidence in the market here in Gibraltar and the retention of existing clients. Early public assurances from the UK Government that it will be immoveable in ensuring Gibraltar’s access to the Single Market must be the priority. Even this, I accept is easier said than done but it must be a priority. The proponents of the Leave campaign held different views about UK access to the Single Market. The announcement that there is to be significant internal reflection and discussion in the United Kingdom to decide some of these issues before any notice is provided to the European Council under Article 50 is to be welcome. That will give us the time to express our views and to lobby intensely. Lobbying that I would expect would be undertaken on a joint basis between Government and Opposition. If an Article 50 notice can be avoided by the United Kingdom staying a Member of the EU and England and Wales opting out in a Denmark/ Greenland type situation all the better. I can, of course, foresee constitutional and political problems with the latter, but we must accept the Government is entitled to leave no stone unturned in this situation. There are other options that we have discussed and will remain confidential between us until the appropriate juncture.
In my view, however, we must plan on the basis that at some stage an Article 50 notice will be delivered by the UK Government to the European Council. We, therefore, have to be prepared for that eventuality. That notice will trigger a two year negotiating period, where the UK will negotiate terms of exit with the EU, including any access to the Single Market. We need to use all the time that we have, mobilising our friends in the United Kingdom and obtaining assurances from the political protagonists of the future, that any access the United Kingdom obtains to the Single Market will be extended to Gibraltar.
Mr Speaker, in this regard, of course, the Foreign Minister, Sr. Garcia-Margallo, has on a number of occasions reiterated that Spain will not agree access for the United Kingdom to the Single Market with the inclusion of Gibraltar. We are going to demonstrate to Sr. Garcia-Margallo what it is to have resolve, what it is to have unity and what it is to show determination as a people. But it is important to emphasise that timing is all important. My understanding is that Spain has no right to veto any terms of access between the UK and other Member States. What Spain can veto is an extension of the two year negotiating period. Provided that agreement is reached within a period of two years after the Article 50 notice is delivered, Spain will not be able to veto an agreement reached by the UK Government with the rest of the EU (including an agreement in respect of Gibraltar). This is why early intervention is absolutely critical on our part.
The leaders of the Leave campaign also spoke about the UK negotiating deals with third countries. At the moment the EU has 50 such trade deals. Those and any other trade deals should be extended to Gibraltar as and when they are negotiated by the United Kingdom.
Our gaming and our insurance sectors have also faced recent challenges arising from decisions taken by the UK Government. Changes to the VAT regime and point of consumption tax are some of those challenges. In the situation we find ourselves today, caused entirely by the UK Government decision to hold a referendum, the UK Government has to rethink these policies as they affect Gibraltar. Mr. Speaker I, therefore, look forward to the Hon. Gentleman’s Minister Isola’s speech.
And, in my opinion, Mr Speaker in tandem with all that we need to work very closely with stakeholders towards opening or expanding into areas that are less susceptible to the EU challenges we face.
These are some of the areas we need to focus on in my opinion. There are others.
Mr Speaker the Honourable the Chief Minister has said that it is business as usual. The fact that we are having this debate today in the best traditions of democracy in this country is a testament to that.
The Chief Minister has also said that business as usual means the Government will adhere to its manifesto. That is where unfortunately there is a difference between this and that side of the House.
In the United Kingdom we have already seen how its credit rating has been downgraded and there has been huge market volatility and uncertainty. The Chancellor of the Exchequer, George Osborne, made a robust, optimistic and positive speech at the Treasury last Monday emphasizing that Britain has one of the strongest major advanced economies in the world and that as a result the British economy was about as strong as it could be to confront the challenges Britain now faced. The very next day in an interview with the BBC he said that the UK Government had to show it could live within its means and that tax rises and spending cuts were almost inevitable. Last week the Hon. The Father of the House said that was potentially the most serious crisis to hit the world since the 1930s. I certainly agree with him as far as the seriousness of the potential crisis to Gibraltar.
In the context of a probable BREXIT and the uncertainty that we will face over the next two years, the Government cannot expect to continue spending money at the rate that it has been spending and it cannot be business as usual as far as its manifesto commitments are concerned. No one is calling for austerity measures. But the Government cannot continue to spend money at the rate it has over the last four years.
Their manifesto will cost the taxpayer hundreds of millions of pounds, in the context that they have already spent £750 million in capital projects over the last four years.
Our discourse over the last four years has been that the Government was spending too much money, funded by too much debt, part of which was being kept away from proper parliamentary scrutiny in Government owned companies. But we were also saying that that that was not prudent at the best of times, but not least, when there were potentially difficult times ahead for Gibraltar. In 2014 in a speech I gave to the Chamber of Commerce I listed a potential BREXIT as one of those potential curves up ahead for this community. That having happened, it is not possible for us to continue spending and borrowing as if the good times will last forever.
If there was ever the time for a return to the rainy day fund policy of the early 1990s it is today.
There is nothing unpatriotic in the expression of that view and we cannot confuse criticisms of Government policy with disloyalty to Gibraltar.
Revenue
Mr Speaker I want to illustrate some of these issues by reference by reference to increases in recurrent expenditure compared recurrent revenue together with decreases in cash reserves.
Mr. Speaker, on 31 March 2012 the overall recurrent departmental expenditure stood at £332.7m while the forecast outturn this year stands at £453.1m. In other words, it has risen by 36.1 % since March 2012. That is a very significant increase in four years and it still underestimates recurrent expenditure for reasons I will develop in due course.
Next year it is expected to rise by 40% from the position it was in March 2012 to £461.1 m.
Mr Speaker, but that in itself does not provide us with the full picture. As I have noted in previous years the comparison between March 2012 and March 2016 is not comparing like with like for this reason. Prior to the financial year ending March 2014, contributions to Community Care were treated as an expense through a contribution to the Social Security Fund. Since 2014, these amounts have not been treated as an expense and have been included in the surplus and then from there, they have been paid to community care. The effect, in accounting terms, is to lower expenditure and to increase the surplus by corresponding amount. This year that would have meant an increase in recurrent expenditure of £20 m and a decrease in the surplus by that amount. If you compare like with like, recurrent departmental expenditure based on these estimates that we are debating today has increased by 42.2% since 2012.
None of this takes into account the huge elephant in the room: CFC and GHFL.
AD LIB the distortion in expenditure created by CFCL/GIHL
In my view, with or without the expenditure incurred by CFCL, these are very significant increases in recurrent expenditure and I remain as concerned today as I have been over the last few years. More so, of course, in the climate we find ourselves.
When we compare this long term trend in increases in recurrent expenditure with the long term trends in increases in recurrent revenue, debt and decrease in cash reserves, we can see that the concern is justified.
Revenue
In March 2012 recurrent revenue stood at £454 m. Recurrent departmental expenditure as we have seen was £332.7m. Recurrent departmental revenue, therefore, stood at 73.2% of recurrent expenditure.
Recurrent revenue today stands £581.5 m and recurrent departmental expenditure has a forecast outturn of £453.1 m. To that we have to add the £20m to community care which the Government is now treating as below the line when prior to 2014 it was treated above the line. Recurrent departmental expenditure today is, therefore, currently running at 81.3% of recurrent revenue and that does not take into account expenditure paid for by CFCL with monies from the GSB
Moreover, whilst recurrent departmental expenditure has increased by 42.2% since 2012 (if we use my figure) or 36.1% (if we use theirs), recurrent revenue has increased by 28.5%.
For three years I have been warning about this convergence between recurrent revenue and expenditure. Last year I called it a worrying trend. It is a trend that we need to reverse. More so post the referendum result.
Mr Speaker in my analysis at the beginning of my speech I said segments of the economy cannot be hermetically sealed from other segments or sectors. Contraction in one sector would have a knock on effect on others and on the size of the economy generally and on, of course, also on revenue. In this regard, import duty is actually down this year from £160 m to £151.5 m. The convergence that I have spoken about between recurrent revenue and expenditure, would have been narrower had it not been for an increase in revenue of £20.4 m in corporate tax and £5.5 m in personal tax. Of course, we know from last week’s answers to questions that the Government owes personal tax payers £19.5 m and corporate tax payers £10.1 m in tax rebates. If that had been paid, the trend towards convergence between recurrent revenue and expenditure would have been much closer and it would have, of course, virtually wiped out the surplus
Mr. Speaker in making that analysis, however, I want to congratulate the Financial Secretary and the Father of the House. Leaving aside CFCL (and as I have said, it is a massive elephant in the room because it distorts much the Government is spending downwards) in the year ending 2014, the Government had overspent by £40 million across Government departments, last year it had overspent by £27.8 m, this year it has not overspent and I am happy to acknowledge that fact. I would like to think that our job as an Opposition in holding the Government to account in this area has played a small (perhaps) but effective part in pushing the Government into achieving that target.
Mr Speaker, recurrent expenditure is not the entirety of Government expenditure. It does not take into account capital projects. That £750 m we say they spent in the last four years. The Government would say this is money well spent but it is money spent nonetheless.
Cash Reserves
And we can see the effect of that spending on debt and on cash reserves.
On 31 March 2011 Cash Reserves stood at £273.8m.
On 31 March 2012, Cash Reserves had dropped but still stood at £213.9 m.
From then on Cash Reserves have dropped significantly to £73.2 m last year in March 2015 and the forecast outturn for this year is £100.3 m.
Mr Speaker that represents a downturn in cash reserves of 53% since March 2012.
Government Debt
The increase in recurrent expenditure and capital expenditure over the last four year term also explains why direct and indirect public debt has increased exponentially since the Honourable Gentlemen opposite came into office.
In March 2011 net debt stood at £206.36 m.
By March 2012, it had increased to £303.72 m and by December of last year it had increased to £418.2 m.
The legal borrowing limits at the time was £447 m. Our net debt was less than £30m from that limit.
Today as per the forecast out turn net debt stands at £345 m. That level is higher than Government targets at the election of £314 m.
I expect net debt to continue to increase.
Indeed, just as at the beginning of last year before last year’s budget session, net debt stood at £400 m and above, and it was reduced for the purposes of the Budget debate but started to increase rapidly thereafter, so too will we see the same pattern this year. The reason is very simple. Every year before the Budget debate there is a tightening of the belt, less bills are paid during the period and producing a temporary increase in cash reserves. After the budget there is a loosening of the belt, cash reserves decrease and net debt increases.
[We do not have the figures for April and May because Hon. The Father of the House said he was not providing them because it would be dealt with by the Hon. The Chief Minister. Unfortunately that has not been the case but I know the way the trend is going and that is in one direction].
Mr Speaker:
The long term trend is clear:
- Very significant increases in recurrent expenditure over the last four years;
- Recurrent revenue increasing at a slower rate than expenditure in percentage terms;
- Very significant reductions in reserves;
- And very significant increases in net debt.
This, of course, Mr Speaker posed an insoluble problem for the Government over the last four years. Not only had it promised £750 million of capital projects to the electorate in 2011 but it had also promised to donate all surpluses to community care and had criticised the debt levels under the GSD administration as an addiction. And of course because of the legal borrowing limits, it was also a legal impossibility for the Government to directly borrow sufficiently to pay for the promises it had made in 2011.
That is the reason why (in our view) £400 million of debentures from the GSB was, to use their term, invested in CFCL, which has in turn been used to pay for Government expenditure. There is no point talking about a surplus of £38.8 m when is the Government is using CFCL and GIHL to pay for Government expenditure which is not accounted for in these estimates of revenue and expenditure.
The gross debt of this community is not £ 447.7 m in the forecast outturn. It is £847.7 m if you simply take into account the monies invested in CFCL or £886.7m if the Government had to make good all the so called investments made by the GSB in other Government owned companies.
Prudent management of our public finances needs to take this global picture into account.
Mr Speaker many countries in Europe calculate and compute public debt by taking into account PFI arrangements and, indeed, the debts of Government owned companies. That is the position in the UK. That is the position I am urging upon the Government.
This is not just about openness and transparency, or the quality of our democracy. It is also about the ability of the Opposition to identify emerging financial problems. This is even more important today than it was last year.
None of this, of course, takes into account the £77 million that the Government will need to find for the power station which can only be funded by indirect borrowing which will not appear in these estimates.
The Legal Borrowing Limits
Mr Speaker this year the Government changed the way the legal borrowing limits were calculated and there was a sense of déjà vu in the way the Government did it.
During the 2011 election, the Honourable Gentlemen opposite said nothing about their plans to use the GSB to fund Government expenditure. In March 2012, three months after the election, the CM moved a bill amending the GSB Act and took out the requirement that the investments of the GSB be held in cash or cash equivalent. In other words, liquid and very safe form of investments. That change to the GSB Act is what allowed the Government to invest GSB deposits in CFCL, which in turn allowed them to pay for their expenditure. It could not have happened under the GSD Government.
During the 2015 General Election, the Government made promises running into the several hundreds of millions of pounds. It could not have paid for those promises by borrowing directly under the law as it stood then, which in simple terms had a net debt borrowing limit based on 80% of the recurrent revenue. As I have already noted net debt was running very close to the legal borrowing limit. At one point as close as £30 m. Rather than simply say to people that the GSLP-Liberals were planning to change the way the legal borrowing limits were calculated, they said nothing and changed the formula within a couple of months of the election. Now the Government can borrow 40% of GDP (i.e. the size of the economy). It can borrow much more than it did before and without being limited to 80% of recurrent revenue. The experience in places like Bermuda shows that decoupling debt from recurrent revenue in a small jurisdiction is not prudent. In a post BREXIT situation I urge even more caution.
I genuinely want the Hon. Gentleman to succeed in these difficult circumstances and I genuinely believe we can. The alternative does not bear thinking. But if it is to do so, it really must start a period of serious consolidation; it must rein in public debt and rein in future public spending. I also urge them to move towards greater transparency of public finances by bringing on to the books of the Government, it’s off balance sheet debt, which is the trend in the UK and other democratic countries.
New spending over the next few years also has to be carefully prioritised.
There are many other examples where we believe the Government has not prioritized its spending but this year I want my analysis to be just as serious as other years but without point scoring that characterized these debates for many years.
Economic growth
Mr Speaker, I now turn to economic growth.
Mr Speaker, the forecast Gross Domestic Product for the financial year 2013-14 was £1.484 billion, and the forecast GDP for 2014/15 was £1.64 billion. Today the Chief Minister has said that GDP was forecast to rise to £1.65 billion.
These figures are, therefore, good figures.
But that economic growth has been driven to a great extent by Government projects (construction in particular) and we would say funded by borrowing. I hope that the Honourable Gentleman is right that the economy will continue to grow. Everyone in Gibraltar hopes that he is right.
Mr. Speaker last year I said this about the Eastside Development:
“It is also fair to say we have been here before on the Eastside Development. The first GSLP Government in the 1990s came very close to concluding a deal and in 2005 the then Chief Minister Peter Caruana and the then Trade and Industry Minister Joe Holliday signed an agreement with the Reuben brothers and Multiplex Construction Limited, Australia’s largest construction Company and a leading property developer in the UK, for an investment in the eastside worth well over £1 billion. Unfortunately the economic slump post 2007 prevented that project from prospering. The GSD hopes, in the national interest, that this latest project prospers and wishes the Government every success in this regard. Anything that creates real jobs and economic development in Gibraltar will be welcome by the GSD”.
This is not an easy project and I accept that. But the Government has made announcements. It led people to believe that this was a done deal. When the Father of the House revealed it was far from a done deal in a debate with my Hon, Friend Mr Clinton at the election we, understandably asked questions about it. The response from Cameron Holdings the day before the election was to say that they were ‘surprised and disappointed’ by the GSD attitude and that they were happy to confirm that they were finalising arrangements for the payment of the premium in respect of this development. We were, of course, merely reacting to the Father of the House. To date we do not know whether this project is going ahead with this developer or with a different developer and I believe in the light of past public statements we are entitled to know. Again I hope the Government succeeds in its endeavours in this regard.
Conclusion
Mr Speaker in the final analysis, I believe that what we need is for the Government to rethink its spending plans for the next few years in the light of the referendum vote. It is a time for consolidation and long term planning.
It is also I believe a time for all of us to reflect. I have been talking about the culture of entitlement and expectation in Gibraltar which I felt we all (collectively) needed to tackle. There is something more important than ourselves as individuals; there is a collective wellbeing of this community and the obligation to ensure that future generations enjoy the benefits we have enjoyed. To do that we must all be responsible in the demands that we impose on the state.
A rethink of spending priorities is important. A rainy day fund is in our view desirable. Consolidation means completion, for example, of the work at Glacis, Laguna and Moorish Castle and priority projects, but also means pause on substantial increases in spending and debt until we have a clearer picture of what the future holds.
The Honourable Gentleman finds himself steering a ship in waters and weather that might seem calm for now but which have the propensity to develop into something of a perfect storm. He can rely on me to help in any way I can but we cannot proceed on the basis of manifesto promises made pre-referendum.
The rules of the game has changed and now is not the time for further gambles.
{fcomment}
