Premier's Remarks at Press Briefing
Remarks for the 15 March Press Briefing
by the Honourable McKeeva Bush, Cayman Islands Premier,
on Government's meetings with the FCO on 11 March 2010
Good morning everyone. This morning I will provide an update on the Government's meeting with the Foreign and Commonwealth Office in London last week.
From March 9th to 16th, I led a Delegation to the United Kingdom which included the Deputy Speaker of the House, the Honourable Cline Glidden, Financial Secretary, Mr. Ken Jefferson, HE the Governor Mr. Duncan Taylor and Consultant to the Ministry of Finance, Mr. Paul Byles. For the meeting with the FCO the delegation was also joined by Mr. David Shaw, who is one of the co authors of the Miller Commission Report.
The purpose of the meeting with the FCO was to discuss the Miller Commission Report and matters relating to the short and medium term fiscal plans for the country.
As many of you will be aware, last year the Cayman Islands Government, in agreement with the United Kingdom, commissioned an independent study to determine the feasibility of implementing revenue sources for the Government. This study also entailed examining the Government expenditures as well as its debt sustainability.
The Cayman Islands Delegation made a presentation which contained:
- A summary of the Government's position on each of the Miller report recommendations
- An overview of the current state of affairs
- And explanation of the reasons behind the variance in the budget forecasts and the actual position
- A number of short term and medium measures that the Government will be implementing
The first thing that I will do today is to provide you with a summary of the Government's position on the various recommendations of the Miller Report.
Let me start by saying that generally the Government is in agreement with the majority of the recommendations of the report. In fact it is our intention to implement many of the recommendations and we have communicated as much to the United Kingdom.
- No direct taxation
On the first recommendation, that there should be no introduction of direct taxation in the Cayman Islands, it would be no surprise for you to hear that we agree with this general conclusion and believe that ideally new revenue measures will need to be kept at a minimum for the short to medium term. However, we are committed to examining ways to broadening the revenue base and we have given that commitment to the UK. We received no indications during the meetings that the FCO will be pushing for direct taxes, although this is something that they would like for us to continue to consider in our efforts to broaden the revenue base.
- Orchestrate substantial privatisation and assets sales
On the recommendation to engage in privatisation and asset sales, we also agree with this proposal. In fact, as I announced at the Cayman Business outlook Conference in January, we are already proceeding with the appointment of the necessary professionals to carry out the respective feasibility studies to enable effective divestment as soon as possible.
- Restructuring of various operations
We agree that there are further opportunities to restructure several existing government departments and agencies such as the Department of Tourism, Department of Commerce and Investment, the National Pensions Office, Radio Cayman and Computer Services, which are all mentioned specifically in the Miller Report.
- Reduction of Civil Service pensions
The Miller report also recommended a reduction of civil service pensions benefits. We agree that changes to the current pensions benefits package need top be examined, subject to legal considerations. This exercise will obviously need to be carried out through the Governor as head of the civil service. From the Government's perspective, I must say that we do not feel that this change can be implemented at the same time as the salary cuts currently being discussed.
- Civil Service Healthcare
The Miller report recommends adjustments to civil service healthcare benefits. We agree that civil servants should be made to contribute some % of their healthcare costs in line with the standard in the private sector, again subject to legal considerations. However again we will leave this with the Head of the Civil Service to implement in the medium term.
- Civil Service salary cuts
As many of you will already be aware, we also agree with this recommendation that salary cuts be instituted and in fact the Government started by electing to cuts our own salaries. We are now awaiting the results of the current discussions on salary cuts within the civil service. This is also subject to going through the proper legal and administrative processes.
- Reduction of civil service numbers
In relation to the recommendation by the Miller Report to reduce the civil service numbers over the next five years, we will support the Governor in the reduction of civil servants numbers on the basis that this is done in a reasonable and compassionate manner. However, we believe that this should be achieved via the divestment of various authorities and Government agencies and by the recommended restructuring of Government departments.
To be clear: My Government does NOT believe that the Government should be aggressively laying off civil servants in the current economic climate for both economic and social reasons.
- Increasing the Civil Service retirement age (to 65)
We also agree with the suggestion to increase the retirement age of civil servants to 65.
- Civil Service investigative committee
The Miller Report recommended establishing a special committee to oversee and monitor an initiative to reduce the numbers of civil servants. We do agree that this initiative will need to be managed properly to achieve success. In fact we also feel that this approach should be taken with many of the recommendations and other medium term plans of the Government.
- Reform of Statutory Authorities and Government owned companies
The Government agrees that these bodies should be reformed. Several of these organisations currently receive an annual subsidy from the Government so it is indeed important that they are made to be more efficient to minimize, and we hope in some cases, completely avoid, the need for ANY subsidy from the Government. We must change the way we do things, to not only recover, but be stronger in these times. In my opinion, reform of the statutory bodies is one of the key measures to achieve our goals.
The UK's Position on the Miller report
I will briefly summarise the FCO's position on the Miller report as follows:
Generally, the FCO agreed with the Cayman Islands Government on the vast majority of the recommendations which I have just outlined.
There were of course a few exceptions, the most notable one being the question of whether the Cayman Islands should introduce direct taxes.
But even on that subject, there seems to be an understanding by the FCO that the Cayman Islands needs to examine a broadening of the revenue base in a manner which makes this country's economy sustainable.
The UK did make the observation that they would have liked to see more analysis in the Miller Report on the question of what types of taxes may be suitable for the Cayman Islands.
But in the end they very much accepted that a key issue for the Government in securing fiscal sustainability is to reduce and control its expenditures and its borrowing levels.
This leads me to providing you with a summary of our discussions with the FCO specifically on the Cayman Islands current fiscal situation.
Before getting into that I do wish to offer my thanks to all of the members of the Miller Commission, namely Mr James Miller, Mr David Shaw and the Financial Secretary for all of their hard work in carry out this very important research which examines how we can make changes to become more sustainable financially. I also wish to thank all of the various stakeholders both in the private and public sectors who assisted the members of the commission in doing a good job.
Finally and for the record, the Government did not have any material concerns on the technical approach to the study, and we certainly felt that it was a very valuable exercise for the country.
So where we stand on addressing the current fiscal challenges?
Over the past few weeks much has been said, particularly by the Opposition, regarding the Government's approach to addressing the current fiscal challenges which they largely created, as well as on how we might engage with the FCO.
Throughout this crisis the Government has held strong to five key principles that still hold true today after the meetings with the FCO and after reading the Miller Report:
- The first of these principles is that my Government remains committed to addressing the rapid growth in public sector expenditure that has been experienced over the past 4 years. While we may not have control of the civil service, as Minister of Finance, I am very concerned about the lack of control over public expenditures. I believe that this first principle makes it abundantly clear how this administration differs from the previous one.
- The second principle is that the Government is committed to ensuring that borrowing is limited in the interest of maintaining the country's high Sovereign rating and in the best interest of fiscal sustainability as identified in the Miller Commission Report. We have all seen too many times how a country with out of control borrowings can quickly become laden with a host of economic and social issues.
- The third key principle of my Government is that while we remain committed to examining ways in which the revenue base could be further broadened, any approach to broadening the country's revenue base MUST be consistent with the nature of the Cayman Islands economy to ensure that there is no negative impact on our economic success. Our position is and will continue to consistently be that we do not believe that direct taxes are good for this country. Indeed we believe that it will change our way of life as we know it, for the worse.
- The 4th principle of the Government which also informed our approach to the FCO is that the Government remains fully committed to the Principles of Responsible Financial Management which promote fiscal prudency in the Cayman Islands. Our position on this is that we will only accept adjustments to these principles in extraordinary and exceptional circumstances and we would wish to see that there are significant controls in place to prevent abuse of these principles by successive Governments.
- The final key principle guiding our actions over the past few months is that we believe that the Government must consider alternative forms of financing in order to secure the necessary investment for key infrastructure projects.
Again, it is indeed important for me to make the following observation: If one were to follow the approach being advocated by the leader of the Opposition, we would be inclined to do two things, both of which form a very dangerous combination which goes against the very grain of fiscal prudence.
First, if we were to listen to the Opposition, we would ask the UK to relax the ratios. I.e., we would throw fiscal prudence out of the window, after 4 years of fiscal mismanagement.
Secondly, the opposition would want for us to continue to borrow significantly to finance our operations rather than focusing on controlling expenditures. This is of course a very dangerous and slippery slope. We would not only be encouraged to continue the out of control spending, but we would also have the ability to borrow infinitely to pay for the continued wastage.
But ladies and gentlemen, this is NOT the approach taken by this Government.
Instead, borrowing will be limited to what is absolutely essential.
We must adhere to the highest standards of fiscal prudence if we are to maintain this country's good reputation. So no Mr. Tibbetts: throwing the fiscal rules out the door in a panic is NOT the way that we will manage this country's fiscal affairs.
I can say that the FCO also certainly appreciated our stance in this regard.
Long gone are the days when the only option that a Government had was to walk into a bank to borrow funds or to hold their hand out to the IMF. Perhaps the Opposition was not fully aware of that when they decided to attack our plans to enter into a Private Finance Initiative with a number of projects.
Or perhaps they were simply looking for what might be an expedient political moment...which it now seems has fizzled out.
I hope that means that they are now starting to realize the gravity of the situation which they helped to create and the need for the country to think outside the box to address the many challenges.
Having outlined those key Principles let me know move to summarise the discussions with the FCO on our fiscal situation.
I will start with borrowings. The Government stressed to the FCO its wish to keep borrowings to absolute minimal levels to maintain the country's international reputation and very high Sovereign ratings.
The UK agreed that the Government's approach to maintaining manageable debt levels was the prudent approach.
The UK made it clear that they were not averse to additional borrowings subject to reviewing a high level three-year plan which will be submitted to them at the end of March.
There was substantial discussions on expenditures relating to the civil service. The UK made it clear that it strongly supported the observation in the Miller report regarding the significant growth in public expenditure as compared to the growth of the economy.
In fact the FCO made the observation that in their opinion, a more aggressive approach should be taken to the reduction of expenditures. They felt that the suggestion of a 4% reduction in civil servant salaries which was being discussed locally was too low given the gravity of the situation and gave the example of the 10% cut in civil service salaries and a 50% reduction in public sector expenditures in Turks and Caicos in support of their argument.
In addition HE the Governor has said that he was willing to meet directly with the civil service on the subject of the reduction of expenditures generally.
On the subject of revenues, The FCO continues to suggest that the Cayman Islands' international reputation would be improved if it were to introduce some form of direct tax in the country as it would be less likely to be viewed as a "tax haven".
The Cayman Islands reiterated the risks associated with taking this course and after discussions, the Government agreed to continue to examine ways to broaden the revenue base but that were suitable to the Cayman Islands consistent with the country's economic model. The FCO did express some disappointment that the Miller Report did not address the question of what revenue measures could be pursued.
5. Private Finance Initiatives (PFI)
The UK reiterated its concerns on the potential risks relating to PFIs, but it also stressed that it was not necessarily against the use of this method of financing. Rather, they said that their main concern is that there is a proper feasibility and cost benefit analysis carried out and that the process is transparent for each project.
In concluding my remarks updating you on the meetings with the FCO, I would add that there were open and frank discussions on the state of the country's fiscal affairs and the various recommendations of the Miller Commission Report.
It was generally agreed that the country needed to implement both short and medium term pans to regain fiscal and economic sustainability.
The UK agreed that the Government's approach to maintaining manageable debt levels was the prudent approach.
Both the UK and the Cayman Islands agreed that most of the measures recommended in the Miller Commission Report were valuable and should be pursued.
The FCO would like to see a more aggressive approach to reduction of expenditures. The FCO also expressed its wish to see further efforts to broadening the Cayman Islands revenue base. The Cayman Islands remains committed to examining this issue providing that the country's economic model is not adversely impacted.
The UK expressed its willingness to support for the Government in implementation of its plans.
His Excellency the Governor expressed his support and willingness to work with the civil service for which he is directly responsible, in relation to securing the necessary expenditure cuts.
The Government will now prepare a three-year forecast to be submitted to the UK at the end of March. This three-year plan will set out the Government's primary medium term economic and fiscal strategies.
The medium term strategies outlined to the FCO by the Government, as part of the presentation, were well received. These will be refined based on the discussions and submitted as part of the three year plan at the end of March.
The three year plan to be submitted will serve as the basis for the FCO's support of any borrowing needs, which are understood to be minimal. The FCO stressed that it would like to see a plan that utilised a mix of strategies and in particular that the following areas were covered:
- Expenditure reduction
- Broadening the revenue base
Both the FCO and the Cayman Islands agreed that the discussions were very productive and on the importance of implementing the strategies agreed both in the short and medium term.
For further information contact: Susan Watler