How often do you hear the phrase – usually from politicians, officials and business representatives – that Guernsey is “well-placed to meet the challenges springing from [insert issue here]”? And how often do you wonder what really lies behind such assertions?
If you are looking for some tangible evidence relating to the island’s overall wealth, two chunky items of information have recently materialised.
The first came with the long-awaited publication by the States of a list of all its properties, together with its plans to manage them better. It is full of detail. There are 4,132 building units in the portfolio, generating annual income of £3.5 million offset by £2.6 million of outgoings. An estimated £20 million a year is needed for repair and maintenance.
Much the most interesting figure, however, was for the “total current asset insurance rebuild value” – that is, the figure which insurers put on the rebuild cost. This is the closest we have to the estimated market value of this property portfolio – and the figure is “in excess of £2bn.”
To understand how big such numbers are, recall that whereas one million seconds is equivalent to 12 days in time, 1bn seconds is over 31 years.
Now add this £2bn to the other pots of medium- and long-term reserve money held by the States. Years ago we used to talk about Rainy Day funds, Contingency funds and so forth. These days it is all in a “States General Investment Pool,” and at the end of 2016 (the figure would be higher at end-2017) this amounted to £1.98bn, including uncommitted proceeds of the £330 million bond issue in 2014. A further £910m or so was held specifically on our behalf in the “Common Investment Fund,” which covers obligations springing from our contributions to our longer-term health and social security.
Even leaving aside the large pension pot held for States employees, which amounted to £1.3bn, you can see we still have a total exceeding £5bn. As was once said in another context, a billion here and a billion there, and pretty soon you’re talking about big numbers. They are numbers which ought to make us all feel a bit better about how well-placed we are to cope with the future, so long as we manage these resources sensibly.
The second item of information came late last year, when the States quietly announced the results of several months’ much-needed work reviewing how the size of the Guernsey economy is measured. Interestingly (or embarrassingly depending on your viewpoint), it was acknowledged that the measurement of gross domestic product (GDP) had hitherto been flawed, and revised figures were duly published, audited by the UK Office of National Statistics.
These showed that in 2016 total GDP – technically economic output measured on an income basis – was £2.868bn. A comparable measure, called Gross Value Added, which adjusts for subsidies and taxes, was £2.806bn. Together, the two measures allow you to measure the contributions to output of different sectors of the economy.
Two conclusions quickly emerge from these figures, which were recalculated back to 2010. The more startling revelation is that the economy contracted viciously in both 2010 and 2012 where previously it had been assessed as growing. Indeed, in real terms it has still not regained the level seen in 2011.
Also important, however, is that the actual size of the economy is significantly larger – in fact about a fifth larger – than previously calculated. The point here is not that we are in some sense better off – after all we are talking about something in history which you can’t change. The point is that the States has previously determined (and spelt this out in its so-called “Fiscal Policy Framework”) that the government should invest 3% of GDP per annum, should run a deficit of no more than 3% of GDP per annum, and should spend no more than 28% of GDP per annum.
If GDP is larger than we thought, then so are the actual numbers which underlie such percentages. This would suggest that the constraints on politicians, officials and others to spend may be less suffocating than in the past. If on top of that we have larger reserves than we expected, those constraints seem to be loosened further.
Plainly the numbers we’re talking about here are chunky, and more so than most people realise. But the caveats which go with them are no less chunky.
Take the property assets. Interesting as it is to see the sheer size and breadth of the States portfolio, we have no idea how these assets are valued beyond the rebuild estimate. Some are a drain on States resources, some will earn a return. Many will need money spending on them to realise any value at all. And any valuation presumes there is a buyer on the other side.
So, we have no idea how prudent the purported £2bn number is. But we do know that, as a number, it is £2bn larger than the near-zero valuation currently put on States property assets.
Then we need to consider the propensity of our politicians to spend or otherwise fritter away this apparent largesse. These reserves may be States assets, but the States also has liabilities. Its social insurance obligations are the most obvious, but if you look at the Medium Term Financial Plan you’ll find a whole host of plausible investment projects – small, medium and large, each categorised as “maintain”, “transform” or “grow”.
On top of this, the States currently has 23 long-term policy priorities that, somewhat awkwardly, are neither prioritised nor evaluated for the likely returns they might produce.
So much, so evident. The crucial financial question for the decision makers is whether the return on any investment of our reserves is better than the return available in the financial markets, where some £3bn is already being invested.
The target for these market investments is typically inflation + 4%. That is a significant hurdle, made even more demanding to the extent that the twenty or so managers of these assets actually beat the target. The only way round the hurdle is to show that the non-financial benefits of any proposed investment far outweigh such conventional benefits.
Of course, the case for pressing on with investments at home is self-evident, because we can all see that the economy itself has not been growing. On the other hand the capacity to pursue such investments is plainly limited, and using our reserves is not the most attractive path to follow. The best that can be said is that these are nice problems to have, even if we hadn’t realised it before.
