The UK has a new coalition government. For Cayman this heralds a positive change in government policies as well as the attitudes of ministers and officials. Those policies are set out in a 36 page policy document that makes clear there is to be: “partnership government” between two political parties that “share a conviction that the days of big government are over”.

The previous UK government had tried to build a client state of voters dependent on welfare and public sector jobs. Not surprisingly the money ran out well before the required number of voters could be bought. By way of contrast the UK’s new coalition government is determined to build a country that has, at its core, the values of “freedom, fairness and responsibility”.

Already the Cayman Islands has benefited from this change by the speed and efficiency with which my former Parliamentary colleague, Henry Bellingham MP, approved the Cayman borrowing needs set out in its 2010/11 budget.

One of the reasons for the speedy approval is that Cayman’s budget and forecasts are in alignment with the key policy objective of the new UK government’s policy book in which one policy is accorded priority ahead of all the others:

“The deficit reduction programme takes precedence over any of the other measures in this agreement.”

From the earliest announcements and speeches, the new UK government has demonstrated that it is facing up to the problems of reducing the UK’s £165 billion public sector deficit. Within days of taking office, the Chancellor of the Exchequer announced reductions in government expenditure of £6 billion. He also announced the recent emergency budget and forewarned that it would contain unprecedented measures to reduce public spending.

Both Cayman and the UK government recognise that gaining control of expenditure and deficits is of critical importance. Without expenditure control it will not be long before it becomes impossible to borrow money. The ability to borrow is dependent on the market’s perception of the ability to repay the borrowed monies. In that regard the UK and Cayman have a common interest in seeking to maintain the highest possible credit ratings thus avoiding a Greek style crisis. Also there is mutual recognition that borrowing is deferred taxation and it should only be undertaken responsibly and with regard to concern for the next generation that will have to pay for it.

By proposing a budget which set out a strategy for reducing its deficit Cayman government policy was very much in alignment with the policies of the new UK government.

The UK’s own emergency budget was designed, just like Cayman’s, to deliver cost reductions, efficiency savings and the privatisation of some activities as part of the deficit reduction programme.

There is also a new reality in the UK government’s thinking on taxation. It recognises that low levels of taxation and limited government are the means by which economies grow. Incentivising people to develop their businesses is better than imposing penalties on achievement.

Consequently, if Cayman reduces its deficits to the extent of avoiding any significant borrowings, its policies of having no direct taxes should continue to be accepted by the UK. Those policies can be justified because of the opportunities that they provide for Caymanians to build better lives than would be possible without them.

Two of the UK coalition government’s core values are “freedom” and “responsibility”. We can be hopeful that Cayman will be encouraged to use that freedom to develop its own policies to meet its own needs with minimal interference. However, there are a number of new policies where the UK government’s approach is different to Cayman’s. Listed below are some key policies of the new UK government which might impact the UK/Cayman relationship over time, although in some cases implementation is subject to legislation:

Firstly, the UK retirement age is to rise to 66 by or before 2020. This is expected to also apply to civil servants whose pensions will be reviewed with regard to placing them on an average lifetime earnings basis rather than the current final salary basis. There will also be downward pressure on public sector pay and a reduction in numbers.

If Cayman follows London that will mean significant changes to a civil service average retirement age of 57 as well as to the more generous current final salary pension and healthcare schemes;

Secondly, transparency in government will be increased. All government spending and contracts over £25,000 will be published with local availability of spending data for items above £500. Local and national governments will be required to publish performance data. Salaries and expenses of senior officials will be published online. A comprehensive spending review will be undertaken with more data than ever before made public. For Cayman to adopt similar transparency levels to London, it will require adapting government financial systems to meet earlier accounting deadlines as well as new levels of disclosure on finances and performance;

Thirdly, regulation will be reduced and the private sector will be encouraged to expand. Members of the UK public have been asked to propose regulations that should be scrapped. There will be increased opportunities for the UK’s small and medium sized companies to secure government contracts with a target of 25% of contracts going to SMEs. It will be a challenge for Cayman as it would be for any government to review regulations drawn up over many years and identify those which are unnecessary. Likewise extending Cayman government’s accounting, reporting and monitoring systems so as to ensure a proportion of government contracts go to local small enterprises will require significant administrative and transparency changes.

Fourthly, corporate taxation rates will be reduced to one of the most competitive in the G20 funded by measures to reduce tax avoidance. If the UK adopts tax competition as its own policy it will be more in line with Cayman’s own approach;

Fifthly, international relationships will be strengthened with the “fastest-growing areas of the world economy”. Particular emphasis is to be placed on developing a special relationship with India and a similar one with China. This is one area of policy where Cayman’s current approach is ahead of the new UK government.

Provided there are no out-of-control deficits requiring excessive borrowings by Cayman, the UK government will have no need to impose any policies as the last Labour government tried to do. Caymanians will have a greater freedom to continue to decide on which policies their government should adopt. The announced values of the UK coalition government imply it will henceforth be operating a “lighter touch” relationship with its overseas territories. Clearly, the UK would prefer to be a placid watch dog over Cayman rather than a bloodhound on the attack.

Endnotes:

1. “The Coalition: our programme for government” published by the UK Cabinet Office, May 2010