Recent events in Ireland are indicative of a risk that has come to the fore. A risk that is unique to jurisdictions that are economically reliant on fiscal, legislative and regulatory leverage to attract economic activity to their shores. This activity, in turn, provide and shore up government revenues. Gibraltar is in this position. Events in the Turks and Caicos Islands, recently reported in the Chronic have brought these closer to home. These islands are more comparable to Gibraltar, both being United Kingdom Overseas Territories (UKOTs), than Ireland, which is a fully independent country.
Ireland has been hard hit by the banking crisis, public finance deficits, liquidity crisis and the recession. Hit so hard that it had to resort to the European Central Bank (ECB) for massive amounts of financial assistance. Assistance of this type comes with many strings attached. Strings that are, on the whole, economic, for example, cutting deficits and imposing huge austerity measures to redress the financial situation.
These economic terms that are imposed, in themselves, have internal political consequences. For example, in Ireland it has led to civil unrest, the resignation of the government and a general election. What is of more concern is that these situations open up the possibility that external forces can use the circumstances to impose political conditions on the economically weakened country, on the basis of the application of the age old principle that beggars cannot be choosers. In the case of Ireland much was made of Ireland being bailed out by money provided by countries (primarily Germany) who suffered economic consequences resultant on the competitive fiscal policies followed by Ireland.
Part of this argument went, Ireland has low taxes in order to attract business away from us, who have higher taxes, yet our tax payers' money is being used to bail out that economy. In turn Ireland had loose regulatory practices that contributed to the onset of the banking crisis. To boot its attractive fiscal environment stole, based on unfair fiscal competition, deposits from our own banking industry which also had an adverse effect on our economy and consequently tax revenues. Time will tell whether, either by reason of unpublicised political terms and conditions imposed on Ireland or because of the pressures of having to meet the economic obligations imposed on the loans, Ireland will be forced to become less fiscally competitive and fall more in line with mainstream EU countries.
The increased vulnerability of UKOTs to political pressures and criticisms , which unlike Ireland are not independent countries, can be seen from recent events in the Turks and Caicos Islands. The government there has not fallen simply because the UK imposed direct rule due to the rifeness of corruption undermining good governance. In addition. however, the UK has recently had to assist the Turks and Caicos Islands with a £160,000,000 package (see the Chronic, Friday,11th February 2010) to assist it to pay salaries of public servants, including doctors, nurses, teachers, police etc.
As the Chronic put it, "The decision to provide support for a country that levies no income tax or capital gains tax, particularly during a period of severe austerity in Britain, has bought criticism ... the loan was dependent on evidence that the country was taking steps to reduce its deficit. The [UK] Government has sent in Caroline Gardner as the new Chief Financial Officer. She has the task of eliminating the deficit by 2013. She can impose tough austerity measures and has power to strip the islands of their tax-haven status". In the Chronic report there then appear quotes from several persons highlighting the incongruity and unacceptability of the UK providing this type of aid to a tax-haven that lives to take away UK revenues and that loans should be conditioned on these practices ceasing.
The Chief Minister has assured Gibraltar that our overall borrowings are highly manageable and that Gibraltar runs, not a deficit but a current account surplus. I do not know whether this is the actual cash position or is based on receivables. If the latter, the cash position may differ, which would be a concern. I am also not clear whether these figures cover all contingencies or budgets for future increased recurrent expenditure that will be inevitable from government capital projects like the new Air Terminal. What seems clear is that Gibraltar has much lower, if any, reserves for contingencies than before. What is also a fact is that a new Power Station has to be built and paid for.
Joe Bossano of the GSLP opposition has expressed reservations and concerns on the financial front, about the public debt levels and about future contingent financial obligations that have bee increased by the GSD Government. Let us hope he is not right in his analysis. If he is, and the financial strength of Gibraltar is compromised, the consequences for Gibraltar could be more serious than for the Turks & Caicos islands. Gibraltar cannot go forward believing in that it is immune from the world economic downturn. Aside from undermining our finance centre, they do not have a neighbouring country that seeks sovereignty. Would they consider filling any financial breach, were the UK to refuse, and if so what would be the political consequences for Gibraltar? That scenario does not bear thinking about.