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Difficult decisions

The continuing deterioration in the economy means that Premier and Finance Minister Paula Cox is caught between a rock and a hard place as she prepares to deliver the Budget tomorrow.

The growing budget deficit, and all indications are that it is worse than estimated 12 months ago, means that she has to increase tax revenue or reduce spending, or both, to get it under control.

In a growing economy, tax revenues increase on their own. In a recession, if other conditions do not change, the only way to maintain or increase revenue is to raise taxes.

But the risk with that is that it will hurt growth, if there is any, or deepen the recession further.

On the other hand, cutting spending is risky as well. Because more than half of Government expenditure is taken up by personnel costs, reducing expenditure without reducing staffing is exceptionally difficult. And reducing staff, or cutting wages, is risky for the same reason as raising taxes. Laying off Government workers takes salaries, and therefore spending, out of the economy and causes a further drag on Government revenues if those unemployed end up needed social assistance.

Ms Cox’s refusal to take tough decisions in earlier Budgets is now coming back to haunt her. Small scale job cuts in say, 2009, would have resulted in several years of savings now, and the economy was stronger then, and therefore better able to absorb the unemployed.

Similarly, small tax increases then would have resulted in more revenue for several years. That would have resulted in smaller deficits in part years and a better Budget position now.

But Ms Cox gambled that the recession would be short-lived and less severe than it has been, and the result is the current Budget squeeze.

The proposal to reduce Government’s wage bill by foregoing pension payments for a year, while utterly irresponsible in the long term, would reduce expenses at the same time that it did not take money out of the economy since the bulk of pension contributions would be invested overseas.

But it is not clear that the unions will take the deal and it would be a brave union indeed that agreed to reduce its members’ pensions and in the meantime the budget deadline looms.

Bermuda needs to take its medicine now before things get worse. There will be pain in the short term, but the alternative is worse; a continued deterioration in public finances, more desperate financial measures and continued contraction of what was once a successful economy.

And still, the only real answer to solving these problems lies in getting the economy moving again. Government can play a part in this.

First, Bermuda must market its services, in both tourism and international business, in order to expand the economy. So the money for marketing these industries should not be cut. That’s because the best form of financial assistance is a job.

Secondly, Bermuda needs to put in place the conditions these industries need to be in Bermuda and to grow. So if legislative or policy changes are needed, they should be put in place.

Third, Bermuda needs to be more competitive and must reduce the cost of doing business. This should include reductions in Customs duty and payroll tax, even if this means a reduction in revenue in the short term.

To make up the shortfall, some benefits need to be trimmed. As proposed in the pre-Budget report, wealthier senior citizens should pay some land tax on their primary residence. And if they wish to own a large vehicle, they should pay some licence fees on that as well. Taxes on alcohol, tobacco and betting should also be increased.

Bermuda should look seriously at opening up the banking sector, which hitherto has been limited and protected. That may have made some sense when Bermuda’s main banks were primarily Bermudian-owned, and what profits there were remained mainly in Bermuda. That’s no longer the case, and there’s no reason why more exempted banks should not be allowed into the Island on the same terms as other exempted companies and should pay the appropriate licence fee to be here. This would provide tax revenue and jobs.

Bermuda must do more to attract other forms of international business as well. Bermuda has the room, the location and the infrastructure to attract hedge funds and other forms on financial services to the Island.

Not all of this, even if it is taken up, will happen overnight. And it may leave a shortfall in the short term. Some of that may have to be covered by additional borrowing. But savings will have to be accomplished through a genuine hiring freeze in which Government staff is reduced by attrition. If a person leaves Government service, they should not be replaced.

Finally, no one wishes to see anyone lose work, but some redundancies have to be made. The expense of running Government is hurting the economy. Personnel costs make up more than half of that expense. If Ms Cox does not take some hard decisions now, it only puts off the inevitable and the longer she waits, the worse it will become. She has to act now.

Premier Paula Cox

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Published February 23, 2012 at 1:00 am (Updated February 23, 2012 at 8:38 am)

Difficult decisions

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