Richards: we’re paying interest on interest
The price of servicing the Island’s debt will outstrip the cost of the country’s most expensive ministry within two years unless action is taken, Bob Richards warned yesterday.
Mr Richards, the finance minister, said that the debt service costs this year would be $187.4 million — just behind the $194.4 million expected to be spent on the Ministry of Health, Environment and Seniors this year.
He told the Chamber of Commerce Budget breakfast: “If we don’t do something about debt service, we will be swamped by debt and we won’t be able to provide the services people expect Government to provide.”
Mr Richards said Government had cut both costs and the deficit.
He told the audience of business leaders that he believed that the economy had returned to growth and that the recession, in strict economic terms, was over, while major projects like the redevelopment of the airport would also help drive Bermuda back to prosperity.
And he said that increases in the payroll tax of 1 per cent for employers and 0.5 per cent for employees and a new general services tax, likely to be around 5 per cent, would be offset by a growing economy.
Mr Richards said: “This is the time to do it and we are doing it as expeditiously as we can.
“We need to broaden the tax base. One thing that was clear during the recession was that relying on customs duty and payroll tax was too narrow.
“There is a lot more to Bermuda than people working and people consuming goods.
“We have to include a broader section of our economy in our income stream so we don’t have to rely so much on these traditional forms of taxation.”
Mr Richards said that notional tax rates — where some professions paid payroll tax on a notional level far lower than their real earnings — had been abused.
He added: “The philosophy is to lower the rate and broaden the base. The bottom line is we’re looking to do that, correct some of the anomalies with payroll tax, the lack of progressivity in it and the loopholes in it.
“Some of these notional tax rates haven’t been revised for 20 years. We have people in professions who pay tax on $40,000 a year — that’s not right.”
He said that Government had called in the Caribbean Regional Technical Assistance Centre and set up the Fiscal Responsibility Panel to look at ways of dealing with the country’s debt problem.
Mr Richards added: “Their findings and recommendations have shaped the policy we announced in this Budget cycle.”
He said that it had been recommended that Government should be “more aggressive” in terms of cutting costs.
“The FRP really honed in on this problem and said this is the biggest threat to Bermuda and we need to fix it and fix it now,” he added.
Mr Richards said that Government had to tread a line between boosting the economy and cutting debt levels and that the problem needed to be addressed in stages.
He added that now was the time to address the deficit and bring it down to zero, so Government could then concentrate on reducing the country’s debt burden.
Mr Richards said: “We are borrowing money to pay interest — we are paying interest on interest and it’s because of this compounding factor the debt service is going up so quickly.
“That’s got to stop and that only way to stop that is stop running a deficit.”
Mr Richards told the audience of business leaders that he believed that the economy had returned to growth and that the recession, in strict economic terms, was over, while major projects like the redevelopment of the airport would also help drive Bermuda back to prosperity.
The Budget breakfast was sponsored by PwC Bermuda