Thursday, August 16, 2012

Cayman’s unbalanced budget

At the moment of writing, our London masters (the British Foreign & Commonwealth Office) have just rejected McKeeva’s latest proposed budget for the current fiscal year. The proposed tax-increases are not sustainable (more will be needed next year), and the proposed expenditure is still too much. Our local rulers ought to learn from the experience of Greece and the other PIIGS nations. In a recession, government revenues decline. Any and all government budgets based on last year’s revenues are therefore false.

We read of declines in nations’ GDPs. (GDP stands for Gross Domestic Product, the value of all goods and services produced by a nation's economy). Since goods and services produced by the state itself are of minimal net value, objectively speaking, declines in GDP apply almost entirely to the private sector. Governments (politicians and senior Civil Servants) could bring balance and stability to a decline by requiring their public sectors to share the pain, but they don’t.

Mostly, they refuse to lay off government workers to match the private sectors’ layoffs, or to cut expenses to match the private sectors’ cuts, or to increase productivity to match the private sectors’ efforts, or to achieve surpluses to match the private sectors’ profits. Most governments don’t do any of those things. They prefer to maintain their public sectors’ status quo, while private businesses go broke and private employees lose their jobs and savings.

That preference aggravates the problem. Insolvent private companies and individuals don’t pay taxes, so government revenues spiral downward. In Cayman’s case, much of our Public Revenue is generated by our Offshore tax-haven’s local administrators and employees. Economic declines in their clients’ home nations adversely affect Offshore administrators’ incomes and their governments’ revenues. We know that from previous recessions. This time, the recent threat of Income Tax will add impetus to the decline, if it hasn’t already done so.

Any budget will be invalid that is based on invalid revenue projections. Reducing expenses then becomes essential, not optional. If our FCO masters in London fail to recognise that accounting truth, they had better brace themselves for a budget shortfall by the end of the year. Balanced budgets depend (in the first instance) on the accuracy of revenue projections.

Our local rulers’ public vow to cut neither Civil Servants’ numbers nor their remuneration will come back to bite them. If I were in a position to do so, I would cut numbers, but not remuneration. After all, employment contracts were agreed in good faith. So the outrageous salaries, perquisites and pensions cannot properly be changed unilaterally. Nor can the abysmal productivity levels agreed on at the time of hiring. Maybe the hirers should be hanged for such an egregious economic crime – and the case for that is strong – but contracts can’t properly be scrapped out of hand.

Changing the terms and conditions of government employment is crucial for the future of Cayman, but it isn’t urgent. It will probably take direct rule from England to effect the necessary changes, anyway, and that may be a year away. What could be done right away, however, is to abolish selected government units and departments, so that their employees become redundant. “Made redundant” is not the same as “fired”.

Which units and departments should be radically trimmed or abolished, and how the redundant staff should be cared for, will be covered in follow-up posts. The redundancies I have in mind might save a hundred million dollars a year in operational expenses, and another hundred million in capital expenditure. That would give us balanced budgets for years to come.

London, are you making notes, here? You damn well should be.