Caymans Question UK Fiscal Proposals

by Amanda Banks, Tax-News.com, London

23 November 2011

The Cayman Islands government says it supports a document drafted by the UK's Foreign and Commonwealth Office requiring the administration in the Cayman Islands to manage the territory's fiscal affairs prudently, but has serious reservations over some elements of the plan.

The policy document, to be known as the 'Framework for Fiscal Responsibility', is being negotiated between the UK and the Cayman Islands, with signature expected to follow shortly after the document is redrafted to take into account the Cayman government's initial concerns.

Responding to the document, the Cayman Islands Premier, McKeeva Bush said:

“This government took over from a previous government that had borrowed and its overspending had placed this country in a dangerous financial position. Because of this, the United Kingdom government (UKG) has asked us to sign an agreement with them. Based on the historical evidence of what can happen when a financially irresponsible government spends without any thought process or a carefully thought out plan, I am in favour of signing such a mutually-agreed Framework for Fiscal Responsibility.”

“It is understandable that the UKG has seen the need to restrict their exposure in such circumstances as there is no guarantee as to what kind of spendthrift government will be elected in the future.”

According to Bush, the FFR has been developed on the basis of four fundamental tenets:

• Firstly, the government should undertake effective medium-term planning to ensure that the full impact of fiscal decisions is understood;
• Secondly, the government should put value for money considerations at the heart of the decision-making process;
• Thirdly, the government should demonstrate effective management of risk; and
• Lastly, the government should drive the delivery of improved accountability in all public sector operations.

Bush said: "These are unquestionably laudable and sensible principles and I support these tenets". However, he added that the government "has reservations about some of the important methods put forward in the FFR as the means by which these principles are to be achieved.”

“As an example, in order to achieve effective management of risk, paragraph 28 of the FFR states that the government should borrow only to fund capital expenditures which will yield sufficient revenues to meet debt service costs.”

“The government interprets that paragraph 28 of the FFR to mean, as an example, that separate juvenile remand facilities which are required in order to comply with the islands' Bill of Rights - scheduled to come into effect in 2013 - could not be constructed using borrowed funds, because such a facility will not generate a revenue stream to fund debt service costs.”

“Further, under the Bill of Rights, the government must build and maintain schools to provide primary and secondary education, free of charge. If in the future the government needed to borrow funds to finance additional educational facilities, it would appear that the FFR would disallow such borrowing - simply because such facilities would be unlikely to yield sufficient revenues to meet its associated debt service costs.”

“As another example, in order to achieve effective management of risk, Appendix A of the FFR indicates that the entire debt servicing costs - which consist of repayments of principal, as well as interest payments - by Government and all its Statutory Authorities and Government Companies - cannot exceed 10% of Government's revenues. The revenues of Statutory Authorities and Government Companies are excluded in this computation but their debt servicing costs are included. It is Government's view that this definition is overly restrictive.”

“The government's senior Civil Servants have accordingly reviewed the FFR and provided suggested changes to the document, which we will take up with the FCO.”

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