A $567 million spending plan contains $90 million in new revenue measures along with some significant pay cuts for the civil service. It also gives the United Kingdom heretofore unseen measures of fiscal control.
The United Kingdom finally gave a conditional assent to Cayman’s 2012/13 spending plan late last month.
However, that assent came with strings attached – measures that will give the UK’s Foreign and Commonwealth Office much more say in current and future budgets.
Cayman Islands Premier McKeeva Bush hailed the agreement, saying it validated his government’s decision to carry the budget process forward even though the UK Foreign and Commonwealth Office and Overseas Territories Minister Henry Bellingham hadn’t initially given formal approval of Cayman’s $567 million spending plan.
“If we had followed the thinking of the opposition and independent members of the House and other critics to wait for formal notification, where would we be today?” Bush asked during a press conference at the Legislative Assembly building. “We would have had to scramble… to meet the deadline for passage of the Appropriations Bill. The course that we have taken in making significant progress in the legislative phase of this budget process was the correct decision.”
Although he lamented that Cayman had lost its “economic sovereignty” to the UK in the 2012/13 budget, Bush said the four-year plan for Cayman’s finances would put the country back on “sound economic footing”.
The United Kingdom Overseas Territories Minister’s office set out four major conditions under which that budget would be agreed with the UK.
First, the government must pass the Framework for Fiscal Responsibility into law by this month.
The framework was an agreement signed between the Cayman Islands and UK governments last year that sets out a number of spending restrictions, management and audit requirements, as well as bidding processes for the government to follow. It’s believed the conditions of the framework will be imbedded into the territory’s Public Management and Finance Law.
Second, there can be no supplementary budget during the 2012/13 budget year, unless it is to fund recovery from natural disasters.
It was not immediately clear whether this requirement had been extended to other budget years. In the previous budget, 2011/12, Cayman added $49 million in additional spending just a few months before the end of the financial year on 30 June.
Third, the Cayman Islands government agreed to assist the UK’s appointed economic adviser in periodic budgetary reviews during the fiscal year, of which there can be as many as four. Whether the UK would be required to report the results of its findings to the public was unknown.
Finally, a “budget board” – as it was referred to by Premier Bush – will be established, to be led by Cayman Islands Deputy Governor Franz Manderson and to consist of an unknown number of members.
The members can include certain representatives from the private sector. The board will assist government in setting longer-term fiscal plans and policies between now and 30 June, 2016.
The Cayman Islands government’s 2012/13 spending plan depends on a 20 per cent, one-year growth in revenues to make ends meet, according to government budget documents released last week.
The proposal also requires a total of $81 million in overdraft facilities, also known as transitional borrowing, to cover expenses during the lower-earning months of the fiscal year.
Central government expenses are forecast to be $567 million for the year, while revenues are forecast to come in at nearly $650 million.
“The [revenue] amount represents a growth of 20 per cent when compared to the $544.1 million in revenue forecast for the 2011/12 year,” budget documents state. “The forecast is based on enhancement to current revenue streams and new revenue measures totalling approximately $90 million.”
The new fees and charges, according to earlier statements by Premier Bush, include higher fees for work permits, increases in stamp duties on certain real estate purchases, and increases to certain fees in the financial services sector, among other revenue streams.
The central government expenses of $567 million are made up of $251 million in personnel costs, $95 million in supplies and consumables [including costs for government building leases], $25 million in depreciation expense, $33 million to finance borrowing costs, $108 million in outputs purchased from statutory authorities and government-owned companies, and nearly $19 million in outputs purchased from non-government suppliers.
Economists generally refer to the $127 million paid for the last two items as the government’s “subsidy” to statutory authorities, government companies and non-governmental suppliers.
In addition to those expenses, $32.8 million in “transfer payments” are budgeted in the 2012/13 spending plan. Those include $14.6 million in scholarships, educational support and nation-building programmes, $8.7 million in poor relief and children or family services assistance programmes, $5.6 million in ex-gratia payments to seamen, $1.3 million in benefit payments to ex-servicemen, $890,000 in housing assistance and $264,600 in support to local business associations, among other expenses.
“The government made significant efforts to restrict expenditures,” the budget statement noted. However, rising health care costs, the need to contribute to government worker past due pensions [nearly $17 million], and the ongoing implementation of the constitution, which was expected to cost more than $32 million before work was completed, all served to increase costs, government noted.
Unaudited figures for central government expenses during the 2011/12 budget year were $554 million, while figures for the 2010/11 year were $512 million.
In addition, the government plans to make $53.2 million in capital project investments during the year.
That amount breaks down in part as follows: $13.9 million for various education-related construction projects, mostly for the new government high schools; $10.5 million for debt servicing and operations at the Cayman Turtle Farm, $5.1 million to Cayman Airways to continue paying off the “shareholder deficiency”, $4.5 million on construction of new roads and $2.2 million spent to settle claims for gazetted properties taken for public road works.
Because of the increased government revenues, the budget is projected to be in much better shape at the end of the fiscal year, 30 June, 2013. However, budget documents indicate government will still not meet debt-to-revenues ratios, nor will it meet requirements for cash reserves set out in the territory’s Public Management and Finance Law. That means the United Kingdom will maintain significant control and influence over its territory’s public sector spending regardless.
Civil service cuts
Some civil servants will be given a much larger pay cut than 3.2 per cent of their salary under budget reduction proposals contained within government’s 2012/13 spending plan.
Government staff is to be reduced by a “headcount” of some 360 civil servants over a period of five years, on top of the 140 vacant or new positions that have already not been filled.
There will also be a “pay freeze” for all members of the civil service.
The across-the-board pay cut of 3.2 per cent in the current budget year, an amount which was just recently restored to civil servants by Mr. Bush’s government, is expected to generate some $5 to $6 million in savings over the course of the 2012/13 year.
Government has earmarked that amount to assist in paying down past service pension liabilities for current public sector retirees.
Some civil servants will be losing additional pay.
Those Caymanian government workers over the retirement age of 60 who continue working for the public sector on contract are able to receive their pension, as well as a salary for the term of their contract.
However, under new civil service rules, those public servants will receive what amounts to a pay cut upon taking up their new contracts.
“All fixed term contracts for civil servants over the age of 60 [will] be assessed at point 1 on the salary scale,” Bush said Monday.
What that means is, if a pay grade ‘J’ civil servant was working at pay point 5 on the civil service scale, when they reached age 60 and signed a new contract, they would go back to point 1 of the scale.
The reduction could result in thousands or even tens of thousands of lost wages per year, depending on the person’s position on the pay scale. The civil servant would also be in a position to receive their pension while receiving the reduced salary.
In addition to the previously announced hiring freeze, which according to Premier Bush means “80 per cent of the posts that were budgeted in the 2012/13 fiscal year” will not be filled, a ‘pay freeze’ for all civil service salaries will be implement.
Deputy Governor Manderson had alluded to some – but not all – of this in a 20 August memo.
“Through 30 June, chief officers have agreed to eliminate approximately 140 of the vacancies and new positions that had been funded in the original draft of the 2012/13 budget,” the deputy governor’s memo stated. “Over the next five years the moratorium on recruitment will aim to make further reductions to our numbers by closely scrutinizing new vacancies….to assess whether such posts remain critical to our operations,”
The goal, according to Manderson, is to save as many jobs as possible of existing civil servants while not requiring them to take massive pay cuts so the government can keep operating.
Bush said that there would be a “reduction in headcount” of the civil service by 360 over the next five years and a pay freeze on “all civil service salaries as well”.
Manderson said that his office was still working out details of a voluntary separation scheme for civil servants and implementation of health care plans for new government workers.