Members of the former People’s Progressive Movement government said Wednesday that Cayman’s current economic situation, while grave, was “temporary” and urged the current administration not to take drastic measures to bring the economy back into balance.
“What is necessary is not a fundamental re-think of the system of indirect taxation, which has served us well all these years,” Opposition Leader Kurt Tibbetts said during an afternoon press briefing. “But rather a means of bridging the revenue gap in the short term.”
The UK Foreign and Commonwealth Office Parliamentary Under-Secretary of State Chris Bryant urged Cayman to consider direct taxation in the form of property or income taxes as a way to “widen” the Cayman Islands’ tax base. Public services in the territory are currently paid for via a variety of indirect taxes such as customs duties, company registration fees and service charges.
A combined increase in government operating costs plus fading revenues began plaguing the Islands last year and led to a budget deficit of some CI $81 million. Government has not yet proposed a spending plan for the current year, but that budget is also likely to end in the red with expenses outstripping revenues.
The United Democratic Party government has proposed a number of new revenue measures, including increasing duties and fees, but excluding direct taxes. Leader of Government Business McKeeva Bush has also supported the divesting of several publicly-owned assets to the private sector in either public-private partnerships or privately financed initiatives (known as PFIs).
Mr. Tibbetts described the latter idea as a less than upfront way of deferring payments on high-interest debt.
“It also presents much greater opportunity for improper dealing and preferential treatment of the contractors involved,” Mr. Tibbetts said. “Mr. Bush has said that he will shortly announce a PFI arrangement for the new (high) schools. I call on him to make public the details of that arrangement.”
Mr. Bush and government members earlier this week presented a proposal to the UK’s Foreign and Commonwealth Office that set out Cayman’s short and long-term plans to sustain public sector revenues and curtail expenses. The UK requested that Cayman make the proposal after the country violated three of the six principles of sound financial management contained in the Public Management and Finance Law.
The UK was particularly concerned that Cayman’s cash reserves were not sufficient and the current level of public debt was so high that it could send the country into a “debt spiral” from which it might never escape. Britain’s assent is legally required before Cayman can borrow any more money.
Mr. Bush has said that he expects to make an announcement shortly on the status of talks with the UK.
Cayman has already received approval from a local bank to borrow some $372 million to sustain its operations through 30 June, 2010. Its credit rating issued by Moody’s Investors Service is Aa3, a stable outlook although Moody’s has warned the country about the dangers of maintaining excessive public debt levels.
Mr. Bush has repeatedly blamed major government construction projects like the two new high schools and government office accommodation project for driving up Cayman’s debt and requiring it to seek, for the first time ever, the approval of the UK to borrow more.
“This is due to the (PPM’s) extravagant expenditure…where they would not listen to anyone,” Mr. Bush said in an earlier interview. “We can’t mess around…the fact is, something has to be done.”
Mr. Tibbetts said Wednesday that proposals to borrow $372 million to keep government operating would further increase government’s debt load and that certain public-private projects suggested by Mr. Bush would cost millions more.
Mr. Bush has said those projects would increase revenues for the country and spur investment.
Mr. Tibbetts rejected the notion that capital projects alone are driving Cayman’s financial problems. He said the cost of government operations is a problem that well pre-dates the PPM administration.
“The reality is that the principal reason for increased operational costs by government is the need to respond to ever increasing demands by those that live and work here,” Mr. Tibbetts said.
Although the size of Cayman’s civil service was reduced by about one per cent in 2008, government’s personnel budget grew by nearly 15 per cent that year, according to figures contained in Cayman’s annual economic report.
Opposition members said Wednesday that policy directives by the PPM government aimed at reducing civil service budgets by six per cent across the board in October 2008 were simply not followed by the service.
Civil servants have also rejected calls by the current government to temporarily suspend pension payments as a way of cutting more than $40 million out of the budget.