In many ways, some of our states are like General Motors before its bankruptcy, suffering from falling revenue, borrowing money to cover operating expenses and operating under crushing legacy health and pension liabilities. It’s entirely possible, given the gigantic size of the pension liabilities, that some states might do what was once the unthinkable at GM and default.”
Todd Zywicki, a law professor at George Mason University: From http://online.barrons.com/article/SB126843815871861303.html#articleTabs_panel_article=2
In George Romero’s 1968 independent horror classic, The Night of the Living Dead, the protagonists are trapped in a farm house by zombies, dead bodies which have come back to life and are trying to devour the living. Some governments around the world are starting to act like Romero’s zombies, desperately seeking revenue even if it means devouring their healthy neighbours. Greece’s fiscal crisis, which has produced demands for an EU bailout despite years of Greek governments’ Madoff-esque financial fraud to conceal their repeated violations of EU budget rules, is currently the worst, but Greece is not alone in the depth of its fiscal crisis.
In the UK, the expected January surplus – which appears because a large chunk of UK corporate and income tax revenue typically arrives that month – didn’t appear, replaced by a £4 billion deficit for the month. To put that in perspective, the UK government ran a £5 billion surplus for January 2009, hardly the best year of the past decade. To make up the unexpected January deficit, Britain borrowed £4.3 billion rather than repaying £2.8 billion as economists had forecast – a £7.1 billion gap! Indeed, Britain’s deficit now rivals that of Greece. Current forecasts are for an overall British 2010 deficit of £178 billion.
The UK’s budget woes stem from both increased spending and collapsing tax revenues. Income and corporation tax revenues were down this past year compared to 2009 by almost £6 billion while VAT receipts were up primarily because the rate climbed to 17.5 per cent. The pain is not limited to HM Treasury – local governments in Britain are feeling the squeeze as well, with revenues dropping just as recession-related expenditures soar. A recent survey by The Independent suggested that 20,000 positions were in line to be axed by British local governments.
In the United States, federal deficits have hit $1.6 trillion and are forecast even by the Congressional Budget Office to remain at staggering levels for the next several years before declining to the merely appalling. More realistic (or pessimistic, depending on your view of the world) estimates from outside economists put those numbers even higher. But the federal numbers, enormous as they are, are just the tip of the iceberg. US states are in deep trouble too. For example, newly elected New Jersey Governor Chris Christie, a rare Republican official in a solidly Democratic state who won on a wave of disgust with the state’s fiscal peril, announced revenue shortfalls of $442 million in state sales taxes and $180 million in state corporate taxes, part of an aggregate revenue shortfall of $1.205 billion for Fiscal 2010. When combined with higher spending in response to the economic downturn, New Jersey’s 2010 deficit is $2.179 billion. That does not count shortfalls in special funds, like the state Unemployment Compensation Fund, which had to borrow $1.14 billion from the federal government in January as it struggles to meet demand from an unemployment rate over 10 per cent. New Jersey isn’t even the worst-off of American state governments – that prize goes to either California, where the deficit is over $28 billion for the fiscal year ending this June, or my home state of Illinois, currently $13 billion for the same period on a much smaller population; although Arizona and Nevada are also strong contenders. Next year will be even worse, with independent estimates of aggregate state budget shortfalls likely to exceed $180 billion. And we haven’t even begun to discuss the shortfalls in state pension funds, which the Pew Center on the States estimates total $1 trillion.
It is not just large developed economies that are afloat in red ink. Cayman’s Caribbean neighbours are as well. For example, Jamaica has a tax collection shortfall of J$29 billion from April 2009 to January 2010, up J$4 billion from earlier estimates, despite a J$22 billion package of taxes introduced on 1 January. With Jamaica’s budget deficit headed over 10 per cent, the country is in danger of being cut off from further access to IMF funds.
And, of course, as to the recently released Miller Commission report (see CFR Board Member Richard Rahn’s commentary on it in this issue on page 78), Cayman also faces serious fiscal problems. As the report notes, “cash flow after capital expenditure has been negative in almost all of the last 20 years” and “[t]he debt burden has grown substantially over this period”. Alarmingly, unfunded pension liability is over US$324 million according to government figures. These numbers suggest Cayman’s predicament is not dramatically different from that facing the European and North American economies.
This dismal summary of fiscal meltdowns is a warning about what to expect from the United States and European Union. With their own revenues in free fall and spending up as they try to spend their way out of the recession, Cayman and the rest of the offshore world can expect little tolerance for anything that these desperate governments see as standing in the way of the revenue they so desperately crave. Although, as we’ve often noted in these pages, the overwhelming evidence is that quality off-shore centres like Cayman actually help the US and EU economies by funnelling investments into them and lowering costs for businesses, that’s not an argument likely to work in Washington, London, Paris, Berlin or Brussels. Cayman and the rest of the offshore world would do well to remember the conclusion to Romero’s film: the last survivor of the group in the farm house hears a rescue party and goes to meet them. Mistaking him for a zombie, the rescuers shoot him. This time it won’t be enough to hunker down and hope for the zombies to go away. They may be here to stay.