Our national collective financial anxiety barometer continues to increase due to the Law of Diminishing Returns and the prospect of higher taxes within the annual Bermuda Government Budget, as tabled last week.

One of the most famous laws in all of economics is central to microeconomic theory. The law states "that we will get less and less extra output when we add additional doses of an input while holding other inputs fixed."

Change output to consumer and corporate spending across the board, change input to taxes, and others to economic downturn, and the informal interpretation reads like this: we will see less and less spending (to generate revenue) when we add additional doses of taxes into the mix of businesses trying to contain current expenses during a down market. Budgets are inviolate.

In the corporate world, the annual budget is clad in stone. Why? Because shareholders, financial analysts, and the investing public base their investment decisions on these numbers. The budget must be adhered to; jobs, profitability, credibility, and future share value depend upon sound predictable numbers.

When a disruption occurs that negatively affects the ultimate performance of these numbers, the company will implement another round of cost cutting to keep actual expenses in line with projections.

Most people (that's us) do the same thing instinctively within our own family financial structure. We know what we earn, and we mentally calculate what we spend and what is left over. If there is uncertainty about job security, tax increases, inflation, interest rate increases that impair ability to pay off debt, and decrease future cash flows, we will restrict spending, and hoard comfort cash - until we see economic prosperity on the upswing again.

Downward pressure on business

It is not just shopping mall consumerism that is affected. In uncertain times, people cut back on everything: less food consumption, less electricity and phone usage, less clothing, electronics, recreational activities, less or no dining out, any medical costs not covered by insurance will be ignored (i.e dental care, prescriptions, vitamins), life insurance premiums will lapse, mortgage restructuring may be needed, plans for renovating, even minor maintenance and travel will be put on the shelf.

These are natural populist reactions to the element of economic uncertainty. It happens to populaces in any economy undergoing contractions.

Attitude shifting is a big reason for promotional articles such as: US consumers need to get to the malls, and Buy Bermuda messages.

The reason: Spending by consumers drives business profits across the board - retail, service industries, manufacturing, and investments. Less spending means less foot traffic in stores, fewer sales, less cash flow, more internal financing of business by owners dipping into their own pockets.

The average retail, service, or production business isn't big enough to attract a private equity package, such as was received last week in the banking sector.

Decreased consumer spending means little or no profits for businesses. The tipping point for a business comes when projections of less than break-even current and future revenue outweigh the benefit of staying in business. No blood from a stone.

Based on public comments from businesses here in Bermuda, the mandatory increase in payroll tax will possibly be tolerated, at first; then be buffered out by business managers.

Containing costs to meet their annual budget numbers, they will institute another round of redundancies. The knock-on effect will see:

• More people seeking jobs.

• Fewer jobs to choose from.

• More people falling into the Financial Assistance safety net.

• Job losses mean no health insurance, a situation that means more people straining the Hospital Emergency Room safety net.

• More people losing their pension plans

This downward circularity can be repeated in order to contain costs. Those jobs lost may, or may not, be recoverable.

Upward pressure on Government resources

With fewer people on business payrolls, the amount of payroll tax collected won't increase as projected, thus placing additional upward pressure on the government administration and financial cost of carrying those unemployed.

This in turn generates more unpredicted overspending by government, against projected revenues, needing more increases in taxes, then additional debt arrangements will be needed to cover current budget shortfalls and future spending.

The result

An upward climbing debt cycle. Interest rate rise acceleration will trigger increased cost of borrowing. The overspending problem is not solved. Caught in the tax trap. All of this overspend will be passed on to you, me, and every other person able to pay. Where do we go from here? What can we do about it? Protest, whine, form a Bermudian Tea Party group, implement a rigorous family cost control regime? These are all stopgaps, not solutions.

Increasing revenue, however, is like manna from heaven.

Recessionary times call for pumping cash into the economy through the use of tax credits, incentives to generate new domestic business, aggressively raising revenue from new international investors (not debtors).

Increasing tax measures do not solve the revenue enhancement challenge. Tax burdens just become an insular island circularity cost: raising taxes, spending, borrowing again as additional residents need social support.

Let us finance our own debt with bonds issued by the Bermuda government for Bermuda investors that return a conservative but decent interest rate.

We need short-term (three years) low-cost or no-interest business loans for Bermudian businesses. We need the confidence to see that everyone has a budget and is sticking to their numbers.

We need to be better friends. Make international business people your new best friends.

The only business sector that grew substantially in the last seven years is international business (National Economic Report). We need to make them welcome like never before. Other islands are doing it, so can we.

Hope isn't enough.

Next week. Continuing the mutual fund investing series: the definition and differences between the words private and public in the investment world. As individuals, we instinctively know what information to keep private and what can be released.

Oops, as Bermudians, we love to gossip too, so sometimes, actually often, things slip out that shouldn't be told. We can't help it, it's in our genes.

Privately held or publicly traded debt, equity, alternative structures and people-involved information have very different connotations in the corporate finance world. Information has value and must be seriously protected. Is that a detriment to the small investor?

Martha Harris Myron, CPA, CFP(US) TEP(UK) JP- Bermuda is an international Certified Financial Planner and a US FATP Tax practitioner in private wealth management. She specialises in independent fee-only cross border investment, tax, estate, and strategic retirement planning services for Bermuda residents with cross-border and multi-national connections, internationally mobile people and US citizens living abroad. For more information, contact martha.myron@gmail.com or call 735-4720.