Direct taxation looms

Civil servants might get no pay in Sept.

The Cayman Islands will have to take a serious look at direct taxation, such as property taxes or income taxes, for the first time in its history in order to avoid an imminent budget crisis.

Leader of Government Business McKeeva Bush

Leader of Government Business McKeeva Bush looks on as a speaker gives her ideas at Thursday’s emergency meeting, held at the Ritz-Carlton, Grand Cayman.
Photo: Brent Fuller

According to a letter sent Thursday from the United Kingdom’s Foreign and Commonwealth Office to Leader of Government Business McKeeva Bush, UK leaders were ‘alarmed’ by operating deficits recorded during last year’s Cayman Islands government budget, particularly after the Caymanian government showed a healthy budget surplus the year before.

‘You will have to make some difficult decisions,’ wrote UK Parliamentary Under-Secretary of State Chris Bryant.

The UK has asked Cayman to present both short term plans for raising government revenues as well as a clear strategy for cutting costs and borrowing over the next three to five years. That plan was due to be presented to the foreign office by 7 September.

‘I need to be absolutely convinced that there is a sustainable medium-term plan [before allowing any more borrowing],’ Minister Bryant wrote.

Mr. Bush told an audience of more than 300 people gathered for an emergency meeting at the Ritz-Carlton, Grand Cayman Thursday that Cayman had secured borrowings of some $372 million through local banks to take government through the end of its current fiscal year on 30 June, 2010.

‘All that is required in order to draw down on the funds is the approval of the (Foreign and Commonwealth Office),’ Mr. Bush said.

Getting that approval will likely be easier said than done. Foreign office officials have warned Cayman that it cannot continue to rely so heavily on its offshore tax status and should not expect added borrowing to be approved based on ‘one-off’ expenditure cuts such as the temporary ‘holiday’ for civil servant pension payments.

The UK suggested that Cayman ‘widen its tax base’ by considering options like payroll or property taxes.

Mr. Bush told those attending Thursday’s meeting that government’s position was indeed grave.

The leader revealed that government was forced to withhold payments in August for civil servant pensions, health care coverage and even some construction projects just to pay civil servants’ monthly salaries.

Mr. Bush said financial forecasts through the month of September show government taking in $29.5 million in while estimating approximately $78.1 million in cash outflows.

‘Utilising the remaining CI$4.5 million of the overdraft facility, the government will face a cash shortage of CI$44.1 million,’ Mr. Bush said. ‘That’s next month.’

Mr. Bush asked those in attendance for ideas for rescuing the budget.

‘Do we now accept the UK’s implication that we should implement direct taxes?’ he asked. ‘Or do we craft our own plan…for the way forward.’

Mr. Bush listed some economic development measures that need to happen soon to help bolster the Islands’ revenues including; moving the cargo port out of George Town, widening the channel in North Sound to allow for larger yachts to sail through, and building a permanent cruise ship dock in George Town harbour.

‘The Cayman Islands must get the proper facilities or lose its cruise business,’ he said.

One proposal that appeared to get at least some support from those gathered at the meeting was for the imposition of a small tax on property.

Former Cayman Islands Monetary Authority chairman Tim Ridley said government needed to heed one particular message in the Foreign and Commonwealth Office’s 27 August letter.

‘The worrying message in that letter…is long term sustainable revenue,’ he said.

Mr. Ridley suggested that a nominal tax of some ¼ of a per cent property tax or ‘community service charge’ be levied on all homeowners, which he estimated could raise some $50 million a year. He said some relief could be provided on the other side by a gradual reduction in stamp duty on the initial home purchase.

However, a representative from the Cayman Islands Real Estate Brokers Association who attended the meeting cautioned leaders that the implementation of such a tax could further hit an already declining home sales market.

Another somewhat controversial suggestion involved a number of increased costs on civil servants. One attendee suggested making civil servants pay a 50 per cent matching contribution for their health care and pension payments.

‘Does the civil service realise there may not be enough money to pay them in September?’ Lorna Bush asked.

Civil Service Association Vice President Christen Suckoo said government workers are already sacrificing and are ‘willing to sacrifice more.’ However, he urged government to consider revenue options before looking into budget-cutting measures.

‘Cutting civil servants should be a weapon of last resort,’ Mr. Suckoo said. ‘In looking for short term solutions, we cannot sacrifice our children’s future.’

Additional revenue measures suggested by the Civil Service Association included; placing taxes on money transfers outside of Cayman, revising existing fees for services, and increasing customs import duties on various items.

Mr. Bush acknowledged that fee increases in the short term would likely have to be considered.

Local businessman Mario Ebanks suggested that government look at more public-private partnerships for several projects including road construction, prisons, the country’s sewerage system, and even the Grand Cayman Airport.

Another speaker proposed selling a minority portion of government’s ownership in the Water Authority Cayman to help raise revenues.

Mr. Bush said both ideas were worthy of consideration.

Mr. Ebanks also expressed disappointment that the time frame for proposals to the UK was so short.

‘I’m concerned about their end game,’ Mr. Ebanks said. ‘We need some more time…to put together a plan.’

Mr. Bush committed that Cayman would do what the UK asked in order to secure borrowing to get it through the current budget year, and he said the Mother Country would likely reciprocate if a reasonable plan was put before them.

‘I believe they will give us a chance,’ he said. ‘If not, I will support the conservatives.’