Pandemic economics make a tough job even harder
The old adage no battle plan survives the first contact with the enemy could apply equally well to government budgets, never more so than when the Covid-19 pandemic is added to the mix.
So Curtis Dickinson, the finance minister, deserves some sympathy after delivering his gloomy update on the Government’s finances and revised Budget for the rest of the year.
Rather than faulting him for failing to anticipate that there would be a third or fourth wave of the coronavirus, he should be judged on how he reacts to events as they are rather than as he would like them to be, which is not to say that the Government as a whole should not be held to account for failing to react more quickly to the tragedy of the fourth wave.
Although it was hardly surprising that expenditures ran ahead of budget as the Government had to deal with the spread of the pandemic , there was some good news as conservative projections for revenues were up.
Nonetheless the outlook is concerning.
Tourism and travel-related expenditures fell short of already conservative projections. If some of the unbudgeted revenue increases have come from stamp duties paid in a real estate market that has heated up quite quickly, this is a sector that is notoriously prone to booms and busts.
At the same time the need to support people put out of work because of Covid-19 is a necessary but steady drain on public finances. So is the strain on hospital and other medical services; that the hospital block grant has had to be increased both through an increase in insurance premiums and a further $11 million subsidy is worrying.
Since the financial year has more than three months to go and the Omicron variant is now in Bermuda, there is no reason to think that a fifth wave can be avoided. That is why Bermuda should take sensible precautions but it also needs to gird itself for more expenditure and more financial problems.
If it turns out that the symptoms of the variant are less severe, then that will be a blessing. But, as with a hurricane, it is best to prepare for the worst and hope for the best.
So the question is, what does Bermuda do to offset the problems that have already emerged and to make contingency plans for the balance of the year?
Mr Dickinson has already taken several steps to address the problems.
He has frozen hiring for vacancies — although it is not clear how that ties in with plans to hire additional bus drivers for the new electric buses — and found other savings on current expenditures. This is not easy when 45 per cent of current account spending goes on personnel and a further 13 per cent is spent on debt servicing. So without laying off employees, spending cuts can only come from 42 per cent of the remaining expenditures.
At the same time, the finance minister has maintained that Bermuda must meet its deficit target. If this is exceeded it could lead to increased interest rates and difficulties with rolling over current debt.
As a result, Mr Dickinson has been forced to go to capital spending to find cost reductions and is is proposing to cut capital spending by $25 million this year although he has not specified where the reductions will come from.
This may seem to be Mr Dickinson’s only option but that does not make it a good one. Bermuda’s infrastructure is falling apart. Just a week ago Mr Dickinson’s Cabinet colleagues were blaming their One Bermuda Alliance predecessors for delaying spending on the incinerator. Now Mr Dickinson is cutting capital spending for the same reason — there is not enough money for every spending goal.
Capital spending, done wisely, keeps people working and stimulates the economy. The future growth of the economy depends on reliable infrastructure. This includes everything from air service to transport to garbage collection to water supply.
So there is danger here. Cutting back on stimulus projects can reduce economic activity in the short term, reducing economic activity and therefore other tax revenues while piling up problems for later.
Mr Dickinson has also said he believes that savings can also be achieved through public service reforms. Certainly there is waste and duplication in government services. As the the recently released Commission on Historical Land Losses just showed, there is a reflexive tendency to create more bureaucracy to solve every problem that arises. Part of the problem is that once created, these new bureaucracies never die, even when their remit is long expired.
So Mr Dickinson should use his power to accelerate this reform process. He will of course run into opposition, including from his own colleagues, but if he is serious about righting the island’s finances, there is a clear necessity for reform of a public service which, despite some outstanding individuals, is generally sclerotic and inefficient.
In the long term though, public finances will only improve when the economy does. While international business has continued to do fairly well, the tourism sector is withering on the vine. The 2021 tourism season is now a lost cause; every effort needs to be made now to plan for a vastly improved 2022.
The moves to make travel to the island easier while the pandemic continues is welcome but much more needs to be done, including getting the renovation of the Fairmont Southampton Resort, now a year behind schedule, under way.
Further immigration reform would also be welcome; certainly Jason Hayward, the home affairs minister, has proven to be more reform-minded than might have been expected, but more needs to be done to solve the island’s demographic imbalance and to encourage investment and jobs creation.
Finally, inflation continues to threaten. This will put pressure on wages and will increase calls to help those struggling with the already high cost of living. There will also be misplaced calls for price controls in various areas. Although oil prices have recently come down from their highs, Mr Dickinson could look at reducing the high tax on oil in order to help lower Bermuda’s electricity prices especially if this could be tied in with a promise from Belco to accelerate its use of alternative energy.
There can be few people who envy Mr Dickinson his job. But he needs to make tough decisions to keep Bermuda not just surviving the current crisis but laying the foundation for a more successful future.