Frank and sobering views aired at Budget Breakfast
The Governments Budget was a triumph of economics over politics, substance over rhetoric and medium-term thinking over short-term thinking yet some very difficult decisions still lay ahead for Bermuda.
This was the view of economist Craig Simmons at the Chamber of Commerces Budget Breakfast yesterday, which featured a panel of industry representatives as well as Minister of Finance Bob Richards.
In front of more than 300 people, Minister Richards and Mr Simmons where joined by Peter Everson, co-chair of the Chambers Economic Advisory Board and George Hutchings, president of ABIC, who provided their frank and sobering view of Bermudas current financial state while offering potential solutions.
The panellists agreed that for Bermudas economy to stabilise and pay down its spiralling debt, focus needs to be paid to three general areas: growing the private sector, infusing the local economy with foreign capital and the shrinking the public sector.
Several ideas were put forth to address these issues but it was clear that it was not going to be a painless process and it couldnt be done all at once.
Stimulus has a price, said Mr Simmons. It is going to be higher taxes and lower Government spending.
Minister Richards offered in order to grow the private sector, and thus stimulate job creation, Bermuda must become competitive in the global marketplace, which includes reducing the cost of doing business and fostering a more business friendly environment.
Why is Bermuda in a four-year recession, going on five years? questioned Minister Richards. It doesnt take a genius to figure it out if you accept the notion that it cant be because of the global recession. The US is growing, the UK is having problems but the Far East is growing. Nobody else is experiencing a four-year recession but us. The problem is here.
Were not competitive. If we were, our economy would be expanding. But since its been contracting for the last four years, we just have to draw the conclusion that we have competitiveness issues in this country. Our Government is addressing those.
ABIC president Mr Hutchings applauded the Governments Budget and agreed that for the international business community, the cost of doing business is a key issue.
He added that the 2010 payroll tax increase was a watershed event in Bermuda — and not a good one.
When you look back at the statistics, you can almost perfectly align that much of the deterioration of international business can be directly related to that event, he said.
He added that the re/insurance industry on a worldwide basis has actually grown over the last four years.
So why is that Bermuda has actually shrunk? he asked. That is because of the cost of doing business here on the Island.
All panellists agreed that the size of the civil service must be reduced, with Mr Simmons recommending that Government spending would have to be cut by approximately 33 percent. But that is no easy task as that issue has become the third rail of Bermudian politics.
Explaining that the Government understands that the civil service has grown faster than the economy, Minister Richards said his Ministry hasnt really come to grips with that problem yet.
Economist Mr Everson, who is also the founder of PE Consultants, added that what wasnt included in the Budget was the cost of post-retirement benefits for the civil service, which stood at $1.5 billion at the end of March 2012.
Thats future promises to civil servants in retirement that isnt backed up by cash or assets, he explained, adding the annual cost of that sum is $154 million a year.
So thats an extra $154 million that you dont see going through the House and Budget but that is being accumulated. We in the private sector have to fund all that. Thats another sign that all is not well in the economy.
But that doesnt make it any easier for Government to make the cuts, stated Minister Richards.
We understand that these are not just numbers, they are real people, they are Bermudians, theyre us, he said. We just cant drop kick them to the curb because we want to make some numbers. We have to go about this in a responsible, thoughtful way. And thats one of the reasons why it cant be done overnight.
Mr Simmons also recommended an increase in taxes — including incorporating a value added tax (VAT) on all goods and services.
From everything from dentist visits to restaurants, he said. What that does is broaden the tax base from $1 billion to as much as $2 billion. VAT is a more efficient way to tap into economic activity. Shared sacrifice should require people selling goods and services (to) pay.
He also offered the idea of a corporation tax. The model in Bermuda, he explained, is that corporations are taxed on size and type of business, not profits. That is something (the Government) is going to have to deal with.
Mr Hutchings of ABIC, however, might disagree with that tact as earlier in the panel discussion he cautioned Government to be careful about coming to the international business community as a source of revenue.
Were quite happy to grow the revenue base based on growth but you need to be very thoughtful about whether international business can afford additional cost because it operates in a global environment not in a domestic environment, he said.
All panellists agreed, though, that Bermuda will continue to struggle this year and into 2014, possibly into 2015.
Prospects for this year arent great but were going to fight it every step of the way, said Minister Richards. Well do what we have to do to turn the ship around.
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