The start of a new relationship for the UK and Cayman

The UK has a new coalition government. For Cayman this heralds a positive change in government policies as well as the attitudes of ministers and officials. Those policies are set out in a 36 page policy document that makes clear there is to be: “partnership government” between two political parties that “share a conviction that the days of big government are over”.

The previous UK government had tried to build a client state of voters dependent on welfare and public sector jobs. Not surprisingly the money ran out well before the required number of voters could be bought. By way of contrast the UK’s new coalition government is determined to build a country that has, at its core, the values of “freedom, fairness and responsibility”.

Already the Cayman Islands has benefited from this change by the speed and efficiency with which my former Parliamentary colleague, Henry Bellingham MP, approved the Cayman borrowing needs set out in its 2010/11 budget.

One of the reasons for the speedy approval is that Cayman’s budget and forecasts are in alignment with the key policy objective of the new UK government’s policy book in which one policy is accorded priority ahead of all the others:

“The deficit reduction programme takes precedence over any of the other measures in this agreement.”

From the earliest announcements and speeches, the new UK government has demonstrated that it is facing up to the problems of reducing the UK’s £165 billion public sector deficit. Within days of taking office, the Chancellor of the Exchequer announced reductions in government expenditure of £6 billion. He also announced the recent emergency budget and forewarned that it would contain unprecedented measures to reduce public spending.

Both Cayman and the UK government recognise that gaining control of expenditure and deficits is of critical importance. Without expenditure control it will not be long before it becomes impossible to borrow money. The ability to borrow is dependent on the market’s perception of the ability to repay the borrowed monies. In that regard the UK and Cayman have a common interest in seeking to maintain the highest possible credit ratings thus avoiding a Greek style crisis. Also there is mutual recognition that borrowing is deferred taxation and it should only be undertaken responsibly and with regard to concern for the next generation that will have to pay for it.

By proposing a budget which set out a strategy for reducing its deficit Cayman government policy was very much in alignment with the policies of the new UK government.

The UK’s own emergency budget was designed, just like Cayman’s, to deliver cost reductions, efficiency savings and the privatisation of some activities as part of the deficit reduction programme.

There is also a new reality in the UK government’s thinking on taxation. It recognises that low levels of taxation and limited government are the means by which economies grow. Incentivising people to develop their businesses is better than imposing penalties on achievement.

Consequently, if Cayman reduces its deficits to the extent of avoiding any significant borrowings, its policies of having no direct taxes should continue to be accepted by the UK. Those policies can be justified because of the opportunities that they provide for Caymanians to build better lives than would be possible without them.

Two of the UK coalition government’s core values are “freedom” and “responsibility”. We can be hopeful that Cayman will be encouraged to use that freedom to develop its own policies to meet its own needs with minimal interference. However, there are a number of new policies where the UK government’s approach is different to Cayman’s. Listed below are some key policies of the new UK government which might impact the UK/Cayman relationship over time, although in some cases implementation is subject to legislation:

Firstly, the UK retirement age is to rise to 66 by or before 2020. This is expected to also apply to civil servants whose pensions will be reviewed with regard to placing them on an average lifetime earnings basis rather than the current final salary basis. There will also be downward pressure on public sector pay and a reduction in numbers.

If Cayman follows London that will mean significant changes to a civil service average retirement age of 57 as well as to the more generous current final salary pension and healthcare schemes;

Secondly, transparency in government will be increased. All government spending and contracts over £25,000 will be published with local availability of spending data for items above £500. Local and national governments will be required to publish performance data. Salaries and expenses of senior officials will be published online. A comprehensive spending review will be undertaken with more data than ever before made public. For Cayman to adopt similar transparency levels to London, it will require adapting government financial systems to meet earlier accounting deadlines as well as new levels of disclosure on finances and performance;

Thirdly, regulation will be reduced and the private sector will be encouraged to expand. Members of the UK public have been asked to propose regulations that should be scrapped. There will be increased opportunities for the UK’s small and medium sized companies to secure government contracts with a target of 25% of contracts going to SMEs. It will be a challenge for Cayman as it would be for any government to review regulations drawn up over many years and identify those which are unnecessary. Likewise extending Cayman government’s accounting, reporting and monitoring systems so as to ensure a proportion of government contracts go to local small enterprises will require significant administrative and transparency changes.

Fourthly, corporate taxation rates will be reduced to one of the most competitive in the G20 funded by measures to reduce tax avoidance. If the UK adopts tax competition as its own policy it will be more in line with Cayman’s own approach;

Fifthly, international relationships will be strengthened with the “fastest-growing areas of the world economy”. Particular emphasis is to be placed on developing a special relationship with India and a similar one with China. This is one area of policy where Cayman’s current approach is ahead of the new UK government.

Provided there are no out-of-control deficits requiring excessive borrowings by Cayman, the UK government will have no need to impose any policies as the last Labour government tried to do. Caymanians will have a greater freedom to continue to decide on which policies their government should adopt. The announced values of the UK coalition government imply it will henceforth be operating a “lighter touch” relationship with its overseas territories. Clearly, the UK would prefer to be a placid watch dog over Cayman rather than a bloodhound on the attack.

Endnotes: 

1. “The Coalition: our programme for government” published by the UK Cabinet Office, May 2010

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David Shaw

David Shaw was a Member of Parliament in the United Kingdom for 10 years from 1987 to 1997. He was a member of parliamentary committees covering national and local government finance. He was recently a joint author and the UK member of the Miller Commission, which produced the report into the Cayman Islands government’s fiscal sustainability.
 
He is chairman of Sabrelance Corporate Partners Limited, a UK based corporate finance and advisory consultancy which is regulated and authorised by the Financial Services Authority. He qualified as a chartered accountant with PriceWaterhouseCoopers.

David Shaw FCA
Chairman
Sabrelance Corporate Partners Limited
(Corporate and Financial Advisers-
Regulated by the Financial Services Authority)
66 Richborne Terrace
London SW8 1AX
United Kingdom

T: +44 (0)20 7735 6965
E:
david.shaw@sabrelance.com
W:
www.sabrelance.com
SKYPE:
first4strategy
 

Sabrelance

For over 25 years, the Sabrelance Group has carried out advisory work in mergers and acquisitions, corporate finance and corporate strategy for clients ranging from small companies to large multinationals. 

Our focus is primarily on medium and smaller sized businesses and transactions and our aim is to bring to our clients high quality, independent advice.  Our executive directors have more than 40 years of experience in international investment banking and corporate strategy consulting and have handled a range of complex assignments.

We have undertaken transactions and consultancy projects for companies located in W. Europe, E. Europe, Russia, USA, China and the Far East.

Sabrelance was founded in 1983, as a fund manager and corporate finance adviser.

Our focus is primarily on medium and smaller sized transactions which are nevertheless of crucial importance to a company and merit the best quality of advisory support.  We work closely with the top management of our clients with the object of building long term advisory relationships.  Our aim is to bring to our clients:

  1. High quality corporate advice
  2. Independent approach: avoids conflicts of interest
  3. Highly experienced team
  4. Capability to handle complex transactions
  5. International experience
  6. Focus on achieving successful transactions
  7. Advice that is in a client’s interests
  8. A team that is accessible and flexible

Sector experience

We have undertaken transactions in a number of business sectors, and the Directors have particular experience in Chemicals, Pharmaceuticals, Biotechnology, Publishing, Radio Broadcasting, Information Technology, Software and Property.

 

Sabrelance Corporate Partners Limited
66 Richborne Terrace
London SW8 1AX
United Kingdom

T: +44 (0)20 7735 6965
E:
david.shaw@sabrelance.com
W:
www.sabrelance.com
SKYPE:
first4strategy