The Cayman Islands risks not being able to meet its financial commitments in the future unless it gets to grips with its spending strategy, the auditor general has warned.
In her report, ‘Improving Financial Accountability and Transparency: Long-Term Financial Sustainability’, issued on Wednesday, outgoing Auditor General Sue Winspear said that public sector spending has been increasing at an “unsustainable” level and, given the demands of an ageing population and a growing debt burden, it might not be able to meet its commitments in the future without a long-term fiscal strategy in place.
Winspear said she was “disappointed that there continues to be poor budgeting for tertiary healthcare”, and that, despite warning on this issue five years ago, “significant overspending continues, requiring annual supplementary budgets”.
Unsustainable financial situation
Winspear said, “Over the six-year period, 2018 to 2023, the Government reported financial surpluses each year except for the two years of the COVID-19 pandemic. However, it is worrying that public sector spending increased at double the rate of revenues over the same six-year period, reaching over $1.3 billion in 2023. This is unsustainable in the long term and raises critical questions about the Government’s ability to meet future financial commitments.”
The report highlights the significant strain placed on government finances by rising healthcare expenditures, public sector pay costs, rising levels of debt and big infrastructure projects. Winspear warned the “lack of clear financial planning” means that consequences could be serious.
Public spending up
Government expenditure on healthcare increased by 74% over the six years ending in 2023, and now accounts for nearly a quarter of government expenditure. In the same period, public sector pay increased by more than 50% to $650 million, thanks to salary increases, an expanding workforce and the impact of the Public Authorities Act, which aligns pay across the public sector.
As well as increased healthcare and public sector costs, government is facing significant long-term liabilities for civil servants’ pensions and post-retirement healthcare insurance, totalling around $2.7 billion.
Winspear told the Compass that during the six years analysed in her report, public sector debt more than doubled and expenditure increased at a far greater rate than government revenues.
Tough choices ahead
Those factors, she said, will mean a tight financial outlook for Cayman.
“At the moment, the government is complying with the fiscal framework, but in the future, some tough choices will have to be made, because you can’t keep doubling debt every few years without busting the fiscal framework,” she said.
“So there has to be either a really tough look at expenditures or you need to increase revenues, or some combination of both.”
The report notes that government significantly reduced its debt levels in the 10 years ending in 2021 but since then, debt had more than doubled to $453 million by the end of 2023. Government also plans to borrow a further $150 million to pay for capital and infrastructure projects such as schools, which could put more strain on future finances.
“This could mean that future governments may need to prioritise repaying debt and liabilities over delivering services and other policies and programmes in the longer term,” Winspear said.
Winspear referenced plans by Premier Juliana O’Connor-Connolly to renegotiate spending rules with the UK to give Cayman greater powers over its financial decision-making, but said that hard choices will need to be made if increases in expenditure continues to outpace increases in revenues.
“Regardless of whether or not you renegotiate the relationship with the UK, every country would need to be keeping an eye on its debt levels, because that’s what goes into the next generation,” she said.
Expensive projects
Alongside rising healthcare costs associated with the ageing population, Winspear pointed out that there are many big-ticket projects proposed or that need to be budgeted for, including a long-term solution for the landfill site, the new school on Cayman Brac, the East-West Arterial road extension and a potential new cruise berth, which collectively run into hundreds of millions of dollars.
Winspear raised concerns about MPs passing legislation of major expenditure plans without being aware of the total costs.
In her report, she writes, “I am concerned that the Parliament and decision-makers may have incomplete information on the financial implications of legislation and policies before approving them. While some financial information may be provided to Cabinet when considering draft legislation, bills presented to Parliament do not include financial implications.”
She told the Compass, “We don’t see anything in the papers that go to Parliament that suggests it is made aware of the financial ramifications of the things they are deciding, [but] you do want decisions to be made based on an understanding of the financial implications … rather than doing it blindly, without knowing what the ramifications are.
“Government now looks three years ahead in its forecasting, but not beyond it. And when you’re looking at big capital projects and major investments, you need to be looking much further ahead.
“Decisions made now may have serious financial consequences in the longer term.”
It isn’t the first time that Winspear has found government fell short on how it managed its finances. Last year, government departments came in for strong criticism from the auditor general in her yearly report on the state of financial reporting in the Cayman Islands.
Some of the charges listed by Winspear in her annual report included late and inaccurate accounting, not complying with regulations, not following procurement rules, building up cash reserves that should have been redistributed, incorrect valuations, poor financial controls and understatement of liabilities.
This is Winspear’s last week in office with her successor yet to be announced.
The full report, ‘Improving Financial Accountability and Transparency: Long-Term Financial Sustainability’, can be found at the Office of the Auditor General.
