WHEN the States decided to scrap corporation tax and move towards zero-10, the resultant financial ‘black hole’ in public finances was to be funded by a combination of immediate tax rises, economies by government itself and economic growth.

Yesterday, the internationally-recognised economics professor Geoffrey Wood produced his independent report on how well that strategy is faring and whether the States is following its own fiscal framework.

There is much that is encouraging in his appraisal and praise for the long-term policy of the island not to have a deficit. However, the framework approach of setting public expenditure at certain percentages of GDP and paying down the ‘black hole’ deficit are, as he says, challenging.

In addition, the States was wrong to commit anticipated savings under the financial transformation programme to new services instead of reducing the current imbalance and it will need to monitor carefully future progress if it is to stay on track.

His wider point, however, is more revealing. Nearly a third of all public sector expenditure is outside of the scope of the island’s fiscal framework and is pretty much uncontrolled.

The two main areas are the amount paid to the Social Security Department each year for old age pensions and other benefits and the inflation-linked pay rises for public sector employees.

More than half – £188m. – of net revenue expenditure last year went on pay. ‘With such a large proportion of expenditure linked to inflation, and with no mechanisms by which the States can control local inflation, increases in inflation are a significant risk to States expenditure,’ Professor Wood warns.

This newspaper has been making the point for years that government payroll costs are out of control – a concern confirmed by the States own independent expert – which begs the question of how a ‘financial transformation programme’ can have credibility or teeth when something as fundamental as pay costs cannot adequately be managed.

What yesterday’s second independent fiscal policy review really shows is how far government has yet to go if it really is committed to a financial transformation process.