Two big challenges to sustainable growth are debt — and, by implication, debt service — and rising inequality. This year’s Budget deals with both head-on.

To the first of these challenges, Bob Richards, the Minister of Finance, has made laudable progress. Government spending is declining in nominal (-1.6 per cent) and real (-3.6 per cent) terms, while taxes are rising. It’s just a matter of time before we can begin paying down the debt in a meaningful way. There is little doubt that Public Enemy No 1 is our national debt. It will take a decade of fiscal discipline to bring that debt down to the point where it will no longer be larger than annual taxes ($1 billion).

The size of debt-service payments ($186 million) are worrisome. They are a reminder of what we could have spent the money on. For example, if debt service were a ministry, it would be the largest — ahead of health ($163 million), national security ($147 million) and education ($127 million). We can all agree that there is no shortage of much needed projects and programmes: early childhood education, tutoring or small learning communities, postsecondary financial aid, increasing access to healthcare and financial assistance.

For the foreseeable future, the debt targets set out by the present government will allow taxpayers to judge for themselves the steadfastness and effectiveness of the government-of-the-day’s debt-reduction effort. In respect to the second challenge of rising inequality, the Minister of Finance was parsimonious. Admittedly, he has limited space in which to operate. In his Budget statement, he let us know that he is well aware that the recent rising economic tide has not raised all boats.

Acknowledgement, however, is of little solace to the thousands of Bermudians at the bottom of the socioeconomic ladder. That the benefits of the recovery have not yet reached the tables of working-class people should concern all middle and upper-income households.

One possible reason for this occurrence is that our economic model of exporting high-skilled financial services and low-skilled hospitality services to pay for imports of merchandise and overseas travel is not working for many Bermudians.

While the demand for skilled work has increased, the demand for unskilled work has been fighting a tide of technological innovation and outsourcing that is unfriendly to unskilled job creation. As a result, working-class inflation-adjusted incomes are falling. It is not difficult to see why some see a cause-and-effect between our openness to the outside world and a reverse Robin Hood effect.

To make things worse, less-skilled workers have a harder time getting jobs in the growing sectors. That helps to explain why we see declining labour-force participation rates among unskilled, prime-aged men.

The finance minister’s attempt at addressing rising inequality falls short. His payroll tax reform does not go far enough.

The financial impact on low-income workers is small. An individual earning $60,000 a year will see an additional $13 a week or a 1 per cent increase. Once 2 per cent inflation is accounted for, a worker’s income will continue to fall, as it has been for almost a decade. A system of earned tax credits targeted at the bottom quintile of Bermudians is a more effective way of making low-paid work more financially rewarding. For someone taking home $600 a week, an ETC of, say, $40 a week would go a long way to improving quality of life. Equally important, a targeted ETC would allow a Bermudian waiter or landscaper to take home more than a foreigner in the same job.

The reform missed an additional opportunity to give low-income Bermudians an edge on their non-Bermudian counterparts. On the employer’s side of the payroll tax, a tariff could have been applied to low-wage workers. This would have the effect of making Bermudian workers more attractive to employers, thereby helping to reverse the adverse effects of recent growth.

An unintended consequence of the reform is that it introduces unnecessary complexity in the form of increasing marginal tax rates that will need constant adjustment for inflation as opposed to a single ETC. A flat tax avoids these problems by taxing all additional income at the same rate. An ETC for Bermudians combined with a flat tax could more effectively reduce the tax burden for low-income workers, while keeping the burden on middle and upper-income workers at less than 10 per cent.

The finance minister is managing the debt well. But he is failing to adequately deal with a second headwind to growth and social stability — rising inequality.

• Craig Simmons is a senior lecturer on economics at Bermuda College