Archive for October 8th, 2013
Archer plans fiscal prudence
(CNS): Finance Minister Marco Archer said he was optimistic for Cayman, despite the difficult times, when he delivered his budget address to the Legislative Assembly Monday. The budget documents and appropriations bill are expected to be circulated Tuesday but in his address Archer said there were no new revenue raising measures and several cuts had been made in operating expenses. There were no indications of any tax or fee cuts as Archer pointed to fiscal prudence and discipline. The finance minister said government would be watching every dollar, as he laid out some of the cost efficiencies that had been identified to produce the budget, which is expected to produce a surplus of more than $100 million.
The government has set a high bar for itself, following years of criticisms of the inaccurate predictions of the previous administration and the need to find money for capital expenditure. The finance minister will now be under pressure to reach the ambitious forecast and improve the cash reserves of the public purse.
Archer said the budget aimed to get the fundamentals right, with accountability, transparency and prudence being the new modus operandi throughout all of government.
“The fiscal policy of the Cayman Islands Government over the medium-term adheres to the definition of fiscal prudence. Revenues and expenditures are planned in such a manner that instead of increasing public sector debt, such debt will be declining. Our fiscal policy targets a modest revenue increase that is non-inflationary, and at a rate that is below projected economic growth, so as not to stifle our fragile economic recovery. This will be accompanied by a decline in total government spending without compromising necessary social investments,” he said.
As well as reining in spending, he said, government would also be more rational in its approach to spending. “Our current fiscal position implores us to make tough but thoughtful decisions,” Archer said. “We must live within our means, and question every dollar the government spends, whether that is within a core government department or in one of our statutory authorities or government companies.”
He said there would be a greater emphasis on partnerships within core government and with the statutory authorities so units don’t work in isolation. Government had rejected general across the board cuts, the minister stated, but was practicing prudency while providing resources for healthcare, education and social services, protecting the borders and exploring opportunities for business prosperity.
Archer revealed that government had ended the last financial year with a surplus of $63.3 million. The prediction by the UDP government when it set that spending plan had been for more than $80 million. Government’s net assets were $1.3 billion, cash balance was $117.06 million and core government debt stood at $575.9 million.
The minister said that the 2013/14 budget was based on the four year fiscal plan sent to London in August, which was approved in days without the need for a defence of the plan, demonstrating the improved relationship between the UK and the CIG.
Government, he added, was focusing its revenue management efforts on encouraging economic growth through private sector investment, as well as improving the collection of revenues from existing measures by identifying and closing loopholes and limiting waivers and concessions. The administration also plans to pay down debt and, Archer said, “where possible restructure the debt portfolio to cut interest costs and remove potential uncertainties around the repayment of bullet bonds.”
He predicted operating revenues of $644.6 million and operating expenditures at $517.9 million, with the financing expenses forecast at $31.4 million, equating to an operating surplus of $95.3 million. After factoring in the forecast net operating surplus of the statutory authorities and government owned companies of $5 million, the entire public sector is forecast to record a net surplus of $100.3 million. Capital Investments are forecast to be $51.9 million and core government debt is expected to fall to $548.8 million with principal debt repayments of $26.3 million during this financial year 2013/14. Cash balances are to increase during the year by $44.9 million, growing to $161.9 million by the year end.
From that cash $59.9 million will be in the operating bank account and $102 million in the various reserve funds, such as the general reserve fund, the environmental protection fund and the infrastructure development fund, Archer stated.
“Even though we find ourselves in a surplus position, with today’s fiscal challenges comes the opportunity for government to demonstrate greater wisdom in spending the people’s money,” Archer told his colleagues in the Legislative Assembly. “The government’s revenue outlook is stable, and is not dependent on any unproven measures. This year will see the implementation of only one new tax measure, Licensing and Registration of Hedge Funds Directors. This measure was originally announced last year by the previous administration but was delayed in order to allow for proper consultation with the financial industry.”
He said the primary drivers of expenditure for this year are education and training initiatives; unemployment related issues; rising health care costs; rising crime rates; social assistance programmes; and new constitutional requirements.
Archer explained how government had managed to shave costs to statutory authorities and government companies (SAGs). Last financial year the government spent $110.8 million on outputs from the SAGCs. “For 2013/14 this has been reduced to $100.7 million by implementing a number of innovative measures,” he added.
The finance ministry held a meeting with the larger SAGCs in August, which led tosome cost saving measures. Archer explained that some SAGCs collect most of their revenue in US$ but expenditure is in CI$ but there were others that collected the bulk of their revenue in CI$ but purchased large quantities of US$ from the local banks for their overseas expenditure.
It was agreed that they would collaborate, whereby those with excess US$ cash would sell to those in need at a fair exchange rate,” he stated. This foreign exchange management saved two entities almost a half million dollars but could be utilized further to save millions in future.
He said it was also agreed that the Cayman Islands Airports Authority (CIAA) would no longer charge rent to the Customs Department and the Immigration Department. Instead it will receive revenue directly from other coercive fees diverted from core government.
“The net effect of this decision is zero but the overall benefit is that it allows core government to reduce its operational expenditure and avoid the need for increased tax revenue, thus reducing the pressure to add to the cost of living and doing business,” Archer said.
Government has also taken a policy decision to exempt core government agencies and SAGCs from paying import duty, lowering operating expenditures for both the SAGCs and core government. Another area of partnership between the SAGCs and the core government was cash management.
“Based on their business cycles and the underlying cash flows there are times when SAGCs have surplus cash on hand lying idle, while the core government is running an overdraft. By partnering with the SAGCs to have them place their surplus cash on deposit with the Treasury Department, the government is forecast to save approximately $89,000 in interest expense by 31 January 2014.”
He said these were just four easily identified initiatives that reduced government's operating cost, and more were in the pipeline.
Archer’s forecasted expenses of $517.9 million represents a $6.8 million reduction on last year as personnel costs were cut, even with a provision of $11.4 million to be paid into the Public Service Pensions Fund for past service liability. Outputs from Statutory Authorities and Government Companies are forecast to be $100.7 million, which also represent a reduction of $10.1 million from 2012/13 because of the initiatives.
Government’s major spending outputs, however, include $14 million to fund overseas medical, $2.5 million to provide Legal Aid, $1.6 million to provide rental housing accommodations to persons in need, $1.5 million in funding to the Cayman Islands Private Schools Association and $1.4 million to fund the NCVO Pines Retirement Home. Transfer Payments increased by $1.5 million to provide funding for scholarships to the tune of $13.6 million; $7.8 million for poor relief and $6.7 million in seamen and veterans benefits.
The planned capital investments of $51.9 million is intended to fund $27.3 million in core government assets, such as roads, land, building improvements, vehicles and equipment. A sum of $24.6 million will be invested in SAGCs, primarily to fund the debt service obligations of these entities.
“Although our fiscal resources are limited, we are making investments where possible, while maintaining effective levels of support for our people,” Archer stated. “This budget affords us the opportunity to reshape government.”
See full Budget Address below and check back to CNS tomorrow for details of the Appropriations Bill.