Putting growth and Bermuda first
Scylla and Charybdis were monsters in Greek mythology — one a whirlpool and the other a six-headed creature — situated on either side of a narrow channel. If mariners avoided one danger, they were certain to be caught and destroyed by the other, and this remains a metaphor of choice for when we face equally unpleasant alternatives.
Last week, a Royal Gazette editorial described Curtis Dickinson as being caught between Scylla and Charybdis. If the Minister of Finance attempted to spend Bermuda's way out of recession, he ran the risk of unsustainable runaway deficits and credit-rating downgrades. But trying to reduce public spending and hence the deficit almost certainly would worsen the recession and turn it into a depression.
That such dilemmas have been common for millennia will be of little comfort to Mr Dickinson. But leaders have indeed faced similar unappetising choices before, and history teaches us that success lies in coolly analysing the costs and benefits of the alternatives and deciding which course will do the least long-term harm, and may even plant the seeds of future success.
If Mr Dickinson takes the long view, getting the economy growing has to be the answer. Deficits, as disturbing as they are, will be reduced if there is growth. But deficits cannot be reduced in a shrinking economy — instead, austerity will lead to a spiral of cuts and contraction.
This will be anathema for those who view a balanced budget as an end in itself. And the Bermuda Government lacks some of the tools larger countries have for combating recessions. David Burt recently expressed frustration with Butterfield Bank for not reducing interest rates here as much as it had in the Cayman Islands. The Premier could not understand the bankers' rationale — that Cayman's economy is stronger. Bankers would argue that interest rates must rise to offset the higher risk of a loan default in Bermuda.
The Premier said other countries — the United States, for example — cut interest rates in recessions, and he is right. But other countries have central banks that lend to commercial banks and can therefore influence rates. And the US has the ability to print its own money and buy troubled assets and government bonds with it, as the Federal Reserve did in 2008. The Bermuda Monetary Authority does not have those powers.
It can also be argued that the Government cannot use other tools to enable Bermuda to weather the recession. These include extending unemployment benefits, providing funds and loans for small and medium-sized enterprises, and for infrastructure projects and the like, because all make the deficit worse — at least in the short term.
Aside from the increased cost of servicing the increased debt, the other fear is that bigger deficits would result in Bermuda's sovereign debt rating being lowered, which would drive away international companies.
That's a legitimate fear, but the proposal of a disaster-recovery bond put forward by the Bermuda Stock Exchange and others is worth examining closely. This newspaper has promoted the idea before because debt owed in Bermuda at least means that interest payments will be made to local investors and spent or reinvested locally rather than disappearing overseas.
The classic example of this is Japan, which has a good credit rating and public debt that is 230 per cent of gross domestic product. Bermuda's public debt is about 50 per cent of GDP. To be sure, Japan's economy is vastly bigger and more diversified than Bermuda, but the key difference is that most of the debt is held in Japan and not by outside investors, and it is therefore insulated from external shocks.
With a local disaster bond, Bermuda can make much the same argument, and local investment advisers would certainly attest that there are Bermudians with money to invest. Bermuda can also make an appeal similar to those for victory or war bonds; lending money to Bermuda in these times is not just an investment — it is a patriotic act since the money is essential to the island's recovery from the Covid-19 disaster.
A patriotic appeal is contingent on the Government's rebuilding plans being transparent and credible. To do this, it needs to present a rational recovery plan, cannot rely on the illusion that fintech will solve all of Bermuda's problems, and it should have broad buy-in, including from the business community.
What is inarguable is that with tourism probably sidelined for the time being, Bermuda needs to look elsewhere for growth. There is no shortage of ideas in the Bermuda First report and elsewhere, but here are some others.
It can start with tax reductions for international businesses as an inducement to them to stay. This would include reductions in registration fees and other taxes. It could also include an across-the-board reduction in payroll tax; again, the goal is to encourage businesses to have their executives in Bermuda and not elsewhere.
Bermuda also needs, more than ever, to do something about the cost of living in Bermuda, and this should focus on customs duties, which is a regressive tax that hurts the poorest most. Reductions in tariffs would reduce prices and increase sales volumes. With many retailers having been forced to enter the digital age, this represents an opportunity for them to sell more to a diverse market.
Bermuda also needs to move towards a greater degree of self-sufficiency as the world moves to a “me first” approach, which exposes the vulnerability of long supply chains.
One example of this is the alternative energy market. The recent award of the tender for the airport finger is a start in reducing dependence on fossil fuels — and in reducing the amount of foreign exchange that leaves the island to pay for oil. But more can be done to encourage individuals to convert to solar power as well. This would reduce power bills and encourage energy independence.
Another area where more can be done — and the Covid-19 crisis has once again exposed Bermuda's weaknesses in this regard — is in food production, where more land resources can be directed to local food production. This may require further embargo requirements for produce, or tax support for farmers to enable them to compete with overseas food manufacturers. But given that restaurants and hotels are likely to be buying less from farmers while social-distancing is in place, this kind of support will be needed to enable farmers to survive, let alone expand.
Mr Burt's efforts to encourage fintech companies to move to Bermuda have failed to bear fruit and part of the reason must be the outrageous cost of internet access in Bermuda. According to one website, the cost of one gigabyte of mobile data in India is nine cents, and in Italy it is 43 cents. In Bermuda, the same gigabyte costs $28.75. This is not just uncompetitive, it is profoundly inequitable.
Bermuda can and should find ways to subsidise internet costs, as a means of making the country more competitive and of narrowing the digital divide.
There is more, of course. Bermuda can do more to cut red tape for entrepreneurs and to encourage more foreign direct investment. Family offices remain an untapped resource, but much of this will be dependent on the Government tackling the need for immigration reform. This editorial has deliberately steered away from that topic, but much of Bermuda's future economic growth requires giving overseas investors reasons to come to Bermuda, and not to its competitors.
Some of these proposals will mean a drop in government revenue in the short term, and this is a difficult proposition to stomach given the parlous state of Bermuda's public finances. But it has to be recognised that Bermuda's economy has to grow if the island is to prosper and recover from the state it is in.