The Cayman Islands is facing an unprecedented budget deficit.

By now, most people who live and work in the Cayman Islands know that the country’s financial situation is looking pretty grim in the short term.
They’ve heard the numbers; an $81.1 million operating deficit for the financial year that ended 30 June, another $132 million budget gap expected in the current year if spending cuts and new taxes aren’t introduced, and a total public sector debt level approaching $600 million.

But what they might not realise is the government’s own annual economic reports show the Cayman Islands public sector has ended four of the past five calendar years with total expenses outstripping total revenues, essentially in a deficit position.

This position is not reflected in budget figures presented to the Legislative Assembly. Reviewing those, one would find that government has ended four of the last five years with a budget surplus.

For instance, the Treasury Department’s budget figures for 2008 actually show a deficit of $131 million comparing total revenues to total expenditures.
For the period of July, 2008 to June 2009, that gap was $81.1 million according to Financial Secretary Kenneth Jefferson.

The difference? The two sets of numbers were collated at different times of the year. Government’s budget year runs from 1 July through 30 June. The annual economic reports are compiled from January through December.

Also, the annual economic reports are put together from Treasury Department figures compiled by the Economics and Statistics Office. The government’s figures are reviewed by the Portfolio of Finance, which includes government accountants.

“There’s an old joke about economists and accountants not agreeing about anything,” said Cayman Islands Auditor General Dan Duguay, an accountant. “Are they taking accrual information, or are they taking just cash information?”

“Economists tend to stick more with the cash side of things, you know, an expense is something when you pay for it. But we (accountants) also say, if you didn’t pay for it but it was due in that period, we’ll count that as an expense.”
 


So, who’s right?
That’s the punch line. Educated guesses can be made, but no one truly knows. The government hasn’t had audited financial statements done since 2003. Mr. Duguay said his office is working through all submitted reports for the 2004/05 government budget year.

The Cayman Islands rolled out its spending plan last month for the current 2009/10 fiscal year.

Mr. Duguay said the lack of audited financial statements makes it more difficult for government to make accurate projections, particularly of its revenue base from year to year. But he said, in the end, the annual figures compiled by treasury and the government’s audited figures – if those existed -- should add up to the same numbers.

“In the long run they should all even out,” Mr. Duguay said.

Judging from each year’s annual economic report, both government spending and earnings have risen steadily over the past decade. But expenditures have simply outstripped revenues.

An analysis of the Treasury Department figures compiled by the Economics and Statistics Office shows that government revenues went up 88 per cent from 2000-2008, while government expenditures increased 110 per cent in that same period.

Government expenditure stayed roughly the same during 2000-2003, according to the treasury figures. A big jump (24 per cent) occurred between 2003 and 2004, the period when government went from calendar year budgets to the current July-June schedule. A 27 per cent hike in spending occurred between 2006 and 2007, followed by an 18 per cent spending increase again in 2008.

On the revenue side, government recorded fairly steady rises year-to-year through the entire decade, with one anomaly being a 17 per cent jump in revenues between 2005 and 2006. This is generally attributed to a huge increase in customs tariffs during the recovery period following Hurricane Ivan.
This rise in expenditures was noted by local accountant Desmond Kinch in an analysis he presented to local news outlets in September.

Mr. Kinch’s analysis pointed out that both recurring expenditure and spending capital projects now make up a much greater percentage of the country’s gross domestic product than they did a decade ago. Total government expenditure neared 30 per cent of GDP by the end of 2008. (See chart)
“Increasing revenue is not the answer,” Mr. Kinch wrote. “The government must control expenditure and borrowing restrictions must remain in place.”

Cayman has also exceeded legal debt management requirements. According to the Public Management and Finance Law, the country’s “net debt” should not go over 80 per cent of core government revenues. Net debt is defined as the outstanding balance of core government debt, self financing loans, and the outstanding balance of public authorities’ guaranteed debt --- less core government’s liquid assets.

That “net debt” ratio, according to the current administration, had reached 86 per cent in June.

Mr. Kinch suggested that Cayman’s government remember the lesson of the country’s old-time sailors and “cut your sail according to your cloth.”

“Neither government nor the private sector can spend more than it earns indefinitely,” he wrote. “Governments that do so eventually find their credit risk so high that they become subject to disciplines imposed by the International Monetary Fund and currency devaluation usually follows.”

How the money was spent
Both the Treasury Department and Portfolio of Finance and Economics have provided details of increases in spending in three major areas over the last decade, and particularly in the past five years. They are: employee costs, government subsidies, and capital projects.

Employee costs are perhaps the easiest to explain out of the three areas. The size of the civil service increased substantially in the latter part of this decade, and the cost of salaries went up accordingly. The cost of providing pension and health care for government employees also increased.

Treasury Department figures show the increase in personnel costs going from about  $150 million in 2000 to $245 million in 2008.

The personnel costs estimated per civil servant have increased sharply in the past three years. In 2006, Treasury Department figures show government spent approximately $51,875 per worker; in 2007 that figure was $55,555; and last year that cost ballooned to $64,509 per civil servant. In fact, during calendar year 2008 the total number of civil servants decreased slightly (1.1 per cent), but the government’s personnel budget still increased nearly 15 per cent.

Subsidies
The cost of government subsidies has risen substantially from year to year with only one exception. Starting in 2000, when government subsidised  $21 million worth of operations outside central government, to 2008, when some $105.5 million was spent on subsidies, the amount paid decreased in one instance, between 2004 and 2005.

Government subsidises the operations of many statutory authorities and public-owned companies as well as some non-profit entities and even a few private citizens. But some of the largest annual subsidies include those paid to the Cayman Turtle Farm, Cayman Airways, and the Health Services Authority.

Capital projects
Perhaps the most problematic of the three areas of government spending is for capital projects. Annual spending for construction projects fluctuated for most of the decade going from  $42.8 million in 2000, to a low of $17.7 million in 2002, and going back up gradually to reach $39.6 million spent in calendar year 2006.  

In the previous two years, as government embarked on a number of ambitious public works projects, the capital spending per year more than doubled, even tripled the amount recorded in past years. Capital project spending reached $150 million for calendar year 2008, according to Treasury Department figures.

There are strict limits set by Cayman Islands law as to how much the country can pay to service its debt. According to the principles of responsible financial management, government can only spend 10 per cent of its core revenues to pay off existing debt in any one year.

The government’s debt service ratio climbed from 4.6 per cent in the 2006/07 budget year, to 5.6 per cent in the 2007/08 year, to 8.1 per cent in the fiscal year that ended 30 June, 2009.

“The clear implication of this movement is that, as from 1 July, 2009, onwards, unless there is a significant increase in government’s revenue, government is nearing the limit as to the amount of borrowings it can undertake,” Financial Secretary Ken Jefferson told the Legislative Assembly earlier this year.

The debt service limit will usually prevent government from eliminating all its outstanding debt in one year, even if it could afford to do so. But over the past five years, the total amount of debt the Cayman Islands carried has more than doubled.

According to figures provided to the LA by Mr. Jefferson, central government’s debt balance as of 1 July, 2004, was $156 million. On 1 July, 2008, that amount had grown to $416 million; an increase of 166 per cent.

The debt of statutory authorities and government companies as of 30 June, 2005, was $132.6 million. That debt as of 30 June, 2009, was $173.9 million; a 31 per cent increase.

Total public sector debt went from $288.6 million on 30 June, 2005, to $590.4 million on 30 June, 2009. That 105 per cent increase has placed Cayman outside the principles of responsible financial management and was one of the reasons the country had to go to the United Kingdom in September to ask permission to borrow more money.

Three major capital projects are driving the increase in total government borrowing. They include the $85 million government office accommodation project and two high schools that are anticipated to cost $120 million without accounting for interior outfitting, such as furniture.

Leader of Government Business McKeeva Bush recently estimated that the cost of those two schools would be closer to $140-$150 million once the schools are completed.