Living within our means

| 21/09/2009

We in Cayman are faced with two government financial crises, related but separate. The first is a shortage of cash in the bank: the second is a budget deficit. The cash-shortage can be fixed by either borrowings or quick sales of assets, or both.

The budget deficits can be fixed by either increasing Public Revenue or reducing Public Expenditure, or both.

In a nutshell, the situation is this. When a year’s Public Revenue and Public Expenditure are in balance at say $600 million each, no problem. (All figures are illustrative, and not necessarily accurate.) But Public Revenue in the current fiscal year ending next June is now expected to be about $500 million, while Public Expenditure was budgeted to be $600 million. What to do?

Borrowing is a quick fix, but there is a sting in the tail. Loans have to be repaid out of future Revenues, and where will that money come from? Selling assets sounds easy, but we’re not in a sellers’ market at the moment. If you’re in a hurry, you can’t get the price you want. Most government assets are poorly managed and would be profitable only under private management – if then. But most government operations are overcapitalised, and their sale proceeds mightn’t be anywhere near book values.

Extra taxes increase Public Revenue, and can help fix a short-term cash shortage. But they are very unpopular, and have a nasty history of hanging around for generations after the original crisis is over.
Often, closing down government ventures is the best option. At least that stops the bleeding – provided the employees can be found new jobs elsewhere. The Civil Service Association is determined that none of its members will be laid off. Cabinet has promised that nobody will be laid off. Wishful thinking, I’m afraid.

Actually, Public Revenue may well fall below even the revised projection of $500 million. Tourism is weak, offshore business is weaker. A swine-flu scare might hit tourism numbers even more that the US recession does. An OECD decision to kill off our tax-haven once and for all would drastically reduce business visitors and the fees-income relating to offshore companies.

However, tax havens don’t die overnight. The flow of new business is cut as soon as clients’ confidence is lost, but existing business falls away only gradually, by attrition. Imagine a bath whose water-level is continuously raised by a running tap. When the tap is turned off, the water in the bath gradually seeps away. The plug is never snug enough, is it?

Anyway, whether our Public Revenue in this current fiscal year will be $500 million or much less, we are going to have to ask our MLAs to slash expenses. Our fifteen elected MLAs (soon to be eighteen – more empire-building, God help us) will have little scope in their current term to indulge themselves in vanity projects. Instead, they have the opportunity to gain some respect by culling the present Civil Service empire of existing vanity projects. A return to “core government” ought to earn each MLA a statue in Heroes Square. It’s that important.

The years of madness are over and will never return. We can no longer afford to allow (much less to encourage) our local rulers to spend money like drunken sailors. They – and we – had more money than sense. Now, the money’s gone; let’s see how much sense we have left. Let’s get rid of what we don’t truly need. Let’s try living within our means.

We own and operate a state airline, with all its bells and whistles, in defiance of common sense and financial prudence. We don’t know how much it costs (that’s astate secret), but it must be at least $3000 per registered voter each year. If we are ever to achieve a sustained balance of our government budget in the new economic circumstances, the airline must be sold or closed down. Will our rulers have the guts to do that? Will we have the sense to let them do it?

Does it make sense for us to keep pouring money into our state-run tourism attractions and marketing programs? Those vanity projects probably cost $5000 per registered voter each year; if they were privately run, they would cost the voters next to nothing. The state’s duty is simply to ensure the local infrastructure can support a tourism industry. That’s all. We’re not communists; we don’t need to own and operate.

Our state radio could be sold or closed down; our government goat-counting program could be out-sourced to Junior Achievement. State sponsorship of sports and entertainment festivals could be cancelled. The hundreds (thousands?) of state-owned cars could be sold to their drivers, and the state’s repair shop shut down. We’re not communists; did I say that?

The state’s University College could and should be given to its private-sector rival. The state-owned business-advisory unit (the Investment Bureau) could and should be closed down; let the Chamber of Commerce do the job.

All state-owned buildings could and should be sold to private investors (and rented back) or leased to private-sector property managers. We don’t need a government property empire, to go with all the other empires.

We can scramble out of this present mess if we can restrain our elected rulers’ thriftlessness. But not otherwise.

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  1. Gordon Barlow says:

    The 2% tax proposal is a red herring, designed to lead us down a false trail.  ANY increase in taxes will simply defer the day when cuts must be made in our bloated government payroll.  This does not necessarily mean cutting wages.  Whether Civil Servants and other government employees are inefficient or not is beside the point.  The main problem is that there are too many of them.  If Cayman is to survive this crisis, the state payroll needs to be cut by around a third.

    Arguments over government workers’ individual ethos and productivity, we can leave till another day.  It’s what they DO that should be our focus.  It’s not how diligent or accurate they are at counting goats or shuffling papers, it’s why they do those things in the first place.  Until our rulers accept that point, and unload all the goat-counters and paper-shufflers, we must expect new and higher taxes to paytheir wages.

    The “community charge” proposal began a few weeks ago as ¼% – a quarter of one per cent.  Suddenly it is 2%; that’s eight times more.  In time it will become 4%, then 8%, then 16% – as the tax-base shrinks while government’s payroll stays the same.

    ALL new or increased taxes are a bad idea, because they allow politicians and senior Civil Servants to expand their empires more or less without limit.


    • Anonymous says:

      What in the world is going on?! Perhaps for the first time in my life I am in  agreement with Gordon Barlow! It feels really strange. He is actually providing constructive commentary free from Caymanian-bashing. Keep it up Gordon; this does far more good for the interests of expats than all of your previous tirades combined. 

  2. But . . . says:

    I thought everything Gordon wrote was bitter anti-Caymanian filth and everyone knew that?  We all knew it so much that there was no need to give any examples to prove it.  I am trying to find this subtext in this suggestion, really I am.

  3. Anonymous says:

    Actually Adam Smith, just because the govt is unable to gain a positive cash flow does not mean that a private company would have to be paid to take the asset.

    It is not unheard of for private entities to be more efficient than govt thus creating a positive return.

    In short, what may be a blackhole of cash for the govt may actually be a golden opportunity for a private investor who can efficiently manage the resources.

  4. Anonymous says:

    How about government only divesting of its assets with a negative cash flow such as Boatswain’s beach, the Hospital, the Prison, Pedro St. James, Cayman Airways (if we really have to) and garbage collection.

    Its financial lunacy to even consider divesting of the Water Authority or any other asset with a positive cash flow at this time.


    • Adam Smith says:

      And with their negative cash flow won’t the government be paying someone to take them over?  Kind of defeats the purpose doesn’t it?

  5. Anonymous says:

    Talking alone never solved anything yet and never will.  To all the smart people out there in Cayman….Get ready.  The system of Cayman was built only to serve a certain sector of Caymanians. Tthey are the only ones with the power and they now cannot survive without it. This means that they will ride this gravy train into the ground before they allow it to stop or slow down.  To do what is needed to fix the problem means that they will no longer be able to SURVIVE because no one else will hire them so they will not and cannot fix the system. So the only thing everyone else in Cayman can do is wait until the system finally collapses, do what you need to survive, and hopefully whoever is left to pick up the pieces will be people who actually understand the meaning of of the words  "RESPONSIBILITY" and RESPECT"  Good luck to all the hard working people of Cayman. You are the lifesblood of the Cayman islands.

  6. The SDA Committee for Legalizing Ganja says:

    Words of wisdom, Gordon. Bringing in money is not the primary problem with our government. Spending too much is the problem.

  7. Joe Average says:

    I think Mr. Barlow’s premise is fairly accurate that Goverment should not be in the business of businesses.  The reasons for this are quite obvious.  An enterprise run by government as opposed to a private one does not have to turn a profit.  Therefore inefficiences do not factor in.  Costs vs. revenues only come to light in times of crisis.  Is this a crisis?  It could be. The other profound difference is those who run and administer public enterprises do so without accountability to shareholders.  The public are the actual shareholders in this case.  And if they blunder and/or make bad decisions it can easily be passed on to the next group that takes over.  And they still get a wage not based on the performance of the enterprise but on their position as minister, etc.  Whereas in the private sector they would be de-moted, downgraded or their ass would be fired.  

    It is common knowledge that most enterprises (businesses) run by goverment do not do well as opposed to similar of those in the private sector.  However there are some things similar to businesses government should run.  That being infrastructure.  Water, hydro, hospitals, healthcare, police, fire and ambulance.  As far as healthcare goes the U.S. is the best example of piranhas let lose disguised as healthcare providers.  Police, fire and ambulance are other obvious places government should be involved regardless of profit.  Hydro and water and their distribution should never be put into private hands.  Some South American countries were co-erced into allowing this and it was a major disaster for citizens as rates skyrocketed for these necessities. 

    But on the other points I still agree.  In most cases government should not be associated with anything designed to be self-sustaining or even (wishful thinking) turn a profit. There is no motivation to operate cost-effectively or efficiently in any government organization I have ever witnessed.  And I don’t think I’m alone in that.  It just doesn’t happen because governments are not designed to operate that way from the labor pool to middle management to the executive.

  8. Anonymous says:

    Dan, Im afraid you dont make much sense.  If you owned an apartment worth $300,000 that you could lease for $1,000 a month and you needed money now, would you not sell that apartment to get the money you need, then lease it for a place to live? 

    Yes, in the long term, it is best to own rather than rent but not everyone can do that (or there would be no apartments for rent), some people need to save to have the money to own or sell in order to pay bills, and that is the situation we are in.  Or would you rather keep the apartment and not be able to pay your bills or starve but be able to tell everyone that "I own an apartment"?  Mr Barlow is actually making sense (cant believe Im typing that) that the best plan is to cut costs, maximise returns in the short term and plan for less spending in the future.  

    • Dan says:

      Certainly what you say makes sense in terms of personal ownership. If you needed money in a pinch and it were your only means available, it would be a prudent decision. And over the short-term you would do well enough in such a situation. But your hypothetical doesn’t fly when considering government-owned properties (at least for the majority of them). Governments last well beyond multiple generations, and paying rent for a building you could own for 50-60+ years is going to cost you more in the end. If government needs to sell a FEW buildings/property to help get back in the black, fine. But the firesale Gordon Barlow is suggesting is a very, very short-sighted idea and one that we would regret dearly down the line.

      I’m also not averse to the idea of leasing government-owned property to private enterprises to gain rents. Current government offices could be consolidated to make space available to lease to private businesses in prime locations. Sorry if my first post didn’t address this aspect of Mr. Barlow’s opinion piece.

      The point is that responsible choices need to be made that reflect an understanding of preserving a financial future beyond the next few years. While we, as private individuals, may make certain choices that make sense for us (seeing as we need only really worry about our immediate financial future and in a slightly longer sense, that of our children until they can provide for themselves adequately), that doesn’t direct correspond to the same choices being right for government.

      And, as in my original response to Mr. Barlow, the key to this is moderation, not the extremist road his argument goes down. Sell off our bad assets (Cayman Airways, Boatswains Beach, Pedro Castle), but don’t go overboard. If we must, sell SOME property/buildings. But no further. Otherwise we will pay far more than the small gains we get now, and be worse off later for it. As you said in your last sentence, we need to cut costs now (selling real losers like those mentioned above), maximise short-term revenue (but tempered with a strong view of future effects) and plan to spend less in the future (which renting will certainly not help).

    • Dan says:

      Just one other quick thing. Rent down here is usually in the vicinity of 1% of the property value (or more than that in prime locations, less so in remote locations). So the $300,000 building would run around $3000 a month (give or take a couple hundred), not $1000. (I know you were probably just throwing out numbers for an example, but in this case numbers really, really matter). Meaning after just 8 years, 4 months you would already have paid more in rent than the cost of owning. After 25 years of renting you would have paid 300% the value of the property for its use. Even if you took a slightly lower rent at say, $2500 a month, accounting for the current condition of the rental market, we’re still talking about it costing more than the value of the property after only 10 years. It’s just not worth it, which is why I am so averse to this "solution."

      • Anonymous says:

        Thanks Dan.  I do understand your point but Im afraid I still dont agree.  If we need money now then selling government buildings and leasing them back cannot be a bad idea.  By doing so we would have an injection of funds to pay our bills with no adverse consequenses.  I agree if that was to continue for longer than a few years then it would be silly but do you really think Cayman will be in the same situation in a few years?  I would think the intention would be that we would be in a much better position in the near future (1 or 2 years) and then be able to buy the buildings back or purchase newer and nicer properties.  Of course, this depends on prudent spending, careful budgeting to reduce expenditure and increased revenue thus ensuring a surplus for the years to come.   

        It is clear that you are a home owner and I congratulate you on that but I am a young Caymanian just starting out and leasing an apartment and I am prudently saving so I can buy something soon.   It is my intention (and I am on the way)  to have bought a place before I pay for where I am living now but for right now I cannot afford to do anything else.  No one intends to lease forever.  The analogy is the same for the government of the Cayman Islands.  We must do what we can now to stay afloat.  If the country is still broke in 8 years then god help us all.  

        I am dishartened by what has happened in the country, I am embarrassed that we are broke, that we have a dump so big it is stinking up half the Island and visible to cruise ships as the highest point in Cayman, and that it is no longer safe to go out at night, even to a resturant, but I know some very bright young people with a vested interest in this Island and I am optimistic that tomorrow will be a brighter day and that we will fix these problems in the short to medium term.

        Thanks for the intelligent debate.

        • Anonymous says:

          Actually, I don’t own a home; like you I am currently renting with the plan of eventually buying. And yes, I do agree the government needs an influx of cash. I just hope that it’s done in a limited manner because this is no magic bullet. I admire your optimism regarding our future economic climate, but personally I don’t believe we will be out of this that quickly. I don’t think we will stay mired in such a bad recessionary period for much longer, but I am highly skeptical of our ability to reach our past heights in the near future. As a financial centre, we are greatly subject to exterior economic conditions, and unfortunately don’t have the luxury of larger countries of relying on internal mechanisms to work or spend our way out of this condition. So while the world begins to sort themselves out (and I do believe they are in that process), we will start to see more gradual gains in our own economic condition. The main issue I feel we face with our current fiscal decision making is to undertake such projects that the extra we will have to pay back (be it from borrowing money directly, or selling assets to rent back their use) won’t exceed the lower growth rate we’ll receive as the global financial markets begin to recover. I’m realistic enough to recognise immediate action is needed, and as such we may have to make decisions (like the selling of some assets) to get us through hard times, but it’s imperative we do so moderately/prudently so as not to waste our future potential to grow and improve.

          And maybe at some point someone will realise it’s better to throw some grass-seed on Mt. Trashmore so we can pretend it’s a hill and not an eyesore until energetic minds such as yours find a more sustainable solution for our waste disposal issues. Who knows what needs to be done to lower the crime rate (as equally pressing right now, if not more so, than our economic woes), but certainly something, and thankfully for our image, everyone else is pretty broke too.

          Tomorrow will (we both hope) be a brighter day, but let’s plan for the worst while we hope for the best, right?

          A pleasure reading your opinion.

      • Naranja says:

        Interest.  It is a bummer.  It is also completely left out of your equation, which seems to equate mortgage payments with capital repayments.  The early mortgage repayments are about 99% interest repayments, look it up on the internet the numbers are quite scary.  Then you have to factor in the transaction costs – which are massive in Cayman – up to 9% stamp duty on the property, add another 1% on the mortgage.  10% of the value of your home gone in cash to the government with nothing to show for it.  Then if you sell you need to put 7% of your property’s value into the grubby little hands of our overpaid cartel of realtors.

        So that means you need 17% apprecation in your property before you are out of pocket on your house.  And here is the kicker, our market has tanked 27% recently.  If you bought in 2006 and sold now you would be 44% out of pocket.  That’s $132,000 on your $300,000 investment.

        Cayman property is a terribly risky investment right now even at low prices – the economy is fragile and if the OECD gets its way we will be looking at the possibility of 30% unemployment and a massive oversupply of properties as the professionals slowly (or quickly) leave.

        So rents are really cheap at the moment, and that is what I am doing.

  9. anon1 says:

    I had to post to say that I agree with Gordon Barlow (except perhaps the University). He is spot on on this one.

  10. Anonymous says:

    "State sponsorship of sports and entertainment festivals could be cancelled." Get rid of the heroes day hoopla.  That is $600,000 saved in one go.

  11. Anonymous says:

    Gordon, for the first time ever, I agree with you (but don’t tell anyone).

    • Anonymous says:

      Hello I do agree with you as this is the first time ever that I agree  more or less completely with everything written in an article  by Gordon Barlow

  12. Dan says:

    While I agree with a few of your points about cutting expenses (the airline and tourist sites to be specific), I think it’s above and beyond inappropriate to equate many of the other items you list as being charateristic of a "communist" society. For example, a state-run university, radio station or festivals do not make for communist policies. Even the most staunchly "capitalist" countries of this world have state-run radio stations, festivals and (especially) universities as counterparts to privately owned operations. One of the many reasons for government is to provide public services and goods to the people, and often at a loss, because the private market will fail to do so in a societally efficient manner. It’s a damn shame you’ve gone and taken a few good points and decided to take your logic to an untenable extreme, while unsophisticatedly trying to negatively brand commonly state-run projects as, gasp, "Communist." 

    The airline, and the tourist sites, really do fail to provide a service the private sector cannot do better. The costs of flying other airline services are often less, so clearly the government is failing in this regard and should think seriously about divesting itself from this endeavour. I’m sure private enterprises could run the state-owned tourist attractions at a lower-cost, or provide higher quality for the experience. But your argument, to me, loses validity beyond these points. Perhaps some trimming could be done with other areas (I have little knowledge of the Investment Bureau, so I’ll give you the benefit of the doubt on that one), but considering the permanency of government, selling long-term assets (cars, buildings) to then turn around and lease their use is really a poor idea. You’d get a short-term influx of revenue, and then bleed expenditures until someone wiser than you realises you’re better off owning than you are leasing. Frankly, I’m just not impressed with this rant, which is a pity because you were on the right track before you went off the deep end.

    • frank rizzo says:

      Some capital-intensive projects that require highly sophisticated management technique are ideal candidates for sale-leaseback. Things along the lines of waste disposal, solid and liquid, de-salinisation, buildings. These are things that may be situated on government owned land that may be sold to a private investment consortium. An example, the consortium will buy the land for cash that the government needs, build the waste disposal facility and operate it. The government leases the services for a set period, say 20 years. At the end of the 20 year period, the land and facility reverts back to the government. By that time the government should be in a position to staff the facility from the local population and continue the services. Government gets a facility without a huge capital outlay, leases services for less than they would pay to build and operate it themselves, the consortium profits from their capital outlay. This is a very simplistic scenario and I am sure the devil lies in the details. Think Mt Trashmore.