Read his lips: no new taxes

Report says less public spending the only option

A report commissioned by Cayman
Finance and written by a renowned European tax specialist concluded that raising
taxes here would devastate the economy and that the only viable way of balancing
Cayman’s budget is through reduced government spending.

“…Detailed studies into the
effect of different taxes find that direct taxes – income tax and corporation
tax – are the most damaging type, far more harmful to the economy than sales
taxes or other consumption taxes,” the report states. “Consumption taxes are
often said to hurt the poor, but in fact it is taxes on business that hurt
low-income workers the most, although the damage is less easy to see because it
is through lowered wages and job cuts.”

The report, titled ‘The Cayman
Islands: A Balanced Budget’, was written by Richard Teather, a senior lecturer
in taxation at the Bournemouth University Business School in the UK.

Teather’s report stated that the
effects of raising taxes could be much more severe in Cayman than in other
places because a large part of the economy is built on the highly mobile
financial services industry, which can react very quickly – by leaving Cayman –
to tax increases. 

After dismissing tax increases –
particularly direct taxes such as income tax or corporation tax – as a possible
way of balancing the budget, Teather’s report stated that there are only two
alternative policy routes:  debt finance/borrowing
or reducing public expenditure.

The report says debt finance “should
not be regarded as an ongoing solution.”

“As well as the economic problems
of debt finance…  it would be highly
damaging to the Cayman Islands’ reputation as a place to do business,” the
report stated.  “Serious doubts would be
cast on Cayman’s financial, fiscal and even political stability if deficits
were allowed to continue annually.”

An ongoing deficit would also
increase fears of future tax rises, something that could cause “businesses and
investors to regard Cayman as a fiscally unstable jurisdiction,” the report
stated.

Other offshore finance centres
include an absence of debt as part of their marketing, Teather pointed out.

The report concluded the only
option is to reduce public spending.

“The longer the Cayman Islands Government
refuses to cut spending, the more likely it is that taxes would have to rise to
maintain spending levels and service debt obligations – and businesses and investors
will begin to factor this into their decision as to where to invest,” Teather
stated.

“If the government does not
demonstrate the political will to tackle the deficit, then the perception of
fiscal risk will increase,” the report continued. “But in addition the deficit
will come to be regarded as a political risk, since the population will be led
to believe that the level of government spending is acceptable.

“It is therefore important for the
Cayman Islands’ reputation that the deficit is dealt with quickly.  And since that cannot be done by levying
direct taxes or by on-going borrowing, the only option is to reduce spending
levels.”

Comparative public spending

Although the report does not
propose specific areas of spending to be cut, it does compare the government
spending in the Cayman Islands with that of similar countries or territories.

The comparison was made with 19
non-Europe countries and territories with a population between 5,000 and
125,000. About half of those places were in the Caribbean and half elsewhere. All
countries in the group are in a similar situation to the Cayman Islands, in
terms of having relatively small populations and having the logistical problems
of being relatively remote islands, the report stated.

“When that comparison is made, it
becomes clear that the Cayman Islands government is wholly out of line with its
peers, having far higher levels of public spending than any other comparable
jurisdiction,” Teather wrote. 

The report stated that based on UN
data for the group of 19 countries and territories, “the Cayman Islands are
immediately prominent as having levels of government spending massively higher
than the other members, both in absolute terms and when compared to the size of
the population.”

Cayman’s total government spending
is twice the level of the next highest member of the group – Antigua and
Barbuda – which has a higher population at 88,000. Cayman’s total spending is
also more than two and a half times the nearest jurisdiction with a similar
population size – St. Kitts and Nevis – which has a population of 52,000.

In terms of government spending per
head of population, Cayman spends more than twice as much the average level for
the comparison group and almost 40 per cent higher than the next highest in the
group, which is Turks and Caicos.

“…The group overall shows that
spending per head is generally lower for those [jurisdictions] with higher
populations, presumably due to economies of scale in government operations,”
the report stated. “However the Cayman Islands break this trend, by having
significantly higher spending per head than both smaller and larger countries.”

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