Bush calls for borrowing rethink

Leader of the Opposition McKeeva Bush filed a private member’s motion in the Legislative Assembly Monday asking the government to reconsider its two-year spending and borrowing plans in response to a probable US recession and possible global economic downturn.

The motion, which was seconded by West Bay MLA Rolston Anglin, notes the government has outlined intentions of central government and authorities to borrow a significant amount of money to fund several capital projects over the next two years.

The motion warns that there could be difficulty repaying the borrowed money.

‘…Whereas the traditional sources of revenue will be strained to sustain this level of commitment in the form of the repayments on the debt and the increased recurrent expenditure associated with the capital programme proposed by the Government,’ the motion states.

‘And whereas [the] global economic outlook has been downgraded, including the imminent impact of an economic recession in the United States on the Cayman Islands and our revenue base.’

The motion asks government to reconsider and reduce the level of expenditure and borrowing over the short term and to establish a public/private fiscal management committee to review the islands’ revenue base and the level of acceptable debt given the prevailing economic conditions.

Speaking about the motion on Wednesday, Mr. Bush said several of the usual government revenue items were likely to be down because of a US recession.

‘Tourism will be down because of it,’ he said, noting that fees are collected for each cruise ship passenger and on each hotel or condominium room rented.

‘And it will trickle down to other revenues, like import duty,’ he said, explaining that if the tourism numbers decline, it will affect the sales of consumer goods like food, alcohol, gasoline and other things, all of which will impact import duties.

‘All of this contributes to the economy, and there will be less money,’ Mr. Bush said.

In addition, US recessions in the past have impacted real estate sales, particularly along the important Seven Mile Beach corridor where stamp duty is 7.5 per cent of the purchase price or appraised value, whichever is greater. A sales drop off would cause government stamp duty revenues to go down, Mr. Bush said.

‘Real estate will be severely affected,’ he said. ‘Beachfront properties were really affected in the recession in the early 90s.’

Another element of the economy that could be affected is residential construction, which Mr. Bush said would see a downward trend because of a US recession. This would impact such government revenue streams as import duties and planning and infrastructure fees.

Mr. Bush also spoke of escalating costs of the government capital projects. New warnings expressed by a US Federal Reserve official on Wednesday about possible US inflation appeared to justify Mr. Bush’s concerns because Cayman gets most of its construction supplies from the United States.

In addition, Florida – which is Cayman’s most active trading partner in the United States – is considering putting a proposal to repeal the export sales tax exemption on its November election ballot. If the measure passes, consumer goods coming from the state would increase by six or seven per cent.

Mr. Bush said he has heard the price tag of some of the planned capital projects are already increasing. Bidding on the three new high schools and a new George Town Primary School was recently carried out, and Mr. Bush said he heard from one contractor about the costs.

‘This country does not need a school for anywhere between $70 million to $85 million, which is what I hear it’s going to be,’ he said. ‘And that’s just for one high school. They’re planning to build three of them and a primary school.’

Mr. Bush also spoke about the $85.5 million government accommodation project and the multi-million dollar Courts Building project. He also noted the government’s recently announced plans to build a new cargo dock and a separate cruise ship berthing facility.

‘And although they haven’t come out and said what the airport [project] is going to cost, it is my understanding it’s going to cost a lot more than they thought,’ he said. ‘And they’re building this airport where it could be flooded and they’re building a cruise dock where it could be knocked out [by bad weather]. Both of these projects are being built where they have the highest risk.’

Mr. Bush said he could not agree with the government’s spending and borrowing plans.

‘It can only lead to two things: devaluation or an income regime based on taxes,’ he said. ‘It will lead to tremendous recurrent expenditure. Do we want these things enough that we’ll have to tax our houses to pay for them?’

‘The government must reconsider their plans and redraw them.’

Mr. Bush’s motions came only days after the Chamber of Commerce urged the government to use fiscal restraint in the upcoming budget. The Chamber also cited the possible economic impacts of a US recession as the primary basis for its concerns.

In the Strategic Policy Statement issued last November, the government concluded the borrowing plans for its capital projects were affordable and within the delineated principles of responsible financial management.

However, the SPS made some significant assumptions with regard to the underlying economic forecasts.

Although the SPS predicted the US economy to ‘soften’ in 2008, it saw global economic growth as stable. Depending on the depth and length of a US recession, many economic experts now believe the there will be a global economic slowdown.

In addition, the SPS forecast air arrivals to grow between three per cent and 3.1 per cent annually from 2008 to 2011. A US recession is expected to cause both cruise and stay-over tourism to fall.

The SPS also assumes the US Federal funds rate policy will remain proactive or reactive to inflation data. However, it is now unsure whether the US Fed would undo any of the recent aggressive interest rate cuts to head off inflation concerns, or whether it would continue to drop rates in effort to stay out of a recession.