American President Franklin D. Roosevelt famously said in the depths of the Great Depression that “we have nothing to fear but fear itself” — and this captures the economic quandary Bermuda is in as 2020 dawns.
When businesses and individuals have confidence and are willing to spend and invest, this creates economic growth, which generally leads to further confidence and growth — a virtuous circle. The opposite effect comes when businesses and individuals are nervous and lack confidence. Then they tend to reduce spending and investment, thus creating the very conditions they were afraid of and causing a downward economic spiral as the lack of confidence feeds on itself.
Both confidence and the lack thereof can be unrelated to the facts on the ground and can be more psychological or emotional than grounded in facts. But in general, low confidence is a combination of the available evidence, plus considerations of what the future holds.
But what is indisputable is that confidence is a key factor in economic growth.
In July 2019, a survey of local chief executives showed business confidence had dropped 26 points in a year to a record low of 62.8. That came after it had fallen from 105.5 in 2016 to 86, approximately 20 points, in 2018. Thus, in the course of only three years, confidence had fallen by about 40 per cent.
There is very little reason to think that confidence has improved since.
Certainly, other recent economic statistics are at best mixed, and suggest that the Bermuda economy is sluggish. The worry now is that flat recent growth combined with low confidence about the future will lead to another period of recession, as genuine economic concerns are exacerbated by fear.
The Bermuda Government recently announced that the economy, as measured by gross domestic product, grew by just 0.1 per cent in 2018 after taking inflation into account. Certainly, more recent quarterly GDP reports have been stronger — growth in the first and second quarters of 2019 were recorded at 3.4 per cent and 3.3 per cent respectively.
However, those numbers need to be treated with some caution: first, because they are being compared with the first half of 2018 when the economy contracted and entered a technical recession, so the growth is starting from a pretty low bar; second, because these figures are subject to revision and may well be revised downwards; third, is the real concern that much of the growth is owing to major construction projects, notably the new airport, the St Regis Hotel and the new Belco power plant.
With the airport due to be completed this year and the St Regis in 2021, many business leaders are questioning what will happen if there are no comparable bursts of economic activity — and at the moment there are no signs of any.
This is the primary reason for the lack of confidence.
There are other business statistics that also contribute to the uncertainty, which we illustrated in the Business section last week.
The recent labour force survey showed that the unemployment rate remained flat between 2018 and 2019. That suggests that if the economy did indeed grow in the first half of 2019, that growth did not translate into more jobs.
As has been noted here before, one of former finance minister Bob Richards’s most important insights was to identify the existential importance of Bermuda’s two major foreign currency earners — tourism and the much larger international business sector. Without them, he said, there is no economy since there will be no money to buy the imports Bermuda depends on for its very survival.
It is sometimes difficult to accurately determine the health of international business, but the 2018 Employment Survey released in June last year showed it added 45 jobs, an increase of 1.1 per cent over 2017, while median income grew by a scant 0.6 per cent. While any growth is welcome, this does not suggest the sector is expanding rapidly.
Similarly in tourism, employment is up slightly, but the continued drop in vacation travellers is worrying — the main reason may be a reduction in airlift from the New York area, but until the St Regis and the Bermudiana Beach Hotel properties come online, Bermuda is unlikely to see much growth in this area of foreign currency earnings, either, and may have peaked, based on its capacity. Certainly the sale of the Fairmont Southampton is a partial vote of confidence in Bermuda, but this seems to be as much a real estate play as a hotel purchase.
So there are many reasons to be concerned about the state of the economy going forward. More than most countries, Bermuda is vulnerable to shocks and changes, and some of these changes are external and largely — although not entirely — out of the island’s control.
Changes in tax structures and compliance demands can do enormous harm, the effects of Brexit are unclear and this weekend’s killing of an Iranian general by the United States and the all too predictable threats in return can have an effect on Bermuda if it dampens travel demand, drives up oil prices or causes turmoil in financial markets. To paraphrase John Donne — badly — Bermuda is not an island when it comes to economics.
Efforts need to be made with our main trading partners, and in that context Bermuda’s placement on the provisional European Union blacklist was an example of the Government failing to take this issue seriously enough.
But, beyond the importance of ensuring Bermuda is meeting international regulatory demands and marketing itself well, there is much Bermuda can do internally to improve its position.
Many of the measures have been well aired, immigration reform among them. There is no questioning the sensitivity of immigration and paths to status, especially in the black community. But this should not be used as an excuse for doing nothing: the reality is that Bermuda needs to expand and diversify its economy, and this is difficult to do when other jurisdictions, especially the Cayman Islands, are able to use immigration inducements to encourage investment in their countries.
David Burt has highlighted the need for more capital, and there is no argument about that. It should be possible to encourage payroll tax benefits and other inducements for new businesses or businesses that need capital to grow.
More broadly, employment costs in Bermuda continue to increase. While targeted tax cuts are helpful, the combined burden of payroll tax, mandatory health insurance, social insurance and private pensions add tremendously to the cost of hiring, meaning that for many employers — especially at the lower end of the employment spectrum — these costs can add an additional 25 per cent to 35 per cent on a wage. While Bermuda’s system of having employers partially fund benefits and taxes has worked reasonably well in the past, it is now an active disincentive to hiring. Whatever the Government gains in taxes from existing employees is being offset by the lost tax revenue from the unemployed — or situations where businesses simply cannot afford to keep up.
The recent debate in the House of Assembly on the retail sector, apart from demonstrating a woeful ignorance from some about how the sector actually works as well as a disturbing insensitivity to the 2,700 people who work in retail and repair trades, was short of ideas for improving this industry, which is essential to most residents and to visitors.
The obvious place to start is with customs duty: as a tax that must be paid up front by the local vendor, this adds to the cost of goods and acts as a hidden tax — as opposed to a value added tax or a sales tax, which is added at purchase — and contributes to the high cost of living.
Despite this, governments from both parties like customs duty because of its ease of collection — since it must be paid for before it leaves the dock or the airport, there are almost no arrears — and Bermuda’s limited import gateways also add to the simplicity. But this does not offset the disadvantages of the tax: its addition to cost, the pressure it puts on businesses, and, of course, its disproportionate effect on the poor and middle classes who end up paying a higher proportion of their incomes on the tax than their wealthier compatriots.
All of these arguments should appeal to a labour government, but so far the opposing idea that retailers are somehow reaping great fortunes from their markups has prevailed, despite the drumbeat of near-weekly announcements of retail closures. None of this makes sense.
Few would want the jobs of the Premier or the finance minister, Curtis Dickinson. They must try to balance the Budget and maintain employment, and the frustration of seeing the economy continue to stagnate despite their efforts must be high.
But they are right on this point — the status quo is not working. The diagnosis is the easy part; the hard part is finding the right answers.
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