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Falklands, after 'boom' years, announces a prudent mid/term sustainable budget

Financial Secretary Nicola Granger made the presentation of the Appropriations and Finance bills to the Legislative Assembly

The Falkland Islands Financial Secretary Nicola Granger presented on Tuesday to the Legislative Assembly the 2016/17 financial budget bill with appropriations of £62.9M, funded from revenues anticipated in the year of £61.3M with the remainder coming from the reserves built up from wind-falls in Illex catches and oil and gas exploration in recent years.

 With the background of a slower economy ahead, (tourism and wool, the bright spots), Falklands have decided to maintain spending at a level that does not make excessive use of reserves or increase operating deficits, but is sustainable in the medium term, whilst redirecting surpluses towards critical infrastructure works.

In a framework of no inflation, due primarily to lower fuel prices, (and despite a lower cost of living) Falklands' government employees will receive a 1% increase and state pensions 2%, while changes in fees and charges will be maintained overall at current rates, although with a couple of exceptions. Fees that are driven by salary costs will be increased by 1% to account for the Civil Service pay award, customs service fees and veterinary fees.

In a similar vein, recognizing that there’s been no increase in the cost of living this year fostering, attendance, winter fuel, family and student allowances were agreed to be maintained at their current rates.

The Minimum Wage was reviewed and will be increased to £5.81 an hour from 1st January 2017, while the Living Wage was also reviewed and is now considered to be £7.26 per hour.

On the tax side, despite the need to raise additional revenues to reduce reliance on reserves it was decided not to reduce personal tax allowances to collect additional revenue, since “the target is to find a balance between raising revenue and improving the quality of life of individuals”.

Nevertheless the 26% corporation tax allowance will only be payable from £1/2M of profit upwards from 1st January 2017.

Follows the Appropriation Bill Speech:

The purpose of the Bill before you today is to authorize the appropriation of monies from the Consolidated Fund for the next financial year.

Before talking about the appropriation itself I’ll first expand on the comments relating to the economy made by the Governor earlier. The economy continues to be strong. However, the largest of the traditional industries, the fishing sector has experienced a difficult year and this demonstrates the risks inherent in the industry. Following several ‘boom’ years for squid there is always a risk of a ‘bust’ year and that has been the case with Illex in 2016. The total catch has amounted to just over two thousand tons: equivalent to an amount which would be taken by a single vessel in a good year. As a consequence there will be a significant refund of license fees. There were concerns last year that the Illex may have had an impact on the smaller Falkland Calamari. However the first season of 2016 resulted in reasonable catches and whilst volumes of this squid have been lower, prices have improved somewhat.

Two fishing vessels are currently being built by local companies representing welcome investment in new efficient fishing vessels. The ability to invest in such long-term projects has been facilitated by the ITQ system and the security it brings.

Agriculture remains a significant employer in the economy, employing the largest proportion of the workforce outside the public sector. Whilst wool production has been declining slightly over the past 15 years, the current good prices have again provided better than anticipated returns to farmers. The meat industry continues to be impacted by the global market. A decline in meat prices in general, and sheepskin prices in particular, have made it a challenging year for meat and related exports.
Finding the balance between supply and demand of livestock continues to prove difficult to achieve.

In tourism, cruise numbers increased once again in 2015, as did domestic tourism spend. Despite an anticipated decline in 2016 in the overall number of transit visitors, due to the scaling back of oil operations, leisure tourism is forecast to grow by 6% in the coming year.

Economy remains strong but the challenges present last year remain

As I said earlier, the economy remains strong but the challenges present last year remain and the Economic Development Strategy will be update and refreshed over the coming months to seek to increase economic activity.

The Budget Strategy re-affirmed in November sets out nine principles and supporting policies that the Budget Select Committee have spent the last four months working to achieve. These principles ensure that FIG can deliver efficient and effective public services whilst encouraging economic development, strengthening infrastructure, safeguarding sustainable pension arrangements and improving the quality of life in the Islands. This is all based on the principles of maintaining a reasonable level of uncommitted reserves and not borrowing for operating purposes so that we only spend within FIG’s means.

These principles and policies have been met in the Bills I present to you this morning. The appropriation of £62.9M is predominantly funded from revenues anticipated in the year of £61.3M with the remainder coming from the reserves built up from wind-falls in Illex over recent years and oil and gas exploration in recent years.

However, whilst windfalls have allowed FIG to improve services in recent years our recurring revenue streams have not increased dramatically. Therefore whilst considering proposals during this budget, the Select Committee were conscious of the need to maintain spending at a level that does not make excessive use of reserves or increase operating deficits to a level that is unsustainable into the longer term. By limiting the deficits Budget Select Committee were able to set a budget that is sustainable in the medium term, whilst still redirecting surpluses from this, and previous years, towards critical infrastructure works.

Despite lower cost of living, an increase in FIG pay was approved of 1%

FIG recognizes the hard work of its employees. When reviewing Pay and Reward policy this year Budget Select Committee were keen to recognize this work with an increase in pay, despite the cost of living actually decreasing since the last review. Therefore an increase in pay was approved of 1% with a continued commitment to the incremental pay progression structure. For those employees who have satisfactory continuous service of more than a year at the 1st July this could therefore effectively result in an increase to pay of 4%.

Employment program rates and welfare allowances were also increased by 1%. The Budget Select Committee also approved a slight restructure of the eligibility criteria for the employment program whilst creating a new category called the “Work Enablement Program” for those who do not meet the revised criteria. The Assembly continues to want to ensure that the state pension offers a basic income in retirement, therefore approved a 2% increase to the weekly state pension rate (and a corresponding 2% increase to FIG and FLH pensions). To reflect the increased cost of funding these pensions, the voluntary overseas contribution rate will increase to £50 a week and FIG will increase the subsidy it pays into the scheme on behalf of resident contributors to avoid the need to increase the resident contribution rate.

No inflation at present due primarily to lower fuel prices

Due primarily to lower fuel prices, there is no inflation at present. Therefore I do not have that many changes in fees or charges to announce today, with these being maintained at current rates. There are a couple of exceptions to this.

Fees that are driven by salary costs will be increased by 1% to account for the Civil Service pay award, specifically customs service fees and veterinary fees.

FIG has also reviewed those fees which are set at cost recovery to ensure the user is paying for services received. In this review there were a number that were identified as not contributing sufficiently towards the cost of service delivery and therefore the following increases were agreed, 10% increase in Stanley House fees, 1.5% increase in Stanley House staff rents, rents for settlement teachers to increase by 10%, various increases to FIG legal services fees, cost of a photocard driving licence increasing to £5, septic tank cleaning by approximately 10%. Alongside this the 7.5% increase in aggregate prices announced last year was reaffirmed, as was the £1,000 increase to the banking license.

However, this review also highlighted that some services were collecting sufficient revenue to cover costs and therefore the following rates will be maintained at the existing level; service charges, refuse collection charges, water rates, housing rents (other than those mentioned earlier). The Committee also discussed the recommendation contained in a recent ExCo paper to increase FIGAS fares and agreed to re-affirm the policy agreed last year of maintaining fares at the existing level for 2016/17 and also agreed to maintain them at the same level for the next season 2017/18.

In a similar vein, recognizing that there’s been no increase in the cost of living this year fostering, attendance, winter fuel, family and student allowances were agreed to be maintained at their current rates.

The Committee discussed the intention announced in previous years to create a commercial service charge. Whilst the Committee remained supportive in principle of collecting charges from the business community in this area, they recognized that designing a fair and equitable structure was not straight forward and therefore agreed not to progress this.

Minimum Wage increased to £5.81 an hour; Living Wage to £7.26 per hour

The Minimum Wage was reviewed and will be increased to £5.81 an hour from 1st January 2017. This is to recognize the principle announced last year to progressively close the gap between the statutory Minimum Wage and the Living Wage. The Living Wage was also reviewed and is now considered to be £7.26 per hour. The revised Minimum Wage has therefore been set at 80% of the Living Wage. FIG is pleased to announce that it continues to pay all employees (including apprentices) at least the Living Wage. The pension contribution threshold will be increased from the same date to £232 a week to reflect this change.

Conscious that expectations for government services continue to increase and that recurring revenues remain static, Budget Select Committee undertook their annual review of tax policies. Whilst the need to raise additional revenues to reduce reliance on reserves was in the Committee mind there was no appetite at this time for reducing the personal tax allowance to collect additional revenue as the Committee wished to continue to find a balance between raising revenue and improving the quality of life of individuals. As a result, no changes will be made at this time to the personal or MST tax bands, rates or structure.

However, Budget Select Committee approved the reduction in the 26% band for corporation tax, resulting in the 26% rate being payable from £1/2M of profit upwards from 1st January 2017. It is hoped that this will bring in additional revenue for FIG whilst also not impacting on small businesses in the Islands.

It only remains for me to thank all those who have been involved in preparing the Budget this year and to those who have kept the Treasury running whilst we’ve been in meetings.

Mr Speaker, Honorable Members, this concludes my presentation of the Appropriation Bill to this House and I beg to move that the Bill be read a second time