An opportunity not to be missed: fixing Cayman’s financial problems

Over a year ago I wrote that Government and the private sector should don their rain gear as the global financial crisis started to bite in Cayman. People said I was being a Cassandra. Nearly ten years ago, I wrote that Cayman’s revenue base was too narrow to sustain its development and the needs of a growing population, certainly not in a down economy. I recommended a modest annual property tax specifically dedicated to building and maintaining the infrastructure. I also recommended that Cayman should develop a ten year plan for independence. People said I had truly lost it with these two suggestions. And now we are in the perfect storm, with the UK running interference and no real progress, writes Timothy Ridley.

Earlier Governments sensibly put in place mains water supply, sewage (but as yet only for part of the Islands), new airport and hospital and mandatory health insurance and pensions. But we then lived on borrowed time by deferring investment in roads, schools, port, runway extension and waste management. The previous Government decided to build the roads, schools and a new Government building simultaneously and without proper long term funding/financing for these projects. Also, over the past few boom years, Government operating expenditures troublingly grew as a percentage both of revenue and GDP. Paradoxically, the Ivan disaster produced a huge inflow of overseas insurance and reinsurance money and (even with the duty waivers and reductions) the Governments coffers filled with import duties on (re)building materials and replacement equipment and goods of all kinds. This inevitably tailed off. Then the global crisis hit and our two main economic drivers, tourism and financial services, stopped expanding and then slid backwards. Real estate, construction, support services and consumer spending all suffered. 2009 Government revenue suddenly sank well below projections, yet Government expenditure continued unabated.  
 
Voters everywhere continually demand more and better services, all too often from their Government. And politicians promise to deliver them. So either we stop demanding or we (not just others) have to pay for these services. And there are indeed vital projects still to be undertaken here. The most pressing (and maybe the most expensive) is waste management and the current landfills in particular. Even the most optimistic realtor, developer and “no new taxes” lobbyist must be aware that the south end of Seven Mile Beach, Camana Bay and the bypass stretch are exposed to a potential toxic disaster (air pollution already and soil and water pollution that may be happening unseen underground). What price tourism, real estate and the North Sound if that occurs (and the crime wave and poor under resourced policing continue)?
 
There are some things we should stop doing. First, bashing the UK. This may play well locally for a time but is unproductive. Second, saying we just have a short term cash flow problem and all will be well if we can borrow some cheap dollars to keep us going until the boom times in tourism and the financial services industries restart. Those times may be a while coming (and we must ensure the right platforms to encourage these key industries), and the traditional revenue streams from these industries will likely be insufficient for the long term.
Third, saying we just cut Government expenditure, eliminate waste and abuse in Government services, downsize the civil service and improve civil service performance. Steps must be taken (the civil service and statutory authorities are in the aggregate far too large a percentage of the total work force), certainly to freeze the expansion, but it will be very hard in reality to turn the clock back (just count the votes).
 
Fourth, saying that privatization and public/private partnerships and private finance initiatives are the solution. There are some sensible options, but these are not sufficient to handle the problems.
 
Fifth, saying that our ratios of debt and debt servicing costs to GDP are and will be well in line with other countries. This is misleading if most of that GDP is off limits as a source of Government revenue, i.e. we are not prepared to tax it directly! I suspect Moody’s may not have taken this into account in their recent rating confirmation of Cayman. Sixth, parroting “do not raise taxes in a recession”. This comes from the same people who during good times say “do not raise taxes, you will stop the boom”. Lastly, painting this as a Caymanian-non Caymanian issue. We are all in this together.
 
We should not ape the fiscally irresponsible behaviour of the US and the UK. Fortunately, we cannot “print money” and flood the market with CI$ debt that we cheapen by devaluing the currency (since Government borrowings are essentially in US$, we leave the Fed to do that for us!). We need to reinstate sound Government finances. I believe this is possible but contributions are required from the entire resident community and those invested locally. The self-interested “nail the other guy, he’s not at the table so he can be lunch” is very unhelpful. Suggestions should be constructive with a willingness to compromise for the greater long term good.
 
At the date of writing (30 September), we have no final (worse than reported to-date, I suspect) figures for the last fiscal year and no budget for the current fiscal year, but we now have verbal confirmation of UK in-principle consent to a portion of the loans requested. The UK still needs to see a proper plan for sustainable revenues/financing and expenditure cuts/containment to match (phased implementation should be feasible). In our own interests, we should also set clear priorities. The short to medium term solutions outlined so far call for increases in the usual indirect fees and duties (e.g. import duties, financial services fees, work permits, boat licences etc.), transaction fees (unspecified, but presumably money transfers of some sort), one off savings (e.g. deferrals and cancellations of services and projects) and windfalls, civil service/statutory authority hiring and remuneration freezes, disposition/refinancing of Government assets/liabilities etc., and improved efficiencies, performance and collections (delivery is another question). But I fear that, if these are not combined with a commitment in the longer term to broaden the revenue base through meaningful new levies (implemented in a sensible staged manner) that are not so dependent on perpetual boom times and buoyant consumption, we may only be kicking the can down the road for a short while.
 
New taxes should only be imposed if and to the extent that the short-medium term measures outlined above fall short or are not sustainable. Taxes should be fair, have the lowest adverse impact on economic activity and should be cost effective to collect and enforce (a payroll tax fails to meet this last test in particular and is wide open to nonpayment and fraud by employers, as with health insurance and pension contributions). Applying these principles, I suggest for mature study and consideration a modest annual community service charge on real estate (dedicated to appropriate infrastructure and services and collected by the Land Registry), a levy on utility (including TV) bills (collected by the utility companies) and, very reluctantly if all else fails, casino licences (collected by a new Gaming Board). These could together raise a stable CI$45-CI$75 million annually for Government fairly, with low adverse economic impact, at a reasonable cost and with a high collection rate.

Tim-Ridley-FINAL

“We should stop…painting this as a Caymanian-non Caymanian issue. We are all in this together.” Tim Ridley

NO COMMENTS