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The Elephant in the Room
It occurs to me that with all this recent discussion regarding the increase in revenue we are still rather successfully managing to avoid the elephant in the room that is growing bigger with every ‘nation building’ project and every paycheck that’s written to those in charge, whose only agenda seems to be plundering the public purse for their (hopefully) last few months in office.
I am of course referring to cutting expenditure and not necessarily putting a bunch of civil servants out of a job. As much as a ‘nation building fund’ is a wonderful idea – it is hardly appropriate to be exhausting the public purse to increase the pride of a nation that seems to me to be in this mess because of an inflated pride to begin with.
Just a couple of the recent expenses that could have been avoided:
- The Premier’s ‘jolly’ to Jamaica to celebrate their independence – let’s not forget at the time he flew to Jamaica we were potentially expecting the arrival of a hurricane
- The massive delegation of Cayman Airways representatives who flew to Cuba to discuss Cayman Airways – could this have been discussed in Cayman? Could local businesses have benefitted?
- Panama Inaugural Flight (in excess of $70k)
- Awards ceremony at the Westin in order that our premier can keep the title ‘honourable’ for perpetuity. With respect to those who may be deserving of this honour, it’s hardly the time to be concentrating on what some might consider to be frivolous matters.
These may seem minor but they are literally just the tip of the iceberg – and looking at the expenditure cuts (minimal as they are) that the premier is proposing, most if not all affect the ‘ordinary’ Caymanian he claims he’s trying to save. This seems to indicate that he doesn’t consider himself to be an ‘ordinary Caymanian’ because I don’t believe he will be affected (at least not directly) by any of these cuts.
We are told (by both parties) that politicians need their inflated salaries because the politicians find themselves having to pay electric bills for those who can’t afford to pay their electricity. As generous and kind as this sounds, it is a fool’s game and reminds me of the saying, “Give a man a fish and he will eat for a day but teach a man to fish and he will feed his family for life.”
I say to our politicians (with respect to those with very real struggles out there trying to meet their commitments) that there are better ways to spend your inflated salaries if you are trying to do good for your country.
If you are simply taking more money than the job is worth so you can keep your people poor and helpless, then you are doing an even greater disservice to this country than abusing your positions by taking free vacations.
Immigration policies support an increasing unemployment rate
“I am pleased that the labour market has improved last year, and I expect it to further make progress this year,” Premier McKeeva Bush said recently. After reading the recently released Labour Force Survey Report (Fall 2011) I do not share the premier’s optimistic outlook for the local economy.
In fact, I am increasingly concerned that the actions taken by the government and the lack of any real visible economic recovery policies and plans has resulted in a bleak outlook for these islands and has created a situation which becomes increasingly difficult to remedy if the current approach to managing the economy is not addressed immediately.
Simply put, a high level of unemployment signals that the economy is operating beneath the production possibilities curve and the economy is not performing at full capacity. This is significant, as suggested by Okuns law, because for every 1% increase in unemployment, real GDP decreases by 2%.
Cayman’s unemployment is largely structural in nature and some local employers are not able to source specific skillsets, training and experience from within the local unemployed labour pool, leaving them with no alternative but to turn to foreign labour in order to meet the demand for labour generated by their individual businesses. In addition to the almost 10% overall unemployment rate, perhaps the most startling statistic revealed in the report is the fact that the unemployment rate for individuals between the ages of 15 and 24 is currently around 20%.
This is alarming, to say the least, because individuals from this group represent high school and university graduates who are the future of these islands and the statistics indicate that for whatever reasons these young people are facing increasing obstacles finding employment. It is also concerning that a significant number of these individuals are ending up in the court system. Twenty years ago high school graduates in Cayman were faced with a multitude of employment and/or educational opportunities to choose from, but the situation today is dramatically different and it is obvious from the survey results that many are graduating with no opportunities ahead of them.
There are also much wider concerns that cannot be ignored. Cayman is in the rather unique position of being able to import labour from outside the country with little difficulty, mainly because work permit fees are a major contributor to government revenues. This imported labour serves to effectively replace, and causes employers to ignore, the local unemployed labour pool, i.e. the approximately 10% overall unemployed Caymanians, allowing the economy to continue to operate boosted by the external labour supply. The 10% unemployed Caymanians then become a cost to the country as they have to rely on government funded social programs to survive and as the importation of labour continues to proceed unchecked, the unemployment rate can only continue to increase.
The irony in this situation is that as government revenues increase from work permit fees, the increased demands on social welfare caused by unemployment will drive up costs faced by the government. The net effect may well be that government revenues are not being effectively channeled into the most appropriate and constructive initiatives. This creates a vicious cycle which becomes increasingly difficult to reverse. Recent examples of where government has spent public funds assisting the unemployed are numerous but unfortunately become increasingly necessary as more Caymanians encounter difficulty obtaining employment.
Ideally government should direct its economic policies towards keeping unemployment amongst Caymanians around 3% or less, and because we are in the unique situation where the majority of our employment force is non-Caymanian, immigration policies play an important role in controlling the rate of unemployment. The ideal strategy therefore would be to tie our immigration policies to our economic policies in order to effectively regulate the supply of non-Caymanian labour. By doing this we will be effectively controlling the level of unemployment. Left unchecked, our rather generous work permit policies will continue to cause an upsurge in local unemployment as the labour force survey has confirmed is the case today.
It is critical that our education efforts and focus for both local and overseas students be crafted to ensure that these missing skills are being addressed via formal education programs and initiatives. It should also be a clear policy that when these skills are available via the local labour supply, priority will be given to sourcing employment for these individuals, and government must be willing to halt or slow the grant of work permits within these specific areas until the local labour pool has been exhausted or the 3% or less limit has been achieved.
The University College must continue to adopt the highest possible standards and begin to offer a diverse curriculum which is crafted based on the needs highlighted by the local labour market and this can be easily achieved by adopting a consultative and cooperative approach with the private sector. It is therefore more effective to offer educational opportunities to prepare students for careers that are in highest demand. For example if the top 5 careers within the private sector are lawyers, accountants, technology engineers, corporate administrators and fund administrators, these need to become the top 5 educational opportunities available to our students. By taking this approach we align the local labour supply with the local demand for labour.
There is some degree of cyclical unemployment, or not enough jobs to go around, which is partly due to the current recessionary conditions, and in many instances a high level of skill and or training is not required for these positions. Government reaction to this must be to seek to reduce the number of work permits within the relevant areas, allowing the local unemployed labour force to become employed and productive. Cyclical unemployment is perhaps the easiest to address, and least costly, and only requires a clear policy and direction when it comes to the granting of work permits in areas where there are qualified but unemployed Caymanians.
Looking forward, Caymanians must accept that for the foreseeable future there will always be a need to hire foreign labour and that we cannot expect to find sufficient Caymanian labour to operate the economy at full capacity given our indigent population level. It is also clear, however, that there is a direct relationship between the level of unemployment and the subsequent negative effect on government costs and the negative impact on the local economy this creates.
Carefully balanced economic and immigration policies can be utilized to achieve the perfect balance between foreign labour and Caymanian labour. What is required, however, is sensible and responsible management, clear tertiary educational objectives, less pandering to one group of individuals over the other and adopting a more scientific and analytical approach to managing the economy.
The end result will be a reduced local unemployment rate, higher education and training standards among Caymanians, a stable and united workforce and a much stronger economy and government.
This is not a quick fix approach and the benefits will only become evident in a few years, but it is clear that taking proactive steps now will prevent further increases in unemployment, reduce the burden on government to “look after” unemployed Caymanians, reduce the divide between expats and Caymanians, both socially and economically, and stimulate the local economy by putting disposable income into the hands ofCaymanians without taking it from the government coffers.
The tax trick damage
For almost two weeks after the political ploy of announcing the possibility of a payroll tax was initiated by the UDP, the community has regressed to being as divided as it ever was in its modern history. Thanks to Mr Bush's "strategy" to announce the payroll tax so that we could swallow a less bitter pill (soon to be announced), the international media has had a good laugh, the cayman vs expats sentiment grew to its worse, and local businesses faced uncertainty.
Some loss potential clients, and quite a few within the financial services industry have had to defend the country's tax neutral status.
But the worse part of this debacle is the very widely held and highly credible speculation that this was all intentional. That is, with no regard to the community division, or international reputational impact on the main sector driving the country's economy, the government went full speed ahead with its brand of local politics, with apparently the only remaining skill set that they possess to deal with a financial crisis.
And this nonsensical piece of politicking was as obvious as it was damaging: CIREBA alluded to it in their reported statement in local media, Wendy Ledger gave us the 'bait and switch' viewpoint, and there were dozens of bloggers on local websites saying this was the political play. So not only was it wrong for the country, it was also a political failure.
None of this will matter much to the UDP, because you see, the UDP is really only one man. And that one man operates with no rationale, little logic in what he does, says one thing on Saturday morning and contradicts it on Saturday afternoon. All on a whim, on the basis of the last person that spoke in his ear, on nothing more than raw and impulsive decision making from one man at any given moment.
Imagine for a second what it would be like if you were to use that same approach to decide which job offer to take or which school to choose for your child. Now consider what it means to operate like that when running an entire country.
And it is this modus operandi of the UDP that is the most worrying. Because regardless of the advice given by his political allies, local businesses and supporters, the leader of the UDP has shown time and time again that he and only he is King. And while no reasonable person would ever criticise a good leader for not having much of a formal education (because one does not need that to make good decisions if they surround themselves with the right expertise and actually use that support), everyone will want to see the back of a leader who shows no respect for others.
If there was ever an episode that gives the other elected UDP members a reason to take charge, it was this one especially because of its closeness to the upcoming election. But we should not hold our breath, because they are all quite happy it seems to stay on board while their captain speeds the ship aggressively towards the rocks.
Hopefully the people will remember the collateral damage of this incident on Wednesday May 22nd 2013.
Expat tax: 10%. A sense of community: priceless
There are many of us civic-minded, gainfully employed, young Caymanians who would gladly part with a percentage of our hard earned salaries if we could be guaranteed two things: 1) that quality benefits, such as education and health care, would become universal, and 2) that the proper system of checks and balances would be implemented to ensure accountability in the way that our money is spent.
From where we stand, however, all efforts that are made to bring about accountability and transparency are met with outrage, disdain and even legal threats. As citizens, when we attempt to engage in conversation and question a policy decision, seek clarification as to how decisions were arrived at, or even attempt to explain why we disagree with a particular proposal we are belittled, ridiculed and at times even bullied by the very people whose six figure salaries we pay.
We are dismissed with a condescending “little girl you’ve had your turn”, the way a parent lets a child know that s/he has been humoured long enough and it is now time to let the adults get back to their important business.
Since the announcement of the introduction of the payroll tax for work permit holders was made last week it has not ceased being on the tip of everyone’s tongue, as it seems everyone has an opinion on the matter. If ever there was an opportunity for a true nation building exercise, where everyone who resides here is able to engage in meaningful and thoughtful dialogue — and perhaps even problem solving — this could have been it.
What we’ve found instead is that we’ve been stripped of our common humanity and sent to our respective “corners” as the tired arguments of Caymanians vs. Expats have breathed a new life, acquired a worrying new momentum, and claimed centre stage — redirecting the energy that would be better served in finding a solution into new, more distasteful ways of tearing down our fellow men.
People — human beings — live here, not nameless, faceless aliens whose existence and value is based on the colour and issuing country of their passports. These people are our neighbours, co-workers, fellow churchgoers, and even friends. We may not always know one another’s names but we recognise faces. There are no strangers here.
We are constantly reminded that we live in a democracy, yet our actions of late have been completely contrary to that very notion. We may not always agree, but it is our democratic right to express our opinions free of intimidation and without fear of repercussion to our personal safety and that of our families. That is basic human decency.
The Caymanian woman who spoke during Wednesday’s meeting stating her view that it was unfair to ask only one sector of our community to contribute more and not another, was dismissed by the Premier as a “little girl” who had had her turn, and then dismissed by another Caymanian woman, who in a rather aggressive manner attempted to put her in her place by telling her that she had not built this country but had “found this country built”.
What followed is what is of importance: instead of addressing the latter speaker, the Premier chose to chastise the first speaker and others who clearly held the minority view at that event to “be careful” of how theyask their questions so as to not stir up the “passionate” crowd.
If our elected officials did more than pay lip service to the notion of unity, someone, anyone from the head table would have stood up and defended that woman’s right to express her opinion freely and without intimidation. Leadership is not about doing the popular thing or the easy thing but the right thing.
Yet no such fortitude of character was displayed as they all sat silently. In that silence the official blessing was given, condoning the perpetuation of this destructive, confrontational, and hostile tone. Here’s the thing about blessings and tones: neither is confined by four walls and so have seeped into the greater dialogue, as was evidenced by the emboldened remarks made on the radio the next day.
For that we should all be ashamed.
From its inception this community “enhancement” fee has served to do the exact opposite of what it intended. It has us turning on each other in all possible combinations: as Caymanians vs Expats, Caymanians vs Caymanians, and Expats vs. Expats. The impact will be greater than stains to our reputation abroad, and we will only truly understand what we have done when we hear it coming out of our children’s mouths.
Tax us, don’t tax us; tax them, don’t tax them … the outcome no longer matters. The damage has already been done, and we have all already lost.
Fixing Cayman’s financial problems
(First published 2009) Over a year ago I wrote that Government and the private sector should don their rain gear as the global financial crisis started to bite in Cayman. People said I was being a Cassandra. Nearly ten years ago, I wrote that Cayman’s revenue base was too narrow to sustain its development and the needs of a growing population, certainly not in a down economy. I recommended a modest annual property tax specifically dedicated to building and maintaining the infrastructure.
I also recommended that Cayman should develop a ten year plan for independence (a discussion for another day). People said I had truly lost it with these two suggestions. And now we are in the perfect storm, with the UK running interference and no real progress with long term solutions.
Earlier Governments wisely put in place mains water supply, sewage (but as yet only for part of the Islands), new airport and hospital and mandatory health insurance and pensions. But we then lived on borrowed time by deferring investment in roads, schools, port, runway extension and waste management. The previous Government decided to build the roads, schools and a new Government building simultaneously and without proper long term funding/financing for these projects.
Also, over the past few boom years, Government operating expenditures troublingly grew as a percentage both of revenue and GDP. Paradoxically, the Ivan disaster produced a huge inflow of overseas insurance and reinsurance money and (even with the duty waivers and reductions) the Governments coffers filled with import duties on (re)building materials and replacement equipment and goods of all kinds. This inevitably tailed off. Then the global crisis hit and our two main economic drivers, tourism and financial services, stopped expanding and then slid backwards. Real estate, construction, support services and consumer spending all suffered. 2009 Government revenue suddenly sank well below projections, yet Government expenditure continued unabated.
Voters everywhere continually demand more and better services, all too often from their Government. And politicians promise to deliver them. So either we stop demanding or we (not just others) have to pay for these services. And there are indeed vital projects still to be undertaken here. The most pressing (and maybe the most expensive) is waste management and the current landfills in particular. Even the most optimistic realtor, developer and “no new taxes” lobbyist must be aware that the south end of Seven Mile Beach, Camana Bay and the bypass stretch are exposed to a potential toxic disaster (air pollution already and soil and water pollution that may be happening unseen underground). What price tourism, real estate and the North Sound if that occurs (and the crime wave and poor underresourced policing continue)?
There are some things we should stop doing. First, bashing the UK. This may play well locally for a time but is unproductive. Second, saying we just have a short term cash flow problem and all will be well if we can borrow some cheap dollars to keep us going until the boom times in tourism and the financial services industries restart. Those times may be a while coming (and we must ensure the right platforms to encourage these key industries), and the traditional revenue streams from these industries will likely be insufficient for the long term. Third, saying we just cut Government expenditure, eliminate waste and abuse in Government services, downsize the civil service and improve civil service performance. Steps must be taken (the civil service and statutory authorities are in the aggregate far too large a percentage of the total work force), certainly to freeze the expansion, but it will be very hard in reality to turn the clock back (just count the votes).
Fourth, saying that privatization and public/private partnerships and private finance initiatives are the solution. There are some sensible options, but these are not sufficient to handle the problems. Fifth, saying that our ratios of debt and debt servicing costs to GDP are and will be well in line with other countries. This is misleading if most of that GDP is off limits as a source of Government revenue, i.e. we are not prepared to tax it directly! I suspect Moody’s may not have taken this into account in their recent rating confirmation of Cayman. Sixth, parroting “do not raise taxes in a recession”. This comes from the same people who during good times say “do not raise taxes, you will stop the boom”. Lastly, painting this as a Caymanian-non Caymanian issue. We are all in this together.
We should not ape the fiscally irresponsible behaviour of the US and the UK. Fortunately, we cannot “print money” and flood the market with CI$ debt that we cheapen by devaluing the currency (since Government borrowings are essentially in US$, we leave the Fed to do that for us!). We need to reinstate sound Government finances. I believe this is possible but contributions are required from the entire resident community and those invested locally. The self-interested “nail the other guy, he’s not at the table so he can be lunch” is very unhelpful. Suggestions should be constructive with a willingness to compromise for the greater long term good.
We now have deficit figures for the last fiscal year (disturbing even if predictable), an optimistic proposed budget for the current fiscal year and UK in-principle and conditional consent to a portion of the loans requested (as yet we do not know which financial institutions have made firm commitments to fund the loans). The UK still requires, not only satisfactory short term fixes, but also a long term plan for sustainable revenues/financing and expenditure cuts/containment to match (phased implementation should be possible). In our own interests, we should also set clear priorities.
The short to medium term solutions outlined so far in the proposed budget call for swinging increases in the usual indirect fees and duties (e.g. import duties – effectively our sales tax, financial services and company fees, work permits etc.), a 2% levy on money transfers through licensed money services companies (but not through banks) and various other miscellaneous fees, a new annual business premises fee payable by the tenant of 10% per annum of the rent (with the concession that no such fee is payable on leases in force on which stamp duty has already been paid), one off savings (e.g. deferrals and perhaps cancellations of services and projects) and windfalls, civil service/statutory authority hiring and remuneration freezes, disposition/refinancing of Government assets/liabilities etc., and improved efficiencies, performance and collections (delivery is another question).
But I fear that, given thereis little hard evidence of sustained cuts on the expenditure side and of specific long term funding/financing of capital projects, there needs to be detailed study followed by action that broadens in the longer term the revenue base through meaningful new levies (implemented in a sensible staged manner) that are not so dependent on perpetual boom times and buoyant consumption. And this is not simply because the UK tells us this. If we fail to do this, we are likely only kicking the can down the road for a short while.
Taxes should be fair, have the lowest adverse impact on economic activity and should be cost effective to collect and enforce. There are two new proposals in particular that do not meet the tests.
The proposed 2% levy on money transfers through money services licensees is unfair as it hits those at the bottom end of the economic scale (who have also been abandoned by the traditional banking system … perhaps the retail banks will be good community citizens and now rethink this poor attitude). It also sets a very ill advised precedent (thin edge of the wedge) as it will be seen as a tax on cross border fund transfers, an anathema to the global financial industry. Finally, it can only be short term, as in a few years, it will be uncollectible as electronic money transfers by cell phone will be possible (this is happening elsewhere already).
The proposed 10% business premises levy on rents (to be an obligation of the tenant but, it appears, to be collected by the landlord and remitted to the Government) fails to meet all the tests (the last one in particular) and is potentially open to nonpayment and fraud, in the same way as stamp duty, health insurance and pension contributions. And in the current climate, I fear that it may finally drive under many small businesses that are already struggling, if they have lease renewals coming up. Also, the new 10 % annual levy may adversely impact one of the key things Cayman needs to do to get the economy going again; that is to encourage greater economic activity here with new financial businesses establishing physical offices with people living and working here in and making real decisions.
My concern is that this new in-your-face line item (combined with the ever increasing work permit fees) in the budget of a fund or investment manager considering a physical presence here might be a turn-off. To put this in perspective: currently a 5 year lease at an annual rent of US$250,000 carries upfront stamp duty of 5 %, i.e. a one off US$12,500 approximately; under the new regime, no stamp duty but an annual tax of 10%, i.e. an annual US$25,000, and thus US$125,000 over the five years.
I also question whether this new levy will result in tenants buying or building their own premises. Anecdotally, the response seems negative. The market is a lot more complex than that. First, many smaller tenants are in no financial position to buy or build. Second, in Cayman other than major retail banks (and most already have their own bricks and mortar), financial services and professional firms typically do not own their office premises as it limits their flexibility for growth (or downsizing) and ownership causes succession problems and more for partnerships.
Third, major tenants are usually already tied into long term leases. Fourth, I wonder if the existing landlord/owner lobby has thought carefully enough about the implications in the unlikely event of their major tenants constructing their own buildings and vacating their current premises. A whole lot of empty buildings, so be careful what you wish for.
I must emphasise that new taxes should only be imposed if and to the extent that the various short-medium term measures outlined in the budget fall short or are not sustainable. Applying the three tests outlined above, I suggest for mature study and consideration three possible new revenue sources.
First, a modest annual community service charge on real estate dedicated to appropriate infrastructure and services (like waste management) and collected by the Land Registry (there can be exemptions for those who genuinely cannot pay and for low value properties, perhaps variable rates/bands depending on the usage and value and a credit/reduction of the upfront stamp duty already paid or payable). Second, a levy on electricity, telephone (including prepaid cell phones), TV and water bills collected by the utility companies. Thirdly, and very reluctantly if all else fails, casino licences (collected by a new Gaming Board). These could together raise a stable CI$45-CI$75 million annually for Government fairly, with low adverse economic impact, at a reasonable cost and with a high collection rate.
This article is an expanded version of the article that appears in the October 2009 issue of the Journal.
Open letter to premier
I am a Caymanian and I have never faltered in my belief that our nation is full of kind, loving and hardworking people. For the first time, however, I lost sight of that belief after attending your meeting on Wednesday night. I found myself leaving that meeting, not with an understanding of why direct taxation is the best way forward for the Cayman Islands, as you had promised would be the case; rather, I found myself exiting the auditorium with my head in my hands apologizing to every expat I crossed for the way in which they were treated by my elected officials and your supporters.
During this meeting I watched in horror as an expat sitting next to me, who came only to listen and not speak, was threatened with physical violence by a supporter of this policy who was voicing her opinions over the PA system. My horror was exacerbated as those who oppose this policy were constantly interrupted and not given the same opportunity to have their voice heard.
The nail in the coffin for me was when you yourself responded to the questions of a Caymanian woman not with an answer but with the words, “Little girl, you’ve had your turn, now give the microphone to someone else.”
For you to accuse the members of a peaceful Facebook group of being ill tempered and incapable of having a calm and measured discussion, then sit by the wayside as your supporters exhibit that very same behaviour before your eyes is outright disrespectful, never mind hypocritical.
I would like to point out something which may have gone unnoticed at Wednesday’s meeting. Not once did an expat stand and say, “I will not pay this tax,” or ask why they should have to pay taxes to support our country. Rather they offered alternatives, voiced concerns about the way in which we are governed, and expressed genuine concern for the future of the Cayman Islands.
There washowever one person who stood before you and dared to say that Caymanians should share, if not bear, the burden of our current financial woes. This person was not an expat as you may suspect; rather a young Caymanian. I stand beside my fellow countryman in that belief, although I disagree that direct taxation is the way forward. As was so rightfully stated, this is our mess and we should be the ones to clean it up.
That is truly the Caymanian spirit of which I have always been so proud.
Our forefathers built this country through hard work and dedication, and that is a quality which still exists in most Caymanians today. Never once have the Caymanian people looked to take the easy way out of a tough situation. This is something which you yourself have commended us for when referring to the way in which our country was rebuilt after the devastation of Hurricane Ivan.
Why then, I ask, does the current administration so adamantly put forth their hand and ask for other people to pay our debts?
Community enhancement or division?
Handing over more money (in the form of tax dollars) to this government feels a little like asking a crack addict to mind your money and expecting it to be put to good use. This may sound a little dramatic but until we are told what the government proposes to do in order to tighten their belts and curb their spending, the people have to be opposed to handing over any more money — all people, expats and Caymanians.
As much as we can all agree that the premier’s proposal is constitutional in that there is a provision to allow discrimination in the matters of immigration and taxation, we all have to ask ourselves is this really the most sensible solution.
Sadly, whether this goes ahead or not, what’s been said cannot be unsaid and this has become a very divisive issue — interesting therefore that the proposed tax is to be called “Community Enhancement”.
There are many people, expatriates and Caymanians, who would welcome the opportunity to provide positive ideas in an attempt at finding solutions to the predicament we find ourselves in. Many people (myself included) are angry because there really is no good reason that we find ourselves in the position we’re in — we got here only because of ‘our’ greed, arrogance and perhaps ignorance. We had rainy day money that we spent on sunny days and here we are.
And yet, despite feeling that I had no say in how we ended up in this position of poverty, I am absolutely prepared to tighten my own belt in order to help us get out of this but I want to see our leaders leading by example; it’s simply not right to expect everyone else to tighten their belts with no intention of doing the same.
I saw a bumper sticker once that said, “How can I be broke when I still have cheques left?” and I believe it’s time to take the cheque book away and get ourselves educated as to the actual position we’re in — no more clever accounting, just the facts.
We have some brilliant minds here and it’s time the government acknowledged the expertise of these brilliant minds and formed a sensible group of people who might actually have some ideas to get us through this without the need for direct taxation and without the divisiveness that we’re currently witnessing.
Other options to tax
There is no need for any form of direct taxation, or any VAT or any other such measure either now or in the foreseeable future. What we as voters require, and what the UK also requires, is sustainable government spending. The most sustainable government financial system is one that limits expenditures. What is required is for government to eliminate waste, corruption and patronage. That may be hard for any politician whose core political constituency is based on these elements.
Mr Miller made some very good suggestions Friday evening regarding both additional revenue sources and areas for possible expenditure cuts. He is to be commended. Perhaps some of our other highly paid politicians might now make equally clear suggestions for getting our finances out of the current mess, rather than just waiting their turn to board the gravy train.
Here are some areas of expenditure that I suggest can be cut. These are derived from the Government’s own June 2012 interim budget. I have merely annualized the expenses they published. See here
The government is currently subsidizing Cayman Airways to the amount of almost $2,000,000 per month. (See budget items CAL 1, CAL 2, and EI 1.) Over the years some $300,000,000 has gone this way, a large part of the total debt of the Cayman Islands. As part of this subsidy the government has been subsidizing essentially free travel for a vast number of Cayman Airways staff and their families and former staff and their families and dozens, if not hundreds, of current and former political appointees and their families, over many years. That needs to end. The entire subsidy to Cayman Airways needs to end. As an older Caymanian I understand the emotional attachment to Cayman Airways, but cutting the subsidy to Cayman Airways would eliminate half of the government’s projected deficit. It has to happen.
The government is also subsidizing the Turtle Farm to the extent of approximately $1,000,000 per month. This is what is shown by budget item EI49. That subsidy has been going on for years at a total cost of many tens of millions. I understand the emotional appeal of the Turtle Farm for Caymanians, but eliminating that annual subsidy would eliminate almost one quarter of the government’s projected deficit. It has to happen.
The premier proposes to keep the various “nation building” and other questionable funds that he controls to the tune of some $5,000,000 per year. (See budget item TP 52.) If that was eliminated another 10% of the government’s deficit would disappear.
The government also spends/wastes something like three quarters of a million dollars per year on what it calls “protocol services”. Perhaps that is where they put the bills for the personal servants, fencing, gas guzzling vehicles, personal Christmas lights, home electricity bills, etc., that are claimed (without any Constitutional basis) as “perks of the job”. See Budget Item CBO 9.
Credit card bills for luxury travel as well as “consultants” pay are buried in vague one line budget items. Double dipping by politicians, which costs the country an estimated a half million per year, is buried. The ministries controlled by the premier have a budget item (OE86) of something like $45,000 per month spent on “Compensation”, presumably to an entity outside government, with no indication of any benefit that the country receives for such an expense.
It is too easy for our politicians to say, “We really enjoy spending more and more of your money without any accountability and we don’t care how much it is going to cost you for us to get that money.” Perhaps that statement is too harsh. Perhaps it is more correct to say that the government has not even a glimmer of an understanding of what it will cost to implement new revenue measures of the type they have presented.
Introducing any new forms of taxation, whether in the form of an income tax such as the proposed payroll tax or in the form of a VAT, will require government to greatly expand the civil service rather than shrink it. The proposed new taxes will also require government to put in place very expensive systems for collection and enforcement. Either of these tax systems will cost many millions for government and the private sector to implement. That will negate most if not all of any additional revenue and it will lead government to raise the rates of such taxes time and time again.
Sustainable government finances require prudent spending above all else. All the revenue in the world is not sufficient for a wasteful government. Forcing expats (and in a few months Caymanians as well) to subsidize government waste is not the answer. Every person and every organisation in the Cayman Islands should insist that every possible expenditure is cut to the bare minimum BEFORE we even think of raising taxes. If at the end of the day more money is required for government, then existing collection systems should be utilised to minimise the cost of obtaining revenue.
I would encourage everyone and every organisation to make yourself very clearly heard on this issue. If you do not, you will have only yourself to blame as you watch our country implode.
The extremes of political cynicism
The premier's latest bombshell announcement (merely one in a long line of many) of his intention to impose a payroll (income) tax on expatriate workers has quite predictably drawn the consternation and ire of so many in this community over the past few days. I would venture to guess that the anger and disillusionment is not because people do not understand that these are austere times and further belt-tightening will continue to be the order of the day.
After all, we do not live in a bubble, and we all know that countries far better funded and equipped than the Cayman Islands now find themselves on their knees financially, or else are going cap in hand for a bailout, wherever that may be found.
I would also suspect that the indignation is hardly because the expatriate community sees itself as exempt from "fees". After all, as one example, it is grappling with the burdensome doubling of work permit fees that was levied some three budget cycles ago to raise revenue.
What is particularly galling about this latest announcement from the premier is the apparent callousness with which this proposed income tax has been considered and thrown out to the public.
According to the premier's statement this past Wednesday, "Government had a choice. We could have introduced income tax, property tax, Value Added Tax (VAT) or something softer such as the community enhancement fee … Government has opted to introduce a community enhancement fee that is linked to the remuneration level received by work-permit holders in the Cayman Islands."
Well, first of all, to refer to a tax on people's income as a "community enhancement fee" is nothing but a cynical ploy. It is a tax, plain and simple, and no one, particularly those who will be directly affected by it, is fooled by the premier's nomenclature. It is what it is — income tax.
Politicians do what they have to do to secure their voting blocs and to guarantee their return to power in the next election. So they avoid those things that would upset that particular agenda. Or they actively court the people important to their pursuit of power.
The expatriate community has no vote. Therefore it merits none of these considerations. It doesn't even merit consultation, discussion or prior notice of a drastic measure that will directly affect its business. We now know from organisations such as Cayman Finance, that they were learning of the proposed tax the same time as the rest of us. This is clearly not a government concerned about discussion and consultation with some of the prime economic stakeholders — people and organisations who directly contribute to the main revenue streams of this country.
Just exactly how this proposed tax will "enhance the community" is anybody's guess, especially when by the very nature of the announcement, it is doing anything but. What's really happening is that this so-called community enhancement fee is already serving to further divide the community. There goes even the verypretence of social harmony.
Some expatriates, commenting elsewhere on this website and in other fora, have indicated that they are withdrawing plans for further investment in the community, such as buying property, as a result of Wednesday's announcement. There goes new investment and business growth, at least to some degree.
The international media has already picked up this story and it's becoming a source of ridicule for the Cayman Islands. There goes reputation and standing and a concomitant erosion of the ability to attract investors and employees.
It remains to be seen whether this tax will in fact be implemented. And if it is, whether it will generate the expected revenues to fill a gap in the budget — because that's all it is designed to do. Or whether the bloated bureaucracy and increased costs necessary for its implementation will be worth it in the long run.
To the premier and his government, the new tax is "something softer" than any of the other revenue measures they supposedly contemplated. That's because they are not accountable to the people on whom they are laying this burden. The selective and punitive nature of this tax is not just economic fallacy. It is political cynicism at its most egregious.
Bad tax & terrible timing
The recent announcement that the government is planning to introduce a payroll tax (to be called a ‘community enhancement’ fee) is a bad idea at a bad time. The proposal seems to be to remove the legal requirement for employers and employees to pay pensions for work permit holders and to replace this with a mandatory payroll tax of essentially the same percentage (5% by employees and 5% by employers).
The idea is that this will have a neutral affect because the new tax is the same as what everyone is now paying in pensions.
But that neutrality argument makes no sense for two reasons.
1. Employees will now not have the 10% pension savings which they had before. Instead they will have to pay 5% of their salary to the government and they will now NOT have the other 5% contributed to their pension in their name by their employer. The employee is therefore losing 10% and that’s cash for CIG to blow irresponsibly, not pensions for a later date for the employee.
2. Employers will also be worse off because many of them will have no choice but to opt to pay the 5% pension for the employee in order to keep them happy. That means higher recruitment costs and higher personnel expenses for existing employees. In some cases employers won’t opt in but in many others, such as within the financial services sector, the employers will feel that they have no choice but to do so to continue to recruit the right type of employees and to keep compensation packages competitive.
Community enhancement or division?
The government is disingenuous in its proposal to call the new tax a “community enhancement” fee. First the existing basket of indirect taxes of over 500 million have been utilised to “enhance” the community for the past 5 decades, so there is no reason to think that we now need to find a unique or additional way to do this.
Secondly, why is the community only being “enhanced” by expats’ taxes? If it is truly a community fee it should be paid by all those in the community (for example, a fee of 200 dollars to be paid by every employee per year), but we all know the political reasoning behind this and it has nothing to do with community enhancement. It will, however, further divide the community.
It's also bad politics
The government will no doubt now try to blame their “need” to do this on the FCO. But while the FCO has asked for years for a more sustainable tax base, they have fallen short of demanding any particular form of tax. In fact, their main focus has been on the need for the Cayman Islands Government to reduce its expenses.
So instead of making a difficult decision in an election year and finding other ways to reduce expenditure, the government will take what they mistakenly feel is the “easy” option and tax those that are not on the electoral list.
Their political mistake is that this decision will have a damaging impact on the local economy and Caymanians will also be hurt when the fallout begins.
Finally, those that point to existing payroll taxes in other financial centres to support introducing one in the Cayman Islands miss a crucial point: Cayman has had to increase indirect taxes and fees in many other areas over the years precisely because the governments were trying to avoid any form of direct taxation. As a result, some of our costs, fees etc are higher than in some of these countries used as examples of payroll taxes. But now the Cayman Islands will not only have those higher fees, it will also have the burden of the payroll tax to deal with, because clearly the government is not going to reduce any of its existing fees and indirect taxes.
Moving targets
As a purely practical matter, the Government will likely only be able to collect taxes from those companies that have a proper system in place with proper records etc.
Unfortunately for the financial services sector they will end up being the ones that are relied upon for the taxes actually collected. Many of the smaller more informal firms, such as smaller construction companies etc, will struggle to have systems in place and it will cost more to chase them than what is ultimately collected.
And therein lies the crux of one of the biggest challenges this new proposal will face: the financial services sector is full of persons who understand how to structure their affairs to minimize taxes in accordance with the law. Readers will recall now that this is essentially what they do for a living for their clients. How then do you imagine will the Cayman Islands government be able to effectively collect from a sector that will spend time and resources finding clever ways to minimise their taxes legally?
There are a host of other issues, such as the infrastructure needed to manage this new tax, but these are not mentioned here for brevity. Nonetheless, with the current state of the economy and the political sentiments against the current government, they could not have chosen a worse time to make such a terrible decision.