Smart policies, not more spending

In the wake of an impending economic downturn, what is required is not a desperate attempt to play the spending game; but effective policies to keep the economy going.

The global economy faces what many regard as its worse downturn in over 7 decades and governments around the world are responding with various degrees of ‘economic stimulus packages’. The US leads with about an 800 billion dollar package, with China next at 600 billion and other countries such as the UK following. In just about every country there is some activity on the public sector side to use Keynesian style interventions to replace the downturn expected, or already being experienced, in their private sectors.

So what about the Cayman Islands?

There are a couple of serious limitations as to what can be done in the Cayman Islands as far any financial stimulus package is concerned.

The first of these is that our government is essentially ‘broke’. The government does not have access to funds sitting around for a rainy day. We can tell from previous and current government forecasts that all is not well with the public sector’s fiscal position and the government’s own actions, in cutting back on its spending across the board, is also clear evidence of this position.

The second issue is that the government is not in a position to borrow significantly. The country’s borrowings have gone from $252 million in 2005 to a forecasted $658 million by this summer, representing an increase of over 161% in a single four year period. Our borrowing is also limited by the nature of our economic and monetary system. Unlike some other countries it would not be appropriate for the Cayman Islands government to engage in the type of monetary policy to effectively “print money” due to the fact that we have a full currency board system and for a number of other reasons.

So what’s left?

We can make some attempts to give a fiscal boost to the economy by spending what we can now. But the truth is that this ‘spending game’ is way out of our reach. Building a couple of schools or paving some roads may do good for the country in the long term, but will have only negligible affects over the next 12 to 18 months. What is required is a focus on those areas of policy that cause the most impact on the local economy today. We also need to consider policies that give consumers a reason to spend today and to avoid tightening up in response to tough economic times.

One of these policy areas relates to the work permit system. Work permits are a very powerful short term policy tool in the Cayman Islands economy due to the significant portion of foreign workers in our labour force. Work permit changes in Cayman have a similar impact as interest rates changes in the US economy. And while interest rates can take sometimes up to a year to start impacting the US economy, we usually see the impact of work permit changes within months in the Cayman Islands.

In the short term (the next 12 to 18 months) the business sector needs an environment that makes it as easy as possible to do business. That means they need access to work permits to either expand or to restructure their work force in response to the crisis. The recently announced new immigration system will clearly take some time for the bugs to be worked out. And neither can the new system be seen as addressing the need for short term policies to specifically deal with the economic downturn. The two issues must be kept separate so that the necessary policy stimulus can be provided while the immigration system can be allowed to work itself through over the medium term.

Another policy stimulus area is changes to stamp duty on property transactions. History provides some evidence that whenever the government reduces stamp duty, the net result is usually no harm to government revenues and the changes always results in more property transactions, which means more economic activity.

The final area relates to ensuring that, despite an impending election in May, the government refrains from the usual ‘man on the street/anti business’ rhetoric which creates further unease within the business sector, despite their political licence to do so.

None of these areas require any funding as such from the government and they will all go a long way in countering what we are now starting to experience. The question is whether the government is able to separate politics and protectionism from short term economic survival and pragmatism. If it can we will all be that much more likely to weather the economic storm.

Paul Byles is Managing Director of Focus Corporate Services & Consulting. He has worked in the offshore sector for over 18 years and is an economist and international consultant in the areas of economics and financial regulation.