Budget offers little job creation incentive
Bob Richards' Budget, delivered on Friday, has already attracted a good deal of comment. Unquestionably, there will be plenty more in the weeks to come.
The Government says it has put debt reduction at the top of its list, and rightly so — debt service has increased to become one of the largest expenditure items for Government. That's a drag on the economy and also means a substantial amount of money leaves Bermuda each year in interest payments.
Mr Richards, the finance minister, has judged that the economy, which has experienced five consecutive quarters of nominal growth and is expected to expand by two to three per cent in 2016, is now strong enough to withstand some tax increases.
To be sure, Government needs to increase revenues in order to end the deficit, and the planned tax increases show that Government does not expect two to three per cent economic growth in 2016 will be enough to achieve this alone, so tax increases will be required.
There are two major disappointments in the Budget. One is that for all the talk of sacrifice, current account expenditure remains virtually unchanged, and in relative terms has not been substantially reduced. The estimate for 2016-17 is $921.85 million, just $200,000 less than the revised estimate for 2015-16 of $921.64 million. To be fair, the increase in debt service does mean that the rest of current account spending is down, but the private sector will rightly complain that it is being forced to fund a government that is not willing to make the same sacrifices the private sector has borne for the last six years.
In part this is due to the failure of the Government to persuade the unions to continue the furlough since personnel costs make up 51 per cent of current account expenditure. But Government has not implemented many cost-cutting recommendations either, including much of the Sage Report.
The second disappointment is that there isn't much in the Budget Statement about job creation or encouraging economic growth. Both the Bermuda Business Development Agency and the Bermuda Tourism Authority get some attention, and the BTA gets additional funding, which is welcome provided it is used for marketing.
But beyond that, there is little real attention given to encouraging job creation, entrepreneurship or small business. Of course, it's not Government's responsibility to create jobs. It is Government's job to create an environment in which job growth can occur and the situation is better than it was four years ago. But running a business in Bermuda continues to be cumbersome, and there's a desperate need for less red tape, less regulation and more flexibility in the workplace.
Instead, the private sector — employers and employees — are being asked to shoulder more of the burden, and Mr Richards is betting that the increases will not reverse the recovery.
The big impact on the employment sector is the increase in payroll tax, which is going up by one percentage point to a maximum of 15.5 per cent, with the employer's contribution rising by half a percentage point and employees contributing 5.5 per cent more, also a half percentage point increase. In terms of cost, this is an almost 7 per cent increase in real terms, so a company that was paying $100,000 a year in payroll taxes will now be paying $107,000 — not a small amount.
The last time payroll tax was increased was in 2011, when it was increased by two percentage points, and the effect was so disastrous on employment that it was reversed the following year. There is a real risk the same thing will happen again. The risk is even greater since the retail, hotel and restaurant sectors are seeing their payroll tax relief rolled back — they will now pay 8 per cent, still materially lower than other sectors, but a potential damper on employment.
The other significant increase is in government taxes and fees which will increase by around 4 per cent, plus duty on fuel. This will have an effect on work permit application fees and the like, which may also be a slight disincentive to hiring.
So, as was the case in 2015, the Government is taking a calculated risk that the tax increases will not dampen the still delicate recovery — time will tell if it is right.
Mr Richards also discussed Bermuda's demographic challenge — the fact that more people will be leaving the working economy than entering it, and why the Government is now preparing to create pathways to status and permanent residence as part of the approach to encouraging a stable working population for the future.
This has become an intense political argument, but the following statistics from the 2010 Census graphically illustrate the problem:
In 2010, there were 3,431 residents between the ages of 15 and 19, the age group just entering the workforce or about to. It is now 2016, so those individuals are now aged between 21 and 25 and are now all of working age.
In 2010, there were also 3,692 people aged between 60 and 64, 161 more than in the 15-19 group. In order to keep the working age population where it is, that means 161 non-Bermudian jobholders will be needed because those individuals are now aged between 66 and 70 and all are past the retirement age.
Perhaps 161 is not that big a number. But in the next two age groups, the difference explodes. In 2010, there were 3,481 people in the 10-14 age group. They are now aged between 16 and 20, and thus are entering the workforce. But there were 4,498 people in the 55-59 age group, a difference of 1,017 people. This age group is now aged 61 to 65, meaning that they are beginning to retire now. That means that if the economy remains the same size over the next four years, Bermuda will need 1,017 new workers it does not have. You cannot do anything to alter birthrates from 20 years ago.
For the Bermuda economy to grow, it cannot afford to lose any more people, and the numbers above do not even include the emigration that has taken place over the last six years.
So the question for Bermuda is not whether it needs more foreign workers, but what kind of foreign workers it wants.
Many Bermudians' fear of displacement in their own home, which is real and deep seated, must be taken into account. But even allowing for that, the arithmetic is inarguable. And if the choice is between people who will make a long-term commitment to Bermuda or a transient population of people who will only come for what they can get, with no long-term security, and then leave, which choice is better for Bermuda? The answer may not meet everyone's desires, but it is obvious.
Bill Zuill is a director of Bermuda Executive Services Ltd, named by The Bermudian magazine as Bermuda's best employment agency in 2015. This and other columns can be found on www.bermudaemployment.com