By Gordon Barlow

Being a tax-haven used to be fun.

Back then, the living was good for everybody, pretty much. All tax-haven professionals made good money; so did all the businesses that serviced their needs. Salaries and benefits for Civil Servants rose on the wave of prosperity. Many politicians and their cronies skimmed the cream off the top in all kinds of ways. Happy days!

Tax revenue surged into government coffers almost too fast to spend; most of the revenue wasn’t even contributed by Caymanian citizens, but by foreigners. MLAs and senior Civil Servants had to invent new “needs” and “public demands” to dispose of it all. The state bureaucracies struggled manfully to spend their bloated budgets, scornful of the very idea of prudence.

Cayman’s relations with Britain and the USA were fine. Those nations’ taxing authorities didn’t fret that some of their revenue was diverted to Cayman and other Offshore hidey-holes. After all, those same nations’ tax-dodgers were heavily represented in their parliaments. And, the hidey-holes were managed by their most respected bankers, lawyers and accountants. It was all in the family, so to speak.

Cayman’s immigrant population increased to the point where immigrants outnumbered the native-born. Every Caymanian (and some foreigners too) got to employ an indentured household servant, with few limits on how he or she could be treated. It was like a gold-rush, with slaves.

Immigrants were granted revocable Status by the Caymanian Protection Board in batches of fifty or sixty, after six or seven years’ residence. Newcomers settled in on the tacit understanding (implicit promise) that they too would be granted Status in due course.

By the mid-1980s there was a sizable backlog of applications. So, in a panic, the elected MLAs froze the granting of Status indefinitely, with the FCO’s consent.

That freeze was perceived by native Caymanians as a heroic defence, and by frustrated applicants as the betrayal of a promise, implicit or not. Cayman’s schism was born, and the mutual resentment began.


Hunkering down Being a tax-haven is less fun today.

The living is still good, but confidence in the future is weak. We’ve all had our ups and downs before, but now we are threatened with a permanent reduction in our standard of living. We don’t yet know to what degree the deep US recession will affect us here. US commentators don’t even know what the full effect will be up there, yet.

Here’s a useful comment from a US newsletter called The Daily Reckoning. “It isn’t a recession; it’s a depression. There is no recovery from a depression; instead, the economy has to re-invent itself in another form. Things aren’t going ‘back to normal’, because the period leading up to the crisis was not ‘normal’; it was a bubble. After a bubble explodes, you have a lot of debris to clean up.”

There is no agreement on how long the US economy will take to reinvent itself, or what form the reinvention will take, or what variety of debris will have to be cleaned up. The Great Depression of the 1930s was not like this one.

Neither Cayman’s government nor its private sector has the slightest influence on anything that is happening up north, which is a pretty scary thought. All we can do, both as a community and as individuals, is to hunker down and hope we find an air-pocket as the tsunami rolls overhead.

So far, the tsunami has scarcely reached us at all.

Will we be lucky and escape it altogether?

Maybe, maybe not. As a matter of prudence, though, we ought to start saving, both as a community and as individuals. So far, the only thing that the trustees of our community’s purse have done is reduce our individual savings by means of new and higher taxes. Thanks a lot.

Civil Service pensions

So far, they have decided against exercising prudence themselves. That would require them to cut some government expenditure, and that would be unpopular. Being unpopular is very much against their principles.

But government won’t balance its budget, even with the new taxes. Public Revenue is going to fall well short of official predictions. Borrowing money to pay what are called “recurrent” expenses (regular expenditure, not counting loan repayments) is futile, since borrowed money has to be paid back sooner or later.

The only practical remedy is to cut expenses, and heavily. That means economising on the state bureaucracies. Some government workers must either be fired or be transferred to the private sector along with their workloads. That’s called “privatisation”, which improves efficiency. Improving efficiency is a Good Thing, economically speaking.

Alternatively, some of government’s implicit promises must be broken. We haven’t heard about this option yet, because our MLAs are still hoping against hope that the US tsunami will sheer off in a different direction.

Twenty-five years ago, the promise of Status for immigrants was crushed under the weight of expatriate numbers. Today, the promise of free pensions and lifelong healthcare for Civil Servants and their spouses will be crushed under the weight of past and current government extravagance.

In plain words: government’s informal, unfunded obligation to pay retirement-pensions and medical expenses to its employees and their families will have to be compromised. The outgoings will have to be reduced by enough to balance the budget. Not a happy prospect for those affected, but the excessive benefits can’t go on forever.

They’ve had a good long run. Now, the cuts are the most justifiable of all the options available.