Head bean-counter takes steps of bravura to turn Nottingham merry
It was the Robin Hood Budget in which Bob Richards took from the rich and gave to the less well-off.
At least that's how the finance minister would doubtless like it to be portrayed in an election year in which he has scant leeway to dish out sweeteners to voters, but has managed to give three-quarters of the working population an effective pay rise.
Most on the island will surely welcome the progressive reform of payroll tax. The new graded system eases the burden on the lower earners while asking more from the highly paid. It addresses the deepening issue of economic inequality in our community, and few would dispute the fairness of that. And in next year's Budget, there will be further tax cuts for the lower brackets and additional increases for the top earners.
Larger companies will see an increase in the rate of their share of the payroll tax, while companies with a smaller staff will pay less.
The new financial services tax, which will skim a few million from the assets of the island's banks and impose a 2.5 per cent levy on the non-health gross premiums of local insurance companies, also follows the theme of raiding the coffers of the wealthier types to help the island climb out of its fiscal hole. In deriving some revenue from a previously untaxed sector, it also serves the justifiable aim of broadening the tax base.
The payroll tax cut will put a few hundred dollars more in the pockets of those with the least disposable income. In doing so, it should spark a modest multiplier effect, the result of those dollars circulating in the economy boosting other incomes as they go around.
However, the progressive approach carries some risks, of which Richards will be fully aware. By targeting larger employers for tax increases, he makes hiring more expensive for them. Even large international insurance companies who count quarterly profits in the hundreds of millions have to look closely at employment costs, and when the maths changes, they may re-evaluate the pros and cons of locating employees in Bermuda.
Lessons can be learnt from recent history. In 2010, the Progressive Labour Party government of the time imposed a two-percentage-point rise in payroll tax, apparently with little warning to the business community. Two years later, Mike McGavick, the chief executive officer of XL Group, told this newspaper about the result. “The payroll tax increase was destructive financially,” McGavick said. “It took what was a close call and made it a bad call. As we shared with the Government at the time, you will have a silent exodus of certain kinds of jobs. When a job becomes open, it will be looked at in a different equation than it was before.”
You can bet your bottom dollar that the latest payroll tax hike will have the number crunchers hard at work comparing the new cost base in Bermuda with that of rival jurisdictions. As international companies operating in numerous countries, it is straightforward for them to relocate jobs or departments to cheaper locations. US corporate tax cuts, if they materialise as expected, would make the maths even worse for the island.
Local employers have less flexibility, but the “different equation” that McGavick spoke of will weigh on their hiring decisions as well. For smaller employers, the equation has improved. But for larger firms whose annual payroll tops $1 million, the payroll tax rate climbs by 0.75 percentage points. Already lumbered by spiralling health insurance costs and having come through a period of sharp population loss and accompanying recession, payroll tax increases — payable whether they make a profit or loss — are the last thing they need.
However, Richards is right when he describes the national debt as the single largest threat to the future of Bermuda and its people. Having set out a plan to eliminate the deficit by 2019-20, he had to deliver a Budget that kept the island on track to achieve that. Veering from that road would have invited credit rating agencies to impose downgrades with the potential for a catastrophic domino effect in the coming years.
But despite the spirit of “shared sacrifice” that Richards has encouraged, it seems that most of the pain is being borne by the private sector. While the Government has managed to squeeze $50 million more in revenue out of the economy in the current fiscal year, its current account expenditure actually rose by about $10 million, according to its revised estimates.
While it is unrealistic to expect swathing public-sector cuts in an election year, it would be nice to see the Government at least managing to achieve some reduction in expenditure.
But with plans to increase revenues by $161 million, or 16 per cent, over the next three years, in the same time that government current account spending falls by a mere $22.5 million, or 2 per cent, it is clear that the lopsided approach is set to continue.
To be fair to Richards, he has been walking on the edge of a fiscal cliff ever since the One Bermuda Alliance inherited a spiralling debt trajectory from the previous PLP administration. Early in his tenure, he said fiscal recovery would be like “trying to turn around an oil tanker”. The struggle of the past four years to guide the public finances to relative stability has proved him right.
While we may disagree on how to eliminate the deficit and stop the debt mountain growing, there can be no doubt that all Bermudians have a mutual interest in making sure it does happen.