Government spending unsustainable in the long term

The Auditor General has issued another report on improving financial accountability and transparency as it relates to government finances, and has some worrying words about the massive costs government are racking up in expenditure. She also worried that government had paid no heed to previous reports highlighting the same trend.

The report, the third in a series, focuses on long-term financial sustainability within government. The report stressed the need for the government to adopt a more strategic approach to managing public finances in the longer term.

The Auditor General, Sue Winspear, said even though the government reported financial surpluses each year from 2018 to 2023 (except for the two years of pandemic), public sector spending increased at double the rate of revenues over the same six-year period. Spending reached a “worrying” more than $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,” she said.

The report highlighted the significant strain placed on government finances by rising healthcare expenditures and public sector pay costs.

Ms Winspear outlined that government expenditure on healthcare increased by 74 per cent over the six years to 2023, and now accounted for nearly a quarter of government expenditure.

“In addition, the population is growing,” she stated. “I have also estimated that within the next ten years, 29 per cent of Caymanians could be aged 65 or over. These population changes will further increase healthcare, and social welfare, costs in the longer term.”

She said she was disappointed that there continued to be poor budgeting for tertiary healthcare, and despite highlighting this in 2020, significant overspending continued, requiring annual supplementary budgets. 

Public sector pay increased more than 50 per cent over the six years, rising to $650 million in 2023, with increases to better align salaries with the cost of living and the growth in the public sector.

“Another reason for the increase is the cost of implementing Section 47 of the Public Authorities Act (PAA) but the total cost of implementing this is unclear. I have previously recommended that government estimate and fund the cost of implementing the PAA and that they develop a pay strategy for the entire public sector and factor this into its budgets but neither has been actioned,” she outlined.

The report identified several risks and cost pressures that threaten the long-term financial sustainability of the government, one of which is the financial implications of legislation, policies, and strategies.

The AG said she was 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 worried.

Long term policies might not get implemented as a result.

The report stated that government debt had increased significantly since 2021 and it had significant post-retirement liabilities, affecting its financial sustainability and which could affect its ability to deliver public services in the medium to longer term.

Ms Winspear continued: “Government significantly reduced its debt levels in the 10 years to 2021. However, since then, debt more than doubled to $453 million by the end of 2023. The government also plans to borrow a further $150 million to pay for capital and infrastructure projects, such as schools. This could put 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.”

She added that government had significant long-term liabilities for civil servants’ pensions and post-retirement healthcare insurance, totalling around $2.7 billion which would need to be carefully managed and planned for.

The report stated that while the government planned its finances over the short and medium term, it did not sufficiently plan for its longer-term financial sustainability.

The AG called for transparent financial reporting on long-term sustainability, crucial to maintaining public trust and ensuring that the Cayman Islands remained on a solid financial footing for years to come.

“Decisions made now may have serious financial consequences in the longer term. I have recommended that the Government start to publicly demonstrate and report that it is financially sustainable in the longer term,” she said. 

Deputy Governor Franz Manderson said they noted the recommendations in the report and, where they felt they were necessary, they would look to see how they could be addressed.