Fiscal Policy Panel publishes fifth annual report

James Qualtrough | October 1, 2012 | 0 Comments

The Panel welcomes the move by the States towards medium-term financial planning and the publication of the first Medium Term Financial Plan.

The Panel has revised down its forecasts for growth in 2012 and 2013 and advises that in response to this deterioration in the economic outlook the States should act to give more fiscal support to the economy in the remainder of 2012 and 2013 and if practical to a greater extent than that set out in the MTFP. The extent of stimulus should not be limited by the balances on the Consolidated or Stabilisation Funds. The States should give consideration as to the best way to fund needed stimulus if it is constrained by the availability of funding from these sources, not least because any constraint would be one of cash flow and funds could be repaid from future revenue.

Panel Chairman Joly Dixon said, “It is our advice that further fiscal stimulus is merited that can help support the economy in a timely, temporary and targeted manner. There is a significant increase in capital expenditure planned over the life of the MTFP and if it is practical to channel more support into the economy in 2012 and 2013 by front-loading this expenditure -where it is necessary and productive investment – then the States should do so.”

“Looking further out the Panel are concerned that the MTFP plans for a continuing significant stimulus in 2014 and 2015 when the economic conditions may then not merit the same approach as in the short-term. As it is too early to judge whether this stimulus will be warranted, contingency plans should be made as to what could be done to reduce the extent of support if economic conditions improve significantly, or increase it if economic conditions deteriorate.”

The Panel’s other recommendations are:

1) No transfers into the Stabilisation Fund are recommended in 2012 or 2013. However, further consideration needs to be given as to how the Stabilisation Fund will be rebuilt through countercyclical fiscal policy, once the economy begins to recover. The Panel does not recommend a transfer into or out of the Strategic Reserve at this stage.

2) The Panel cannot rule out that there is an underlying structural imbalance between expenditure and revenue. The Panel’s view is that further analysis is required by the Treasury and Resources Department to consider the nature of proposed capital expenditure, the way it is funded and what it implies for the underlying position of States’ finances. If this analysis suggests there is a structural deficit then consideration should be given to its extent and nature, including a detailed plan of action to rectify it.

3) The Panel have had to make significant adjustments to the financial forecasts presented in the MTFP to try to assess the underlying economic impact of the proposals. In future the presentation of States’ finances would be more informative, leading to a better informed policy debate, if these types of adjustments were already included in the analysis accompanying any proposals in the MTFP or Budget.