Doing the unthinkable
Bermuda is facing financial disaster as a result of the coronavirus crisis — a recession that will make the Great Recession of 2008 look positively buoyant by comparison.
This is not hyperbole; it is the only conclusion that can be drawn from Curtis Dickinson’s report to the House of Assembly on Friday. The finance minister’s report described a catastrophe for both Bermuda’s economy and government finances. Bermuda is facing the worst recession in living memory.
The economy is expected to contract by between 7 per cent and 12 per cent in 2020. This means the present recession could be twice as bad as the two worst years in recent memory — in 2009 when the economy contracted by 5.6 per cent and in 2012 when it slumped by 5.3 per cent.
Government statistics say at least 7,000 people are unemployed now, which equates to approximately 20 per cent of the working population or one in five people.
In fact, the number of unemployed is likely to be higher, as there were about 1,500 unemployed people before Covid-19 who would not have been eligible for the unemployment benefit on which that 7,000 number is drawn, and there will be others who will not have applied for it. So the number of unemployed during the lockdown was probably closer to 10,000.
With the gradual relaxation of the shelter-in-place requirement, some of the unemployed are returning to work, starting with construction workers, landscapers and some retail and restaurant workers.
But those numbers will not increase very much until retail businesses can allow customers through their doors and until restaurants can move from offering takeouts to some form of restaurant dining.
Even then, as evidenced by the closure of the Swizzle in Warwick, the tourism season may as well be non-existent in 2020.
A resumption of scheduled commercial air travel is weeks if not months away and it is not clear when it resumes what form of quarantine will be required. Assuming there will be a quarantine, it is unimaginable that many visitors would wish to take a holiday in Bermuda.
This means that few of the 4,400 people who work in hotels and restaurants, not to mention those who work in tourist retail or tourism-related services such as tours or transport, will be in work.
If the Bermuda economy contracts by 10 per cent this year, that is the equivalent of a drop in economic activity of $650 million, or approximately $10,000 per Bermuda resident per year.
That is about the same as the annual rent for a room or small apartment, or groceries for a family for a year. For families who were just about making it before, this means they are not making it now.
So these will be desperate times for many. Presumably some non-Bermudian workers will leave, which would reduce the pressure on the public purse, but the economic ramifications of a drop in the working population are profound and long-lasting, as Bermuda already learnt after 2008.
Like it or not, the onus is on the Government to provide support to those who find themselves out of work for more than 12 weeks, and some extension of the coronavirus unemployment benefit will be required, along with financial assistance.
This is a moral necessity, but it is also critical economically.
If groceries are not bought and rents, utilities and taxes are not paid, the whole economy grinds to a halt and an already severe recession will plunge into a depression.
The problem, of course, is how to pay for it when, as Mr Dickinson has noted, tax revenues are likely to drop by as much as $200 million and expenditures on relief are rising. The answer in the short term is indeed to borrow; there is no alternative.
Mr Dickinson has indicated that any rise in the debt ceiling above $3 billion would be unsustainable and he hinted that it would also lead to a reduction in Bermuda’s sovereign debt rating. This would not only result in Bermuda having to pay more to service its debt; policymakers are haunted by the fear that a reduction in Bermuda’s credit rating would force the reinsurance industry — now more than ever the island’s main economic driver — to move elsewhere.
As a result, Bermuda’s ability to borrow its way out of the recession in the way other countries can, and are, is limited. The Government faces some unappealing choices. The mathematics dictate it:
• If the tourism industry has been shuttered and the prospects for growth in international business are limited, then revenues will not increase and, in fact, are likely to decrease by $200 million
• Expenditures related to Covid-19 are already forecast to increase by about $80 million and, as noted, more unemployment relief may be needed
• The Government was already projecting a $20 million deficit for this financial year. If the stated projections hold true, then this will balloon to $300 million and extend existing debt from $2.68 billion to close to $2.98 billion
The finance minister has drawn the proverbial line in the sand on this and wants to keep the deficit to $175 million or less, which would leave total debt at about $2.83 billion.
Even this looks difficult to achieve. Mr Dickinson says the Government has identified up to $60 million in savings through delayed starts for capital projects, a hiring freeze and other discretionary spending freezes. But this still leaves a further $65 million in required savings or tax increases to get to the $175 million.
If the Government was a business, it would look to find those savings in its payroll expenses, which is its single highest expense — almost $500 million or 50 per cent of all expenditures. A combination of pay reductions and redundancies would need to be effected to find $60 million in savings — an approximate 12 per cent cut in these personnel expenditures.
But the Government is not a business and must take account of two other factors in doing this. The first is that cutting loose up to 12 per cent of the government workforce into a labour market where jobs are shrinking could very well simply shift a payroll expense to financial assistance.
The second, broader issue is that taking that money out of the economy would accelerate the recessionary spiral. A similar argument can be made for the delay in capital projects — public works that will keep people employed and keep money moving through the economy are needed now more than ever.
This does not mean that savings cannot be found in government personnel expenses — furlough days and salary cuts as short-term measures make sense. So, too, would suspensions of payments to government pension schemes and the like. But Mr Dickinson will struggle to hit his $175 million target and, even if he does, Bermuda’s options going forward would be more limited as a result.
Bermuda needs satisfactory, long-term solutions to its problems, which, broadly speaking, are the same the island faced before Covid-19. This crisis has not created them; it has simply magnified them and, in some cases, accelerated them.
Tourism’s prospects for further growth were already relatively limited. The addition of the St Regis hotel in St George’s would have added a few more beds, but was not a game changer. The Airbnb market was already saturated. Now the tourism industry, assuming it comes back in 2021, will be different.
People will be more reluctant to fly, let alone board cruise ships. Presumably attending conferences, going on excursions and even going out to dinner will require some form of social-distancing. So tourism will not be the answer.
All things being equal, international business will continue, but as it is now constituted, it is not enough to get Bermuda out of this quagmire.
Bermuda must look for answers elsewhere. Fortunately, some are literally sitting on the shelf. The Bermuda First report was showing signs of going where so many reports have gone before — nowhere.
Now it needs to be picked up and dusted off and made the centrepiece of Mr Dickinson’s economic revival committee. Some of the ideas remain politically unattractive, especially to the Progressive Labour Party base, but immigration reforms, changes to the way Bermuda attracts foreign direct investment and changes in the way we deliver education and health should be priority items.
Bermuda is in the worst crisis it has faced in most people’s living memory. On Friday, the world celebrated the 75th anniversary of the end to the Second World War in Europe.
The war was won by the Allies by taking actions that would have been unthinkable in peacetime. They did so to survive. Bermuda must do the same now.
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