Other small islands face debt struggles too
The UK Crown Dependency of Jersey is facing a massive deficit dubbed “the black hole”.
The small self-governing territory off the coast of France faces a budget shortfall of more than $178 million a year by 2019 as a result of a downturn in business.
And a Jersey business magazine said: “The black hole is so big that filling it will take the equivalent of shutting down every school on the island, laying off every teacher, letting the parks turn into overgrown jungles and having our roads literally fall apart.”
While parallels may be drawn with Bermuda — another small-island economy anchored by international business — there are crucial differences from Jersey, according to a Bermudian economic expert.
In Jersey, an influx of international business in the 1950s as a result of severe restrictions on the movement of money turned what had been a jurisdiction dependent on farming and tourism into a major offshore jurisdiction, according to a feature in the UK's Guardian newspaper.
The cash generated allowed Jersey, which has no political parties in its States Assembly, to build major infrastructure projects and keep a kitty of a year's worth of expenditure as insurance, while income tax was one third of that in the UK at 20p in the pound, there was no inheritance tax, no VAT, no capital gains tax and no tax on corporate profits if business was conducted outside Jersey.
But the new wealth brought new problems, with house prices and labour market costs so high that only international finance could afford to survive.
Nick Corbel, head of Jersey's branch of UK public services union, Unite, told The Guardian: “This was, once upon a time, an inclusive island where we all felt as one, whether you were a politician or a road sweeper or a nurse, whoever. We all shared in the prosperity.”
But he added: “I love how we used to do things here. But it's depressing, personally depressing, seeing where this island's heading, the total lack of compassion and understanding from our leaders. There is nothing there at all, they're absolutely cold.”
Peter Everson, an economist who runs PE Consultants, highlighted the differences between Jersey and the island.
He explained: “Jersey is purely based on banking and all the things that go with banking.
“Bermuda is based on insurance and Bermuda will still prosper because the big countries keep messing up their own insurance and show no sign of getting better.”
And he pointed to the Cayman Islands, which has amassed enough spare cash over the last three years to repay between C$8 million and C$12 million worth of debt early.
Cayman, however, due to its different constitution, is not allowed to spend more than 10 per cent of its core revenues in any year to pay off debt run up in the last decade.
Cayman only regained control of its annual budget last year. Since 2010, it has had to present its annual budget to the UK Foreign Office before approval in the Legislative Assembly.
It it were to exceed the 10 per cent threshold, the UK could retake direct control of Cayman government finances.
The Cayman Legislative Assembly will table amendments to its finance law this month to allow it to pay back more than the 10 per cent of core revenues figure where repayments of debt principal are not legally required to be made.
Mr Everson said: “It's impressive what they have managed to achieve in the same time we have been talking about it.”
The money Cayman wants to pay early, however, is only a small part of the C$500 million Cayman' government owes. The largest chunk — a US$312 million “bullet bond” debt — is due in November 2019.
Cayman faces other significant debts in its government pension and healthcare systems, totalling an estimated C$1.4 billion over a rolling 20-year period, according to an Auditor-General's review last year.
The Caymans has also earmarked C$16 million per year for the public sector employees' retirement fund run by the Public Service Pensions Board.
The extra cash came after a review that found had an unfunded liability of between C$166 million and C$266 million.
Financial advisers warned that the liability, attributed to the civil service defined benefit retirement system, could have caused the entire plan to collapse by 2024 if not addressed.
Government has estimated a C$1.18 billion liability over the next 20 years associated with its healthcare coverage plan for retirees.
Some changes to address that funding deficiency, including raising the government retirement age to 65, have been made and civil servants will have to start paying a portion of their healthcare premiums starting in 2018.