world over are faced with the challenge of a growing imbalance between public
spending and revenues.
For decades, the Cayman Islands
government enjoyed surplus budgets with large amounts of public spending,
thanks mainly to the successes of its financial services industry.
global economic crisis and significantly reduced government revenues suddenly
and dramatically changed all of that, and soon the Cayman Islands government
was faced with the same dilemma as most other countries around the world: how
to manage the gap between decreasing revenues and growing public expenditures
for government services and benefits.
Most other governments in the world have
the ability to increase revenue through direct taxation of wages, profits, land
holdings and other assets. Although the Cayman Islands does have indirect forms
of taxation, it has so far resisted the implementation of income, payroll or
property tax, even though there have been suggestions from the United Kingdom
to do so.
The Cayman Islands government has managed
to eke out an acceptable budget the past two years by increasing some business
fees and import duties, while at the same time curtailing spending. But no one
believes this solution is sustainable in the long run – public service has
suffered, the cost of the civil service remains disproportionately high and the
revenues are not growing apace with higher expectations for social benefits and
Moreover, these important local priorities can inadvertently distract
from the global issues and negatively affect Cayman’s competitiveness as a
jurisdiction if not corrected.
I am reminded of an article entitled “Red
Ink Rising” published by Deloitte. (See http://www.deloitte.com/redinkrising).
These problems are common to local, state and national governments around the
world. The historical approach of waiting out, assuming that the problem is
cyclical and will correct itself when good economic times return is obsolete. Most
analysts agree the world’s economic model has fundamentally changed as a result
of the latest global recession and the new imperative is for change.
finance structures must change if governments are going to cope with the new
Change can be very difficult, especially
when it comes to well-entrenched government practices and cultural social
expectations, but change we must. The Cayman Islands can no longer rely on
revenue projections based on expected performance of a financial services industry,
which is facing increasing political and regulatory pressures from the world’s
The solution is both resetting
expectations and finding new funding solutions. Innovation and prudent private
sector partnerships can allow us to reframe our public expenditures and create
a new economic paradigm without introducing direct taxation. It appears the
Cayman Islands government is trying to move in this direction.
In June, it announced an agreement
reached with the Dart Group that on the face of it represents a true strategic
public/private partnership that offers many benefits to each party, as well as
to those who live, visit or invest in the Cayman Islands.
Over the next three years, the Dart Group
will fund more than $100 million for needed infrastructure and social
programmes, something it would take the government years or even decades to
accomplish without massive – and ill-advised – borrowing. In return, the Dart
Group received a commitment to deliver a number of development incentives –
from resolution of the George Town landfill, duty waivers and other fee
concessions, land swaps and certain other legal reform. This agreement has
created the confidence level Dart needed to investment another $415 million
over the next five years, something that will create tens of millions of
dollars more in indirect economic impact during the same timeframe.
This partnership alone will create
hundreds of jobs and tens of millions of dollars in government revenue and is
exactly the type and scale of economic stimulus the Cayman economy needed to
revitalise the local economy.
Now strongly joined in a strategic
partnership for prosperity, the Dart Group anticipates spending more than $1.2
billion in the Cayman Islands over the next 20 year while developing hotels and
other commercial space, as well as a variety of housing options.
The government’s efforts to change the
paradigm don’t stop there. A number of other public/private initiatives are
being discussed, from the privatisation of certain government functions or
entities, to innovative solutions for other infrastructure needs.
The government is also discussing
projects that would diversify Cayman’s economy. Cayman Enterprise City, a
special economic zone specialising in technology, could lure some of the
world’s top hi-tech companies here, Dr. Devi Shetty’s Narayana Cayman
University Medical Centre could give the tourism sector an new sector with
medical tourism and the East End Seaport could create new industry here with
cargo transhipment and cruise ship home berthing.
This is the kind of innovative,
out-of-the-box thinking the Cayman government must do if it is to have
confidence that it can balance its budget every year while at the same time
providing the level of service its residents and investors demand, and the
compassionate assistance its less fortunate citizens need.
The financial crisis was a wake-up call
for every government and we’re proud to say the Cayman Islands government has
risen to the challenge as it embarks to create a model that will ensure its
economic sustainability now and for decades to come.
The private sector also has to pursue new
opportunities to drive the Islands’ growth. One of the regions that has been
identified by the investment funds and trusts sector in particular is Latin
America. As Latin and South American countries increase their weight within the
global economy, the more important the Cayman Islands becomes as a facilitator
for investment into and from the region. Specifically Brazil, South America’s
economic powerhouse, has strong relationships with the Cayman Islands in terms
of investment structures, banking and the use of trusts, which this issue of
the Cayman Financial Review investigates.
This is complemented by a sub-focus on
trusts that highlights topics as diverse as the role of STAR trusts amid the
latest philanthropic trends, the tax and reporting requirements of United
States taxpayers with interests in foreign trusts and the most pertinent
accounting issues faced by trustees.
In addition this issue of the CFR provides once
again the answers to a number of questions from across the financial services
spectrum, including how a hedge fund should be run from a revenue and cost
perspective and how retail banks can best leverage customer information and