Fiscal Stimulus Package direct payments and vouchers: Reserve funding

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A decision made on 21 July 2020

Decision Reference: MD-TR-2020-0090
Decision Summary Title:	Reserve funding for Fiscal Stimulus Package: Direct Payments and Vouchers		Date of Decision Summary:	20th July 2020
Decision Summary Author:	Head of Investment Appraisal		Decision Summary: Public or Exempt?	Public
Type of Report: Oral or Written?	Written		Person Giving Oral Report:	n/a
Written Report Title:	Reserve funding for Fiscal Stimulus Package: Direct Payments and Vouchers		Date of Written Report:	20th July 2020
Written Report Author:	Head of Investment Appraisal		Written Report : Public or Exempt?	Public
Subject: Reserve funding for Customer and Local Services as part of the Fiscal Stimulus Package
Decision(s): The Minister approved an allocation from the General Reserve in 2020 of £12.3 million to Customer and Local Services for Direct Payments and Voucher / pre-paid card scheme as part of the Government of Jersey’s Fiscal Stimulus Package.
Reason(s) for Decision: Article 15(3) of the Public Finances (Jersey) Law 2019 states that the approval by the States of a Government Plan authorises the Minister to direct how an approved appropriation for a reserve head of expenditure in the plan may be spent (including on another head of expenditure) in the first financial year covered by the plan. The current Procedures on Allocations from the Reserve (published as R.23/2020) sets the requirement for all allocations from contingency to be considered by the Investment Appraisal Board, Principal Accountable Officer and States Treasurer prior to submission to the Minister for approval, however it also states that ‘Where a request is made for £100,000 or less, or where the Minister is satisfied that there is an urgent need to provide funding in the public interest, an allocation may be made by the Minister on the recommendation of the Treasurer.’ The Fiscal Stimulus Package was proposed to the Council of Ministers and approved on the 8th July 2020. Following approval of the Fiscal Stimulus Package by the Council of Ministers, the Minister is satisfied that there is an urgent need to provide funding in the public interest and that the threat of prolonged economic downturn and its impacts warrant the higher than normally acceptable risks inherent in the proposed measures being taken and accordingly accepts those risks A business case has been developed and appraised by the Investment Appraisal Team. On the basis of the above regarding risk, the Treasurer recommends to the Minister, the allocation of £12.3 million for the direct payments to low income families and the voucher/pre-paid card schemes proposed. subject to reviews of the scheme before any future extension and an expiry date of 30 November for the voucher/card scheme. The Treasurer concurs with advice that a strong and effective communications strategy would reduce the risks associated with these schemes. The case for the Fiscal Stimulus Fund and reduced Social Security will be made in propositions to the States Assembly.
Resource Implications: The head of expenditure for Customer and Local Services will increase by £12.3 million in 2020. The balance of the General Reserve will decrease by the same amount.
Action required: Head of Financial Governance to ensure this decision is published on www.gov.je and notify the Heads of Finance Business Partnering for Customer and Local Services.
Signature:		Position: Deputy S J Pinel, Minister for Treasury and Resources
Date Signed: 21st July 2020		Date of Decision: 21st July 2020

Fiscal Stimulus Package direct payments and vouchers: Reserve funding

Treasury and Exchequer

Ministerial Decision Report

Reserve Funding for FISCAL STIMULUS PACKAGE: Direct Payments and vouchers

Purpose of Report

An allocation from the General Reserve in 2020 of £12.3 million to Customer and Local Services (CLS) for Direct Payments and Vouchers as part of the Government of Jersey’s Fiscal Stimulus Package.

Background

Funding provisions were made in the Government Plan 2020-2023 in the General Reserve for funding needs that cannot be met from existing heads of expenditure in 2020. The Minister has increased the amount available in the General Reserve by transferring £65.3 million from the Treasury and Exchequer head of expenditure (MD-TR-2020-0035) and approving an additional £99.99 million of expenditure (MD-TR-2020-0047) and approving the transfer of £28 million from the Stabilisation Fund, with associated authority to spend from the General Reserve (MD-TR-2020-0055).

The Jersey economy is experiencing a sharp downturn in output, income and employment and the advice of the FPP (March 2020) is to consider a package of fiscal stimulus to support the recovery. It is important that automatic fiscal stabilisers be allowed to operate but these will not be sufficient during the current global situation. The costs of active fiscal stimulus can seem daunting in the short term but need to be set against the benefits that accrue over the long term in promoting higher economic activity and revenues. Fiscal stimulus should be Timely, Targeted and Temporary. It should take effect quickly, aim to maximise spending in the domestic economy and should be ended to avoid promoting structural budget deficits and creating permanent distortions or subsidies in the economy.

The latest FPP forecast shows a level of real GVA that is 5% lower than the pre-Covid forecast, in the medium term in Jersey. While it is inevitable that there will be a considerable cyclical fall in output, due to the health-related restrictions put in place by Government, it is important to minimise the level of structural damage and economic scarring. There are limited options for the Government to manage this issue – Jersey does not have control over monetary policy due to its currency union with the UK and use of monetary policy is constrained due to the already low interest rates. This project is designed to appraise the range of fiscal stimulus measures available to Government with their intended outcomes and the cost and benefits of these over the short to medium term in order to:

Reduce the falls in output and employment in the short term

Reduce the damage to the economy in the medium to long term

The proposed measures are designed to facilitate a quick recovery and to avoid reduced levels of employment once the co-funding payroll scheme comes to an end. These measures are designed to improve confidence and begin the process of ‘lift-off’ in Q3 2020. Part of this will necessitate a credible and clear commitment to stimulus with an early communication of the intended measures in July 2020. This needs to be managed alongside the communication of the timing of the end of the deferrals and the future of the payroll scheme.

Options for Fiscal stimulus in addition to those provided through the GOJ Group’s capital programme, were extensively considered by the Tax Strategy Group of Ministers, who presented the following package of measures as its favoured measures. This package was agreed by the Council of Ministers

Direct Payments (£1.3m)

Direct payments can be made quickly and recipients are more likely to spend the additional income rather than save it. Direct payments are targeted and can help children, people who are not in work, workers who receive income support and pensioners. A direct payment of £100 will be made to working age income support claimants and children, plus pensioners on income support and pensioners in receipt of pension plus. Eligibility will be based on the individual being included on an open claim on 30 June 2020 and the payment will be made in July 2020.

Vouchers (£11.0m)

It is proposed that the £100 voucher/card will be issued to Jersey residents and will expire by 30 November. Vouchers can be used within the local economy but will not be permitted to be used for gambling. Eligibility will be based on individuals being registered with Social Security/Control of Housing and Work Law on 30 June 2020 and locally resident.

These initiatives form part of a wider Fiscal Stimulus Package that includes £26m to fund a reduction of employee Social Security Contributions to 4% and the establishment of a £50m Fiscal Stimulus Fund. Both of these measures will be proposed in the States Assembly and bring the total amount dedicated to fiscal stimulus to £88.3m

Governance

Governance arrangements for the Direct Payments and Vouchers will be through Customer and Local Services. Treasury and Exchequer will have oversight of the allocation of the Fiscal Stimulus Pot by the creation of a Fiscal Stimulus Oversight Group.

These schemes and the wider Fiscal Stimulus Package were proposed to the Council of Ministers and approved on the 8th July 2020.

The Minister, with other Ministers involved in developing the package of fiscal stimulus, has been briefed regarding the risks of various options and in particular those attached to the package being proposed.

In particular those Ministers have been briefed that the risks of deadweight loss/leakage are inherent with most options and are difficult to quantify. The Minister acknowledges these risks and the partial mitigation which can be put in place, however, along with fellow Ministers, believes that the potential benefits and the imperative for policy intervention are sufficient for those risks to be accepted, consistent with advice.

Recommendation

The Minister is recommended to approve the allocation of £12.3 million to Customer and Local Services for Direct Payments and Vouchers as part of the Government of Jersey’s Fiscal Stimulus Package.

Reason for Decision

Article 15(3) of the Public Finances (Jersey) Law 2019 states that the approval by the States of a government plan authorises the Minister to direct how an approved appropriation for a reserve head of expenditure in the plan may be spent (including on another head of expenditure) in the first financial year covered by the plan.

The current Policy for Allocations from the Reserve agreed by the Minister for Treasury and Resources on Friday 17th July 2020 sets the requirement for all allocations from the General Reserve (Covid-19) once approved by the States Treasurer to be referred for review to either the Council of Ministers or the relevant Competent Authorities Ministers and to seek comments from the Principal Accountable Officer prior to submission to the Minister for approval.

The fiscal stimulus package was proposed to the Council of Ministers and approved on 8th July 2020.

Following approval by the Council of Ministers, the Minister is satisfied that there is an urgent need to provide funding in the public interest that the threat of prolonged economic downturn and its impacts warrant the higher than normally acceptable risks inherent in the proposed measures being taken and accordingly accepts those risks. Furthermore, the Minister is satisfied that the expenditure is justified in accordance with and from the funds available to the Minister under Emergency regulations agreed by the States Assembly in p28/2020

The Investment Appraisal Team has recommended this request for approval. On the basis of this and the above regarding risk, the Treasurer recommends to the Minister the allocation of £12.3 million for the direct payments to low income families and the voucher/pre-paid card schemes proposed. subject to reviews of the scheme before any future extension and an expiry date of 30 November for the voucher/card scheme.

The Treasurer concurs with advice that a strong and effective communications strategy would reduce the risks associated with these schemes.

The case for the Fiscal Stimulus Fund and reduced Social Security contributions will be made in propositions to the States Assembly.

Resource Implications

The head of expenditure for Customer and Local Services will increase by £12.3 in 2020. The balance of the General Reserve will decrease by the same amount.

Report author :	Document date : 21 July 2020
Quality Assurance / Review : Head of Financial Governance	File name and path: L:\Treasury\Sections\Corporate Finance\Ministerial Decisions\DS, WR and SD\2020-0090 - Reserve funding for Fiscal Stimulus Package
MD sponsor : Treasurer of the States

Appendix

Key Risks to implementation

Social Security Contributions

Risk	Probability (0-5)	Impact (0-5)
Implementation - an October change would leave very little time for government to communicate and for employers to implement the change. Businesses need to change payroll systems and will need notice to do this. There may be some additional administration around payment of wages in arrears.	5	1
Mitigation / Explanation for ratings Advance notice will be provided that the change is being proposed, allowing employers time to prepare to change payroll systems. Subject to political engagement it might be possible to launch communications around the potential change in advance of the States Assembly debate. Should still be aware of the change in early September, giving them a degree of advance notice. Ultimately the impact is likely to be tolerable.
Risk	Probability (0-5)	Impact (0-5)
Leakage – some of the additional income may not be spent in the local economy. It could be used for imports (e.g. internet purchase from overseas) or saved. Higher income households will receive the benefit and are likely to save some of it and/or spend it on imports/overseas.	5	3
Mitigation / Explanation for ratings This risk cannot be fully mitigated so it will be realised and will undoubtedly impact on the efficiency of the intervention. However, a material benefit is still expected to be transmitted. Even the highest income households are unlikely to save all of the benefit on average. If they spent in line with their general savings rate c.62% of the benefit would be spent. Low rates of savings amongst lower income households mean that a material amount of the benefit should be transmitted into the economy as intended. Consideration was given to tapering the benefit provided to those on very high incomes by introducing a new contribution rate above the SEL. If the rate below the SEL were reduced to 4%, it would require a 0.5% rate increase between the SEL and UEL to taper away the benefit. A higher increase would taper away the benefit quicker but lead to some contributors paying more overall. This approach was discounted by the TSG as it considered that amendments to rates above the SEL should form part of a wider strategic consideration of financial sustainability and changes now could limit options for longer-term adjustment to Social Security rates. It was also considered that any increases to taxes or contribution rates (even if to offset a reduction elsewhere) could inhibit the overall messaging of a programme of stimulus that is designed to improve confidence. Communications around the fiscal stimulus package should aim to encourage citizens to spend the additional income they receive, and to spend it locally.

Vouchers

Risk	Probability (0-5)	Impact (0-5)
Leakage - whilst vouchers themselves can only be spent with local businesses and cannot be saved because they expire, people can reallocate their budget to use the voucher on goods or services that they were going to purchase anyway. The equivalent value of the voucher can then either be saved or spent on imports (e.g. internet purchase from overseas) such that no incremental increase in demand has been experienced in the local economy where this takes place	3	3
Mitigation / Explanation for ratings Consideration was given to restricting the vouchers to specific sectors that were most acutely affected by Covid-19 such as tourism related businesses and retailers. However, the ability to substitute expenditure largely remains. Even if sectors were drawn incredibly tightly it is possible for vouchers to be exchanged for cash (potentially at a small discount) such that those interested in spending in a target sector do so with vouchers purchased from others. In this scenario, only the discount achieved would be incremental. A better mitigation is therefore a communications campaign intended to persuade Islanders to spend on truly incremental items to help support the Island’s economic recovery. In this context, vouchers have a clear advantage of over increases in incomes through Social Security Contributions as they are a tangible provision of value and thus more readily lend themselves to messaging intended to encourage incremental spending. This risk is not likely to be realised extensively. Large numbers of people are likely to spend their vouchers on incremental purchases or to bring forward purchases to make use of the voucher. In these circumstances the voucher will be an effective stimulus.
Risk	Probability (0-5)	Impact (0-5)
Capacity/inflation – there is a risk that vouchers with a two month expiry for all Islanders will not be able to be absorbed by the economy as it will not have capacity. Alternatively, or simultaneously, that the vouchers will increase prices and thus be inflationary.	2	3
Mitigation / Explanation for ratings Given that there are no sector restrictions and demand in retail and hospitality (potentially popular sectors for vouchers) is customarily lower during Autumn, capacity is not considered to be a substantial problem. Similarly, this will reflect a one-off stimulus so an upward pressure on prices would likely be temporary, and, whilst immediate demand might be less well impacted, firms benefiting from higher prices will still support the flow of income within the economy. On balance this problem is not likely to be extensively realised.

Fiscal Stimulus Pot

Risk

Probability

(0-5)

Impact

(0-5)

Capacity/inflation – the current intention is for the fiscal stimulus pot to support the construction industry, provide funding for skills training and enable further investment in technology. Prior to the crisis, the construction industry was operating at close to full capacity so if it recovers robustly there is a risk that stimulus could crowd out private investment.

Mitigation / Explanation for ratings

The purposes that the fund is put to will need to be aligned to underlying economic performance to ensure the stimulus is appropriately aimed at industries in need of support.