UK FCO Official Urges Caymans To Introduce New Taxes

by Phillip Morton, Investors Offshore.com

04 September 2009

Parliamentary Under Secretary of State with the UK Foreign and Commonwealth Office, Chris Bryant, in a letter to the Cayman Islands government, justified the UK government’s decision to block the jurisdiction’s plan to further increase its borrowing to mitigate the impact of the global economic crisis.

In a letter to the Caymanian Leader of Government Business, William McKeeva Bush, Bryant wrote that he was “alarmed” at Cayman’s deficit for the fiscal year 2008/09 following a surplus in the preceding year.

Stressing that the UK government is keen to avoid the Crown Dependency repeating a large deficit in 2009/10, Bryant argued that the government should make 'difficult decisions' to expand its tax base, and cut expenditure, to ensure its long-term fiscal sustainability.

The FCO official wrote:

“The global recession has put a large number of countries in a similar situation to yours – needing to consider economic stimulus against a background of weakening public finances. Most significant of these is your close neighbour, the United States. On August 26, the Federal government reported that its budget deficit will reach almost USD1.7 trillion this year, when the economy is expected to contract by 2.8%. Cumulatively the deficit will be USD9 trillion for 2010 to 2019.”

“Policymakers have to get the right balance between restoring confidence in the markets, by boosting economic activity, and ensuring that debt remains affordable. Unaffordable debt creates a debt spiral, which reduces governments' ability to address other needs. I am worried that the Cayman Islands are getting into that situation.”

Bryant noted that in the case of the United Kingdom, the global financial crisis has significantly affected its debt, and acknowledged that the government has chosen to allow borrowing to grow during the worldwide recession.

“At the same time we have made it clear that this can only be a temporary set of measures," Bryan explained, continuing:

"Hence we have already announced that VAT will rise by 2.5% at the end of the year and we have outlined increases to the top levels of income tax.”

Bryant went on to add:

“As you know we in the UK have both indirect and direct taxes, including income tax, inheritance tax, business taxes, VAT and Council tax, ensuring a broad base for our revenues. A wide tax base automatically provides greater revenues to government as the economy starts to grow again, but even this does not guarantee that tax rates will not have to be raised, or no new taxes introduced. We have therefore outlined a clear strategy to cut UK borrowing and debt over the coming years.”

“I cannot underline strongly enough that Parliament, being accountable to the UK public, will expect to see its Overseas Territories taking a similar responsible approach to managing its finances. This means both ensuring a clear strategy for cutting borrowing and debt over the next three to five years and tackling expenditure."

Going forward, Bryant advocated that the Cayman Islands make rational policymaking decisions with regard to falls in business activity and projections that suggest there will be a protacted recovery from the crisis.

“[The plan] will need to target and prioritise both expenditure and revenue measures, and factor in risks in both areas,” he argued.

Noting continuing uncertainties about the United States economy and other big markets, the decline in the number of registered hedge funds and Cayman’s other financial services, and the G20 summit, Bryant cautioned the Cayman authorities against relying too heavily on "rapid improvements in trust fund income" or "prosperity on the back of an offshore tax haven status".

Bryant recommended that “in order to make public finances more resilient in the face of uncertainties that the government consider new taxes – perhaps payroll and property taxes such as those in the British Virgin Islands”.

Bryant concluded by stating that he, on behalf of the UK government, would reconsider the Islands’ borrowing requests providing the government presents "realistic plans to manage the situation, and shows that clear progress is being made”.

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