Government borrowing, a good thing for intergenerational equity.

The concept for intergenerational equity is based on fairness and justice between generations. It stems from an idea that the investment projects pursued today will benefit multiple generations (some still in the womb in some distant land) who should share the burden of repayment for the benefits they will enjoy, and the resources they will consume. Some have referred to this as distributive justice ... the concept is the same.

If we use a new school as an example, the building, properly maintained, will last over 50 years. It will see thousands of children go through its classrooms over many years and many generations. If the taxpayers of 2023 fully fund this project (or use saving reserves to build it), that would create a mismatch between the generation paying the taxes, and the generation who will consume the benefits.

Whilst it is bragworthy to say the Cayman Islands only have a small national debt relative to other countries, the extent we go to keep borrowing to a minimum should not overtake the sensibilities and economic fiscal realities of running a prudent government.

The Cayman Islands national principles for responsible financial management, and its restrictions on borrowing are outlined under section 14 of the Public Management and Finance Act (PMFA). Additional safeguards are in place under section 34 of the same Act which requires the approval of the Foreign and Commonwealth Office of the United Kingdom if certain ratios are breached, especially in the areas of borrowing.

The six principles set out by the PMFA for responsible management of the country’s finances include a requirement that annual debt repayment obligations (principal and interest) remain within 10% of the revenue the government expects to collect in that financial year.

It also requires that the country’s net debt do not exceed 80% of the central government's revenue in any year. The “net debt” involves a few elements to its calculation; however, for the context of this article, it is largely the total borrowing of the country less the amount of cash the government has in its accounts on the relevant measurement date.

Many people will agree that the preceding is ultra conservative. In layman’s terms, it means that no more than ten cents from every dollar earned in revenue each year should go toward servicing debt, and the government should earn enough money each year to be able, in theory, to cover the total unpaid principal balance of its loan portfolio.

Private citizens generally do not operate that prudently. Some people pay as much as thirty-three cents from every dollar earned towards their mortgage, and few of us earn enough each year whereby we could pay off our entire mortgages with one year’s salary.

Therefore, while the announcement of an intent to borrow to fund policy priorities may be alarming to some (given our refrain from doing so in recent non-covid years); borrowing can be a crucial tool for improving infrastructure, and safeguarding the well-being of citizens while ensuring that current and future generations will pay their fair share.

This concept in our current context could be argued against if the government was borrowing to meet recurrent expenditures (such as salaries and utilities), it isn’t.

Colleagues have also argued that since we will be “gifting” future taxpayers the burden of paying for an unfunded healthcare plan for Civil Servants, gifting debt-free infrastructure is a reasonable trade-off.

That is a valid argument, but one could also say that it further supports the notion that government should pass on a cash reserve to future generations to help to meet those obligations instead of spending it all now on infrastructure.

The point is, borrowing isn’t kicking the can down the road for future generations to be burdened; it helps to ensure we do not bring further economic pain to the current taxpayers by building roads, schools, and other infrastructure investments that future generations will enjoy but not pay for.

A controversial thought perhaps, but something worth pondering when you consider the alternative of raising a revenue package that makes it more expensive for the people of today to go to the supermarket or otherwise afford the necessities of life.