In August, the Cayman Islands government made a request to the UK Foreign and Commonwealth Office to borrow an additional CI$372m, in loans already arranged with local banks, to see the government through to the end of the current fiscal year on 30 June 2010.

The Cayman government required the Foreign Office’s permission to borrow more, after it violated some of the principles in Cayman’s Public Management and Finance Law, notably the requirement to maintain an operating surplus in the government budget and the provision to keep net debt below 80 per cent of core government revenue.

Leader of Government Business McKeeva Bush announced in August an annual operating deficit of CI$81.1m in the budget for the period 2008/2009, which ended on 30 June 2009. The suggested new borrowing of CI$372m, in addition to the existing central government debt of CI$416.5m, would take the government’s debt well above the 80 per cent threshold of total revenues of currently CI$487.4m.

The Foreign Office turned down the government’s request for increased borrowings until it is presented with a medium term strategy to ensure sustainable revenues.

In a letter to the Cayman government UK Parliamentary Under-Secretary of State Chris Bryant suggested that Cayman ‘widen its tax base’ by considering options like payroll or property taxes.

Cayman’s increased public debt burden is in part the result of the general economic downturn in the two main industries tourism and financial services. To a larger extent, however, the borrowing needs are due to an ambitious expenditure programme for new roads, schools and government buildings that the previous government had undertaken.

The need for large infrastructure spending in combination with a prolonged economic downturn have thus exposed Cayman’s lack of diversification in terms of government revenues.
Therefore, several new revenue ideas have been floated. The introduction of direct taxation would have the benefit that government revenues become more predictable.

A direct tax could be linked to the provision of public services such as police, emergency services or waste disposal and structured as a community service charge on the basis of property values.

A sales tax, as it was introduced by Jersey under similar circumstances, would be another option, but the same effect could be achieved more easily through the increase of import duties.
Mr Bush ruled out the introduction of direct taxation in the Cayman Islands, saying it would alter the unique characteristics of the Cayman economy. Instead he suggested private finance initiatives for the country’s capital expenditure programmes to reduce the need for public debt and free up liquidity.

Mr Bush announced an investment programme through private sector partnerships, which he expects will generate up to CI$3bn of inward investment.

In addition he identified a number of new revenue measures, including increasing customs duties, licence fees and a number of other indirect taxes. On the spending side the government aims to cut expenditure by CI$89m.

Credit ratings agency Moody’s has meanwhile confirmed Cayman’s credit outlook as stable, stating that the current rating of Aa3 reflect the ratings agency’s assumption that government finances will improve considerably once the exceptional capital expenditure programmes are completed.