Direct taxes called counterproductive

The Miller Shaw report three years on – what has happened? 

Three years after an independent commission assessed Cayman’s fiscal situation and the various options available to government to improve the financial and economic health of the Cayman Islands, few of its recommendations have been implemented.  

In the aftermath of the financial crisis, the UK’s Foreign and Commonwealth Office concluded that the Cayman government was on an unsustainable fiscal path. In order to secure the ability to raise more debt, the Cayman Islands government agreed with the foreign office to appoint an independent commission, whose members James C. Miller III and David Shaw submitted their findings on 26 February, 2010. 

Their study concluded that the fiscal performance had deteriorated only “recently”, after the growth in spending outran growth in revenues and that the main obstacle to restoring government’s fiscal financial balance were, among others, the “crippling”, “excessive” and “unsustainable” personnel costs.  

With regard to new revenue measures, the report found that additional levies would be counterproductive and recommended not to impose direct taxation. Instead, Mr. Miller and Mr. Shaw said it should be possible to restore fiscal sustainability by making major spending cuts, privatising enterprises, lowering work permit fees, selling assets and creating public-private partnerships.  

The study highlighted the reliance of the economy on financial services and tourism and concluded that significant opportunities exist for government to enable the private sector to supply needed investments in the Islands’ infrastructure and broaden the economy’s base. 

At the same time, the government could improve its efficiency and effectiveness in a number of ways, including completing audited accounts and reforming the budget process to make it more transparent and make officials more accountable, Mr. Miller and Mr. Shaw concluded. 

Three years later, the Cayman Islands government has partially implemented only a few of the recommendations, not started on others and acted contrary to some. 

The Cayman Islands has not privatised any government entities nor sold any assets. Government acted against the Miller Shaw report recommendations and raised work permit fees across the board. Work permit numbers declined, but revenue from the permits rose 26.1 per cent between 2008/09 and 2011/12 and fee revenue from permanent residents jumped 75.3 per cent, both as a result of higher fees and a larger number of permanent residents.  

The first of the 12 recommendations of the Miller Shaw report was that the Cayman Islands government not impose direct taxation, mainly because it would limit the performance of the economy and, secondly, because the authors considered excessive spending, not a lack of revenue, to be the problem. The study noted that, for income tax purposes, Cayman’s tax base, especially its more than 20,000 guest workers, was too mobile and it would be difficult to collect the anticipated revenue.  

With regard to a payroll tax, the report stated: “Cayman employers already regard [work permit fees] as high, relative to those in other jurisdictions. A payroll tax in addition to work permit fees would add to employment costs and make the Caymans less competitive in the market for skilled professionals.” 

The Cayman Islands government has since not introduced direct taxation but only because a proposal to introduce a payroll tax for expatriate workers was withdrawn at the last minute and replaced by a range of work permit and other fee increases.  

The commission found that the fiscal problem in the Cayman Islands was too much spending, not too little revenue. “The government‘s fiscal shortfall exists because spending has grown even faster than revenue,” the report stated. It tracked how core government operating expenses increased from $335 million during the 2004/05 financial year to $537 million in the 2008/09 financial year.  

The recommended reduction of government’s operating expenditure was only initially successful. When the Miller Shaw report was produced, operating expenses had been reduced from $537.4 million at the end of the 2008/09 budget year to $517.1 million a year later. This was further reduced to $512.4 million in 2010/11 only to surge again by $40 million to $554.4 last year. Current projections point to another increase of operating expenditure this year to $567.2 million. 

Government personnel costs were identified by the study as the main culprit for excessive expenditure. Between 2005/06 and 2008/09 salaries and wages for civil servants had surged by 46.3 per cent from $172.4 million to $252.3 million. In the following two years, personnel costs decreased to $228.1 million and $214.7 million. Last year, core government personnel expenditure crept up again to $223.1 million and this year it is expected to get close to the 2008/09 peak again. 

Between 2005 and 2007, the number of civil servants increased by more than 500 from 3,332 to 3,843. Since the Miller Shaw report, this number has been reduced by 200. The government has committed to further cuts of 10 per cent of staff over the next five years through natural attrition of staff retiring.  

Rather than cut staff, efforts were made by government to reduce costs elsewhere in the civil service, with significant cuts to expenditure in supplies and consumables. From the peak in 2008/09, spending on supplies reduced by 25.6 per cent or $35.3 million the following year. It has since grown again to $100 million but remains well below the $119.3 million maximum of 2008/09. 

 

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