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Letter: Wanted: A permanent champion for the private sector

Published on Friday, May 14, 2010 Email To Friend    Print Version

Dear Sir:

Basic Principles
While the open letter published on 12 May 2010 from members of the private sector to the Governor, the Honourable Premier, all elected members of the Cabinet and all other members of the Legislative Assembly is long overdue, commendable and remarkable, the fact that it had to be done in such an extraordinary way points out that the private sector in the Cayman Islands needs a Caymanian permanent champion for the sector. To make the case, let us start with some basic principles: (1) for any country to be wealthy, it must allow wealth creation to happen; (2) only the private sector, given an environment in which wealth creation can happen, can create wealth; (3) government’s job is to create a stable environment in which the private sector can create wealth; (4) government’s revenue is derived from taking a portion of the wealth created by the private sector; and (5) government is justified in taking money from the private sector only for useful collective purposes and not to create (money losing) businesses which compete or, if not granted a monopoly by government, would compete with the private sector.

Government’s Expansionist Tendencies
Government wants to expand; this is its natural tendency in every country. The other natural tendency is for government to spend more than it takes in. In Cayman, the following picture has emerged for the various financial years (which cover the period of 1 July of one year to 30 June of the next):

  Operating Expenses (CI $) Operating Revenues (CI $)
2006/2007 367,952,000 416,523,000
2007/2008 490,024,000 (+ 30%) 530,717,000 (+ 27.4%)
2008/2009 546,224,000 (+ 11.5%) 489,917,000 (- 7.69%)

The government’s reaction to the revenue decline for the 2008/2009 financial year was to propose and then implement “Revenue Measures” which were expected to bring in additional revenues of CI $ 94.9 million to 30 June 2010. These revenue measures raised the fees and duties payable by the private sector and, far from raising the necessary revenue, they have succeeded, in combination with a hostile business environment, in the elimination of over three thousand work permits between September 2008 and today; no working steps have been taken to reduce government expenditure. Government has floated the idea of a payroll tax on employers which would, of necessity, have to be passed on to employees in the form of lower wages and to customers in the form of higher prices. We are told that in the financial year 2009/2010, government revenues will again be short some CI $ 60.2 million, necessitating further borrowing.

Matching Government Revenues and Expenses
What has happened in Cayman has happened and is happening in almost every country in the world; government is spending more than it takes in, leaving the deficit to be financed by borrowing. Of course, this makes the situation worse because annual interest costs (forecast at CI $ 20 million for the 2009/2010 financial year) reduce the amount of money available for personnel costs and recurring programs. Ironically, the more government takes from the private sector, the less revenue government takes in. Therefore, in the Cayman context, the fees payable by the private sector must be lowered to previous levels and the government must get out of the way of private sector hiring decisions. An argument can be made that duties can be raised as an alternative to direct taxation.

Immigration Policy
It is not an accident that the open letter of 12 May 2010 states that one of the actions which needs to be taken is to “create a simple and competitive immigration policy to encourage inward investment”. Under the current immigration system, private sector employers are not able to make hiring decisions independently. Often, although there has been advertising and all the proper steps taken, the employer is told that it does not need this employee; this should never happen. In the real world of the private sector, every employee is a “key” employee; otherwise, the employee would not be on the payroll. Speak to the local car dealers about the rollover and get ready to duck. Under the current system, talk of a bricks and mortar financial services industry is a pipe dream.

The Private Sector is Shrinking
The Economic and Statistic Office’s Quarterly Economic Report for the Third Quarter of 2009 states that, on an annualized basis, Cayman’s GDP will shrink 3.6% for 2009. The Miller report is more pessimistic, estimating the shrinkage at 6%. Taking Cayman’s GDP as CI $ 2.5 billion, this means a shrinkage in Cayman’s economy of anywhere between CI $ 90 million and CI $ 150 million. This shrinkage directly hurts Caymanian businesses. If one takes the position (as I have in the past) that every work permit lost to the Islands means a loss to GDP of approximately CI $ 39,000 (a conservative number) and 3,000 work permits have been lost since September 2008, one can come up with a GDP loss of CI $ 117,000,000. What this means is that there is a direct correlation (positive or negative) between the number of work permits held, in other words, the size of the private sector, and both the size of Cayman’s economy and the size of government revenues. Cayman needs to increase the size of the private sector to increase both the size of its GDP and its government revenues; more immigration is needed, not less. Sending work permit holders away and shrinking the private sector only makes things worse; not only does it make it difficult for businesses to survive but also makes it impossible to cut the size of the public service as there would be no jobs in the private sector for those let go.

Loss of Liberty
The growing size of government and its increasing cumulative debt poses a threat not only to the standard of living in a country but also to liberty of the individuals who live there and try to carry on business there. Criticism of what goes on can be undertaken only in the extraordinary way in which it has been done in the said open letter. Unfortunately, governments often start businesses, ignoring the irrefutable evidence of the past failures of other governments. As Milton Friedman once said – if government ran the Sahara Desert, in 10 years there would be no sand.

The Way Ahead
Cayman needs a Caymanian permanent champion for the private sector. The only way out of the economic mess in which we have found ourselves is to increase the size of the private sector. Only a re-invigorated private sector can provide the growing economy and government revenue which Cayman needs and, consequently, increased employment opportunities for Caymanian job seekers; in the final analysis, that is what all this is about.

Paul Simon
 
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