How should government cut expenditure to cut the budget deficit?

There really is just one question on everyone’s lips right now: How should government approach cutting its expenditure to bring its budget out of deficit? The Journal asked several prominent business people and institutions this question and here are their answers.

Cayman Islands Chamber of Commerce

“Responsible budget management is essential for the success of the Cayman Islands. The elected Government should use the state of the country’s finances as an opportunity to introduce radical reform such as assessing all services and staffing levels, eliminating wasteful spending and non-essential services that can be either eliminated or provided by the private sector.

“The Chamber has expressed its concern over the growth and the expanding scope of government for many years and has promoted privatisation and the sale of government assets as one of the ways to reduce the size of government and the public debt.

“Government should not be competing with the private sector for the services that it provides. Government works best when it creates an environment that supports and stimulates business growth, investment and development while at the same time providing fair and balanced regulation that keeps the free market system in check. The elected government should also use this opportunity to ensure that all accounts are audited and brought up to date as an urgent priority. Once the real financial picture is determined, a medium to long term plan can be developed to meet our debt obligations and to build up reserves so that the current situation is never allowed to occur again.” 

Michael Ryan,
owner, developer, Dragon Bay

“The fiscal challenges that Cayman’s government faces can be dealt with in three ways: cut expenditure, increase revenue, or, if these are not enough or don’t work fast enough, sell assets. Governments across Europe’s advanced economies, such as France, Spain and Portugal have realised that the divestment of assets is an intelligent option to relieve government debt and also to improve services.

“The Miller report highlighted specific assets in Cayman that could benefit from private ownership, among them the sewage works and the water company. Their current format is inefficient and does not allow for growth. Privatising these services would increase government’s funds, lower its debt ratio and provide a better service for customers, while at the same time encouraging investment and creating new jobs via expansion of the services across the island. This is a win/win situation for all parties.

“The new government administration building has also been identified as a good opportunity for divestment. Ownership of this building could be directly offered to the Caymanian people via some kind of share or trust buy-in, thereby ensuring that the ownership of this government asset stays within the local economy. Private ownership of such entities will always be more effectively run than public ownership. Government is already renting property for its use all across Cayman.

“A third opportunity for private investment lies with the Airport Authority. Extending the runway to accommodate European long haul flights is, in my mind, essential if we are to grow our economy and have the ability to compete with jurisdictions such as the Dominican Republic, Puerto Rico, St Lucia, Antigua and Barbados, which all have runways long enough to accommodate long haul wide body aircraft that can come directly from Europe and other destination markets.

“For this reason and the additional efficiencies that can be realised, private investment in the airport and runway expansion is a sensible and intelligent solution. There are many examples all around the world where such a move has taken place, with governments in the UK, US and Canada all realising that private airport facilities are the best way to provide service and reduce costs.

“The full extension of 1700 feet into the North Sound could be funded by fill taken from the proposed North Sound Channel offsetting the need for additional government investment and within a short space of time we could be in business competing with similar jurisdictions.  

“However, it should be pointed out that divestment must be done with extreme care with regard to the process. There must be transparency, clarity and an unbiased approach so that cronyism cannot rear its head. No one wants this. This is a process that is not unique to Cayman and there are many precedents that we can draw on.

“As part of any programme we need to clearly focus on overall economic growth, a clear coordinated programme to attract new investment and encourage existing business to invest and grow. This needs to be coupled with a targeted promotion delivering a clear message that the Cayman Islands is the best place to work, invest and live and welcomes the right people to join us.

“Another point to make is that moving forward is not about singling out the Civil Service; it did not deliberately cause the challenges we are facing and is a vital part of the solution. We need to ensure that there is enough economic growth and investment to create new jobs to ensure that when government is reduced in size there are jobs available in the private sector to accommodate the shift from the public sector. Some tough choices need to be made but we are all living together in this small community and we have to resolve it together.”   

Bo Miller, businessman
“Our problem over the recent past has not been a lack of revenue; it has been poor management and excessive expenditures. And expenditures will have to be cut across the board if this country is to survive.

“The centralised top-down style of management is a failed system; we must now adopt a new format of ‘from the bottom up’ in order to empower people and streamline efficiencies. We elect our leaders on a district basis, yet we manage form a central stand point; this is a conflicting and inefficient situation.

“Instead we should be electing our leaders on a national level and managing on district level. Government needs to identify every business type entity that is operating in the loss category with a view to divesting of these. A line item veto type review should be implemented and all unnecessary items removed from the budget. We should do this while we still have a private sector to take some of these services on.

“Our leaders continually defend the need for certain wasteful programmes because of the demand from their voters. I don’t buy this. We need to remind one and all of the fundamental role of Government-it is to protect us – so we can provide for ourselves. The exceptions being those who cannot do for themselves; laziness not included.

“Some other ideas worth considering include reversing the duty increases from the current 22 per cent down to 15 per cent (statistics show increase duty results in less revenue) and streamline customs duty collection by direct computerised link up with the largest importers, leaving one off imports to be done by visiting the collection centre.

“There could be an introduction of a 5 to 7 per cent duty on all duty free items including religious entities (abolish duty free; rename tax free) and consideration for a one to two year moratorium on specific types of new real estate developments in order to stabilise the drop in values (there is too much inventory on the market with too few buyers).

“Government could seek private sector investors either through direct sales and /or joint ventures for Cayman Airways, Boatswain Beach, Pedro’s castle, the Botanic Park and examine privatisation of health care management, roads constructions and maintenance, sewage treatment, garbage disposal and recycling, general building maintenance.

“Most countries facing today’s economic challenges would like to be in our position with relatively no unemployment. But for this to happen there must be a change of attitude by all. Our present focus must be sustainability, as it is impossible to achieve growth and expansion in this climate. Let us use this period to lay out a new vision and a sustainable development plan for the future. We have to learn to live with less and focusing on our needs; not our wants. More is not always the answer.

“Cayman can pull through this crisis and have a bright future but it cannot be achieved by chance; it requires a clear vision, competent management, proper planning and an inclusion policy for all our people. Every crisis presents new opportunities, let’s find them and get to work before Cayman’s slips into a point of no return.”

Paul Byles, managing director, Focus Corporate Services & Consulting
“The quickest and most effective thing is likely through divestment (for areas which can feasibly be offered in the private sector).

“Assuming the above, for areas in which the government is subsidising the service at moderate levels, the government could consider a complete divestment. In these cases there is a greater possibility that the service can be commercially attractive to the private investor as they will likely be able to make some efficiency gains and be profitable.

“For areas in which there is currently a very large subsidy (for example Cayman Airways or Boatswain’s Beach), the government could consider entering into a management agreement with a private sector entity where the government could pay a fixed fee to the operator, which is lower than the current operational cost, and the operator’s efficiency gains and other improvements would still make the transaction viable to them

“In both cases there could be the usual contractual stipulation arrangements to ensure ongoing quality and availability of service as well to handle any sudden/high increases in prices.”

Anthony Travers, chairman, Cayman Finance
Swiftly.”

Eduardo D’Angelo P. Silva. managing director, Sul America International Bank (Cayman) Ltd.
The Cayman Islands Government should immediately deal with the deficit by reducing all expenses (including salaries) temporarily across all departments and authorities. At the same time, an aggressive privatisation programme of all non-essential services provided by government should be implemented.

“This programme should include services provided directly by government (for instance, garbage collection and disposal) and also those provided by authorities (for instance port / airport management and roads construction). The privatisation process should establish that civil servants presently working on these services should be given preference for job placement with the new private providers and that the bidding process should estipulate that the winner(s) should, besides demonstrating the technical capabilities inherent to each type of service, be the ones offering the best combination of: a) the highest concession fee paid to government and b) the lowest fee charged to the public for their services. Government should retain the power to regulate the service providers and to terminate agreements for poor performance.”

J.C. Calhoun, broker/owner, Coldwell Banker Cayman Islands Real
“I have asked this question of persons within the civil service and they say the financial problem lies with leadership – starting with the ministers on down.

“Sadly, the specific answers cannot come from within the civil service, because while they know where the fat is, they are concerned that they would be black balled in the future from ever working for government again.

“It will take an objective outside firm to do an efficiency study of every department – the whole system. But the results of these efforts should be made public and not hidden to be eventually shelved and just gather dust like previous efforts.

“Times like these emphasise the need for us to re-evaluate the packages the MLAs and civil service receive including pensions and health insurance, which have become a tremendous cumulative burden on our Treasury.

“It is a fact that salaries, pensions and health insurance for the Civil Service and related government authorities make up over 50 per cent of our annual expenditure.  Over 6,000 people, plus their families, have health insurance for which they contribute nothing.  In our firm I have had to let admin staff go and cut my own salary.  It is time that government compensation, pension and health benefits mirror what is happening in the private sector.  

“It has been said that our Civil Service is the closest thing we have to a labour union. That is probably a fair comment. They represent a huge voting bloc, which is why nothing has come of any civil service reform for the past 30 years.  

“But political considerations must not be allowed to rule the day under present circumstances.  If the expense side of the balance sheet is not addressed, any gains made on the revenue side will be wasted. Make no mistake about it; the status quo is insupportable in its current form. So we might as well try to fix the system to ensure what we come up with is supportable in the future. We need to decide: Do we want a Socialist-type system that will require direct taxation of ever increasing percentages to support a bigger government, which is destined to employ the bulk of our citizens, at huge and ever rising expense? Or do we want a smaller sized and reasonably compensated Government, which can be financially supported by existing consumption driven fees,  allowing the private sector to do more of what government does currently, which will enable it to grow further and provide a sound financial base for our country? It is our decision to make, and it needs to be made now.”

Stuart Bostock, owner, The Security Centre
“Basically, as with private sector businesses, there are several ways to address an organisation’s expenditure when the objective is to reduce costs. Companies with vision started the process of cutting its expenditure and preparing for these times 18 months ago and, depending how aggressive those cuts were, had to make further adjustments as the global economy continued to decline.   

“Achievable and measurable short, medium and long-term targets must be set and commencement of the short-term objectives should not be delayed whilst the medium and long-term objectives are identified. A strict policy for targeting small and immediate cost savings will have a significant impact on the expense line and it is time for the Civil Service to accept that it is operating inefficiently and expensively. I personally would  implement severe and immediate cut backs on all non-essential services, official travel and transportation benefits, consumables and office supplies, official events, consultants and professional fees and recruitment and then ‘clean house’ of people who are failing to do their jobs to a satisfactory level. These are the times to have one person doing the work of three and not the other way around. The medium and long term solutions would address issues such as staffing levels, Civil Service employee related costs such as salaries, health and pension liabilities, operational, housing and contract allowances. In my personal opinion, initiatives and responsibility for cutting costs should lie squarely on the chief officers and CFOs who should not need austere instructions from the Premier to reduce departmental expenditure during these difficult times.”   

Bobby Bodden, developer, businessman
“Cutting expenditure to bring a budget out of deficit will likely require short term reductions in recurring expenses as well as long term solutions. One way to consider if it has not already been done is to place the repayment of loans on an interest only basis for a fixed time and resume regular interest and principal payments when things improve.”

Chris Wight, businessman
“We have to accept that Cayman will never recover until the global economy recovers. Government’s revenues are down from previous years, largely because of the world recession.

“The reality is that we will be running an operational deficit for the next few years, and therefore we must look at cutting the operational expenditure as much as possible.

“Government must seriously consider rolling back the increases on fees and taxes imposed on the financial sector in order to attract back the business that has already left and to attract new business, but telling the world that Cayman is bankrupt does not help any.

“I also feel that the Boatswain Beach attraction is a liability that we can cut back on. Government is having to pay almost $10 million per year just to keep it open; therefore I would like to see the Turtle Farm remain and improved but do away with the failed Boatswain Beach attraction.

“That said, it is obvious that no one single act will solve the problem, but the cuts in MLAs salaries is a small step in the right direction.”

Mike-RyanSM

Michael Ryan

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