The process started in earnest from December 2011, to establish a Budget for the Government’s fiscal year that started on 1 July 2012. In December the Legislative Assembly approved the Strategic Policy Statement – the foundation for the establishment of a Budget for the 2012-13 fiscal year.
In mid January 2012, as Minister for Finance, I issued a Budget Circular that granted Ministries, Portfolios and Offices that make up Government, their Expenditure Allocations for both Operating and Capital Expenditures. These Allocations should not have been exceeded when agencies of Government submitted their expenditure requests for the 2012-13 fiscal year; however, the Expenditure limits set out in the Budget Circular were exceeded by a significant extent – in the region of $150 million.
Honourable Ministers of Government and senior Civil Servants have spent the past several months reviewing expenditure submissions with the objective of reducing those submissions to more affordable and sustainable levels. As an example of the seriousness of our efforts, the policy has been implemented that there is a moratorium on the recruitment of Civil Servants. The notable exemption granted has been to enable continuity of classroom cover by teachers.
In June 2012, the Government presented to the FCO for its prior approval, its intended 12-month Budget for the 2012-13 fiscal year before taking the Budget to the Legislative Assembly and Finance Committee. The FCO refused that budget request.
The FCO insisted that the Government strengthen its fiscal position by implementing a greater level of expenditure reductions than had hitherto been made by Honourable Ministers and senior Civil Servants. The concern is to make expenditures more sustainable going forward into future fiscal years. The FCO is also of the firm view that the strengthening and improving of fiscal results for the Government must not occur solely as a result of reductions to expenditure, but revenues of the Government need serious enhancement and expansion.
To allow the objectives of finding further expenditure reductions and revenue expansion, the Government implored the FCO to permit a 3-month Budget – as this would permit more time in which to pursue the twin-objectives of expenditure reduction and revenue improvement.
However, the FCO would only give authorisation for a 2-month Budget within the 2012-13 fiscal year – and that 2-month Budget will expire on 31 August 2012. The expenditure amounts therein will be subsumed within the full-year Budget.
Since the 2-month Budget was authorised by the Legislative Assembly on 28 June 2012, Honourable Ministers and senior Public Servants have worked assiduously to achieve the twin objectives that I mentioned previously of revenue enhancement and expansion, as well as further reductions to Government’s expenses.
Due to the fact that the PPM Administration caused the country to be non-compliant with the financial ratios in the Public Management and Finance Law (“PMFL”) and resulted in the National Debt of Central Government more than tripling the FCO insisted that we establish a clear path to compliance without further borrowings. Further the Government is committed to maintaining the level of service demanded, and deserved, by our private sector and the wider general public. This made it inevitable that we looked at robust revenue enhancement measures. Two key revenue measures will be implemented during the 2012-13 fiscal year.
A CHOICE…WHICH NEW REVENUE MEASURES?
Government had a choice. We could have introduced income tax, property tax, Value Added Tax (VAT), or something softer such as the Community Enhancement Fee. We have made extremely deep cuts to get the budget to this stage. This still did not produce enough savings to satisfy the FCO. There have been calls to have significant layoffs (in the range of 500-700) in the civil service from the private sector. Neither the Governor nor the Deputy Governor has come with any such plan, and Government could not have accepted it anyway.
Government has opted to introduce a Community Enhancement Fee that is linked to the remuneration level received by work-permit holders in the Cayman Islands. The Fee – which is payable to Government – will be charged in respect of remuneration levels that exceed $20,000 per year. The employee on a work-permit will make a contribution to the Fee – which will be calculated at 10% of the employee’s remuneration.
Government recognises that its implementation of Revenue Measures must not stifle growth in the economy or make the cost of business unsustainably high in the Cayman Islands. Accordingly, Government – to mitigate the effect on employees of introducing the Community Enhancement Fee, will introduce legislation to make optional, the present mandatory requirement for non-Caymanian employees and their employers to contribute to pensions. At present non-Caymanian employees and their employers each contribute 5% of the employee’s remuneration, to pensions.
This is a real reduction in the cost of doing business in the Cayman Islands.
It should be noted however that the Government will impose a fee of 5% on certain categories of employment payable by the company. This will serve as a further incentive to hire Caymanians in those roles.
Secondly, the Government also seeks to introduce a fee to enhance the regulatory environment in respect of the funds industry in the Cayman Islands.
Since the 28 June, there have been material reductions to Government’s Operating Expenditures.
Government established an Expenditure Review Committee (ERC). It was comprised of a broad and knowledgeable team of civil servants who made a number of recommendations to reduce expenditures. The Government accepted a number of them.
Some of these represent a “sea-change” to the sharing of expenses between the Government and members of the Public Service.
I provide the following examples to illustrate this fundamental shift from the past:
• any newly recruited Civil Servant will be required to contribute to both their pension and health-care costs;
• existing Civil Servants will also be required to contribute to their health-care costs from their remuneration; and
• spouses of Civil Servants that enjoy health-care coverage from the Cayman Islands National Insurance Company (CINICO), will now be required to pay for such coverage.
Government is of the firm view that in order for expenditure reductions to be truly sustainable, such reductions should not be restricted to a particular category of expenses: instead, the reductions should be spread across a broad base.
Accordingly, in addition to the previously mentioned reductions to Government’s expenses that impacted Personnel Costs, the Government has reduced Operating Expenses further, some examples of which are as follows:
• $1.5 million was trimmed by budgeting a lower level of Marketing and Public Relations expenditures; always being mindful that this activity contributes to our economy through tourism and financial services – but acknowledging also that better synergies may be possible, amongst our own entities, and with the private sector.
• we have agreed with the ERC to sell the police helicopter as it is simply unaffordable to this country. This will save in excess of $1.7 million;
• the planned reduction to Housing Allowances to levels that existed before hurricane Ivan, is expected to result in an expenditure reduction of $1.5 million;
• the rationalisation of remuneration in Statutory Authorities is expected to yield “savings” or expenditure reductions of $1.5 million;
• the centralisation of the procurement of utilities, consumables, janitorial costs and security costs is expected to reduce expenses by $1.3 million;
Adopting a widespread and broad-based approach to expenditure-reduction has also resulted in the minimisation of Equity Investments by Government in its Statutory Authorities and Government Owned Companies and a “bare-bones” Capital Expenditure programme.
It is expected that Government’s Equity Investments in its Statutory Authorities and Government Owned Companies will amount to $23 million during the 2012-13 fiscal year.
The Capital Expenditure level set for the 2012-13 fiscal year is now down to a historic (or near historic) low amount of $33 million.
The introduction of material Revenue Measures during the 2012-13 year; achievement of Operating Expenditure reductions; and record-low levels of Capital Expenditure, all result in the Government not intending to incur any new long-term debts or loans in the fiscal year. This is a great result – a position which very few Governments have achieved in recent years, and yet for the present UDP Government, such a feat will be accomplished two (2) consecutive years in a row. We have also achieved an $83 million surplus which is most difficult in the prevailing economy. One might ask the question, why a surplus and to this magnitude? Well quite simply we cannot borrow; we must fund and continue important capital projects like the new high schools; we must fund $29 million in interest expense on debt; and we must pay toward past service pension liability. All of this is legal obligations and mandated by the FCO.
Despite achieving what I have just said there is a further request from the FCO to reduce an additional $20 million in areas of the budget which give grants to: Seamen/Veterans benefits, Social Services, such as the Elderly and Handicapped Persons benefits, temporary rental assistance and temporary financial assistance for persons who find themselves unemployed, Education Council Scholarships, grants to Community programmes such as apprenticeship programmes and church related programmes. To do this would truly make our community suffer much more than at present. I have refused that cut!
To conclude this Statement, my Administration has done as much as possible without putting vital services for the country in jeopardy, while trying to improve and strengthen the fiscal performance and position of the Government. We now await approval from the FCO of our Budget parameters before proceeding to the Legislative Assembly and Finance Committee.
Fiscal responsibility has always been the hallmark of my Government and it always will be: the future of the Cayman Islands depends upon it. This is a tremendous step away from the normal Government Budget – but the FCO has the upper hand and to give them their due, some of their solutions to our financial position are warranted.
Cayman does need to put sustainability tests on all that we do. We need as a country to buckle down to the integrated national planning, planning our development for the common good, which is in our Manifesto and in keeping with our down-to-earth, pragmatic values.
Based on the deep cuts and necessary revenue measures proposed in this budget the Government will launch a series on public informational meetings commencing at the Mary Miller Hall on Monday July 30th at 7:00PM
May God Bless the Cayman Islands, its citizens and its residents.