From John Clennett.

RECENT events in the States have left me wondering if I’m living in cloud cuckoo land. On the one hand we have the States pleading poverty, stringent budget cuts, unable to afford any pay increase for States employees; and on the other hand the Treasury Minister has miraculously produced the sum of £222 million to be spent in the next three years partly, justifiably, for health and property refurbishment and partly for more dubious purposes intended to stimulate the economy.

I assume that the basis for the approval of this huge sum rests on the fact that at the end of 2011 the audited States accounts showed ‘reserves’ of £3.7 billion, that is three thousand seven hundred million points. A sizeable sum!

What needs to be appreciated is that, of this sum, £2.7 billion represents the estimated ‘value’ of all States property and engineering works previously paid for. This amount was brought onto the books two years ago as a result of the States adopting the GAAP rules of accounting. This part of the reserve cannot be regarded as a source of funds for future expenditure, although certain properties might be saleable.

The States liquid resources at the end of 2011 were approximately £950 million, of which £590 million comprises the strategic reserve and £90 million the currency reserve. I understand the States have already authorised using 60% of the currency fund to provide cash, which means that the Island can no longer claim that its currency is 100% backed by UK gilts, as was the original intention.

The strategic reserve is created by a specific article of the Finance Law with a specific purpose and the associated investments should be ring-fenced so as to ensure that funds are available for the specified need, should this need arise. I believe it would require an amendment of the Finance Law to allow the fund to be used to meet future capital expenditure.

So the question needs to be put: From where will the States find the cash to meet the projected expenditure?

The States have historically met capital expenditure from revenue surpluses. Recently there have been no revenue surpluses. The estimates given in the press for years 2013, 2014 and 2015 total £964,000, with £707,000 for 2013 alone and no increase in taxation.

If this figure were to be achieved, which seems unlikely, it would provide short-term relief but as in the case of potential property sales it does not address the long-term problem. The States are going to need capital expenditure for the foreseeable future and at present there is no indication as to how this need is going to be met.

Finally, I note that the Treasury Minister has adopted the Gordon Brown euphemism of describing all capital expenditure as ‘investment’, irrespective of the nature of the expenditure.

While capital expenditure may sometimes generate income it frequently brings in its train increased maintenance costs.

What in my opinion is urgently needed is a cash flow forecast for the next three years and beyond, indicating precisely from where the cash required will be obtained, and what the knock-on effects will be.

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