Balancing the budget
It’s becoming clearer by the day that most of the world is in the grip of a deep and long economic recession. This looks like the real thing – a severe enough recession is called a Depression.
Cayman has just begun to be affected, and there is worse to come. Back during the Great Depression of the 1930s, Cayman was poor. Caymanians might not have noticed much difference in their lifestyles. This time Cayman is rich, and the difference may shock us. Our MLAs have warned of a decline in Public Revenue, but the eventual decline may be as much as thirty or forty percent of last year’s total. They haven’t warned us about that.
Let’s face it: their modest financial skills can barely cope in times of plenty; how will they manage when the cashflow dries up? Thriftlessness in good times is poor training for the self-discipline that’s needed in bad times. They have two basic options for balancing their Budgets. They could turn to the taxpayers for a bailout, or they could cut expenses.
There are three main kinds of bailouts that the taxpayers could be called on for. First, new or higher taxes, and user-fees for government services. Second, stealing the assets of the private-sector Pension Funds. Third, a state lottery. All dangerous ideas. Let’s look at them briefly.
Raising taxes or fees is not practical. We taxpayers all have our own books to balance. We aren’t in a position to hand over any more of our money to the tender care of professional politicians. Their fat pensions are safe; our thin ones are not.
We have already been hit by large falls in the values of our savings. We’re in no shape to make good a shortfall in Public Revenue from any decline in tourism and tax-haven operations.
Fewer construction projects mean less Revenue from Work Permits, and less Import Duty from all the things that migrant workers buy. Already, imports of construction materials are way down; imports of everything else are bound to follow.
Pension Funds are a convenient source of bailout money, and a tempting one for politicians desperate to preserve their bureaucratic empires. All that’s needed is a change in the Law to require that a large percentage of the assets and future contributions be invested in Cayman Islands Government Bonds.
What could be simpler? What could be more patriotic? After all, our present Pension Funds have lost 30% of their values by being invested in overseas stocks and bonds. Surely our MLAs couldn’t do any worse. At least they could guarantee we’d get our money back. Well, it sounds good – as long as we can trust our rulers to treat it as a repayable loan.
However, the trouble with allowing politicians anywhere in the world to get their hands on people’s savings is that they don’t always give them back. What they usually do is spend the money on pet projects that don’t produce any profit – and then, as each person’s pension comes due they pay it out of current Public Revenue – that is, current tax receipts.
But unless they have built up a reserve fund, the current receipts will never be enough. So either existing taxes have to be increased or new ones have to be introduced. In effect, the Pension Funds are nationalized. The pensions become state pensions, and the extra tax-levies needed to pay them usually become an Income Tax.
The Chamber of Commerce twenty years ago beat back an attempt to do this exact thing. These days the Chamber is just part of “The Establishment”, but it is thanks to the extraordinary far-sightedness of Chamber Presidents Nick Duggan and Tommie Bodden and their Councils, that we all aren’t paying Income Tax today. God forbid their victory should ever be betrayed.
As for lotteries – they are universally recognized as being a tax on the poor and financially naive. Yet those are the very people who are always the first victims of economichard-times. That’s why casinos in poor countries are always closed to local residents; it’s for their own protection. If we ever get a casino in Cayman, no Caymanians will be allowed to play the tables, and no immigrants either. Rich retirees living here might be allowed in, I suppose, and maybe some of the well paid expats – but certainly not the low-paid migrants. So why encourage the most vulnerable among us to fritter their hard-earned money away on lottery tickets?
A state lottery would be yet another boondoggle. There’s a bumper-sticker on the Island that says it all: “Crime wouldn’t pay, if the government ran it”. Tax all the existing raffles and numbers if we have to, but please don’t let’s vote for a state lottery. No, when you get right down to it, the only practical way for governments to balance their budgets in a recession is to reduce Public Expenditure.
Something like two thirds of our Public Expenditure every year goes on state employees’ salaries and benefits, and that’s where the bulk of the savings will have to come from. If our representatives had been prudent enough to put some cash away for a rainy day, they could spend that; but they didn’t.
There is plenty of fat that could be cut. The Turtle Farm may have to be closed down for a while. MLAs may have to fly Economy on their overseas junkets. Post your suggestions online.
Category: Viewpoint
One of the most profound quotes I heard was Roger Babson a well-known economist in the 1920s. he predicted the 1920 depression.
"The test of a nation is the growth of its people-physically, intellectually, and spiritually. Money and so-called ‘prosperity’ are of very little account. … Babylon, Persia, Greece, Rome, Spain and France [and the UK and the U.S. ] all had their turn in being the richest in the world. Instead of saving them, so-called prosperity ruined them"
Money will not save us, "Only a sane spiritual revival which changes the desires of our people will save us. We must be filled with a desire to render service, to seek strength rather than security, to put CHARACTER ahead of profits." Today we see the opposite ! Just as in Rome before it fell.
After being scoffed at for predicting the depression of 1920-21, Babson returned after it hit to address a group of business men who were no longer so smug. He told them his secret to accurate financial forecasting: "If I want to know what the temperature is, now, in this room, I go to the wall and look at the thermometer. If I want to know what it has been, up to now, and the existing trend as of the moment, I look at a recording thermometer. But if I want to know what the temperature in this room going to be, an hour from now, I go to the source which determines future temperatures-I go down to the boiler-room and see what is happening down there.
You gentlemen looked at bank clearings, indexes of business activity, stock car loadings, stock market quotations-you looked at the thermometer on the wall; I looked at THE WAY people as a whole were dealing with one another. I looked to the SOURCE which determines future conditions. I have found that that source may be defined in terms of ‘RIGHTEOUSNESS.’ When 51 percent or more of the whole people are reasonably ‘righteous’ in their dealings with one another, we are heading into increasingly prosperity. When 51 percent of the people become ‘unrighteous’ in their business dealings with their fellows, then we are headed for BAD TIMES ECONOMICALLY ! " How much righteousness is there in business today? And, since the government is now so heavily involved in business, how much righteousness is there in government officials today?
Are we willing to listen to the tiny few economist who tell the truth?
Cayman Islands Government Budget
Gordon, actually the E’ers contribution is still part of our payment package and would most likely be paid doirctly to the E’er if not to the pension. My pension is down to only my contribution.
The problem with the curren pension law is there is not "give" in how the pensions can be invested. I beleive that currently 80% has to be in Equities. SO even though most IM’s could see the drop in equities coming, they could not do anything about it.
If the law allowed them to move the investment at the first sign of trouble to "safe" governemtn bonds my pension would not have lost over 50% last year.
The law needs changing governing the investment ratios, especially for those near retirement ages
Two points need to be made. First, your personal investment won’t have dropped 40%, since half of that will have been contributed by your employer. Even 20% is a hefty slug, but still…
Next, remember that the Pensions Law was created and passed by the ruling politicians of the day. The administrators of Cayman’s Pensions Funds are all licensed by our governments. Neither the administrators nor the supervisors are the world’s best and brightest, but they are all constrained by the requirements of the Law. A certain proportion of contributions must be invested in shares and a certain proportion in bonds, only a certain proportion may be in non-US currencies, and so on.
Since an earlier Cayman Islands Government introduced our compulsory pensions scheme, the world’s economies have fallen out of bed, and everybody’s savings have fallen with them.
I have never been a fan of pensions, and have never believed they are the best way of building up a retirement fund. I argued long and vehemently against our current pensions system when it was first proposed. Obviously, I lost the battle. Sorry about that.
However, in my opinion a State-pension program is even worse. There is never any correlation between what one must pay in (Income Tax, at a rate decided by the ruling politicians) and what one may take out (also decided by the politicians, based on purely political considerations).
Gordon, you need to understand that we working people view pensions as a legalized Ponzi Scheme. The only persons that profit from this mess are the pension providers. We little people don’t benefit..never have and never will.
My plan has lost 40% of it’s value over the past 4 years. Heck..even if I had bought numbers with my pensions money I would have a better performance than that!
Mr Barlow has an interesting perspective on the use of pension plans to fund other things other than actual pension payouts to the contributors. Nontheless in his usual way of flippantly expousing his solutions to any problem, ha excels in research but has little input from the man on the ground, the contributor.
As a contributor to the forced pension scheme that has also seen his investment drop by some 40%, I put the plame squarly on the sholders of the pension providers NOT Governments that may in the future use the funds unwisely
iI is my considered opinion that it is the fly by night pension providers, who I have intrusted with my pension money, who are far more likely to fritter it away, with NO accountability nor reprecussions, than any future Government who at least is up for reelection every 4 years. Remember contributors have NO recourse after 4 years if the pension provider has lost 40% of your investment, indeed the law protects the provider to the extent that if they fart away ALL of my pension money they are not held accountable and I am compelled, by law, to continue to give these idiots 10% of my salary so that they can "provide" for me when I am old.
The problem with the way the pensions are set up now, is that the only people who are allowes to steal my pension money are the liscenced providers, while I have no say or recourse. They steal our pension monies every day through their extravagant buildings, high paid salaries, expensive cars, outrageouus cocktail parties etc. Do not be fooled contributors, it is not their money that is spent for this, it is your pension money, whick they then list on their books as our ‘assets". However when the market for their fancy investments tanks, they look at you and say it is the economy, as if they wrer not the ones making stipid investments with MY money.
The pension providers are the only intity ( except government) that are allowed to pretend that their brilliance is responsible for any groth in my plan then say ops, sorry when their investments tank losing 40% of their value, notwithstanding that a large chunk of that investment is in themselves.