8^th August 2012

The Development of the 2012/13 Budget

Deputy Premier, other Ministers and colleagues, senior civil servants, Ladies and Gentlemen, thank you all for being here tonight and I welcome all those from other districts who took the time to come to the good District of George Town.

Anytime any matter, particularly raising revenue is proposed – there will usually be more concern than necessary, and, depending on the climate, opposition of various kinds will come into it.

We are a mannerly people; let’s act accordingly, respecting each other.  Beyond that, I am asking everyone to act in accordance with our laws, that is we shall brook no unruliness or disorderly behaviour.

The history as to how the Foreign and Commonwealth Office (the “FCO”), of the United Kingdom Government was enabled to have significant influence in determining the annual Budget of the Cayman Islands Government is firmly established: it occurred as a result of the financial results experienced during the year ended 30^th June 2009 – the last year of the previous Government’s term in office, at the end of the four years of PPM administration.

This was the background to the current Budget preparation process, which started in earnest from December 2011, to establish a Budget for the Government’s fiscal year that started on 1^st July 2012. In December the Legislative Assembly approved the Strategic Policy Statement – the foundation for the establishment of a Budget for the 2012-13 fiscal year.

In mid-January 2012, as Minister for Finance, I issued a Budget Circular that granted Ministries, Portfolios and Offices that make up Government, their Expenditure Allocations for both Operating and Capital Expenditures. These Allocations should NOT have been exceeded when agencies of Government submitted their expenditure requests for the 2012-13 fiscal year; however, the Expenditure limits set out in the Budget Circular were exceeded by a significant extent – in the region of $150 million.

Honourable Ministers of Government and senior Civil Servants have spent the past several months reviewing expenditure submissions with the objective of reducing those submissions to more affordable and sustainable levels.  As an example of the seriousness of our efforts, the policy has been implemented that there is a moratorium on the recruitment of Civil Servants. The notable exemption granted has been to enable continuity of classroom-cover by teachers.

On 13^th June 2012, the Government presented to the FCO for its prior approval, its intended 12-month Budget for the 2012-13 fiscal year before taking the Budget to the Legislative Assembly and Finance Committee.

The key elements of the 2012/13 Budget that were presented to the FCO on 13^th June 2012 were:

• Operating Revenues of $598 million;
• Operating Expenditure of $576 million;
• an Operating Surplus of $22 million;
• Capital Expenditures and Investments in Public Entities of $83 million;
• New Borrowings of $59 million;
• $40 million in New Revenue from Directorship fees; and
• Operating Overdraft of $65 million for the period 1^st July 2012 to 31^st January 2013 and for it to revert to $25 million from 1^st February 2013 to 30^th June 2013.

The FCO refused that Budget request.

The FCO insisted that the Government strengthen its fiscal position by implementing a greater level of expenditure reductions than had hitherto been made by Honourable Ministers and senior Civil Servants. The concern expressed by the FCO was that expenditures should be made more sustainable going forward into future fiscal years. The FCO as of this week is still of the firm view that while expenditure must be cut, the strengthening and improving of fiscal results for the Government must not occur solely as a result of reductions to expenditure, but revenues of the Government need serious enhancement and expansion – and these must be sustainable.

The FCO’s Economic Advisor arrived in the Cayman Islands on 4^th July 2012 to assist with an understanding of what the FCO would like to see in the 2012/13 Budget, and subsequent years’ Budgets, in order that Minister Bellingham would be in a position to approve Government’s 2012/13 Budget, and budget plans for the succeeding two years.

The FCO’s Economic Advisor, on 10^th July 2012, established what he referred to as the “frame” for the 2012/13 Budget and subsequent years’ Budgets: by the “frame” the FCO’s Economic Advisor meant the aggregate levels of: Operating Revenues; Operating Expenses; Financing Costs; and ultimately, the Net Operating Surplus expected to be achieved by Government.

The Net Operating Surplus established by the FCO’s Economic Advisor for 2012/13 was $76 million.

You might ask why such a very high level of Surplus was established for the Government. This high level of Surplus is explained by one simple condition: the FCO does NOT agree for the Government to finance, or fund any of its operations by increasing Government’s long-term debt. The FCO says Government must fund its operations – first and foremost – from Revenues and secondly, by making use of an Overdraft facility.

As I have just said, Government was told in no uncertain terms, both that our revenues must be enhanced and expanded, and our expenditures must be reduced, and they are accepting no less. Indeed, it was suggested to Government that the total improvement in our fiscal results and position should be achieved by 50%, or half, from Revenue Measures and 50%, or half, from Expenditure Reductions. Hence Government HAD to do BOTH: increase Revenue and reduce its Expenditures.

A CHOICE…WHICH NEW REVENUE MEASURES?

Government had a choice.  We could have introduced Income tax, Property tax, Value Added Tax (VAT), Tax on business income – Capital Gains tax – Inheritance tax – Death tax – or, something such as the Community Enhancement Fee, that was felt would have a smaller overall impact on the economy.  We had made extremely deep expenditure cuts to get the budget to this stage.  This still did not produce enough savings to satisfy the FCO.  There have been calls to have significant layoffs in the Civil Service (in the range of 500-700) from the private sector.  The Governor has not come with any such plan, and the Elected Government would not want that especially at a time when the private sector can’t absorb them all. However, that is now off the table, and the private sector has volunteered alternative revenue measures and we appreciate their partnership.

Government recognises that its implementation of Revenue Measures must not stifle growth in the economy or make the cost of business in the Cayman Islands unsustainably high.

The proposal to remove private sector contributions to pensions, is still in effect and is a real reduction in the cost of doing business in the Cayman Islands. That is persons on work permits will not be mandated to have a pension plan.

It should be noted, however, that the Government will impose a fee of 5%, payable by the company, on certain categories of employment.  This will serve as a further incentive to train up and recruit Caymanians in those roles. There is presently far too easy to make a case to hire employees to do painting while excellent Caymanian Painters are left without work – and – there are similar other such situations.

The main area of focus for revenue measures on the financial services industry relates to corporate governance. We are proposing reform that is expected to improve our current framework and further strengthen investor confidence.

This reform would bring greater scrutiny to the role that is played by directors on a wide range of corporate entities. For example, the government is looking at implementing a registration process that would call specific attention to the role of directors in ensuring that anti-money laundering practices are in place, as well as compliance with pertinent requirements for good corporate governance. Particular emphasis will be placed on the role of independent directors in the fund governance area.

Additionally, there is a proposed increase to license fees payable by corporate services providers, a slight increase to the annual fees of exempt companies, as well as a number of changes to a variety of fees for services provided by the General Registry and CIMA.

EXPENDITURE REDUCTIONS

Since 28^th June, there have been decisions made for several material reductions to Government’s projected Operating Expenditures.

Government established an Expenditure Review Committee (ERC).  It was comprised of a broad and knowledgeable team of Civil Servants who brought forward a number of options on ways to reduce expenditures.  The Government accepted a number of these options.

Some of these reductions represent a “sea-change” to the sharing of expenses between the Government and members of the Public Service.

I provide the following examples to illustrate this fundamental shift from the past.

• any newly recruited Civil Servant will be required to contribute to both their pension and health-care costs;

• existing Civil Servants will also be required to contribute to their health-care costs from their remuneration; and

• spouses of Civil Servants that enjoy health-care coverage from the Cayman Islands National Insurance Company (CINICO), will now be required to pay for such coverage.

Government is of the firm view that in order for expenditure reductions to be truly sustainable, such reductions should not be restricted to a particular category of expenses: instead, the reductions should be spread across a broad base.

Accordingly, in addition to the previously mentioned reductions to Government’s expenses that impacted Personnel Costs, the Government has reduced Operating Expenses further, some examples of which are as follows:

• $1.5 million was trimmed by budgeting a lower level of  Marketing and Public Relations expenditures; always being mindful that this activity contributes to our economy through tourism and financial services – but acknowledging also that better synergies may be possible, amongst our own entities, and with the private sector.

• the ERC’s suggestion was to northball the police helicopter in the USA as it is simply unaffordable to this country and we decided that rather than northball it, we would be better off selling it and realize some savings. This will save in excess of $1.7 million;

• the planned reduction to Housing Allowances for Police to levels that existed before hurricane Ivan, is expected to result in an expenditure reduction of $1.5 million;

• the rationalisation of remuneration in Statutory Authorities is expected to yield “savings” or expenditure reductions of $1.5 million;

• the centralisation of the procurement of utilities, consumables, janitorial costs and security costs is expected to reduce expenses by $1.3 million;

It is expected that Government’s Equity Investments in its Statutory Authorities and Government Owned Companies will amount to $23 million during the 2012-13 fiscal year.

The Capital Expenditure level set for the 2012-13 fiscal year is now down to a historic (or near historic) low amount of $33 million.

In respect to the Governor’s Statement, I repeat what I said previously.  We went as far as we could with the 2012/13 Budget – this was finalized and forwarded to the FCO. The FCO knew the broad parameters of the Budget. They understood what we have here; they have acknowledged the high quality of services provided by the Government of the Cayman Islands. They have said plainly that it is remarkable what we are doing, but to sustain it, a better balance must be found: expenses must be cut, and revenues must also be enhanced.

They knew of the Directors’ fee – that was submitted in June to the FCO – but they were not satisfied with that alone. They asked for, and would not be satisfied with anything but a broadened revenue base that is, based on reasonable projections, “sustainable”.

To meet that demand we proposed the Community Enhancement Fee. They know of the revenue projection of that proposal. The FCO economist went back to London with that knowledge. As you know, this is now off the table.

We recognize that the Private Sector has asked, and demanded that the size of the Civil Service be cut. We have been working with a group in the private sector to cut expenditure that is still ongoing. There is a need, however, for a greater recognition of the very valuable role the civil service has played, and continues to play, in Cayman’s well-being.

I repeat now what I said before – the Governor of this Territory is responsible for the Civil Service not the Premier – I do not hire – nor fire – nor do we sign any contract for any employed Civil Servant. The Governor himself is better able to explain why the Civil Service levels are so high.

My fellow Caymanians, these are the sorts of times when you take a good hard look; and you can usually tell who your friends are. I wonder if they would include Mr. Ezzard Miller, MLA for North Side, who stated that he knows how to cut the budget; he would save $20 million alone by cutting the civil service. How many families would lose a breadwinner? How many businesses would lose a customer? How many foreclosures would that bring about? How many medical bills would be left unpaid? And what would we do – spend half the $20 million on welfare support, and the other half saving their homes?

Although the Leader of the Opposition makes the claim that Government has not cut expenses, it is his usual way of not telling the truth. But if the opposition has a genuine suggestion of cuts they ought to give it to me in writing – they should have done that from the Interim Budget. I again invite them to put up or shut up; and I repeat what I said previously:

We are cutting the expenditure that will bring about a change in the benefits previously enjoyed by the Civil Service. They will now pay part of the cost of their health benefits. The post Hurricane Ivan housing allowance for police officers will be cut. Any new Civil Servant hired in the future will have to contribute to pensions and health benefits. These are things the Premier can participate in, so expenditure has been cut – but I cannot cut the Civil Service numbers. These are humans who was given a contract – etc. etc.

However if the Governor makes a recommendation to the Elected Ministers – then I can be the judge as the Minister of Finance on what I will or will not submit to the Cabinet as reduction in the emoluments.

The Leader of the Opposition has also come out to mislead the public again. He has suggested a VAT, or Property Tax, Everyone knows that I rejected VAT, Income and Property Tax, and Payroll Taxes and all other taxes across the board in 2009 – I still do! His suggestion is nothing but him trying to gain points from this situation. The Leader of the Opposition and his group created a mess of the Islands’ finances.

A Value Added Tax, or VAT, would be disastrous for these Islands, so would Property Tax, which the Leader of the Opposition now embraces. Well, he can go ahead – based on my Government’s stated Policy and core principles, I will NOT introduce any such taxation.

So, you will naturally ask the question where are we now or how close is the Government to satisfying the broad “frame” that the FCO’s Economic Advisor developed on 10^th July 2012 which projected an Operating Surplus of $76 million.

Ladies and Gentlemen, the Government – with its proposed Revenue Measures and Expenditure Reductions – has achieved an Operating Surplus of $70 million; which is just $6 million “shy” of the $76 million mentioned previously.

The detail requested by the FCO in respect of these Revenue Measures and Expenditure Reductions was sent to the FCO. It is worth repeating what I said earlier: the broad parameters of Government’s 2012/13 Budget were known to the FCO – what they were subsequently given were the intricate details.

The other key features of the 2012/13 Budget are:

• an Equity Investment by Government in its Statutory Authorities and Government Companies of $23 million;
• Capital Expenditures by Government of $33 million – this is an historic (or near historic) record-low level of Capital Expenditures;
• $26 million of principal debt repayment during the 2012/13 year; and
• no long-term borrowing at all in 2012/13.

This latter point should not be under-stated. The Government did not incur any borrowing in the year that just ended on 30^th June 2012; coupled with the proposed zero long-term borrowing in the current 2012/13 year, this Government would have gotten through half of its term in office without incurring any long-term borrowing. Make no doubt about it, this is a great achievement. How many other Governments can say the same?

Fiscal responsibility and restraint have been the cornerstone of my Government and it always will be.

My Government has done the very best for these beloved Cayman Islands under circumstances that are very difficult – the same circumstances that have brought advanced and industrialized countries to their knees. I consider that the Government has done a sterling job in difficult times. Anyone who does not appreciate that has NOT been looking at Greece, at Spain, at even the mighty USA.

I’ve said a number of times that we’ve been forced into too short a time period, and been asked to do too much in that time. That said, one of the unfortunate consequences is that the opportunity to feel out, or to consult, has been limited. That relates to some of the cuts, as well as the revenue measures.

We accept the reality, though, that some hard decisions were coming. One of the things the FCO is right about, is that we have been providing levels of service and infrastructure comparable to the so-called ‘first world’ nations – but without the comparable revenue base. We accept this has to be addressed, and we are looking for credible and sustainable ways to address it.

We’re giving a resounding answer to the question ‘who are we developing for?’ We say – ‘We’re developing for ‘Caymanians’. What does that mean? Let’s be clear now – my Government – and myself personally – has taken more licks I believe than anyone in public life, for my attitude to status grants, and for my generally positive welcome to persons from elsewhere, to come to invest and settle in Cayman; and some of them, those who really want to, would in due course become Caymanian. So, we are developing for Caymanians, but this is not an ‘Us and Them’ story, no matter how many screaming headlines there are that stir up trouble and dissension. Friends of Cayman would act more responsibly.

In this budget – there will be more funds to train Caymanians; more funds to ensure we can keep up with growing needs for community enhancements. These are the needs we must provide for, if we are to sustain the high quality of life we are known for.

I am hoping to get a favourable reply from the FCO by Tuesday of next week and deliver the Budget to the House by the 20^th of August.

Government has tried to build a better Cayman – we have consistently tried to get projects off the ground that will improve our economy and the quality of life for all of our people.

We believe that these projects will make a huge difference in Revenue for Government – and jobs for Caymanians, and will positively stimulate our economy.

I firmly believe with business on the table, things will be better in the short, medium and long term for the Cayman Islands.

Cayman is still a Country that welcomes foreigners and we have a reputation for living and working harmoniously.

Cayman is still a good place to live: We have a More Liberalized Immigration Policy

The outlook for the Cayman Islands is good:

• Shetty Hospital is still online
• The Cruise Ship Dock facility will be developed
• Spotts landing redevelopment
• a golf course community in North Side/East End
• one hotel in Bodden Town and Dart’s 2 hotels on 7-Mile Beach
• the rest of the ForCayman Alliance Developments of Commercial Buildings and Roads
• more airlines coming here opening up more U.S. and other gateways
• tourism on the increase for the first time in 10 years
• Cayman Brac’s Airport expansion is progressing well
• Grand Cayman’s Airport expansion is planned
• Dragon Bay Development will also come online

There are those who are also saying that the Cayman Islands, will now be going down the path of introducing income tax.  This, again is far from the truth.  My government has no intention to levy any form of taxation on corporate earnings, capital gains or profits generated by businesses operating within the Cayman Islands; also, No Inheritance Tax – No Death Tax.

My Government has worked hard to create a positive environment for the private sector, especially in financial services.

•          The Financial Services Industry is a major national and economic asset which belongs to the people of the Cayman Islands.

•          As a major asset, it has brought about great improvements to our standard of living since its emerging development which commenced in the late 1960’s.

•          This National Asset, which we describe as our Financial Services Industry, has been brought about through the blended efforts of past lawmakers (Members of the Legislative Assembly) and the private sector stakeholders working in genuine partnership.

•          The majority of the key partners from the private sector who worked with Governments, (present and past) have benefitted significantly from participation in this industry.

•          These private sector partners, while benefitting personally from this National Asset, also took on the role of being primary advisors to the Government on legislative and domestic policies.

•          While some might complain about Government grants, in fact the Government has often been told by some of these individuals that it is the Government’s responsibility to ensure the well-being of our citizens.

•          The present economic crisis which we are in, started in 2008 and no one knows how long it will last.  Within the European Union today there are 18 million persons un-employed.  Even in the great United States, today, the primary focus is on job creation and the economy.

•          In such an environment as we are now in, where employment opportunities have  diminished, those of us having jobs should be prepared to tighten our belts a bit, share a little of what we have and become more of our brothers’ keeper.  Unfortunately, there are some people who do not see it this way and want my Government to take the hard decision of cutting the Civil Service by as much as 500-700 persons and sending them home. The Ezzard Plan. I am not prepared to do that.

•          If what they are advocating is done, how will these people live? Who will cover their living expenses? Who will feed and clothe their children? Who will pay their mortgages? Where will the Government get the money from to provide the necessary ‘social safety net’ for these people? Where in the private sector will we absorb these 500-700 people into their ranks and give up some of the staff they have employed on work permits?

•          Now for those persons who would want to advocate such an inhumane, callous and non-caring approach and who, while having their personal financial security fully assured, are now advocating that civil servants be sent home, the question I would like to pose to them is what would be their solution for assisting such persons until they are able to find meaningful employment?

•          The Civil Service has expressed concerns about the proposals regarding changes in their benefits. It is not my desire to see any of you suffer unnecessary hardship.  You have made many sacrifices before, in the interest of the country; if you don’t support what we are calling for, some workable recommendations will be needed for other ways to cut expenses. What we propose is workable. It is not pain-free, but it can work; and we all need to resolve to do our bit.

Fellow citizens (Caymanians and non-Caymanians) most of you, like my Government, realize that we are facing very challenging times and an unknown future.  My appeal to you is for us to work together by keeping all hands on deck through this period of uncertainty until the good ship “Cayman” reaches calmer waters.

Caymanians and non-Caymanians, as recently as 2004 when this Country was devastated by Hurricane Ivan, we had to depend on each other and draw upon our own resourcefulness, ingenuity, resilience and faith to rebuild this nation.  In fact, similarly to what we now face today, those who we would naturally expect to support us, did not come to our aid.  Fortunately for this Country, my Government, through careful financial management was able to amass an amount of approximately $105 million in General Reserves back in 2005.  This is what was used to rebuild the Country combined with the efforts of Caymanians and non-Caymanians, wealthy, middle class and poor working together. We will again overcome this financial storm but only if we walk together.

The times in which we now find ourselves again call for the same level of cooperation.  Let us, therefore, work together for the good of Cayman, especially in coming up with the resources needed to provide good governance for these Islands, while promoting sustainable development with a view of generating employment opportunities for our young Caymanians, many of whom after having completed their tertiary education are now sitting at home unemployed.

Let’s unite together to get our people back out to work and let’s do all within our power to nation build and make the Cayman Islands the best place in the world to live and to raise our children and grand-children. My Government wishes to thank you for your patience and understanding. We will get through this together.

May God bless these Cayman Islands.