S T A N D I N G C O M M I T T E E O F T Y N W A L D C O U R T O F F I C I A L R E P O R T

R E C O R T Y S O I K O I L B I N G V E A Y N T I N V A A L

P R O C E E D I N G S D A A L T Y N

PUBLIC ACCOUNTS COMMITTEE

Budget

HANSARD

Douglas, Wednesday, 11th April 2018

PP2018/0075 PAC-B, No. 1/2017-18

All published Official Reports can be found on the Tynwald website:

www.tynwald.org.im/business/hansard

Published by the Office of the Clerk of Tynwald, Legislative Buildings, Finch Road, Douglas, Isle of Man, IM1 3PW. © High Court of Tynwald, 2018 STANDING COMMITTEE, WEDNESDAY, 11th APRIL 2018

Members Present:

Chairman: Hon. J P Watterson SHK Mr T M Crookall MLC Mr M R Coleman MLC Mr D C Cretney MLC Mr R E Callister MHK

Clerk: Mrs J Corkish

Assistant Clerk: Ms N Lowney

Contents Procedural ...... 3 EVIDENCE OF Hon. A L Cannan MHK, Minister and Mrs S Lowe, Chief Financial Officer, with: Caldric Randall, Financial Controller; Darrin Oldam, Deputy Director of Policy and Legislation; Ross Stephens, Director of Social Security; David Ireland, Director of National Insurance; and 5 Paul Martin, Deputy Assessor of Income Tax – the Treasury ...... 3 The Committee sat in private at 4.50 p.m...... 38

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Standing Committee of Tynwald on Public Accounts

Budget

The Committee sat in public at 2.30 p.m. in the Legislative Council Chamber, Legislative Buildings, Douglas

[MR SPEAKER in the Chair]

Procedural

The Chairman (Mr Speaker): Good afternoon and welcome to this public meeting of the Public Accounts Committee. I am Juan Watterson, Speaker of the House of Keys and Chairman of the Committee. With me are Mr Tim Crookall MLC, the Vice-Chair, Mr David Cretney MLC, Chair 10 of the Social Affairs Policy Review Committee, Mr Mike Coleman, who has now gone out of office as an MLC but under Tynwald Standing Order 5.5 remains as Chair of the Economic Policy Review Committee until replaced, and Mr Rob Callister MHK, Chair of the Environment and Infrastructure Policy Review Committee. Could I just ask you all to check that your mobile phones are on silent so they do not 15 interrupt proceedings. Also for the purposes of Hansard I will be ensuring that we do not have two people speaking at once. Today’s session is with the Treasury Minister, the Hon. Alf Cannan MHK, and Chief Financial Officer, Mrs Sheila Lowe, and the topic is the 2018-19 Budget. This session follows last year’s session about the Budget and the more recent session in January about the 2016-17 accounts. 20 Also in attendance we have: Darrin Oldam, Deputy Director of Policy and Legislation; Ross Stephens, Director of Social Security; Caldric Randall, Financial Controller; David Ireland, Director of National Insurance; and Paul Martin, Deputy Assessor of Income Tax. Fantastic – we can remember six names! Okay, we will get started.

EVIDENCE OF Hon. A L Cannan MHK, Minister and Mrs S Lowe, Chief Financial Officer, with: Caldric Randall, Financial Controller; Darrin Oldam, Deputy Director of Policy and Legislation; Ross Stephens, Director of Social Security; David Ireland, Director of National Insurance; and Paul Martin, Deputy Assessor of Income Tax – the Treasury 25 Q1. The Chairman: If I can ask you, Minister, last year we asked you how much of the Budget was inherited and you said, ‘I think in the next 12 months we will certainly be looking to delve deeper into those departmental spending plans so that we produce a much more cohesive Budget, I hope, the next time,’ so if I could ask you, for starters, what has changed? 30

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The Minister for the Treasury (Mr Cannan): I think what has changed is we have delivered, I think, a fairly impressive track record of delivery in terms of our progress and that instead of a deficit of £79 million, we estimated a structural deficit this year of £40 million. Therefore, the indications are that we have experienced significant economic growth – I think progressive 35 economic growth. Some of the Budget plans that we had last year, some of the reforms that we brought in, have proved to be successful and I think that we are demonstrating clear progress moving forward.

Q2. The Chairman: So in terms of the department spending plans which was an area that you 40 were hoping to delve deeper into, how has that manifested itself in this year’s Budget?

The Minister: I think you will see that, first and foremost, we have been able to deliver £13.8 million of targeted additional spending for departments in key areas that reflects the Programme for Government, the priorities set out by Tynwald. I can tell you that during the 45 process of determining budget and spending requirements we have spent significant time with the departments talking their plans, interpreting their plans and understanding where their pressures were and what their priorities are. You will see, of course, that we continue to control departmental spending and we continue to control that by limiting increases or giving very small inflationary increases and of course a 50 significant cost control on staff salaries which form a significant part of the overall Budget.

Q3. The Chairman: I am sure that we will be touching in a bit more detail on just about all of those points as we go through. We asked you about Budget reform last year and you mentioned you were looking at a more 55 consultative process in relation to apportioning the Budget. We see that you attended a Positive Action Group meeting and held a public meeting in Peel after the Budget; how did they go?

The Minister: In terms of delivery I was happy with the way that it went and for those that were there and turned up you would have to speak to them, but from my perspective I think we 60 gave a pretty good overview. But more importantly we were there to answer questions from those present about the Budget and about the future plans.

Q4. The Chairman: In terms of pre-Budget consultation, you said in December 2014 that the public need to be engaged in the process. I was just wondering how the public have been 65 involved in the process and what you have done to engage public engagement before the Budget?

The Minister: The public needed to be engaged?

70 The Chairman: Yes, in December 2014 in Tynwald – if I can find the reference – you said that the public needs to be involved in the Budget, in the planning process for Rebalancing the Budget – if I can just see if I can find the reference:

[They are]… absolutely clear in our communication, and I hope I am getting the message across that I think there has to be more engagement from outside the Council of Ministers because it is too sheltered at the moment.

And also later on:

I think it is possible to use the web to carry out consultation on budget plans and seek public views.

– was your quote from 2014. 75

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The Minister: Yes, and so I am delighted that we carried out the single biggest consultation with the public in terms of determining where we could find savings within Government. The SAVE initiative was designed in such a way so as to seek the broadest possible range of views on where Government could save money – 1,200 responses; I think the public did get engaged in 80 that in a number of ways and of course I will be reporting on that very soon to Tynwald in terms of what outcomes we can expect to see. So yes I think that we did carry out a very successful public consultation in that respect and obviously the next challenge is determining how successful that has been and where the key areas are that the public felt they could get reform from public services and how willing of 85 course Tynwald is to see those reforms through themselves.

Q5. The Chairman: So this is something that will be a continuing theme of engagement over the next few years in terms of that public engagement? Because of course a Budget is about more than just savings, isn’t it? So is this something that we can expect to see more of in the 90 coming years – pre-Budget public consultation?

The Minister: There is no pre-Budget consultation as such. We have gone out to the public in a very comprehensive way to determine where they think Government should be seeking its efficiencies and we will be delivering – I will be delivering that – in terms of a report to Tynwald 95 in the very near future. Tynwald has an opportunity to debate that report and then we will progress forward as a result of that debate.

Q6. The Chairman: You said last year that the Programme for Government has more clearly identified the priorities for Government, so between that public consultation … how have 100 budgeting and spending profiles changed as a result of that process or has it been the usual sort of incremental based approach that we have seen in the past?

The Minister: There has not been a fundamental, radical overhaul. At the moment, as we have discussed, departments will put their budget plans in, the service delivery that 105 departments are tasked to do is in line with Tynwald’s wishes and in line with the Programme for Government – those are the basis on which we have been working. As I have said, when I deliver the SAVE report there may well be an option in there to further change the way that Government works. Of course it is no secret that things like the single legal entity could fundamentally help change that and those are the types of measures that will be looked at 110 potentially as a result of the SAVE report when we come to Tynwald. But there are ways to change it, to seek better efficiencies. We do need to continue to work at this, but look, the bottom line is this: all these initiatives, all the reason for this is absolutely clear because we need to find and ensure that we have found £40 million-plus by 2022 when that money finishes from the public sector pensions reserve and 115 drops into the revenue. Let’s not get distracted about individual elements; we have to keep focus on what happened to public finances. I cannot stop reiterating to people how important it is that we pull together to work this out, because if we do not and if we cannot overcome the issues around SAVE, if we cannot overcome issues around departments’ protectionism or we cannot overcome political will, then there will have to be some form of consequence to that and 120 we will then have to decide what that is – either that Treasury adopts a more hard-line in terms of budgetary readjustment or we look at alternative measures. But the point of having SAVE, the point of trying to deliver this in a more holistic manner or a more whole manner, rather than what we term the drip, drip, drip effect of the last administration, was to try to get to a point where we put the whole reform options on the table, 125 or at least the current reform options on the table, with a view to achieving a clear direction of travel for departments, but more importantly along that, both delivering public services but also achieving the savings that we have set out as part of the overall plan – the five-year plan – and

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we have put together, and we continue to deliver a long-term budgetary forecast to ensure that public finances are in a good position, or in as good a position as we can make them, by the end 130 of the term of this administration. That is a clear focus of mine and of the Council of Ministers, and really should be the clear focus for Tynwald.

Q7. The Chairman: I think you will certainly find an ally for balanced public finances in the Public Accounts Committee. 135 You mentioned there about potential, if the £40 million cannot be found, for more hard-line budgetary readjustment being imposed by Treasury; is planning underway on that?

The Minister: I think that you talk about the easiest way for Treasury to achieve savings and that is to start top-slicing, and you simply then start prioritising that top-slicing across 140 departments. My view – and the view I think supported by the Council of Ministers – is that by working in the way that we are working, across departments, across Government, in trying to deliver these reforms through the SAVE programme is a much better way for Government to go about delivering its business rather than Treasury just simply turning around and saying there is no money, you get on with it because the results in the past in the last five years have not been 145 necessarily the ones that we would have wished. It is actually a fairly simple exercise for Treasury to start top-slicing. What is the hard work is actually delivering these kinds of projects, getting people on board, getting political buy-in, getting the officer buy-in and, I hope, coming out with some sensible solutions. We started off with a target in that respect of £25 million, if your remember, in the Budget. I have readjusted 150 that Budget and we are able to readjust that target to £12 million which I think was a more realistic objective to take, but we really do have to make that by the end of this administration. So there is time – there is still time on our side – but time is ticking away, given that we are fast approaching the end of the second year of this parliamentary five-year term. So this is not something that can afford to slip from our grasp, and I do worry that, given the 155 significantly improved performance, the receipts that we are getting in, which are going to probably now – I think I said in the Budget speech we are going to be about £13 million more in Income Tax. I expect that now to top £20 million. People may be lulled into a false sense of security. I would urge everybody not to take their eye off that target in 2022 and start thinking in the short term. We have to continue – and this is 160 what we are focussing on – ensuring that we are delivering not just a year-on-year strategy, but we are focussed on delivering an end outcome in what remains of the next three years of our terms in office.

Q8. The Chairman: You talked about working with departments. Last year you mentioned a 165 zero-based budgeting trial. This year you mentioned in the Budget Speech that the department of Education, Sport and Culture have offered to undertake trial priority-based budgeting. I presume the zero-based budgeting trial has been dropped and we are going to try this priority- based budgeting within the DESC. Can you just clarify that for us and perhaps explain a bit about how it is going to work? 170 The Minister: Could you just clarify my statement on zero-based budgeting?

The Chairman: Yes, in the oral evidence line 195 – last year’s – (The Minister: Yes, I said?) Sorry I thought you were looking it up yourself. My apologies. I saw you flicking through 175 paperwork.

Mr Coleman: I have it if you want it?

The Chairman: Thank you, Mr Coleman.

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180 Mr Coleman: If I may:

I think we have already discussed this issue of having a carte blanche zero Budget imposed across Government and I think there is an unrealistic expectation that we are looking to see whether there may be some areas of Government that we could perhaps take the first steps towards asking them to produce zero-based Budget on a trial period to see whether there is any resulting impact.

Then, I think it was in one of the other reports, it said that the Department of Education, Sport and Culture had volunteered to actually participate in the trial of that.

The Minister: Okay, as I said in my Budget speech, what we are doing is we are going to run a 185 trial with the Department of Education, Sport and Culture, which is an approach based on a priority-based budgeting system, that we are going to trial that system within the department and if we can run that successfully then I hope we will roll that out in a speedy and efficient manner across Government. Clearly, there is some risk with that, but it was great that the Department of Education 190 stepped up to the plate, has pretty much put themselves forward to do that, and rather than just implement it across Government I think it is probably sensible that we do this on a trial basis first. Let’s get the results out, let’s ensure that it has been effective and then we can push that out, if appropriate, more broadly across Government.

195 Q9. The Chairman: Can you explain a bit more about what that looks like in practice?

The Minister: Effectively, what it is is partly a departmental self-review. They have got to list their functions, services, identify those services, link them back to legislation or relevant policy, get confirmation from the department of the need to fund, justify the delivery and the priority 200 related to those services and get opinion on the value for money being delivered and the opportunities for a business process review taking place where there are clear question marks around the actual service delivery. Of course the challenge then for Treasury is to understand the cost structures, look at the service level options that are being delivered and of course from a political perspective if you get 205 that information clearly expressed then you have clear political service level policy decisions around whether or not to fund, or to adjust the funding for that particular area. I mean that is the provision or outline of how this will look, but now we need the chance to get the trial done, because I have not seen it in operation clearly. Until I have seen those results coming through and shared those results then we will not be in a position to give you a clear 210 profile of what, for example, it will actually have delivered. But we have spent time last year looking at the options, looking at how this has been rolled out in a couple of areas in the UK public service, and I have taken that across and will look to roll it out. But like everything else, you starting again is not often the cheap option per se, so we need to be careful: firstly, that we are getting results, secondly, we can do it successfully, thirdly, that the cost of doing so is also 215 appropriate.

Q10. The Chairman: So in terms of your expectations of what it will deliver in terms of improving value and focus, could you perhaps articulate that for us? What you hope we will get out of this? ‘We’ being Tynwald. 220 The Minister: It will be a chance again for departments to look at what they are doing, the services that they are providing to ensure that those services link properly back to policy and legislation, that they comply with those statutory requirements that they have, that they comply with the policy requirements that are being delivered both in the Programme for Government 225 and/or coming from political departmental decisions, and that we are getting, and the public is getting, that service delivered for the right financial spend. Those are the key points.

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So, yes, it is about drawing out everything that a department is doing, re-looking at those services and everything that is sitting alongside that and making sure that it ties in with their statutory requirements and their political requirements, policy requirements. 230 Q11. The Chairman: You said in your earlier answer that there is some risk to Treasury in doing this, but it seems like a pretty risk-free option for Treasury, doesn’t it – perhaps more risky for the department?

235 The Minister: There is risk in everything you do, in terms of are you going to get the right outcomes – that is the critical thing. I think when you are just running a trial like this it is just making sure that everybody is working and is buying into the trial. I am sure there will be some hiccups along the way. I do not envisage that when you bring in a process it is going to be a perfect process. So the point of running a trial with DESC is to make sure that we have properly 240 understood that the pilot is demonstrating that we are getting a proper outcome from it and it is delivering some proper results in terms of prioritisation of services. That will help departments and it will help Government and it will help Ministers and politicians, as we go forward, determine what they regard as priorities and what they do not – especially when you get departments, Ministers and departmental Members who are looking at this sort of information 245 that is coming out of departments.

Q12. The Chairman: So in terms of your statement last year, zero-based budgeting, that has been shelved for now? A trial on zero-based budgeting?

250 The Minister: I cannot remember exactly what I said, but –

The Chairman: As Mr Coleman read.

The Minister: – the point is we talked about reform. We are trying to move forward to deliver 255 reform and I think that it is right that we start to move forward in these ways. I think having looked at what has been going on in other areas, this seemed to carry the most appropriate benefits and zero-based, priority-based – it is getting reform into the budgeting process to get better outcomes for both the departments and for Treasury when looking at public expenditure.

260 The Chairman: The Chief Financial Officer is eager to provide some –

Mr Randall: Financial Controller.

The Chairman: Sorry, my apologies. (Laughter) 265 Mr Randall: You have promoted me! Just to back up what the Minister has said, obviously we were given the challenge by the Minister to go and look at the budgeting process. There are lots of different types of budgeting you can use that people were bandying around. Zero-based budgeting is one, you have got 270 activities-based budgeting, priority-based budgeting – all sorts of different things. So we actually had someone that came in, seconded from the Department, a finance director, who spent a couple of months doing a piece of research to produce a report and from that we came out with some options about what we thought the best way forward was to do it. What it was was the approach which has had a zero element in it because it goes in a form that 275 we challenge what the Departments are doing, but with the priority element in it as well. That was based on some of the work done by the police authorities in England. It was really an opportunity to say, combine that with looking at our service levels – because we suggest you go forward really now, to start to look at where savings would be made or looking at running

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yourself, it gets more and more difficult. You are going to have to look at service levels and it 280 was to try and get some information on what the impact of that was. Where some services have very high fixed costs, to change the service level would not make a lot of difference; in other areas it does. Somebody ran a survey there as well across Government, saying, ‘What do you think about the budgeting process?’ Part of the feedback was, ‘We don’t always understand why decisions 285 are made on priority.’ This will help us give some information to the Members to base that upon.

The Chairman: It sounds very familiar to the Department of Home Affairs five years ago, but I will pass you over to – 290 Q13. Mr Cretney: That was the point I was going to ask. Really departments should have been doing, if they have not been, priority-based budgeting in the past. Certainly departments I have had something to do with have done. It just seems to me the difference here – and correct me if I am wrong – is that there is going to be more intense close working between the Treasury 295 and the individual departments, rather than coming to have the meetings with you, that used to be the case.

The Minister: I think that is fair. I think we are expecting to get more information from this process, more clarity between what the department is telling Treasury and the justification for 300 what they are telling Treasury. In other words, that link to either the statutory requirement or the political requirement to be delivering that service. I agree over the last five, six, seven years departments have been effectively – or should have been – forced into looking at their priorities. But of course, as we all know and we will continue to hear from politicians, I know that is not always the case; they can clearly see there are other 305 ways that services can be delivered. I think this will be a step forward to help determine and justify and understand how those services are both being delivered and also funded, and the raison d’être behind that.

The Chairman: Mr Coleman. 310 Q14. Mr Coleman: Thank you, Mr Chairman. Just to put my mind at rest here, is the priority intra-department or can it be extra- department, such that should we be looking at the priorities across all departments rather than looking at how each department prioritises its own requirements? For instance, if we have a 315 chronic social need where the funding is not there, would that take priority over another mile of track for the electric tram? I want to know whether the priority is within departments or it is across Government spend?

The Minister: Clearly that is a political question really because it is up to the politicians to 320 determine where the money is being spent –

Mr Coleman: Minister, I simply felt that if you are looking at priority-based budgeting you need to know what the ground rules are.

325 The Minister: To be frank, Mr Coleman, I think part of this exercise will help politicians better determine where they feel the priorities exist. Let’s be frank, we are all looking for that nirvana within the Government system. I think anybody who has been in politics possibly for many years, but even for a short time, will recognise that there are huge pressures, huge demands on everything from railways to delivery of social care, to delivery of health care, to education. Yes, 330 fundamentally – I mean Tynwald has put together a huge Programme for Government; it has got

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a lot of cost attached to that Programme for Government and all departments are delivering across those areas. But somewhere along the line, and I go back to the original point, we have to find, just looking at it from purely a figures perspective, £12 million from within the current budgetary projections in order to satisfy the objectives that we have set out in the last two 335 Budgets; and part of that process is a process of prioritisation. I think SAVE will help in that process because that report will outline the key areas where we believe savings can be made and some of those are cross-departmental or certainly cross- service. Moving on from that, I can see a progression point moving forward where we need to determine how best or how better Government can deliver its priorities. 340 If you look at the Budgets at the moment they are stretched. Everybody has had a lot of cost control implemented on them. Some departments are finding that difficult to cope with. We have clearly got a health review going on because we need to get some clarity now about our health budget, because it is not going to help matters if we have to keep putting out another £10 million, £15 million, £20 million each year over and above our budgets in that area. You 345 have got the DHA, the Police Force in particular now at quite a pressurised situation. You have got pressure on pay, full stop, if you tie those back to the inflation figures that we are seeing coming through at the moment. So we have to keep working and keep moving towards a point where the decision-making process, or certainly the political decision-making process, about where money is being spent is 350 further refined. We are not at a perfect position at the moment and I think we have still got a long way to go. But by the same token, I think progress is being made in a number of areas and we need to keep on. That is why I keep saying and I am looking forward to the SAVE debate when it happens, because I think it will be a chance to hear from the politicians where else they see and 355 what else they would like to see in terms of the decision-making process in the Government expenditure process. But of course bear that in mind, when you talk about a mile of railway or 10 miles of railway track, take the way the millions of pounds or whatever figure that is attached to that and apply that somewhere else, there will be a lot of pressure from elements of society and different elements of society about that. 360 One of the difficulties we have to overcome politically – and that is why the SAVE debate will be interesting – is understanding how much political will there is to start making some tougher decisions; because let’s face it, in the past every time Tynwald has been faced with a tough-ish decision about public spending and where that public spending should be allocated and what will be the impact of removing public spending from one particular area, we have not always 365 been successful in addressing that and that is putting that fairly politely.

Q15. Mr Coleman: Can I just go back again? I am still not actually certain I got the answer to the question. That is: so the departmental budget is going to be allocated and the department is going to be able to prioritise within that figure and what I was asking was should the 370 prioritisation be done within silos or should the prioritisation by need, from a social need point of view, be done across the silos, or could it be?

The Minister: Well, I think it can be, it should be. Ultimately we should be starting to move to a position, I think, where those decisions are taken centrally rather than in Departments. But 375 that is a broader political objective than just in the Treasury. That requires significant change of emphasis in the way that decisions are made within the whole departmental structure, vis-à-vis the Council of Ministers and yes I think that there are improvements to be made. But what I am saying is there have been improvements made this year, because we have tried to allocate additional spending to those areas that we believe have carried the biggest 380 political emphasis, including additional budgets for Health and Social Care; including additional support for the people on Employed Person’s Allowance, i.e. the low paid; including the people in residential nursing care who are on the lowest of incomes. And a raft of other measures

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including, for example, benefit increases to Child Allowance including increasing the tax allowance rates, because we – I say ‘we’ – the Treasury, the Council of Ministers and ultimately 385 Tynwald have indicated their preference for monies to be addressed to start addressing some of the social imbalances and social inequalities that have arisen as a result of a decade-plus of inflation outstripping wage growth, and some of the other issues that come from what has effectively been a decade-long recession.

390 Q16. The Chairman: In terms of that opening up the Budget process a bit more, last year you wrote to Tynwald Members in July to invite contributions in respect to the Budget process. Was that a success? How do you feel that went?

The Minister: Was it …? 395 The Chairman: Was it a success? How did you feel it went?

The Minister: We had two responses and, yes, I mean in general terms it was a bit disappointing but perhaps when we do it this year we might get a few more responses. 400 Q17. The Chairman: So you intend to repeat the exercise?

The Minister: I will repeat that exercise, yes. And again, I offer that the door will be open to Members who wish to come and talk to me or 405 Treasury about political spending or spending issues. We have never shied away from talking to politicians. But yes certainly I will open the door, and for people to either write or just to come up and have a chat about where they see the priorities. We do so on a fairly open and transparent basis. We will never satisfy everybody’s demands, especially when you are effectively working on a consensus political basis with some 33 effectively independent, give or 410 take, Members. But I think it is important that we have tried to engage as widely as possible within the political boundaries; and so yes we will carry that exercise out again.

Q18. The Chairman: Okay, and can I possibly encourage you next year to provide the feedback from that exercise, because I think it is sad to say that last year you may have only got 415 two responses in but I do not think any response from Treasury came back out to either of those. Is that … ?

The Minister: Well, I did respond in the Budget to the … Anyway, but fine, yes.

420 Mr Randall: I have added it to the Budget timetable.

Q19. The Chairman: Thank you. Ministers and Members in Departments had the opportunity to discuss the Budget relating to their own Departments – and I appreciate we have talked a bit about the writing or visiting 425 process that is now being built into the timetable. Are there any plans to allow Tynwald Members a longer period to consider the whole Budget, and is there still time to make adjustments within that after representations from Members?

The Minister: There are no plans fundamentally to change the timing of the Budget process 430 at present.

Q20. The Chairman: Sorry, in terms of it was noticed that this year, for example, when the Budget was released to Members it said that this is not the final version, and there were a

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couple of changes between the version that Members were briefed on and the version that was 435 presented to Tynwald and the public on Budget Day. I think there were only a couple of amendments in that period, but is that an opportunity for Members to lobby and have the Budget changed, or what was the reason for that?

The Minister: I think there were some technical figures that for one reason or another either 440 had been stated incorrectly, I think that was one of the issues, or we were just waiting for some further statistics to come in. So there was no fundamental offer to change –

Q21. The Chairman: The Budget. So it was not a lobbying opportunity – ? 445 The Minister: – the Budget, or to lobby to fundamentally change. We present a whole Budget on the Island and clearly if you start changing one element of the Budget you have to change the whole Budget. (The Chairman: Yes.) If people want money spending on one part then we have to look at where that money is going to come from. 450 You and I have discussed this, but so far there is no evidence that I have presented to me that this would be beneficial for the Island. In fact my view is that this could just throw the budgeting process and the financing … and also create a business uncertainty that would be detrimental to the Island. So unless you get proper evidence that this is a successful operation … And also the other 455 thing is to bear in mind we do not have a party system here. You put out this issue of having a Budget out for consultation say for a month or two months before, and you find that one particular element of that Budget is … Well, first and foremost there is a strong risk that people will just simply vote against the parts they do not like and vote for the parts they like, and we would just end up in a mess 460 because the whole package would start to be stripped into silos, effectively; and/or secondly rebutting or developing an argument against charging, say, or perhaps other issues highlighted in the Budget, or some cuts highlighted in the Budget. If they garner significant public support on one issue, we do not have a major balanced press here so if the newspaper, for example, decides one element of the Budget is unacceptable and campaigns on that basis, has it 465 changed –? As I have said, one element, one change, will have the whole budgetary process back in Treasury and we will be working out where money is going to have to come from to make those adjustments or deal with any cost increases, etc. attached to the Budget. So I think whilst it could be argued that there are faults and the budgetary process needs to be improved, I think 470 we are taking steps to do that, I think we are trying to be more open, and we are trying to make sure the Budget is more easily understood, that we have the door-open policy to listen to people’s concerns. But one of the benefits of the Island – and it has been for a long time – is that whilst there is plenty of room for improvement there is also a lot to be said for stability, and whilst it is not always a perfect system it is a stable system and it does give confidence. At the 475 moment I think stripping that away is not, and should not really be, on the agenda without a significant amount of very careful thought as to how that would actually work.

Q22. The Chairman: Well, given this is a question time, I will resist the temptation to come back with my views on that, but I note your comments and we will just possibly agree to 480 disagree. Moving on to fees and duties changes, are there any plans to include all fees and duties changes as part of the Budget so they can be considered as a whole, rather than the drip, drip effect of fees and duties and charges coming through throughout the year? For example, this year the Vehicle Duty Order came in March?

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485 Given that Departments will have their revenue targets and will have known about them for two months, is it reasonable that the fees and duties could be rolled into the Budget?

The Minister: I think this continues to be an issue that I am very open to considering. I think that on the whole it will be more beneficial to try and determine those and have those put out in 490 a more transparent manner in the Budget. So all I would say at this stage is that I continue to discuss with Ministers and with senior officers the ability and potential and the workings of doing so. Again, I think it is important to say of course that nobody likes cost increases and obviously clearly the way it has been delivered in the past does mean that those charges come through at 495 certain points in the year. I think, however, having said that, it is important that people get an oversight as to the Budget in its entirety so they can make a reasoned choice. So whilst I cannot commit at this stage to you that this will happen, I think that it remains a matter that should remain open for proper consideration. And how that would then obviously work in terms of orders and fit into the statutory delivery on the day would need to be discussed. 500 The Chairman: Mr Callister.

Q23. Mr Callister: Yes, thank you, Mr Chairman. Minister, I am quite passionate about this because realistically if you look at this year’s 505 Budget it clearly says that you asked for a 2% increase in the Department income targets, so realistically other Departments knew potentially the element of charges they could implement throughout the year. So going by what you have said and what the Chairman says, surely if we could give some projection or forecast of what charges could be coming down for the year would that not show us more in an open and transparent way, but also give the general public 510 some idea of what costs are coming down the line during the next financial year? At the same time it will avoid this drip, drip effect which is something I think we are all against and is something we would like to get rid of at some point in the future?

The Minister: Sure, I have just covered that and I think there is merit to the argument. I need 515 to work on this with the Chief Financial Officer and with the senior officers.

Q24. The Chairman: Would you describe the mood in Council of Ministers as positive when you have debated this? Is this something that is likely to be coming?

520 The Minister: I think so. We have had a brief discussion on this and I think that it is something that all parties see some merit in, and we will just work out how best that potentially could be delivered, and obviously ensure that we are not missing anything in terms of the way that is being –

525 Q25. The Chairman: It is important. I think there has been a fair accusation levelled at Departments in the past (Mrs Lowe: New legislation.) that revenue has been raised through fees and charges to cover an increasing cost that was perhaps extra-budgetary. I think it is positive to hear that, so that is great. The use of reserves is predicted to be higher over the next five years than in the last 530 administration – £283 million against £220 million. What are the imaginative solutions for reducing reliance on reserves?

The Minister: I think that primarily you will find the reason that reserves have been used in that way – and I hope I am right in saying that – is because we have chosen to not increase the 535 public sector pension contributions. They were increasing up to 20%, and we have kept them at 15% –

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Q26. The Chairman: The employer’s contribution?

The Minister: The employer’s contribution. And the fund will run out much earlier than was 540 ever envisaged. But I have already explained the reasons why we have maintained the employer’s contribution – well, the public’s contribution – at 15% because we think that is absolutely reasonable and that Government needs to find the solutions to deal with the – (The Chairman: Legacy.) problem on a much more coherent and longer-term basis, so that we are absolutely clear, rather than just raising up the contribution year-on-year which is clearly also 545 having a very, perhaps hidden, and negative effect on departmental budgets. So I think there have been a lot of positives around that move, and clearly in terms of the other support that has been required from reserves, we have set out clearly our economic growth plans and we have also maintained the cost controls which we have already discussed within the budgetary process. So that is fundamentally the key area obviously of concern, 550 ensuring that we have got that £50 million or so covered when it drops into the –

Q27. The Chairman: Yes, you mentioned there about the legacy issues: can you just remind the Committee what the timetable is for coming forward with the proposals for the legacy issue? 555 The Minister: I think it is safe to say by July we will have debate. I am hoping that we will have a debate in June, but July at the absolute latest, Mr Chairman.

Q28. The Chairman: Thank you. 560 Income is forecast to rise in the current year from £987 million to £1,002 million, an increase of £15 million, but spending is looking to increase by £32 million. So with spending rising faster than income, are we really on course to balance the books?

The Minister: Yes, we are on course to balance the books. I think those figures probably need 565 readjustment now given the additional figures that have been brought forward from Income Tax receipts.

Q29. The Chairman: You said there is another £20 million.

570 The Minister: No, not another … probably another £9 million or so.

Q30. The Chairman: Oh, okay, well that is still £24 million increase in income and £32 million increase in expenditure. I am going off, I think, it is table 3 in the Pink Book – the Gross Income and Expenditure numbers? 575 The Minister: Just bear with me a minute and I will find that.

The Chairman: Page 9 of the Pink Book. So, Total Income goes up from £986 million to £1,001 million and Gross Expenditure goes up 580 from £1,029 million to £1,061 million. That is 2017-18 to 2018-19.

The Minister: Well, it would be helpful if these kind of technical questions were given to us before so we can actually study the figures. But look, basically we have set out a clear Five Year Financial Plan. The expenditure costs and 585 the reasons for that are clearly outlined in 2018-2019 and include obviously additional costs around pension contributions. Obviously, we have built-in the additional cost increases for salaries and we will have other areas – loan charges, for example, are scheduled to rise by £6 million. Overall of course you will see we are projecting a surplus of £10 million for next year.

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Q31. The Chairman: Down from £18 million, yes. 590 The Minister: Yes, down from £18 million – (Interjection by Mrs Lowe)

Q32. The Chairman: And even that £10 million surplus is after transfers from internal reserves, of £70 million. So that is not really a surplus, is it? 595 Mrs Lowe: I think the original Budget for 2017-18, was a £3 million surplus.

Q33. The Chairman: Yes, the £2,864, yes.

600 Mrs Lowe: Yes, which was the original Budget – the 2017-18 surplus is obviously higher because receipts have exceeded what we have budgeted for.

Q34. The Chairman: Yes, however the expectation for this year is that in terms of total income less total expenditure there is a deficit. 605 The Minister: Yes, because we accept we are still using reserves. (The Chairman: Yes.) We have been absolutely clear about the forecasted need and I made that absolutely clear in the Budget that we were expecting £69 million or £70 million worth of reserves expenditure. But of course bear in mind that £40 million or so of that is scheduled to come from the Public Sector 610 Pensions Reserve. So I think you need to be ensuring that we are looking at … You have almost got to look at this with the Public Sector Reserve and without the Public Sector Pensions Reserve figure because if you are going to see whether we are making any progress, then we need to be taking away also how much progress we are making without that Public Sector Pensions Reserve figure 615 being included in the overall projections. I think you will find that in fact Departments have delivered better value for money and that we are keeping costs as low as possible with the measures that we have brought in. And of course you will see that we have got the unallocated savings which is the SAVE programme – they are not actually scheduled to start taking effect until 2019-20. 620 So yes, in 2018-19 there is not actually a huge amount of variance, but you will see from 2019, £3 million of savings; 2020-21, £8 million, £12 million, recurring from 2021-22; and then we have put that up to £15 million. So it will take another year before we really start to see some significant improvements from what we are delivering in the SAVE programme.

625 The Chairman: Mr Coleman.

Q35. Mr Coleman: Thank you, Mr Chairman. Minister, the structural deficit for 2017-18 is £40 million less than forecast. How has this been achieved and how is it connected to a strong economy? 630 The Minister: I think first of all, let’s look at what we expect to be the £20 million now from … Well, at the time I think it was £13 million, but expected £20 million plus of additional receipts; I think 600 more people in work, a lot more evidence of higher wages increasing or a higher wage being delivered in 2017-18, and the unemployment figures, as you know, are incredibly low. 635 Those sorts of increases are relatively reflected also in the National Insurance which will deliver around about £2 million more than budget. I think there is absolute clear evidence that jobs and employment opportunities are there at the moment in the marketplace; and really pleased to see of course as an aside to that, further evidence backing that up with the performance within the life insurance industry which now tops e-gaming in terms of GDP. So I think there is plenty of 640 evidence of a strong economy and strong performance coming out from these figures.

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The other area of course, the underperformance if you like, was in our capital expenditure where we were £20 million or so less than where we expected to be; and of course the key project within that I would point to the slowness of getting the Promenade scheme underway and the delays attached to that. 645 Q36. Mr Coleman: Fine. Given that we have had this better-than-expected position this year, why are the structural deficits for the next four years now projected to be greater than they were in last year’s Budget? Table 4. 650 The Minister: Well, are you looking at the net deficit surplus? Yes? Well, the structural deficit … Yes, because we have not readjusted … I mean, we have to accept there are a number of broader international risks that may impact on the Isle of Man’s economic performance in the next 12 to 24 months, particularly clearly we are coming into an unknown situation with Brexit, 655 and there is enough political instability around both associated with that and more broadly for me not to want to adjust our projections. It has been a hugely successful year, far better than we expected, but I think I would need to see that carrying on well into this year and up to next year’s Budget before we started to fundamentally change our projections. It goes back to my earlier point that I think to do so would encourage also complacency to set 660 in, and that would be hugely dangerous for the Manx Government and for the public at this particular point. We need to keep working hard to underpin and deliver on our economic growth, particularly given all the issues around demographics, and accept the cost pressures that are coming in. If we start readjusting those figures just based on … Well, potentially I hope long-term far better than expected growth, but based on 12 months’ exceptional performance 665 and I think it is fair to say – well, ‘exceptional’ is probably the wrong word, but a 12-month performance that has been far better than we had expected, it would be wrong. And those figures merely reflect the original projections. But they are, of course, you will remember in terms of returning us into a better financial position, I have stated we would still be effectively running a deficit, it is just the scale of our 670 interest returns would mean that effectively we have got a surplus. You can see that reflected on the bottom line of that chart, where by 2022 we are expecting and aiming to have a £28 million surplus, that clearly to some extent we are heading towards achieving that potentially this year but we have to think that we should not determine that one good year should signal that we are in the clear. As I have said, there is still a lot both particularly 675 externally, but also potentially internally, to deal with. We do need to get through this next stage and have particularly this debate about the legacy issue and to get clarity on that before any readjustment of these figures.

Q37. Mr Coleman: From what you have said, does that mean that somewhere within 680 Treasury there is a Budget line for Brexit costs?

The Minister: There is a what?

Mr Coleman: A Budget line for Brexit costs. 685 The Minister: Well, we have got the Brexit fund. I think we have got £1 million set aside within Brexit. I said we would cover the cost for that. It remains to be seen whether £1 million is going to be enough, and again I think I did highlight in my Budget Speech that if those international commitments were to grow in terms of weight and scale that we would look to 690 fund that. Yes, and there is some evidence that fund is now starting to be used and that one or two Departments – the Cabinet Office and DEFA, for example – will need to start using that fund to

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hire in additional resource to deal potentially with the weight of legislation and the implications resulting from the transitional agreements that are currently being worked up and will come 695 into play.

Q38. Mr Coleman: It is just that when I asked the first question about the increases in the structural deficit for every year from 2018 onwards, you were looking at £14 million in 2018-19, you were looking at £15 million in 2019-20, increasing structural deficit. And, if most of that is 700 Brexit, £1 million is not going to go very far.

The Minister: Well, the structural deficit is not Brexit-related –

Q39. Mr Coleman: Oh sorry, I thought that was what you said to me earlier? 705 The Minister: The structural deficit is what we determine and I think as part of our … Sorry I do not know where you got structural deficit linked up with Brexit –

Q40. Mr Coleman: But you did, you linked it. I asked you why the structural deficit between 710 2018-19, let’s say, in 2017-18 was going to be £53 million, and in 2018-19 in the new Budget you have upgraded that structural deficit to £67 million; and you came back and said well of course Brexit is going to be a part of that and we have got a £1 million fund for dealing with it.

Mr Randall: Can I, just referring to the original Budget for 2017-18 which was projecting a 715 structural deficit of £79,400 million in last year’s Pink Book? So obviously the change is the additional income that we have had in the current year and the reduction in capital expenditure have given a one-off change to that spending. Then afterwards when you see that we compare what the structural deficit is projected on page 11 of this year’s pink book, compared to what it was on page 9 of last year’s pink book, you will see that the structural deficit is actually lower 720 than we projected and that is to do with re-profiling income and expenditure with capital expenditure spend. (Mr Coleman: Okay.) So it is roughly along the profile that we expected before – what has happened is we have had a one-off change and we have not taken those one-off changes and reflected them into the future projections of the structural deficit, because we do not know that they are going to recur. 725 In fact the capital one, we really hope it would not because we want to spend … that is why they have remained as they are.

Q41. The Minister: Okay. In your Budget Speech you said: ‘The Island’s economy is stronger than it was a year ago. There are more people in work, less people unemployed, and a diversity 730 of opportunities.’ Can this be linked to Government’s support for economic activity? Have you been able to calculate a return on your investment, or is the connection coincidental?

Q42. Mr Coleman: Do you ever work it out, what the return on the investment is?

735 Mrs Lowe: We see the larger applications and when they come in they will have a payback period, so it might be if they are getting something and we will look at a payback period from receipts, and I am sure Mr Callister knows from being in the Department that the reports say that. Often the support is not linked to the creation of jobs, so it is often not all paid at once. It 740 might be so much is paid after they have got … I am going to say 25% of the report. Support may be paid after they have created five jobs, and that is checked with the Assessor just through taxpayer … There is a gateway they are allowed to check. The employer has to give permission and they can check that that number of jobs has been created.

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745 Q43. Mr Coleman: In fact, the Economic Policy Review Committee is in the process of looking into the grants system – I will not be around for that. But anyway, moving on, unemployment is probably almost as low as it can get, so how much of this year’s economic development is repeatable? What are we going to get coming on in the future? We have just had the people coming to the Island figure – I think it was 600, but the 750 majority of those were of an age where they would not be economically active. Does that cause you any concern?

The Minister: I think the clear target for this Government is to grow the working population and I guess we are supporting the Department for Enterprise, who are the fundamental drivers 755 of achieving that, in terms of ensuring that they have the funding available to support those businesses seeking the growth. I think we have recently seen those figures. I have not really had a chance, if I am brutally honest, to reflect on how healthy they are. I appreciate there has been a difference in I think it was over-65s and under-65s. As an Island we ideally want to be supporting growth, if you look at our demographics, in 760 terms of working people. I do not want to get too much into the age profiles of that, but it is important that people are generally coming to make a contribution to our society and also to, I hope, start to address some of that imbalance we potentially see in the future with the demographics. I know the Minister for the Department for Enterprise will be talking about, in the very near 765 future, how their Department intends to more proactively attract people to the Island but …

Q44. The Chairman: Yes, I think the figure was 120 of those were economically active out of a figure of –

770 Mrs Lowe: We can see that I think we had 127 more people in employment over the last 12 months.

Q45. The Chairman: Which does not seem to quite gel together –

775 Mr Coleman: Well, one is a monthly figure and one is a quarterly figure.

The Chairman: Yes.

Mrs Lowe: But the tax stats show we have got 127 more people in employment – and that 780 could be people who were not working for all sorts of reason.

Q46. Mr Coleman: Having said that, if the ratio applying to the recent arrivals was applied to the 700, it could mean that you could possibly have 1,500 or 2,000 who have come over here, of whom 700 are working. If you extrapolate, that could be the possibility. The benefit might 785 possibly be the need for more care workers.

Mrs Lowe: We have seen an increase in 515 taxpayers in the same period.

Q47. Mr Coleman: Okay. Tax and NI receipts have been higher than expected this year due to 790 an increase in employed persons. What is the budgeted-for assumption for unemployment?

The Minister: I think it is fair to say that we are working off the current figures in terms of our unemployment budget, so we have no reason at the moment to adjust that figure. It is very difficult to foresee into the future how that may develop, so we are very much basing it on last 795 year’s expenditure and the current figures that we have.

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Q48. Mr Coleman: How does the Budget support DfE’s focus on locate and relocate this year?

800 The Minister: There are two areas of funding that are currently supporting … potentially three areas of funding supporting locate and relocate. Within the Department for Enterprise’s budget they have included money, and I am not sure of the exact amount that has been budgeted for but they have a relocation scheme available for companies bringing staff across to the Island. They can claim money back after they have been in employment for 12 months. They 805 can come and get a contribution towards relocation fees of £10,000 per employee. We have almost £5 million worth of Enterprise funding available to be allocated out to businesses throughout the year and of course we have the Economic Development Scheme (EDS) currently up and running as well. So the Department does have access to key areas of funding to enable them to help support 810 the jobs growth and to help support employers who are looking to potentially relocate to the Island.

Q49. Mr Coleman: In your Budget Speech it will use ISLEXPO as a platform to launch a campaign to get people over here, outreaching to the Manx diaspora, outreaching to TT fans. 815 Are you content that that is going to be enough?

The Minister: You are asking me a question really for the Department for Enterprise because clearly they are going to have the key responsibility of delivering that. I do not know a lot about that. We have not had the actual measures presented to anybody, really. They are presumably 820 under a lot of discussion within the Department, but the Department of Enterprise have been tasked. That is their task, to help get people to the Island, help businesses establish themselves, help businesses grow, and I cannot … All I can tell you is that the Minister has informed me that he will be giving the details of that at ISLEXPO in terms of how that is actually going to work.

825 Q50. Mr Coleman: I thought there might be some estimates which might provide input to your Budget, that was all. If you are getting more people, you expect to get x number of people over here, then you might expect to have x number of additional pounds of income. But we can move on. How about attracting recruits to the public sector, particularly in relation to hard-to-fill 830 vacancies and being able to provide a great public service which will in turn attract people here? How is this, your recent Budget, supporting those initiatives?

Mrs Lowe: I think there are a lot of initiatives going on. We are working with OHR. If I had known this was going to come up I could have brought some of the information with me. 835 Q51. Mr Coleman: Sorry, I thought this was one of the questions that you had received.

Mrs Lowe: We only received bullet points, sorry. I would have brought some more information. We only received the headings. 840 There is a lot of work going on with this and we are continuing to do it. We need to work with OHR because there are areas that are difficult to recruit. That is looking at our competitors but it is often more than that. It is often how we are viewed as an employer. I am sure the Cabinet Office can give you a lot more. There is a lot of work going on with different workstreams. 845 Q52. Mr Coleman: Okay, fine. You will be pleased to hear this is the last one from me. You said in the Budget:

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I am introducing new legislation to stop certain practices which have enabled some individuals to receive tax free payments via the sale of goodwill or unquoted shares to their own companies, in preference to taxable ones such as dividends.

How much is this likely to raise?

850 The Minister: That is a very good question. May I just ask the Deputy Assessor whether he is …?

Mr Martin: I think it is quite difficult to say what it is going to raise. We are aware of certain cases that were going on but I think when it went to Treasury we said £1 million to £2 million, so 855 it is certainly millions of pounds we are talking about.

Q53. The Chairman: And will you be monitoring whether the businesses that you suspect might be doing this sort of work just move elsewhere to continue that or remain on the Isle of Man? 860 Mr Martin: We are closely monitoring all the time.

Q54. Mr Coleman: The question I have is maybe slightly different to that – it is where people in certain types of organisation take loans rather than taking pay, and you are allowed to do it 865 for three years, I believe.

Mr Martin: No, not as far as we are aware.

Mr Coleman: Well, we will talk afterwards then! (Laughter) 870 Q55. The Chairman: I think there was an example put recently about if an individual has a couple of million of investment bonds and then they produce an income you would get taxed on that. However, if you set up a company and you put the £2 million into the company and then you repay that loan by virtue of loan repayment rather than dividend, that is capital and 875 therefore that escapes Income Tax.

Mr Martin: When you eventually pay the income out, that is taxable, so eventually the tax would come out of the income loan and it is at that point … So it is a timing difference.

880 Q56. The Chairman: Clearly, though, you are turning income into capital in that respect in order to allow those at the higher end to not pay tax.

Mr Martin: I think the difficulty is that with the zero-rate received from companies, we have to accept that any income in a company is going to be taxed at the zero rate. It is only when that 885 income itself is repaid that it is taxed. What we have seen for the two areas where we introduced the avoidance legislation was something that is being created and that that income then would never be repaid. So the goodwill going into a company is sold into the company but that goodwill of course then is sold on or whatever and that is a capital receipt, so the income within the company never actually 890 comes out to the taxpayer. What we are talking about here is somebody putting investments into a company. Yes, they get the return of their loan, but there will still be income in the company and at some stage that income comes out of the company and will be taxed.

895 Q57. The Chairman: But it is committing income to loan repayment, isn’t it?

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Mr Martin: No, they are getting repayment of their loan but the income is still in the company.

Q58. The Chairman: So it is the difference between the capital repayment and the interest 900 repayment.

Mr Martin: Yes, I agree. I understand what you are saying.

Q59. The Chairman: And how is that monitored? How do you actually monitor that in terms 905 of being able to ascertain when money is paid out of a company, whether it is capital or interest?

Mr Martin: We are looking at all the company accounts for anybody on the Island who owns a company. We get the company accounts, we know what is coming out, we get the loan 910 accounts, we know what is coming through the loans, so all of that is …

The Chairman: Thank you.

Mr Coleman: Thank you, I have finished. 915 The Chairman: Mr Crookall.

Q60. Mr Crookall: Okay, thank you very much indeed. Good afternoon, Minister. The SAVE scheme has been mentioned several times this 920 afternoon already and I take it you were very happy with the consultation and with the 1,200 responses to that, and happy with the team’s performance on that in working towards a figure of £25 million. Is that still the target?

The Minister: No, we have readjusted it in this Budget to £12 million. 925 Q61. Mr Crookall: To £12 million, but you are happy with that and you are happy with the outcome of the consultation and the team’s work on that?

The Minister: People have worked hard to get everything together. The proof of the pudding 930 ultimately … It is one thing getting everything in, and the team that have been behind it have done a great job in terms of both administratively dealing with it going out to the public and getting the ideas together. The critical measure will be in how effective that has been. We have still got some way to go both to deliver the outcomes, or a report on what the potential outcomes are, to Tynwald and to get those into force and achieve our target. I have 935 already spoken about this in quite lengthy detail, but that is the overall position.

Q62. Mr Crookall: You said the figure has been readjusted to £12 million – how much of that has been identified? Is that the figure that has been identified or is that now the figure that you are working towards? 940 The Minister: I think it is fair to say we have potentially got £12 million there, or thereabouts, but I will make that clear in the report, against each potential project that we are able to bring forward for political approval, the savings that will result in.

945 Q63. The Chairman: The reason that the £25 million was picked was not just plucked from thin air, was it? The target to the SAVE team was £25 million because that was effectively the

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last bridge of the structural deficit. If that is now only £12 million, what plan have you got to bridge that other £13 million that still needs to be found from somewhere?

950 The Minister: I think we have readjusted our figures … Primarily we have looked at spending, as you know, and put a more realistic target around capital spending, and of course we have built in also our performance figures relating to economic growth. The Budget is there in front of you. We are going to make some readjustments particularly around capital and I think that we have got enough within that to credibly go ahead. 955 We took £25 million. To a degree that is the … As I said, going right back to the beginning, that was the way we chose to do it because we felt that that was a more cohesive way of delivering savings. The other option, of course, was for us not to do this project whatsoever and just to top slice across Departments and deal with the issues that come out from that kind of approach. 960 That is the measure and we have readjusted it – £25 million was a huge amount of money. We know how difficult it is to even find £250,000, never mind £25 million, in the Manx Government. So we have looked at that, we have looked at the response and I think we have now settled on a much more realistic, but more importantly achievable, figure. But I go back to my earlier comments, Chairman, that we do not have any legroom to mess 965 around with this. If we cannot achieve this, if we cannot get these potential reforms through, if we cannot get SAVE accepted and we do not get political support, then clearly we will, to a certain degree, be back to the drawing board in October/November when we come to be planning the budgets again. So, as I said, we look forward to the debate and we will see where we go from there. I think 970 driving efficiencies, finding new ways to do things, changing the way we do things in the Island is a very difficult task. Let’s not be under any illusions that this is somehow some sort of easy process. I think, if I go back to the original question, the question was how do I think the team has performed behind SAVE, but actually the delivery in terms of the objectives of getting things 975 together, compiling the information, pushing forward to try and get some justification – because we have come up with the ideas but we have obviously got to get justification behind those ideas of actually will they work; it is all right writing an idea down on a piece of paper, but there has got to be work behind that to make sure there is some evidence of the attached savings being achieved and achievable and the impacts of doing so. So – 980 Q64. The Chairman: But what we said is that the £25 million savings target is now a £12 million saving target. There is a little bit of money to be saved because of the tweaking in the capital, but the rest of it is basically down to we are going to rely on increases in income.

985 The Minister: Yes.

Mr Randall: One of the other major factors in all of that was the re-profiling of our pensions expenditure which was done after an actuarial review this year as well, and that is actually lower than we anticipated. That means that the pensions reserve looks like it will last a year longer 990 than we projected the year before, so it gives us a little bit longer to re-profile so we do not need such a … Certainly in the 2017-18 Budget we have about £56 million dropping into the revenue account with the reserve right now. That is now £44 million, so the gap between it to make sure that we can have a balanced Budget when that happens – and it is a long-term trend projection – is around £15 million the year after the end of this administration. This 995 administration is looking at trying to achieve £12 million.

Q65. The Chairman: It is another way of saying they are just kicking the can a year further down the road, potentially. If that is just a profiling issue, the money still needs to be saved.

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The Minister: Yes, correct. We have still got to find it. 1000 Q66. Mr Cretney: Would you say that this SAVE scheme has been a more focused approach than simply top slicing? I have not heard recently the Minister for Infrastructure saying there had been very little spend in Infrastructure latterly. He obviously was not aware your predecessor had top sliced the Infrastructure when this Member was the Minister. So this is a 1005 more focused approach – is that what you are trying to say?

The Minister: I think that is what we are trying to do. I think from a political perspective, having witnessed the last five years, I guess I and others felt that trying to get to a position where we have clear sight of what the figure we were trying to achieve was and a clear vision of 1010 what projects needed to happen across Government to help contribute towards delivering that was a better way forward than the approach that you and others had been going through previously. This is one of the reasons why I was actually quite pleased to give evidence today, because I think that we are in danger of running into complacency, and I sense this complacency around 1015 the income figures being so … When you are delivering … If you are going to say to people, ‘Actually we have had £20 million-plus more than what we were expecting,’ you are going to feel that we are going to be lulled into a false sense of security, and we just cannot. Better that we overachieve at the end of this parliament than underachieve, because, as I have said, there are a number of threats – and of course I did make the other threat that we are going through the 1020 VAT, the first re-evaluation. We are going through that project this year. We believe that we will come out with a stable outcome, but that remains a potential risk as well. So I think there are a lot of positive performance indicators but we have to keep focused in terms of getting some reform, I believe, to public services; both better in terms of, hopefully, transparency, accountability and delivery, and also just to ensure that we have and do get the 1025 financial benefits that we are seeking.

Q67. Mr Cretney: But would you agree with me that the focus – which I certainly agree is something you should keep your eye on – should be balanced with the potential detrimental effect on vulnerable people, so there is a balancing act for you to do and find there? 1030 The Minister: And I think that we have been conscious of the need to do that. When you look at what we have done in the last 12 months and over two Budgets, if you take them together, we have. If I go back to priorities, certainly my view is that we were too top-down focused. We perhaps 1035 felt that the tax cap alone would just bring benefits to this Island. Actually, what we needed to do was to take steps to start making adjustments to lift living standards, to lift salaries, and we have done that through related issues to Treasury – the minimum wage, support for the living wage. But more importantly, in terms of the actual measures that we have been delivering, as I have said, we have done that by increasing the tax allowances, by providing those additional 1040 support platforms around Employed Person’s Allowance, by providing those additional platforms in Child Benefit increases and a number of other areas within that benefits system to do so. I think that the unemployment figures bear testament to some degree. I think the other thing is we have done that having … and we did raise, for example, the tax thresholds expecting to 1045 decrease tax. Actually, we have seen the opposite effect happening and we have actually increased our revenues this year. So it remains to be seen how that performance is continued.

Q68. Mr Crookall: I think everybody would agree £12 million is a hugely significant figure and if we can manage that it is to be commended. So is it your plan in May, when you bring your 1050 paper forward to Tynwald, to bring one definable plan to work on that to save that £12 million?

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The Minister: Our plan is that when I bring that paper forward I will be delivering, obviously, a summary of where we are at, I will be delivering a summary of the key projects that can be adopted and should be adopted and I will also deliver, I presume, with that some indication of what further steps may be required to both support delivery and maybe go on to achieve more 1055 if once we have compiled that report we feel that it is not going to be enough or it is just too tight for us not to carry on looking at other areas. I think some of the areas potentially we are talking about may be some of the stuff that we have discussed earlier around how Government is prioritising its spending.

1060 Q69. Mr Crookall: Minister, have you got any idea how much it is taking to administer this at all?

The Minister: The SAVE?

1065 Mr Crookall: The SAVE scheme, yes, in officer time.

The Minister: We have had a dedicated administrator put on the job.

Q70. Mr Crookall: If you have not got that – 1070 The Minister: I think we have coped with it without huge additional resources. I think one or two of the Departments, in looking at some of the areas, have had to bring in a bit of resource. I can try and look at whether I think … but it has been thousands of pounds as opposed to … a few tens of thousands, generally, as opposed to any significant expenditure.* I think pretty much we 1075 have kept the cost of doing this either within departmental budgets or by bringing in resource within those budgets. [* See Hansard Appendix: http://www.tynwald.org.im/business/hansard/20002020/pacb180411A.pdf ]

Q71. Mr Crookall: Okay, thank you. In view of all the good work that has been done by the team on this, can I ask why was 1080 Mr Hooper sacked?

The Minister: That was a political decision. I think I explained myself at the time. Mr Hooper delivered a rebut against the Government’s spending plans and I did not think that was appropriate to what we were seeking to achieve with the SAVE campaign. 1085 Mr Crookall: Thank you.

Q72. The Chairman: So he was sacked for disagreeing with the Budget?

1090 The Minister: He is on a Treasury committee. If he cannot agree with the way the Treasury are trying to do things, then …

Q73. The Chairman: So it is an all-or-nothing deal, is it?

1095 The Minister: I think it is normal. If you cannot support the Council of Ministers, you normally resign, don’t you? Is that not the deal? I think that is the way the process normally works, and –

Q74. The Chairman: But for Members of Departments?

1100 The Minister: And for Members of Departments, absolutely. I think you have to have confidence that people are supporting the endeavours, the objectives that you are setting out.

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And that is fine, I have got no problems, but you cannot have it both ways. I am quite happy for people to have a different opinion, but …

1105 The Chairman: Mr Cretney.

Q75. Mr Cretney: Talking of different opinions, (Laughter) just back to my bit about the vulnerable again: looking at the National Insurance contributions and income tax, a single person employed, earning between £6,500 and £12,500 per year, would be better off in terms 1110 of take-home pay if they lived in the UK. Is that something you are comfortable with?

The Minister: Is that on the …?

Q76. The Chairman: This develops on the point that Mr Robertshaw made during the Budget 1115 debate about the National Insurance threshold capturing more people at the low end in the Isle of Man than it would in the UK.

Mr Ireland: Yes, that is correct, Mr Chairman. The lower earnings threshold is the equivalent of the personal allowance for National Insurance purposes. The Isle of Man’s starts at £118; the 1120 UK have just risen to about £160 (The Chairman: £157, yes.) a week. The view on that has been that the level of contributory benefits, predominantly the retirement pension, and individuals contributing to it by paying National Insurance is considerably higher in the Isle of Man than the Manx Pension Supplement, and the Single Tier Pension that the Minister brought through Tynwald last month, the starting amount for that is 1125 forecast to be again higher than the single tier pension in the UK, and around the lower earnings they are the individuals who benefit most from the state pension as a replacement income percentage. So the previous administration and this administration has continued to be of the view that in paying National Insurance, albeit more than they do in the UK, they do see a greater benefit from the benefits that are provided. 1130 Q77. The Chairman: So we tax the poorest to provide a universal benefit, essentially. Is that something that the Minister is comfortable with from a policy perspective?

The Minister: First of all, I think, if my memory is correct – and again you have to excuse me 1135 for not remembering verbatim what was said and what was not, but I do think I did say to Mr Robertshaw during that debate or in my conclusions that it is something that I would be prepared to look at and those earnings levels were things that we did keep under review. I am also satisfied that the explanation that I received and the explanation that you have just heard from the Director, in terms of the better benefits that people are receiving on the Island 1140 and the access to those benefits, is a positive measure. But I did say that is a matter that we would be looking at on an ongoing basis and I continue to maintain an open mind. But I think also this remains more broadly a process, Mr Cretney, that we have engaged in and I think you have to take into consideration that you have picked on one issue. We need to look at that, I agree, but I go back to what I told you earlier about the number of significant 1145 measures we have put in place to encourage people into employment, to support them in that employment. And of course when you look at the number of jobs being created there comes with that, clearly, opportunity for people to aspire to bigger things. This Government, with Treasury, are clear that it is absolutely the right thing to do for us to make sure that we put the platforms in place to help people and support people achieve and get 1150 the best they can from their working lives. Minimum wage is one mechanism, living wage is another mechanism, the tax thresholds are another mechanism, the support they get from Child Benefit is another mechanism, the support they get from EPA for the low paid is another mechanism. So I think we have to look at the package as a whole rather than just take isolation,

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but as I said, we keep these under review and I am pretty sure I said to Mr Robertshaw that we 1155 would look at that.

Q78. Mr Cretney: And I am sure also under review will be in relation to workplace pensions – I think it said that as well: the situation in the Isle of Man where young people are concerned perhaps that in the future they might not have the provision that they need. 1160 The Minister: Again, a couple of issues there. Clearly, in delivering and supporting those state pension reforms we recognise that we are making the sort of medium-term fixes, or medium to longish term, to try and protect that National Insurance Fund, but of course we want to … The importance of workplace pensions is clearly recognised in the UK. I think it is fair to say it is a 1165 successful measure and we should certainly now be looking at how that can be adopted on the Island and the consultation to follow this year.

Q79. Mr Cretney: Looking at the upper limits for class 1 National Insurance contributions, in the Isle of Man anyone over £40,768 is proportionally better off than someone in the UK, so 1170 presumably that is something you are comfortable with.

The Minister: Again, I think the reasons for the assessing of the higher earning limit goes right back to the times of Margaret Thatcher and a bid to encourage enterprise and opportunity and to help ensure that there was economic growth and that people were given every opportunity 1175 to create success for themselves and create success more broadly. I said in the Budget that we should remain competitive. Now is not the time to start messing around and increasing tax burdens, effectively, and particularly given the broader risks that are around Brexit, and the potential economic impact that may or may not have on the Isle of Man remains to be seen. It is clearly an area that again we need to keep under review, but as it stands 1180 at the moment I am comfortable that it is in our best interest to keep that higher earnings limit purely from the basis, if nothing else, that we remain as competitive as possible, particularly given our need to attract people to the Island.

Q80. Mr Cretney: Resisting the temptation to get into a philosophical argument with you 1185 about Mrs Thatcher – (Laughter)

The Minister: I am merely pointing out the historical facts behind that to you.

Q81. Mr Cretney: I think the idea of encouraging enterprise and entrepreneurs is perfect, but 1190 it does also include a little bit of selfishness, in my opinion, so we will leave it at that for now. Regarding the increased benefits for people in nursing homes, you mentioned that you will be engaging with stakeholders regarding subsequent price increases. What will you be doing about that?

1195 The Minister: I think that was an area of risk that we continually see happening. I think I did say that it would be unacceptable to us to see prices rise, but could I bring in the Director of Social Security for a second?

Mr Stephens: We have started meeting with every single nursing home provider and have 1200 put on the agenda ‘Why do they hate us?’ as a statement for them, because everybody believes they are lighting cigars with £20 notes. They say they are not, and finding that balance between … They are very amenable to that discussion because there are some key issues, especially with the upcoming review of health. They feel, I am going to repeat, that some of the stuff that had previously been held by Health and paid for by Health is then pushed on as cost to

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1205 the home and they have a choice of either eating it and taking it out of their profits or putting up their charges. So there is a while to go on it but I think we have built a high level of trust as a process by which we can gauge the real effects of … I think as the Minister said earlier, when you make a small change in a budget it affects the whole budget. I think the one they cited was the 1210 incontinence pads. The cost of incontinence pads is now falling on the homes; previously they had been paid for by the National Health. That one, as a minor change from the Health point of view, creates a huge knock-on effect and a problem then that you wind up funding, perhaps through another benefit, by paying higher benefits. So everything has to be thought through carefully but the process has already started – I 1215 think we have got the second one coming up fairly shortly and the third and fourth already programmed. Generally they are pleased with the idea that they are invited into the process and they hope they have given us the idea that they are not looking to steal the money that we have put up there but that we could have a holistic view of solving the problem rather than just pushing money from budget to budget and back, as the Minister said again, from silo to silo. We 1220 have to think wider.

Q82. Mr Cretney: In terms of the incontinence pads, my understanding from conversations I have had since that announcement with the Minister is that that decision may well be reviewed.

1225 Mr Stephens: That will be for Health.

Q83. Mr Cretney: Yes. I was at a meeting with you, and Mr Oldam was there, where Mr Thomas, the Minister for Policy and Reform, indicated that he hoped to have a solution to this pattern by July. Do you think that is an optimistic hope? 1230 Mr Stephens: As an officer, I would say we are working hard to hit the timetables that are given to us. There are a lot of things that get in the way, as you are all more familiar with than I am, but I think July would be spectacular to have an answer that everybody could accept. Let’s leave it at that. 1235 It does not mean we are not doing our darnedest to try and get something, a big meaningful step forward, even if it is only in everybody’s understanding of the rules, how they work now, so that they can say whether they like them or do not like them and they can say what they might want them to be changed to, because at the end of the day I think one of the latest reports from the King’s Fund was … Obviously that is about the UK, but everybody has recognised the need to 1240 change for years and nobody has done anything about it because at the end of the day it has been discussed at one point but it actually needs the entirety of their population to agree how that bill for a nursing home is split between the state, the person and an insurance or any other mechanism.

1245 Q84. The Chairman: In terms of the status as it is now, that was covered by a Select Committee report in 2016, so that could be considered to be sufficiently known; it is what the Government’s promise is.

Mr Stephens: Again, knowing the problem, indeed getting people to think about the 1250 problem … and as we found out when we went to meet with them at the meeting that Mr Cretney is referring to, we described it as how are we, the Isle of Man, going to fund this going forwards; the people who attended described it and were only interested in the top-up fee and the part on it. The issue of how that arises and getting everybody to understand the whole size of the elephant is a start and I genuinely do not think we are there yet here, or the same for the 1255 UK, but we are moving in the right direction.

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Q85. Mr Cretney: Thank you. Another subject: what benefits do you anticipate as a result of the Job Centre becoming part of Treasury? Given the current low unemployment it seems they are doing quite a good job, so 1260 how will they be in a better position to assist and help people into work?

The Minister: I think it gives us certainly the opportunity to … I do not necessarily like this word ‘holistic’ but the fact is that it is incorporated. If people are seeking work there is a strong chance they will also be claiming benefits. It is not always the case, but there is a strong chance 1265 that they will be on benefits and it will enable, I guess, two things to happen: one, for those advising the jobseekers to work more closely with the Social Security officers to ensure that people are actually doing what they said that they are going to do; and I think that in terms of access, the ease perhaps now of the more concentrated location, it will mean that jobseekers themselves do not have to go to the benefits office and then plod off up the hill and go up to the 1270 Job Centre. And who is to say they will not get waylaid on the way? It will be there for them. I think it will be more cohesive and it will give us the opportunity to work more closely together and to develop from that, I hope, better ways to do things in terms of that interaction for people claiming Jobseeker’s or Employed Person’s Allowance, for example, to try and help them find those either opportunities for work or better opportunities for work to help them and 1275 encourage them along the pathway. So there are potentially a number of benefits and that process will happen gradually as the Job Centre integrates and both Social Security and those who are working in the Job Centre start to work more closely together.

Q86. The Chairman: Being slightly cheeky, I wonder if Mr Shimmins is working on his Norman 1280 Tebbit impression – ‘Get on your bike and go to work!’

The Minister: I think our view has been that people are better off in work than they are out of work, there are a number of benefits attached to that and we have a policy of making being in work more attractive than being out of work. That gap has probably widened to about as much 1285 as £140 a week in terms of the benefits that you can claim plus your in-work salary. So it remains our policy to bring in provision to ensure that people are being supported; and that is why, as I have said, we have done a lot of work around Employed Person’s Allowance where I lifted those other benefits in the way that we have where we have talked about also providing additional Child Benefit for those with Employed Person’s Allowance. 1290 So ‘getting on your bike’ is perhaps expressing it too harshly –

Mr Coleman: … you have started something.

The Minister: – but we are working as hard as possible to make sure and I think the reduction 1295 in unemployment is not just necessarily down to the number of jobs available, but the way that we have been working to help people focus more on the opportunities and to provide the support for them particularly when they are going into low-paid jobs as a way out of their … where it has been clearly just a life potentially on benefits. We need to keep working and keep developing and I think that is part of some of the areas where I think we can demonstrate some 1300 clear success.

Q87. The Chairman: Minister, I was interested then in that £140 figure you talked about. I would be interested if perhaps you could follow up after this meeting with a bit more around that ‘better off in work’ calculation and where that £140 a week has come from please. 1305 The Minister: Sure.

The Chairman: Thank you.

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Mr Coleman. 1310 Q88. Mr Coleman: If I could just ask one question. We used to hear an awful lot – this may be a DfE issue – about NEETs and I just wondered how we are doing in reducing the number of NEETs that are there?

1315 The Minister: I think we can help you on that, Mr Coleman.

Mr Oldam: As the Treasury Minister mentioned in the Budget Speech over the same period – that is over the period of two years – the number of NEETs, that is those aged between 18 and 24 who are not engaged in employment, education or training, has fallen by more than 1320 half.

Mr Coleman: That is very good.

Q89. The Chairman: To? 1325 Mr Oldam: To, off the top of my head, about 119.

The Minister: That is under-25s, is it?

1330 Mr Oldam: Under-25s, yes.

Q90. Mr Coleman: May I just follow up on that? Is there a single thing which has gained this very good result?

1335 Mr Oldam: Economic conditions, primarily. But also now since November 2015 we have provisions in place if a person has been claiming Jobseeker’s Allowance for more than six months their benefit actually starts to go down so there is a greater leverage once they are six months in and obviously the advantage to work increases.

1340 Mr Coleman: Okay, so it is the apple and the stick!

Mr Oldam: Yes, it is indeed.

Q91. Mr Cretney: At each Budget, Treasury provide Members with examples of the effect of 1345 the various Budget measures on a range of people in different circumstances. Presently, these examples start with a single person on minimum wage and I was just wondering if any modelling is done with respect to those falling below this threshold and whether you might like to consider that in future?

1350 The Minister: I think it is very difficult to model for those below the figures you have just quoted, because low income thresholds do not necessarily mean the people are poor. They could be living in significant wealth, it is just that their income levels are very low for whatever reason. It is difficult. I think the answer to your question is that it is difficult. We could say how many 1355 people are declaring income below those levels, but as to their circumstances it is incredibly hard to determine because of at the moment what is being declared on their returns themselves.

Mrs Lowe: One of the other things is a number of the benefits are not taxable so somebody’s 1360 taxable income is not equal to the household income.

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The Minister: I think if I may, Mr Cretney, just say that I can see some talk about this coming through in terms of the questions that we are receiving. Actually I think we need to be looking at the support measures, the benefit measures that are in place around Income Support, around EPA, to try and get more of a handle on those who you may be … the target market of what you 1365 are aiming for, which is the low-low paid or those who are not earning or receiving an income that is being determined as unacceptable, whatever you might determine is an acceptable income level.

Q92. Mr Cretney: One Member has given us the example of a pensioner receiving £176.30 1370 per week, plus housing benefit of £70.80 per week in a one-bedroom sheltered accommodation. This is lower than the minimum wage of £277.50 a week, so is that in fact poverty?

The Minister: I do not have the definition of poverty. If they are in sheltered housing I would have thought that in some ways they are actually living in relatively protected circumstances; 1375 they are not out on the street. They have got housing, they have got a structure around them. But there is a lot of work going on within Government, within the Cabinet Office led by the Minister for Policy and Reform, to determine some of these or to try to get some definition around these sorts of statements. Personally, you would have to look at the whole situation. Just from that particular 1380 statement, I could not tell you whether I personally think that is poverty. If that person is living in a cardboard box and is getting £20 a week I think that is going to be poverty. If they are in sheltered housing, receiving, you are telling me, an income of £247, I do not know what other circumstances around that apply. So it is really difficult to get to the bottom of those sorts of statistics. What we have to focus on is taking the measures that are available to lift standards 1385 and to ensure that people are receiving either what they are entitled to or being given the support to be able to go out and earn the money that they need to provide for the lifestyle. Of course within this I am talking about how people who do not have additional support requirements, such as mental or physical support. So it is a really big question you have asked and I do not think I can give you an answer based 1390 on the information that I have, other than to say if they are in sheltered housing there is a pretty good chance that they have got some protective environment around them.

Q93. Mr Cretney: You say that the Minister for Policy and Reform is leading on that work and also … We did not hear about the Middle Man during the Budget this year, but you have said 1395 that the same Department is doing work in that regard a lot. It must be accepted though that it is something that is shared between your Department and the Cabinet Office? Officials you have in certain areas obviously are key to any policy decisions that come out of any discussion around this.

1400 The Minister: Absolutely and we recognise – and I cannot re-emphasise how much we recognise – the challenges that are facing and have faced, particularly, the low to middle income earners in our society. I am not going to repeat, but the steps that we have taken to help and redress the balance for them. Clearly you have to look within that as to how pay is being impacted; and we have recently 1405 had a report in there and there were some concerning statistics around the gulf that had happened. Very good increases for office-based roles; it would appear potentially negative figures around manual labourers. Yes, clearly we start to pay attention to that, but when we deliver budget policies we do so effectively across society to apply to people in their earning brackets. 1410 Sure, we can ensure, for example, if you look at the manual construction industry as one area, then clearly it will be helpful if we meet our capital spending requirements for starters; and secondly, obviously anybody who is working for Government is meeting their pay commitments,

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that people are being paid according to legislation, so at least the minimum wage. Clearly, we would like to see that moving towards the living wage if at all possible in the private sector. 1415 So we are taking steps. We do recognise those challenges and of course it is not just reports that come from within Government; you can clearly see from reports that are available across the United Kingdom now that in the last decade the measured statistics show from 2007 to 2017 that for many people it meant a real terms reduction in their income levels. So we have to get those back up and there is evidence that some of these measures are 1420 impacting and we continue to work to make sure that we are trying to deliver a fair use of public money to ensure fair distribution and support mechanisms are available to benefit clearly those who are potentially in the weakest positions, and of course, in doing so, with a broader aim of creating a more strengthened society overall.

1425 Q94. Mr Cretney: In your response there you just said you hope the private sector would be moving towards the living wage, but of course you do mean as well the public sector should.

The Minister: I think we have made that commitment that the public sector will look at that very carefully and I would be surprised if we do not have an announcement soon. 1430 Q95. Mr Cretney: Good. Looking at the cost of living rises in some fundamental areas, they are up by significant amounts – communications, 10.9%; food and non-alcoholic drinks, 4.5%. When you are considering rises in personal allowances and benefit rates, which are all welcome, is inflation 1435 considered?

The Minister: If you are going to use inflation as the measure, I would say we far outstripped inflation with our rises in personal allowances. Effectively, we were at £10,500 initially on the first Budget; we lifted that by £2,000 up to £12,500 in one swoop. So that was effectively a 20% 1440 rise. Yes, of course we are always conscious of the inflationary figures, we are conscious of the cost of living and we absolutely consider what we need to do, first and foremost, to ensure that people are, as much as possible, getting money in their back pocket. That is what we set out to do and that is a very easy mechanism – a risky mechanism one might add, because we forecast, 1445 as I said, that downturn in receipts. Instead what has happened, probably combined with some good general growth, but still it has not negatively impacted; it has in fact positively, I think, contributed towards those increases. Of course you are looking at the inflation figures and the forecast is for inflation to start to come back under control back down towards the 2% level this year. It remains to be seen 1450 whether the economists are right or wrong on that. (The Chairman: Half will be!) Half will be! It is something that we have got to –

Q96. Mr Cretney: One of the things you discussed last year was the inflation and what measure of inflation you use. What is the current measure of inflation? 1455 The Minister: We have had a reflection that, currently, the Isle of Man inflation key forecast remains at CPI and there have been, obviously, the discussions around RPI and RPIJ. But, as announced in January 2018, there will be a change in the way the RPI is indicated and that will be using the Jevons formula. 1460 Q97. The Chairman: So RPIJ will become RPI, but (The Minister: Correct.) Government’s official definition of inflation is based around CPI?

The Minister: We continue to use CPI as our key measure of inflation.

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1465 Q98. The Chairman: Can I just ask what influence do you think the Treasury and the Government generally has on inflation?

The Minister: I think that is a very interesting question. Again, you bear in mind – and I think I made this point in the Budget – that we have control of fiscal policy, we do not have control of 1470 monetary policy. So to some extent, most inflation control measures are out with our control and remain with the Governor of the Bank of England and, effectively, the Chancellor of the Exchequer, but effectively, as we know, it is the Bank of England that has got target figures to aim at. I think perhaps one of the points I was just going to point out slightly earlier is that when you 1475 start increasing wages, when you start increasing payments to people there is always a risk that you start to create local inflation as well, particularly in small businesses. But there is always a give and take to each side, so it is something we are very mindful of, Mr Chairman, but as I have pointed out, it is not something that we have necessarily got huge control measures over. But it does bring challenges for us, particularly when you are looking at mechanisms within 1480 cost-control mechanisms, set at 1% or 2%, we have within our budgetary forecast, then alterations to that could mean that we need to either seek requirements if those cost increases have not also been reflected in terms of our income receipt.

Q99. Mr Cretney: Okay. I am nearly at the end of mine, you will be pleased to hear, as well. 1485 Perhaps I will continue with the series of 1980s political analogies. Before I put my extra jumper on, are you confident that there are enough pre-school places to support the increase in demand which might occur as a result of the welcome increase in credits? Or is that another Department?

1490 The Minister: The Department of Education have very much supported that measure. We have supported it because we could see the added benefit it was going to bring more broadly to I think two elements: to our young children, where there is clear evidence that it is benefiting them; and secondly, to our working families. I think the initial answer to your question is yes, in the short term it remains to be seen. I 1495 know there are challenges in that area. Again, I think I would probably need some further information with me and I have not really got that to be able to give you a comprehensive response.

Q100. Mr Cretney: It might be in the time ahead if there are not sufficient premises available 1500 and Government premises, for example, need to be brought in to enable a private sector provider to … There may be consequences for Treasury in that way that you will have to consider, but thank you very much.

The Chairman: Okay, Mr Cretney? 1505 Mr Cretney: Yes, thank you.

The Chairman: Mr Callister.

1510 Q101. Mr Callister: Thank you, Chairman. Just on the Brexit Fund, in 2017-18 you put aside £1 million for the Brexit Fund. Can you give further details on this fund and how the funds have been used?

Mrs Lowe: I do not think we have had any drawdowns from it. I think the Minister said earlier 1515 we have now had two applications.

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Q102. Mr Callister: Okay, so none of the funds have been used to date?

Mrs Lowe: We have had applications, so they will be getting used but I think the first claims 1520 will be in this current financial year.

Q103. Mr Callister: Okay, thank you, that is perfect. Just moving on to the public sector, or public services, there has been an increase of 3% in the total employee costs for 2017-18 to 2018-19. A predicted rise for 2018-19 to 2019-20 is 4% 1525 against a 2% cap on contributions to pay rises. The prediction for 2019-20 to 2020-21 is predicted at 2%. Further projections have also been adjusted up by more than 2%. Can you explain this, if possible?

Mrs Lowe: The large increase from not next year but the year after – the contracting out 1530 goes, so the employer’s contribution for National Insurance increases.

Mr Callister: Okay, thank you.

Q104. The Chairman: And that is forecast at about £10 million – is that right? 1535 The Minister: Seven million.

The Chairman: Seven million, okay.

1540 The Minister: Approximately.

Q105. Mr Callister: Mr Thomas, the Cabinet … Are you okay there?

Mrs Lowe: Five to seven million, depending … 1545 Q106. Mr Callister: Okay. The Cabinet Minister, Mr Thomas, said in his Budget speech that we were looking at the new terms for new starters and he said they deliver an annual saving of £1.8 million. This is now raised up to £2.4 million in 2021. Can I ask where the savings are being achieved and how they are being achieved? 1550 The Minister: They are built into the … but you will not necessarily … What you will see is the caps that we have got on those figures and those caps have to be … money to fund those caps, especially if you get above-inflation pay rises, which we have had. That money needs to be found and I think it is a constant process of, when you have got capped budgets, looking to find 1555 the efficiencies that need to be delivered. In other words, some of this efficiency saving is a requisite of the delivery of these budgets in order to meet these budget targets and people need to work to find the savings possible. So it is an ongoing process and –

1560 Q107. The Chairman: But this money is about changing terms and conditions, so doesn’t it mean that an increase in the saving actually means that you are getting a higher churn in the public sector? And is that something to be worried about?

Mrs Lowe: No, I do not think we have got a higher churn. I am not aware that we have got a 1565 higher churn.

Q108. The Chairman: Only that that is one potential reason for a higher annual saving based on the new terms and conditions.

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Mrs Lowe: I am not aware there has been a higher churn, but I do not know. I have not got 1570 the figures on the churn rate with me.

Q109. The Chairman: Okay, so there was in the Budget debate about savings of £1.8 million –

Mrs Lowe: No – 1575 The Chairman: – going up to £4.2 million –

The Minister: From Mr Thomas?

1580 Q110. The Chairman: Yes, so maybe we will ask him about that, then.

Mr Randall: The calculation is based on an 8% churn and those figures were projected at the time it was introduced and they are about right, so he feels that this keeps the saving –

1585 Q111. The Chairman: And that is across the board? That is across the public sector? There is no …?

Mr Randall: Across the … [Inaudible]

1590 Q112. The Chairman: Yes, in terms of if there was one Department that was having a significantly higher churn than another, obviously the Budget would need to be adjusted to reflect that.

Mr Randall: That is right. 1595 Q113. The Chairman: And that has not necessarily been identified as being the case?

Mr Randall: We have had no approaches from Departments.

1600 Mrs Lowe: Nobody has given us any information to indicate that.

The Chairman: Okay, thank you.

Q114. Mr Callister: There was also a commitment to reduce the size of the public service. 1605 The staff numbers are no longer published in the Pink Book. Can I ask how it is going?

Mrs Lowe: It has not reduced.

The Minister: I do not think there has been any sort of reduction in the size of the public 1610 service in terms of actual personnel employed. That is a concern, but I think I go back to … It is wrong to say there is a panacea, but certainly we will be looking to create efficiencies from that. Whilst that is disappointing, just purely from a numbers perspective I think the encouraging thing is that we are on track with our overall budgetary plans and I think if we were not on track then there would be certainly a higher level of concern from me about that. 1615 Of course I look forward to the support when it comes to talking about personnel reductions, because normally that will mean some form of service removal and as yet clearly that has not been … Well, it has in some areas, primarily the Department of Health and Social Care, but I am not sure that is actually … even though they have been fighting just to deliver the services that they want to deliver in the key areas of health and social care; key employer the Department of 1620 Infrastructure; key, perhaps less so, the Department of Education; a fairly substantial employer,

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Home Affairs. It is a question of finding those and I think realistically you would expect, if we are finding service efficiencies, if we are going to deliver some change to change services as a result of SAVE, that there will be some staff savings along the way; but yes, they have not materialised. But from a budgetary perspective we feel comfortable that we are still on track. 1625 Q115. Mr Callister: Can I just ask why the staff numbers were removed from the Pink Book? And would you consider putting them back in again?

The Minister: I have no issue from a … 1630 Mr Randall: Previously there was a control mechanism that was used to control the numbers of staff in the Departments etc., but that had certain kind of odd …

Q116. The Chairman: Behavioural issues? 1635 Mr Randall: Behavioural issues, yes, because what it meant was you could not employ someone in a Department even if it was more expensive to bring in a contractor, so everyone would bring in a contractor. So we had lots of contractors, which was actually costing Government more, so what we moved to instead was a budgetary control which said you have 1640 got a budgetary cap on … That is why some of the numbers have gone up, because of instant insourcing.

Q117. The Chairman: Okay, but the numbers are not in the Pink Book.

1645 Mr Randall: No, they are not. We do not collect those numbers in …

Q118. The Chairman: The only thing, of course, when you are looking at the total cost of providing staff … not necessarily advocating returning to the personnel control mechanism, but it is a useful number to have when you are looking at the total costs and number of employees. 1650 Mrs Lowe: We could put it in.

The Chairman: Sorry, Mr Callister.

1655 Q119. Mr Callister: No, it is okay. Twenty seven million pounds for heritage railways in the next five years – it seems a lot in these difficult financial times. How are business cases for capital works assessed and prioritised?

The Minister: They are absolutely, obviously, assessed. We have a Capital Infrastructure 1660 Committee that looks at all these business cases. If you are going to take heritage railways, we assess the reports that are given to us, we assess and look at and ensure that the estimated expenditure is, as far as we can tell, being done correctly, and each business case will carry the reasons for wanting to invest. If you take the heritage railways, if you want the heritage railways to keep running you will need to spend that 1665 money. From a Treasury perspective, unless we get to a situation where we decide not to have a heritage railway or have electric trams, or to run them in a fundamentally different way, we are left with those decisions to take and ultimately put into the Budget for support. And of course bear in mind those decisions, the majority of them, will come to Tynwald on an 1670 individual basis for some kind of analysis and support politically, so it is not … Just because it is in the capital projects does not mean to say that it is actually received. Depending on which column it is, it needs to clearly receive some form of Tynwald support, so there is a further check

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along the way that we have got the right figures and that people are getting value for money and indeed that it is the political will that heritage railways still continue to be supported. 1675 Q120. Mr Callister: Mr Shimmins, who is in your Treasury Department, mentioned in his Budget speech about the active travel policy and the benefits and the cost factors, 5.5:1. How is this benefit being achieved, measured and reported?

1680 The Minister: We clearly have supported the Active Travel Strategy. We have supported both the bits from the Department of Infrastructure to do that. We have brought in our own measures in terms of cycle to work schemes particularly. I think it is difficult to necessarily say how much that kind of mechanism measure, effectively trying to improve the wellness or the health of society, actually reflects then in terms of where 1685 the savings are going to be found or how much benefit is being applied to the DHSC. So I think it is one of those areas where there is a … I think if the analysts who have applied those figures are delivering those kind of figures, they are taking that, presumably, on a one-person basis, so you then have to measure how many people are taking advantage of active travel strategies and then apply the figures that the analysists have provided. You get the analytical figure, you can 1690 see that clearly it has benefits. Actually then getting a precise figure around that benefit that is being delivered is subjective. It is always going to be subjective. We know – let’s face it, we have got to accept from a society perspective – it is better for people to stay fit and healthy than it is for them not to do so, so I think it has been and it is a positive way for Government to spend public funds and I think from Treasury’s perspective I fully 1695 support what people are doing at the Department of Infrastructure and what we are doing through our support for active travel.

Q121. The Chairman: You said it is difficult to measure it, but obviously there is a methodology out there that has led to that 5.5:1 cost-benefit ratio – that is the gov.uk local 1700 authority active travel information. I think what this Committee is after is an assurance that the supposed benefits that come out of active travel are actually measured and reported and that someone is actually going to crunch the numbers at some point and it is not just going to be left as an assumption that it is doing a good thing and that the money is worth it without any sort of proof. 1705 The Minister: You have given us the figure 5.5, so if we have invested £5 million we are going to get £25.5 million return in additional benefits – savings that I guess will be found from within fewer people going to see the doctor for various ailments.

1710 Q122. The Chairman: We would hate the opportunity to pass and be asking the same question in two years and you say you have never actually asked for the numbers, so I suppose the opportunity is there at this stage, while it is still at ground level, to ensure that the figures are being collated, measured and reported to see if that figure is anywhere near remotely realistic for the Isle of Man. 1715 The Minister: I do not know how we are going to do that.

Q123. The Chairman: Well, the methodology is in the –

1720 The Minister: I am sure that we will find a way to get statistics on –

The Chairman: – local authority active travel information.

The Minister: I can get any statistics that you want, no problem whatsoever.

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1725 Q124. Mr Coleman: It is going to be very complicated. You are going to be measuring the number of cyclists who go to the doctor with chest problems from breathing exhaust fumes because they have been behind a diesel. It is how many of these people who are on a bike, from a Treasury point of view, are going to stop using their cars, so are using less petrol – so you are getting less tax. Calculating that is … 1730 The Minister: Very helpful, thank you.

Q125. The Chairman: We are going to talk a little bit just about capital. There is a recurrent underspend on capital. Is it now the case that Treasury is going to stick with this assumption of 1735 about 50% to 60% spending on capital is realistic?

Mrs Lowe: Yes.

The Minister: I think we have committed to £60 million as being a realistic spend on capital. 1740 Q126. The Chairman: And so if Departments were to buck their ideas up a bit and actually deliver to 100% of the capital budget, could Treasury actually cope with that?

The Minister: Yes. We have budgeted in for, I think, four hundred and something million 1745 pounds worth of capital expenditure.

Mr Randall: The capital programme is at about £119 million, so if they delivered all of that it would drain the capital account, but look back historically and we have delivered around £60 million. So we have not done it on a percentage, we have done it on how much we can 1750 actually deliver because we have looked at what the capacity is for the local industry etc. Moving forward, I think the Minister has said in the past, if there was a significant increase in the level of capital expenditure we would have to go back and look at the funding requirements for that. But at £60 million – I think it moves up to about £68 million by the end of the period – there is sustainability. 1755 Q127. The Chairman: Yes, so in other words Treasury probably could not afford to fully deliver the capital project. I think the highest it ever got to was 88%, if I remember rightly.

Mr Randall: We would have to look at how the funding came into it. 1760 Q128. The Chairman: Yes, and there is also a new line in the capital account this year about the drawdown from the housing reserve. What is that for?

Mrs Lowe: There has always been a drawdown from the housing reserve. 1765 Q129. The Chairman: But in terms of the purpose and what Treasury is trying to achieve from that.

Mrs Lowe: It has always been done. It is to do with the public sector funding of public sector 1770 housing and there has always been a drawdown. I think maybe if this is the first year we have shown it, I do not know why because there has always been a drawdown.

Mr Randall: It is for transparency. All the time we are trying to improve the presentation and make sure there is more information out there. 1775

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The Chairman: I stand to be corrected by my colleagues but I think we have covered just about all of the topics that we had hoped to cover today. Can I thank our army of witnesses for being with us today. It is much appreciated. It has been a very interesting session. 1780 The Committee will now sit in private. Thank you very much.

The Committee sat in private at 4.50 p.m.

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