REVIEW OF STATES OF JERSEY FINANCIAL FORECASTING (SR13 2008) BY THE CORPORATE SERVICE SCRUTINY PANEL
RESPONSE FROM THE MINISTER FOR TREASURY AND RESOURCES
The Minister would like to apologise for the length of time it has taken to respond to the Panel’s report and is grateful to the Panel for allowing a significant project to be undertaken before this response was completed.
This substantial project, by the States Economics Unit, involved analysing past trends in profits, earnings and investments to identify relationships with the resulting income tax revenues and so enable an improved model for income tax forecasting to be developed. This work is referred to in the response and the final report on the analysis has been provided to the Panel for information.
At the same time the Panel will be aware that the same key staff have been focussing on critical work relating to the new draft Strategic Plan, draft Annual Business Plan 2010 and the Fiscal Stimulus process.
Introduction:
The Minister welcomes the report of the Panel and the approach which has been taken involving close consultation with Treasury officials and other key staff within the process. The Minister also welcomed the opportunity to be involved at the outset in shaping the direction of the review such that it would be of benefit to all parties and which also involved the appointment of an independent expert adviser to the Panel, Professor Michael Oliver. The Minister believes this was important and recognises the complex nature of the financial forecasting process.
Comments on Findings:
The recommendations from the Panel are very comprehensive and in most cases provide a summary of the findings so the Ministers comments have consequently focussed on those recommendations.
There are however a number of comments the Minister would like to make in relation to certain of the findings:
Firstly, the review has been carried out over almost a 12 month period but the Minister is supportive of the consultative approach resulting in the engagement of an independent expert adviser.
The purpose of forecasts – The Minister would support the views of the previous Minister in that perhaps one of the failings of the past has been to infer too much importance on single spot forecasts, rather than the trends within the forecasts and a more general surplus or deficit position. It is these more general positions and trends that should inform States members thinking in terms of financial framework and business planning.
The accuracy of forecasts – The Minister would wish to highlight the findings of the independent adviser (pg 31 of the report) where 12 forecasts were underestimates and 13 over estimates of outturn, which dispels any assertion that forecasts are being either consistently under or over estimated.
The Minister would accept that there appears to be a pattern of under estimating in times of economic growth and over estimating in economic downturn. This may well simply reflect that previously there has been no quantitative forecast undertaken for the Jersey economy. However, the States Economics Unit have already undertaken detailed research which should help improve our forecasting capability.
The remainder of the comments are sufficiently covered in the Panel’s recommendations.
Comments on Recommendations:
Recommendation 1: The Treasury should consider how they can make States Members more aware of what financial forecasts are, what they are designed to do and their limitations. In turn, States Members need to communicate this more effectively to the general public.
The Minister accepts the recommendation and believes this to be one of the key challenges in relation to the financial forecasting process. The focus in the future needs to be on clear and simple messages, which at the same time identify the assumptions that have been made and the limitations within the figures. This is the only way that criticism and unreasonable expectations of the accuracy of financial forecasts can be managed.
Recommendation 2: The presentation of data in the Budget and the Business Plan could be improved. One obvious improvement would be charting different rates of inflation in a density (fan) chart. Another suggestion would be to consider the effects of a range of economic growth forecasts on employment and population growth. There could also be a range of income forecasts produced within a probability band.
The Minister will take on board the views of the Panel and would highlight that the recent draft Strategic Plan included a fan chart presentation of the financial forecasts. This is likely to become the format of future forecasts rather than the five year spot forecasts which have been presented in recent years and further improvements are intended for the draft Annual Business Plan 2010.
The expansion of some of the other areas of forecasting and reporting in relation to the effects of ranges of economic growth on employment and population will be subject to resources being available.
Recommendation 3: There needs to be a greater discussion of the assumptions underlying the forecasting figures in the Budget. Some of this could be incorporated into the Budget to introduce greater transparency into the forecasting process. The Treasury should also indicate where its forecasts differ from the FPP
This recommendation is accepted. The assumptions currently included in the Budget and Business Plan can be expanded and made more explicit. As discussed above, there is some work to be done to integrate the traditional forecasts produced by the Treasury for the Budget and Business Plan with the recent development of FPP reports and forecasts. This should enable improvements in comparison, understanding and familiarity both with States members and then with the public and business community.
Recommendation 4: The Treasury should introduce target zones for forecasting. This would allow them to measure how well they did against the target and to try and improve upon it.
The Treasury will continue to strive to improve forecasting and the recent development of a new income tax forecasting model will assist that. The new range forecasts have been introduced and more work is required to establish the appropriate performance targets. A later recommendation suggests the involvement of the C&AG and the Minister would welcome his involvement in developing appropriate performance targets
Recommendation 5: The Panel welcomes the Treasury initiative to address the significant variation between estimates of profits in the finance sector and the actual outturn.
The Minister also recognises the value of this piece of work and will encourage further development as more information becomes available.
Recommendation 6: The Panel welcomes the introduction of an Annual Business Inquiry to complement the existing approach for determining GNI.
The Minister agrees that this will provide new and valuable information on our economic performance.
Recommendation 7: Work should be undertaken on the feasibility of Jersey adopting a Statistics of Trade Act (as in the United Kingdom). This law should have the power to call for information unless there was sufficient information forthcoming on a voluntary basis.
The Panel’s comments have been passed on to the Chief Minister, the Head of Statistics and the Statistics Users Group.
Recommendation 8: The Panel appreciates that the role of the FPP is to advise the Treasury Minister on economic trends; however, it is important that the independence of the FPP remains undiminished and the Panel has reservations about whether by accident or design, the FPP could supplant the work of Treasury officials. The Treasury should Review of States of Jersey Financial Forecasting continue to strengthen their forecasting processes (income and economic) and not sub-contact this responsibility to the FPP.
The introduction of the FPP has been a tremendous and timely initiative for Jersey. The work of the FPP and their reports has brought a fresh focus and interest to the workings of the economy and financial forecasts in general. It has also helped with the understanding and communication of financial forecasts generally, and most recently the potential of an economic downturn.
There is no suggestion that the work of the FPP is intended to replace anything previously done in house – indeed their work provides additional, independent and expert advice which we are fortunate to have access to. However, we would be foolish not to seek to extract as much advice, knowledge and experience from the FPP as they can provide to improve our own forecasting processes.
The work of the Treasury and States Economic Adviser in relation to financial and economic forecasting is unchanged and improvements will continue to be sort and processes strengthened.
Recommendation 9: The FPP should be subject to independent scrutiny. The present Corporate Services Panel believes that it has an important role to play in providing a forum for this and recommends that the next Corporate Services Panel gives this high priority in its work programme.
The Minister is open to suggestions that will improve the transparency and therefore credibility of the new Fiscal Framework and will listen to any recommendations made by the new Corporate Services Panel on this issue.
Recommendation 10: In the UK, the Comptroller and Auditor General reviews budget assumptions on a three-year rolling basis. Such a process should be introduced into Jersey. This would provide a check both that the audited assumptions remain reasonable and cautious, and to see whether they were reasonable and cautious projections in the period since they were last audited.
The Minister would welcome the proposal for an independent check of budget assumptions and performance. Indeed, the Minister would welcome the input of the C&AG in terms of developing some appropriate performance targets for financial forecasting
Recommendation 11: The Panel recognises that the forecasting processes have been strengthened in recent years, but also notes the importance of informal processes of gathering data for the forecasting process. This relies on the experience of individuals who have had many years examining how economic issues have affected the business community. With the retirement of certain individuals, a good deal of understanding and personal links will be lost. The Forecasting Group needs to consider how it will maintain these informal links, especially with the finance sector.
The Minister notes and recognises the Panel’s specific concerns. The informal links with industry are indeed invaluable in gauging potential affects in the industry on States tax revenues both current and future. However, the current financial climate has caused an even greater dialogue with the finance sector and indeed other sectors of the economy. Furthermore, with the strengthening of the Chief Minister’s department in relation to international tax and also additional resources proposed for income tax it will be possible to establish new links to industry in addition to those informal links which exist at present. There is certainly no intention that the forecasting group be reduced, indeed it is likely to be strengthened by the new officers.
Recommendation 12 There should be a single annual forecast which would be updated on a regular basis internally and made available to the FPP. The various financial surveys should be timed to feed into this single forecast.
There has been much debate over many years about the frequency of forecasts. Essentially the purpose of the forecasts is to provide a basis for financial planning and to aid decision making. Whether a forecast is published once or three times a year, components of it will need to be updated on a more regular basis.
At the current time with the rapidly changing economic climate regular forecasts are crucial to monitor changes in the economy and States finances. The forecasts will continue to be produced to coincide with States publications – Budget and Business Plan and updated at the times of significant new information – generally income tax assessments and financial outturns. The Minister will also continue to ensure that updates are produced as and when required by the FPP.
The Minister is not opposed to the concept of a single annual published forecast but with the current rapidly changing climate does not feel this is the right time to consider such a change. However, this is a principle which the Minister will seriously consider in the medium-term particularly in relation to the integration with FPP reporting.
gov.je