Hon Minister for Finance’s Speaking Notes on Government Motion No. 1/ 2013-14

Authorisation of Executive Financial Transactions for the 2013/14 Financial Year

Madam Speaker, I Beg to Move Government Motion No. 1 of 2013-14 which is captioned “Authorisation of Executive Financial Transactions for the 2013/14 Financial Year” and with your permission Madam Speaker, I would like to read the Government Motion in its entirety.

Thank you. The Government Motion reads as follows:

WHEREAS the 2013/14 Budget needs to reflect the policies of the Government and, Government was established on 29 May 2013 following the 2013 General Elections, and there is not sufficient time to prepare a detailed budget and enact an Appropriation Law for the 2013/14 financial year before the 1 July 2013 commencement date of the 2013/14 financial year;

AND WHEREAS Section 11(1) of the Public Management and Finance Law (2012 Revision) states that “the executive financial transactions in respect of a financial year may be authorised by a resolution of the Legislative Assembly in advance of a law making appropriations for those transactions if:

(a)       the resolution is arranged according to each of the appropriation types specified in section 9(3); and

(b)      the resolution provides that it shall lapse after a period of four months from the date of the resolution.”

AND WHEREAS the Government, pursuant to Section 11(1) of the Public Management and Finance Law (2012 Revision), is seeking the approval of the Legislative Assembly for the attached Schedule of Appropriations for the four-month period from 1 July 2013 to 31 October 2013; and

BE IT NOW THEREFORE RESOLVED that for the period 1 July 2013 to 31 October 2013 the Cabinet be authorised to incur executive financial transactions not exceeding the limits specified for each of the following appropriation categories, further details of which are provided in the attached Schedule to this Motion:

Output Groups:                                 $153,568,586;

Transfer Payments:                          $  13,652,925;

Financing Expenses:                        $    7,919,000;

Other Executive Expenses:              $    6,616,342;

Equity Investments:                          $    8,937,024;

Executive Assets:                               $    2,256,000;

Loans Made:                                      $       448,700; and

Borrowings (re temporary overdraft facility):

$  30,000,000.

Thank you, Madam Speaker. I shall take my seat temporarily until you invite me to speak to the Government Motion.

Thank you, Madam Speaker.

Introduction to Interim Budget

Madam Speaker, the Government’s financial year starts on 1st July and it ends on 30th June, in the following calendar year. The preparation of the Government’s Annual Budget normally begins in October of each year and culminates in the presentation of the Annual Plan and Estimates document to this Honourable House, usually during May in the next year – followed by the approval of an accompanying Appropriation Bill.

The timing of the recent General Elections in May 2013 has made it impractical to prepare the substantive 2013/14 Budget and, to have the Legislative process completed before the start of the 2013/14 Financial Year on 1st July 2013. Hence, as occurred in 2005 and 2009 following the General Elections in those years, the Government has now presented for Members’ approval, an interim budget for the 4-month period: 1st July to 31st October, 2013. Before the expiry of the interim budget on 31st October, the Government will bring to the House a Budget for the full year to 31st July 2014.

Legislative Authority to Incur Expenditures

Madam Speaker,  Section 7 of the Public Management and Finance Law (the “PMFL”), makes it very clear that Government cannot incur any Expenditure without an Appropriation being in place for that intended Expenditure. Normally this authority to incur Expenditure is provided by the Legislative Assembly approving an Appropriation Law, at the end of the normal Budget process. That is not the situation that is being presented to the House at present.

Section 11 of the PMFL permits the Government to incur Expenditures in advance of an approved Appropriation Law if such Expenditures are included in a resolution that is subsequently authorised by the Legislative Assembly. This is the approach being used by the Government and the resolution takes the form of the Government Motion now before the House.

Section 11 of the PMFL, was intended to be used in a year where circumstances within that year make it very difficult to enact the Appropriation Bill into Law prior to the start of the next financial year.

Hence, the procedure of seeking authority for the Government to incur Expenditures via a Government Motion is in accordance with the PMFL.

The Structure of the Motion

Section 11 of the PMFL also provides that:

1.         the resolution seeking authority for the Government to incur Expenditures has to be arranged by Appropriation types;

2.         the resolution will expire after a period of four months; and

3.         the resolution will be subsumed by the amounts respectively provided in the Appropriation Law for the full year when that Law is brought into operation.

The purpose of this Government Motion is to seek the approval of the Legislative Assembly under Section 11(1) of the PMFL for the Cabinet to undertake the various types of executive financial transactions necessary to finance the on-going operations of the Government in advance of an Appropriation Law for the 2013/14 financial year.

The approval is being sought for the four-month period 1st  July to 31st October 2013 during which time the Government will prepare the substantive 2013/14 Budget and present it to this Honourable House for review and consideration.

Madam Speaker, Members will see in the Schedule attached to the Government Motion the amounts relating to the various Appropriation categories, specifically: Output Groups, Transfer Payments, Financing Expenses, Other Executive Expenses, Equity Investments, Executive Assets, Loans Made and Borrowings. The Appropriation categories are in the Schedule in accordance with the new Ministry/Portfolio and Office structure implemented by the Government and will take effect on 1st July.

How the Appropriations were Developed

Madam Speaker, in developing the amounts shown on the Schedule to the Government Motion, the Ministry of Finance and Economic Development used as its base position, the original 2012/13 Annual Plan and Estimates figures and then adjusted that base position by removing certain items which are not expected to occur in the interim budget period, and by adding any new items that were not included in the 2012/13 Budget but which would occur during the interim budget period.

For instance Madam Speaker, in the 2012/13 financial year, there was a Referendum held in July 2012 to address the question of “one person one vote”: that will not be an expense in the interim budget period from 1st July to 31st October 2013, and so that expenditure was removed in arriving at the amounts included in the interim budget for 2013/14.

Madam Speaker, this Government takes a different approach to the concept of “nation-building” and so provisions for expenditures that are not supported by a proper framework have not been included in the interim budget. That does not mean, Madam Speaker, that students who have been awarded scholarships to study overseas under the “Promotion of Nation Building” Appropriation will lose financial support. To the contrary, I can confirm that provisions have been placed in the interim budget to continue in these areas where the Government is already committed.

Madam Speaker, the Government must also be grounded in reality and take a measured approach to our moral, safety and other obligations. Therefore, items which were not adequately provided for in the 2012/13 Budget (such as the provision of medical care at overseas institutions for indigents) had to be adjusted in this year’s interim budget to ensure adequate levels of coverage.

When the Ministry of Finance and Economic Development completed the review and adjustment process, the interim budget was then sent to each Agency of the Government and consultation meetings were held to ensure that the interim budget was realistic and would not entail any disruption to critical services.

I should also point out, Madam Speaker, that in accordance with Section 9(1) of the PMFL, the Appropriation amounts shown in the Schedule to the Government Motion are on an accruals basis. This means, the level of expenditures incurred does not equate to the same level of cash pay-outs.

Madam Speaker, I will cite the following two examples which illustrate what I have just said. In the Schedule to the Government Motion, approximately $8.5 million is included for depreciation. Depreciation spreads the cost of a fixed or long-term asset, over its useful life – thereby affecting more than one financial year – and it is an important part of accrual accounting. This $8.5 million, while recognised as an expense, does not represent a cash outflow during the interim budget period.

The second example, Madam Speaker, is the annual insurance premium. The Government pays its annual insurance premium during the last quarter of each financial year (that is between April and June of each year). However, while the full cash pay-out occurs during this quarter, in line with accrual accounting, the expense is recognised evenly each month during the financial year where the insurance coverage applies. This means, Madam Speaker, that while the cost of the Outputs in the Schedule would have an element of insurance expense contained, there would be no cash outflow for such expenses during the interim period – as this out-flow would have occurred during the previous financial year. Madam Speaker, the important point being made by citing these two examples is that there is not an equal match between the accrual-based expenditures that are shown on the Schedule to the Government Motion, and cash-flows.

Madam Speaker, I wish to provide a greater level of detail on the basis of the expenditure figures that resulted in the amounts shown in the Schedule to the Government Motion.

The Government’s stance for the development of the interim budget is that there should be no significant net increase in Personnel Cost above the levels the Government inherited when it took Office in May. This means, the personnel cost forecast in the interim budget is based on a “constant policy” assumption.

Supplies and consumables, a category of expenditures, has been included in the interim budget at a level that results from consultation between the Ministry of Finance and Government’s Ministries, Portfolios and Offices. This position is augmented by a Government policy which places restrictions on all discretionary expenditures. Additionally, I have asked personnel within my Ministry to carefully scrutinise any request for payment to ensure that the policy is being observed.

Lease costs are based on existing contracts and obligations.

Depreciation, as previously stated, has been included in the interim budget in accordance with accruals-based accounting and Government’s Financial Regulations. The depreciation figure, at approximately $8.5 million, has been increased partially on the basis that the Clifton Hunter High School is operational and is now being depreciated.

Financing Expenses are based on the existing debt servicing requirements of the Government with additional amounts included for the temporary overdraft facility which will be necessary during the interim budget period.

Outputs from Statutory Authorities and Government Owned Companies are based on the normal levels of services provided by these Public Entities – for which Government pays these Public Entities. I can say, however, Madam Speaker, that this is one area that will be under enhanced scrutiny as the Government develops the full-year budget.

Outputs from Non-Governmental Suppliers have been included in the interim budget at levels which the Government considers will be necessary to meet the existing short term obligations and this category of expenditure is  subject to changes in policy when the full-year budget is being compiled. In many instances, these amounts are prudent provisions which allows for possible, though uncertain, eventualities. For instance, $250,000 has been included in the interim budget for “Services for Refugees”; this is based on the possibility that there could be refugees arriving in the Cayman Islands during the period of the interim budget and those individuals will need to be catered for.  It is also possible that refugees will not arrive in the Cayman Islands during the interim budget; however, the interim budget makes provision for such a possibility.

Transfer payments, another category of expenditures, were developed by taking into account normal monthly payments (such as those for poor relief) as well as “seasonal” obligations (such as the increased funding required for scholarships before students begin the new school year in September). Again, Madam Speaker, the Government has sought to meet its moral obligations while keeping a tight hold on the public purse as we develop the full budget.

Other Executive Expenses represent various known obligations and is largely based on a “constant policy” assumption. However, there is an increase in this category of expenditure due to the additional three Members of the Legislative Assembly and, a further two Ministers in May 2013. Except for that provision, there are no additional amounts proposed for this category in the interim budget.

Madam Speaker, I have spoken on Personnel Costs; Supplies and Consumables; Lease costs; Depreciation; Outputs from Statutory Authorities and Government Owned Companies; and Outputs from Non-Governmental  Suppliers. All these categories have been combined and shown on the Schedule to the Government Motion as the single line description of “Output Groups”, for an amount of $153,568,586.

Madam Speaker, I wish to point out that the forecast expenditures in this interim Budget are meant to establish limits to the level of expenditures the Government can incur during the four-month period of the interim budget. All efforts will continue to ensure that the Government not only remains within those limits, but actually spends less than the amounts shown in the Schedule to the Government Motion.

Details of the Appropriations Requested in the Schedule to the Government Motion

Operating Expenses

Madam Speaker, for the 1st July to 31st October period, the Motion seeks approval for a total of CI$173.8 million in Operating Expenses in the following Appropriation categories: Output Groups – $153.6 million; Transfer Payments – $13.6 million; and Other Executive Expenses – $6.6 million.

The Appropriations for these categories represent the indicative Core Government’s Operating Expenditures for the four-month period and should not be taken for granted as being one-third of the amount that the Government will spend over the full 2013/14 financial year.

All Government Agencies are expected to exercise fiscal constraint and prudence during the coming financial year. While the Government is upbeat and positive about the prospects for growth in the economy, there is still a long way to go before we can truly say that the economy has rebounded to a full-employment level. During the preparation of the full-year Budget for 2013/14, Government Agencies should be mindful that it is very likely that their Budgets may be decreased below the level of Appropriations in the 2012/13 financial year. In this current economic environment, Government must innovate and deliver services at reduced costs.

Financing Expenses

An Appropriation of $7.9 million in Financing Expenses is sought to cover the interest payments on the outstanding Public Debt during the July to October period.

Equity Investments

Appropriations for Equity Investments into Ministries, Portfolios, Statutory Authorities and Government Companies amount to $8.9 million. The main items included in this Appropriation category are:-

$2.5 million ($2,500,000) to Cayman Turtle Farm to enable it to meet its debt obligations;

$2.0 million ($2,000,000) for the Ministry of Home Affairs to establish a new holding-area for persons arrested and held in custody by the Police. The cells currently used by the Police are not fit for purpose. In addition to this, funding is also being requested to start the youth custody area at Northward Prison. All efforts are being made to complete this prior to November 2013 – which is when the Government needs to be compliant with the Bill of Rights as enshrined in the Constitutional Order 2009, with respect to the segregation of juvenile and adult prisoners;

$1.8 million ($1,853,893) to the Ministry of Education for the purposes of carrying out minor capital works and purchasing equipment and furniture;

$1.7 million ($1,700,000) to Cayman Airways for the purposes of meeting its debt obligations; and

$0.6 million ($633,131) to The National Housing Development Trust in respect of its debt obligations.

Executive Assets

Appropriations for Executive Assets total $2.3 million, the main items of which are:

$0.75 million ($750,000) is sought to fund miscellaneous road surface upgrades;

$0.25 million ($250,000) to settle on-going Gazetted Land claims arising from roads development;

$0.35 million ($350,000) to fund continued road development on Cayman Brac;

$0.35 million ($350,000) to fund further development of the Bluff Playing field on Cayman Brac; and

$0.25 million ($250,000) to fund further development of the Emergency Shelter on Cayman Brac.

Loans Made

Appropriations totalling $0.4 million are sought to fund Loans Made by the Government to Civil Servants and to qualified persons needing assistance with expenses related to overseas medical care.

Borrowings

An Appropriation of $30.0 million is sought in respect of an overdraft facility that the Government will need during the July to October period. Government’s Expenditures are greater than its Revenues during the July to October period and thus an overdraft facility is required.

Financial Impact of the Expenditures and Revenues for the 4-month Period

Madam Speaker, Honourable Members of the House, the media and the listening public will naturally query in their minds, what is the financial impact of the interim budget now being presented to the Legislative Assembly.

I have previously commented on Expenditures and how they were derived for inclusion in the interim budget. The Expenditures stated in the Government Motion are those items that the Cabinet requires to be provided and is willing to pay for, out of Revenues accruing to Government.

The Government Motion clearly shows the following Operating Expenditure classifications:

Output Groups                                  $153,568,586;

Transfer Payments                           $13,652,925;

Financing Expenses                          $7,919,000; and

Other Executive Expenses               $6,616,342.

These Operating Expenditure classifications total $181,756,853 for the four-month period.

In addition to services that the Cabinet pays for – and for which Appropriations are sought via this Government Motion – the public also requires services for which fees are paid to Government agencies for the provision of these services. These are referred to as third party Expenditures – examples of which include the licensing of drivers and vehicles, the provision of garbage collection services, the provision of national mail service and the sale of agricultural products to the public. Importantly, because third party Expenditures are not services that the Cabinet itself requires of Government agencies, Appropriations are not required to be sought for these services via the Government Motion. Nonetheless, the cost of providing such services has to be included in deriving the total Operating Expenditure and, the payment for the provision of such services also forms a part of Government’s Operating Revenues. Third-party Expenditures are expected to total $12 million in the four-month period.

Therefore, the overall Operating Expenditure figure for the period from 1st July to 31st October is $193,756,853.

Madam Speaker, let me explain to the House how the Revenue estimates were derived for the four-month period.

Staff in the Ministry of Finance have examined the actual Revenues that have been received by Government during the 1st July to 31st October period in the four years from 2009 to 2012 and, in preparing the estimate of Revenues during this period in 2013, and Ministry staff would have taken into account the fact that some Revenue lines of Government would have been impacted by Revenue Measures that were implemented during the present 2012/13 fiscal year.

The estimate of total Operating Revenues to be earned by Government during the 1st July to 31st October 2013 period is $137.8 million.

Therefore, the estimated Operating Deficit during the 4-month period to 31st October 2013 is $55.9 million, approximately.

Madam Speaker, the query will arise as to whether an overdraft facility of $30 million is adequate in light of the just stated Deficit for the period of $56 million, approximately. A simple explanation will make it clear that the $30 million overdraft facility is adequate for the 4-month period.

The Government expects to have an Operating Bank account balance of approximately $15 million at 1st July and when this is added to the requested $30 million overdraft facility, the total Operating Bank account balances available to the Government during the 4-month period is $45 million. The possible Deficit of $56 million includes $8.5 million of a non-cash item: Depreciation. The Depreciation amount needs to be removed from the Deficit figure because it does not have a cash impact.  When this $8.5 million is removed from the Deficit figure, the possible resulting outflow of cash during the 4-month period is $47.5 million.  Therefore, when one compares the cash resources available to the Government during the period of $45 million with the possible cash outflow of $47.5 million, the gap is only $2.5 million. The Government will easily address this $2.5 million by active hands-on management of its resources. It should therefore be clear Madam Speaker that a requested overdraft facility of $30 million is adequate to cope with a possible Deficit of $56 million, when the other details that I have just provided are taken into consideration.

It is also important to make explicitly clear that the Government is determined to keep the temporary overdraft balance to a minimum: hence only $30 million is being sought as an overdraft facility as opposed to a larger amount. Moreover, even though the House may approve an Overdraft Facility of $30 million, the Government can utilise a lower-valued facility, it will certainly do so.

Madam Speaker, a likely Deficit during the four-month period should not cause alarm: that there is expected to be a Deficit for the four-month period is perfectly normal since during the period of time from 1st July to 31st December each year, Government’s Operating Revenues are less than its Operating Expenditures. In the period from January to March each year – which is when Government receives Revenues in respect of Financial Services fees – the situation is reversed and, Operating Revenues during this period far outstrip Operating Expenditures.

It is of utmost important that I state very clearly, on behalf of the Government, that the full-year Budget for the fiscal year that will end on 30th June 2014 will show a significant Operating Surplus.

Conclusion

Madam Speaker, the Government has much work to do in the next two months in order to prepare the substantive 2013/14 Budget and I ask all Honourable Members of this House for their support of this Government Motion which will allow for the continuity of Government’s operations while the 2013/14 full-year Budget is being prepared.

Thank you, Madam Speaker.