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Emphasis on raising revenue rather than reducing costs

Tackling the debt: finance minister Bob Richards arriving at Sessions House to deliver the 2016-2017 Budget Statement. (Photograph by Akil Simmons)

Bob Richards has an unenviable task. His brief as finance minister is to take the tough actions necessary to keep the country from lurching into fiscal disaster, while not smothering a nascent economic recovery. And his brief as a politician is to perform this balancing act in such a way that voters do not turn away from his party, with the next General Election due by the end of next year.

On deficit elimination, the plan is intact. If executed successfully, two years from now the finance minister, whether or not it is still Mr Richards, will get up before the House of Assembly and announce a national budget with no deficit for the first time since 2002.

This will be a significant milestone, but in reality only the first phase in getting our fiscal house in order. The next Herculean task will be to chip away at the monster gross debt, expected to peak at $2.54 billion in March 2018 and that can be achieved only by stringing together years of budget surpluses.

No one with the island’s best long-term interests at heart would dispute the truth in Mr Richards’s message that “debt service is stealing from the future of our children and their children”. It follows that eliminating the deficit is essential, but the question is how that is achieved.

The three-year projection at the back of the Budget Statement suggests a lopsided approach with a heavy emphasis on raising revenue rather than cutting costs. The numbers spell out just how heavy this revenue bias is.

If one compares the revised current account totals for the fiscal year ending next month with the projections for 2018-19, the bottom line is this: annual revenue will rise 22.5 per cent in three years, while annual current account expenditure will fall 3 per cent.

In dollar terms, the Government expects to take in $211 million more in 2018-19 than it has done in 2015-16, while it intends to spend just $27 million less.

In other words, for every dollar the Government will cut from public-sector spending, it expects the private sector to chip in $7.80.

It is to be hoped that a return to growth in the coming years will help the economy to shoulder this dramatically increasing burden. In other words, if the Government is going to take a larger slice of the pie, it will not hurt so much if the pie itself is getting bigger.

The finance ministry is projecting growth of between 2 and 3 per cent this year, but the increasing financial burden imposed by the Government will be a headwind.

Business people and private-sector employees have every right to feel that the Government is not meeting them halfway in the “shared sacrifice” to which Mr Richards refers. In fact, it seems that the One Bermuda Alliance approach to deficit reduction has turned full circle in a short time.

The standout feature of Mr Richards’s Budget two years ago was the plan to privatise or outsource a number of government functions, an idea based on the work of the Sage Commission and aimed at cutting out waste and giving taxpayers better value for money. Those plans have apparently been shelved. Even last year, the finance minister warned: “We cannot guarantee that the planned reduction in spending can be achieved without layoffs.”

That has proved to be an empty threat. Instead, the planned reductions in spending were abandoned in favour of digging deeper into private-sector pockets.

Just a year ago, the Budget was projecting that in 2016-17, current account spending would total $870.7 million, while revenue would be $959.2 million. The plan changed so dramatically in the space of 12 months that the actual Budget entails a staggering $42 million addition to the spending column and an equally staggering $37.7 million added to the revenue total.

It seems that either the public are being asked to fund the Government’s failure to achieve its own efficiency targets and its reluctance to confront the unions, or the strategy on achieving deficit reduction has undergone an about-turn over the past year. Either way, the public are owed an explanation of what has changed.

Perhaps the report by the independent experts on the Fiscal Responsibility Panel carries some of the answers. The FRP noted that the larger cuts that were planned before this year’s change of tack would be difficult to achieve and would “require making a start on fundamental restructuring of government services, particularly as some of the short-term measures to contain spending taken to date will not be sustainable in future years”.

Perhaps the appetite for such restructuring is not there, given the looming General Election.

The report concluded that “all or nearly all of the additional fiscal effort needed after 2016-17 will have to come from revenue increases”.

One can only hope that the burden of the planned general services tax and next year’s reformed, more progressive payroll tax regime will affect those who can best afford it.

However, the Government would do well to follow the advice of another line from the FRP report to avoid growing discontent from a community expected to shoulder repeated tax increases. It states: “It will be important to demonstrate with visible actions that alongside increases in taxes the Government is serious in its endeavour to improve efficiency and reduce waste.”