The newly elected government needs support, goodwill and hopefully a reasonable honeymoon period. And with the extent of the task faced at this juncture they will need every ounce of this support.
The big issues facing us are high unemployment and a high cost of living. In attempting to resolve these, at the outset we know of three key challenges faced by the Government and ultimately all residents. First, even if additional debt is permitted by the UK, partly in its willingness to give the new government a fighting chance in a challenging fiscal situation, new borrowing will be limited. Second, tax increases will be difficult and untenable due to a local economy that is already over taxed and third, significant cuts to the Civil Service are politically and economically challenging especially if not executed with a transition or retraining plan for those made redundant.
Many of us are hopeful and looking forward to seeing a recovering economy and stable public sector finances as soon as possible. But there should be no misconception that things will be ‘fixed’ within the next four years. If we fully appreciate the true nature of the three above challenges, at best we can all hope to see evidence that things are on ‘track’ within four years and a gradual recovery over the next several years.
This is certainly not meant as a ‘doom and gloom’ message. It is possible to have a positive outlook while keeping a firm grip on the reality of the situation.
Barring a lengthy period of economic success or some significant divestment of public assets, a large portion of the current government debt seems set to have its principal renewed for many years. Cayman is now in the unenviable position of having one of those never ending mortgages, where future generations simply make the interest payments. And when global interest rates rise, this raises the prospect of additional taxes or further cuts in order to make the payments, both difficult choices in any economy.
The current tax burden on the local economy including the financial services industry among others, is crying out for ‘rollbacks’ in fees etc. But continued delivery of certain public services and addressing welfare expenses during a period of high unemployment means that relief to taxpayers is likely to be negligible if it occurs at all.
The Civil Service appears to be working at rationalising its size and this must be commended. At the same time it is unlikely to result in the level of redundancies that would have any noticeable impact on the government’s recurrent expenses. Of course there are other ways to reduce expenditure such as cutting or privatising certain areas of public services. But this is unlikely to occur soon enough to help and we know that salaries represent the bulk of the government budget.
As far as solutions are concerned, the government needs to create the policy framework to grow the economy in the short to medium term. This reduces unemployment and increases government revenues while coming at a relatively low cost to the government.
But growing the economy will require compromise by policy makers as they will be faced with a delicate balancing act.
Any partnership with the business community aimed at reducing unemployment in this country will fail if businesses cannot continue to be successful. Hence any policy that interferes with that success (for example by pressing too hard against profitability) even if the policy has other broader and worthy objectives, will likely backfire purely from an economic perspective. And that in itself will further worsen any ill that the government was aiming to address in the first place.
No one ever said it would be easy, but new or existing businesses will need to be encouraged, facilitated and incentivised to grow and hire and that will take some compromise and a competitive (i.e business friendly) policy environment.
Assuming that all stakeholders, including the UK, appreciate the long term nature of the task ahead, and work together we could well see a decent recovery by the end of this decade. If the shorter term strategies are effective, we might also hope for some positive signs over the next few years.