Letter to the Editor: Private sector champion needed

While the open letter published on
12 May, 2010, from members of the private sector to the Governor, the premier,
all elected members of the Cabinet and all other members of the Legislative
Assembly is long overdue, commendable and remarkable, the fact that it had to
be done in such an extraordinary way points out that the private sector in the
Cayman Islands needs a Caymanian permanent champion for the sector. To make the
case, let us start with some basic principles: (1) for any country to be
wealthy, it must allow wealth creation to happen; (2) only the private sector,
given an environment in which wealth creation can happen, can create wealth;
(3) government’s job is to create a stable environment in which the private sector
can create wealth; (4) government’s revenue is derived from taking a portion of
the wealth created by the private sector; and (5) government is justified in
taking money from the private sector only for useful collective purposes and
not to create (money losing) businesses, which compete or, if not granted a
monopoly by government, would compete with the private sector.

Government’s expansionist
tendencies

Government wants to expand; this is
its natural tendency in every country. The other natural tendency is for
government to spend more than it takes in. In Cayman, the following picture has
emerged for the various financial years (which cover the period of 01 July of
one year to 30 June of the next):

2006/2007 Operating expenses
$367,952,000

Operating revenues $416,523,000

2007/2008 Operating expenses
$490,024,000 (+ 30 per cent)

Operating revenues $530,717,000 (+
27.4 per cent)

2008/2009 Operating expenses
$546,224,000  (+ 11.5 per cent)

Operating revenues $489,917,000 (-
7.69 per cent)

The government’s reaction to the
revenue decline for the 2008/2009 financial year was to propose and then
implement revenue measures, which were expected to bring in additional revenues
of $94.9 million to 30 June, 2010. These revenue measures raised the fees and
duties payable by the private sector and, far from raising the necessary
revenue, they have succeeded, in combination with a hostile business
environment,  in the elimination of over
3,000 work permits between September 2008 and today; no  working steps have been taken to reduce
government expenditure. Government has floated the idea of a payroll tax on
employers which would, of necessity, have to be passed on to employees in the
form of lower wages and to customers in the form of higher prices. We are told
that in the financial year 2009/2010, government revenues will again be short
some $ 60.2 million, necessitating further borrowing.

Matching government revenues and
expenses

What has happened in Cayman has
happened and is happening in almost every country in the world; government is
spending more than it takes in, leaving the deficit to be financed by
borrowing. Of course, this makes the situation worse because annual interest
costs (forecast at $20 million for the 2009/2010 financial year) reduce the
amount of money available for personnel costs and recurring programmes.
Ironically, the more government takes from the private sector, the less revenue
government takes in. Therefore, in the Cayman context, the fees payable by the
private sector must be lowered to previous levels and the government must get
out of the way of private sector hiring decisions. An argument can be made that
duties can be raised as an alternative to direct taxation.

Immigration policy

It is not an accident that the open
letter of 12 May, 2010, states that one of the actions that needs to be taken
is to “create a simple and competitive immigration policy to encourage inward
investment”. Under the current immigration system, private sector employers are
not able to make hiring decisions independently. Often, although there has been
advertising and all the proper steps taken, the employer is told that it does
not need this employee; this should never happen. In the real world of the
private sector, every employee is a “key” employee; otherwise, the employee
would not be on the payroll.  Speak to
the local car dealers about the rollover and get ready to duck. Under the
current system, talk of a bricks and mortar financial services industry is a
pipe dream.

The private sector is shrinking

The Economic and Statistic Office’s
Quarterly Economic Report for the Third Quarter of 2009 states that, on an
annualised basis, Cayman’s GDP will shrink 3.6 per cent for 2009. The Miller
Report is more pessimistic, estimating the shrinkage at 6 per cent. Taking
Cayman’s GDP as $2.5 billion, this means a shrinkage in Cayman’s economy of anywhere
between $90 million and $150 million. This shrinkage directly hurts Caymanian
businesses. If one takes the position (as I have in the past) that every work
permit lost to the Islands means a loss to GDP of approximately $39,000 (a
conservative number) and 3,000 work permits have been lost since September
2008, one can come up with a GDP loss of $117,000,000. What this means is that
there is a direct correlation (positive or negative) between the number of work
permits held, in other words, the size of the private sector, and both the size
of Cayman’s economy and the size of government revenues. Cayman needs to
increase the size of the private sector to increase both the size of its GDP
and its government revenues; more immigration is needed, not less. Sending work
permit holders away and shrinking the private sector only makes things worse;
not only does it make it difficult for businesses to survive but also makes it
impossible to cut the size of the public service as there would be no jobs in
the private sector for those let go.

Loss of liberty

The growing size of government and
its increasing cumulative debt poses a threat not only to the standard of
living in a country but also to liberty of the individuals who live there and
try to carry on business there. Criticism of what goes on can be undertaken
only in the extraordinary way in which it has been done in the said open
letter. Unfortunately, governments often start businesses, ignoring the irrefutable
evidence of the past failures of other governments. As Milton Friedman once
said – if government ran the Sahara Desert, in 10 years there would be no
sand. 

The way ahead

Cayman needs a Caymanian permanent
champion for the private sector. The only way out of the economic mess in which
we have found ourselves is to increase the size of the private sector. Only a
re-invigorated private sector can provide the growing economy and government
revenue, which Cayman needs and, consequently, increased employment opportunities
for Caymanian job seekers; in the final analysis that is what all this is
about.   

Paul Simon

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