Government’s efforts to ensure public health and to stimulate the local economy amid the coronavirus pandemic have had a very significant impact on government finances, according to Finance Minister Roy McTaggart.
However, he stressed that government is not considering implementing direct taxation.
Speaking at the Chamber of Commerce Economic Forum on Friday morning, McTaggart said given the “significant reserves in the treasury, we are, and continue to be, well placed and well prepared to face the fiscal challenges that were wrought upon us by COVID-19”.
Refuting reports that direct taxation may be needed to deal with the fiscal impact of a global economic recession, the finance minister said Cayman’s “indirect tax regime is well established and supports robust levels of economic activity, and the government does not see the need to make any changes to this regime”.
He said, “To be clear, the government is not contemplating any direct taxation.”
In the first six months of 2020, government’s operating revenues were down 12.1%. However, government also spent 1.4% less than budgeted, through a combination of savings on personnel costs, and supplies and consumables, as well as transfer payments.
With income from work-permit fees, tourist-accommodation charges, certain financial-services fees and import duties deteriorating, the operating surplus of $75.76 million was 43% lower than budgeted.
For the full year 2020, government expects its revenues to be 17.3% lower than budgeted, while expenditures are forecast to be 12.6% higher. This would result in a budget deficit of $173.23 million. And government’s cash balances would drop to $188.17 million from $559.56 million as of 30 June.
Government debt is expected to increase by 9.4% to $273.55 million by the end of 2020.
McTaggart said that government is planning to spend almost $100 million more than budgeted to mitigate the economic hardship of vulnerable people and to support the economy. Higher spending would also cover the coronavirus healthcare-related expenditures for test kits and personal protective equipment.
So far, the government has been able to finance the COVID-19-related costs and stimulus measures from cash reserves. To achieve greater financial flexibility, McTaggart said, government is seeking to obtain a $500 million line of credit.
Five local banks have submitted a syndicated bid for the loan. The bid is currently assessed by the ministry’s entity procurement committee and an external public procurement committee.
If accepted, the terms of the loan are expected to be announced by the end of August or early September.
To limit interest costs, McTaggart said, government would only draw down on the loan if the funds are absolutely needed, but that is not the case at this time.
For the 2020 financial year, the government expects that it will not comply with two of the Principles of Responsible Financial Management. Namely, government is forecasting a substantial operating deficit, rather than the required surplus, and it will fall short of the minimum 90-day cash reserves, prescribed by the Public Management and Finance Law.
Government predicts it will have 47 days of cash reserves by the end of the year.
As a result, government will be required to get written approval from the UK’s Foreign and Commonwealth Office before it can borrow or divest public assets.
Asked by Chamber president Woody Foster where government could cut costs, in terms of capital projects or personnel, McTaggart said all ministries are instructed to look at ways of curbing expenditure. But it was not the time to look at civil service pay cuts.
“At this point in time, you don’t want to withdraw spending and reduce economic activity by asking people to take pay cuts,” he said.
Every other government in the world is spending more money to stabilise their economies and promote growth, McTaggart said. “It’s not a time to conserve. When you conserve that’s recessionary.”
Encouraging economic output applies also to government’s capital projects, he added.
The one-day Economic Forum is being held over a digital platform this year, due to COVID-19 restrictions.