A large share of government revenues is directly dependent on financial sector activity. If this activity declines, as was the case during the recession, government sees its revenues diminish.
Rather than cutting spending to deal with this new reality, government acted against the advice of everyone it asked – or did not ask, for that matter.
First, it proposed an ill-conceived expat tax, before replacing it with yet another round of fee increases, negotiated with a group of successful local business people, who decided that the financial sector would bear the brunt of the new revenue measures.
The response was to attempt to recoup the shortfall in revenue by increasing the fees for both service provider licenses and the financial service products themselves, such as funds, trusts, partnerships or captive insurers.
Now, these measures not only make the financial services industry less competitive, they also threaten to reduce government revenue even further.
Consumers of financial services are becoming increasingly cost-conscious and have no reason to use the Cayman Islands if the relationship between cost and service quality is more favorable elsewhere.
In other sectors, work permit fee increases had a similarly harmful economic effect, which impacted smaller businesses even more than large firms.
In an ideal world, government would use some of the surplus revenue of strong economic years to support the private sector by reducing the cost of doing business during a recession to dampen its impact and kick-start new growth.
In the real world, however, governments have a tendency to use surplus revenues to grow in size.
That this growth does not translate directly into better government services becomes clear by the Chamber of Commerce’s response to the impact of last year’s fee increases.
Not only are the chamber members losing clients because higher fees make them uncompetitive, they also question the value they receive from government in return for the fees.
The new government should be commended for seeking the feedback of industry on the issue. But the response by the chamber members cannot have come as a revelation.
The previous government had not even asked the Chamber of Commerce for its input, because its position was as clear as it was unpopular in an election year: Government should shrink the public sector and reduce spending.
This position has not changed, nor has the economic rationale behind it. But the need to address the issue is becoming more pressing.
Asking the private sector for feedback is only part of the equation. Now that government has the answers it could have expected in the first place, the question is, does it have the fortitude to make the necessary cuts to lower government spending?
Because only this will enable it to reverse the haphazard and harmful fee increases put in place by the previous government.