A Budget for uncertain times
Curtis Dickinson, the Minister of Finance, faces his greatest challenge yet when he delivers his third Budget today.
It was not supposed to be this way. Twelve months ago, Mr Dickinson laid out a plan to bring Bermuda's runaway budget deficits under control while encouraging economic growth. If all had gone to plan, today’s Budget would have been the next stage in an orderly process.
As a wise general once said, no plan survives contact with the enemy.
The coronavirus pandemic was a very big enemy, meaning that last year’s plans, which were already uncertain, were irrelevant within weeks of them being announced.
It goes without saying that the human cost of the pandemic has been incalculable, even if Bermuda has so far survived it better than many other countries.
The cost to the economy and Bermuda's fiscal position can be calculated. There is no doubt that it has been the most severe blow either have sustained since the Great Depression.
The economy contracted 15.9 per cent during the lockdown in the second quarter of last year and and is expected to have shrunk by between seven and nine per cent for the whole year.
Instead of returning a relatively modest $20 million deficit for 2020-21, Mr Dickinson is likely to announce a shortfall of $295 million or more, which will be the highest since 2014 and could easily be the largest ever.
So the Finance Minister has a difficult task ahead of him. Bermuda’s economy was faltering before the Covid-19 pandemic struck and many looming problems already existed and were simply accelerated, not created, by the crisis.
Uncertainty about when and how tourism will recover, the ability of employers to survive months more of prolonged weakness and the uncertainty of when and if people will return to their workplaces all make calculating the future more difficult.
Certainly the international business sector weathered the storm better than tourism, and in some cases grew. But it is not at all clear how durable the long-awaited hard market is, and the Class of 2020 may turn out to be closer to a small tutorial group. Even if Bermuda does see something closer to the Classes of 2001 or 1992, the reality is that companies are unlikely to building the kinds of operations in Bermuda that were seen then. The possibilities of remote working make it even less certain.
Against that, there have been signs that the Bermuda economy is more resilient than it might appear. Retail sales were robust from August through September as working residents appeared to release pent-up demand for cars and durable goods. People who were unable to go on holiday may well have invested in new kitchens instead.
The digital nomads also provided an extra boost to the economy and had the added bonus of showing that relatively untrammeled immigration has little downside. It seems unlikely that Jason Hayward, the Minister of Labour, would have proceeded with the recent economic investors’ policy if the digital nomads approach had been unpopular.
All the same, and even if Bermuda embarked on a much more liberal immigration policy today, Mr Dickinson would not be projecting an explosion of growth in the next 12 months.
If Bermuda cannot grow its way out of a Budget deficit in the short term, that leaves him with the problem of how to manage Bermuda out of it.
The Pre-Budget report gave some clues. There will be some restraints on spending, and there will not be much hiring this year.
Reductions in the safety net are not tenable and quite aside from the humanitarian impulse to help people, make no sense in economic terms. Limiting people’s ability to pay rent, buy food and the necessities of life simply causes more of an economic spiral and more pain.
Mr Dickinson has rightly said he will not be introducing new taxes or raising existing ones. There are likely to be some increases in licence and permit fees to keep up with inflation but for the most part there will be no increases in tax revenues in the coming years.
Holding the line on taxes and maintaining the social safety net all makes sense in the short term but also has the effect of putting off the inevitable day of reckoning when Mr Dickinson must contain and then reduce the debt which he himself admits is unsustainable.
Needless to say, it is much easier to get into debt than it is to get out of it. If 2021 is the year of survival, then 2022 will be the year when debt reduction must begin.
The Pre-Budget Report and the Fiscal Responsibility Panel both laid out ideas for this. Many are centred around introducing new taxes and using taxation to redistribute wealth. That may well be necessary even if it is risky in an economy built around the idea of low taxation, but the key to fiscal sustainability is economic growth. Mr Dickinson must not forget this.