Control costs and increase growth
This week’s series of stories shows that the cost-of-living crisis is continuing to worsen for Bermuda residents.
At the same time, recent retail sales figures for March show that the economy remains weak.
As stated in an earlier editorial, the risk for Bermuda is that it becomes caught in a period of stagflation, in which prices soar at the same time that the economy contracts.
This week, The Royal Gazette reports that food prices are likely to jump still further because supermarkets, seeing what was coming months ago, stockpiled staple goods. Those stockpiles are now running out, meaning that prices are likely to jump.
And there is plenty of evidence that rental prices, contrary to the Government’s official statistics, have risen by 10 per cent or more in the past year.
Bermuda’s high prices are damaging for several reasons.
People who are conscious of high prices are likely to reduce their spending. While this may make absolute sense at a personal level, it is bad for the economy overall.
High prices also make Bermuda less competitive. Bermuda depends on international business for the bulk of its foreign-exchange earnings and companies that have substantial physical presences in Bermuda are essential for economic growth.
Even high-earning businesses watch local expenses, and are less likely to hire here if the island is too expensive or because non-Bermudian employees are less willing to move to the island or remain in Bermuda if they feel the cost of living is prohibitive.
Although it is less significant as an economic contributor than it was decades ago, tourism will be hurt if visitors decide Bermuda is too expensive. They will either spend less when they come or they won’t come at all.
That has a direct effect on employment and income for thousands of Bermudians; the same people who are paid less and are struggling to make ends meet in the first place.
That places more pressure on employers to raise wages, which in turn leads to higher prices, thus triggering a wage-price spiral.
If wages do not go up, there is instead more pressure on helping agencies and the Government, which can ill-afford to give help.
This has already begun to happen. The Cabinet was supposed to discuss direct payments to struggling people last Tuesday. A minimum wage appears to be a done deal.
The Government has frozen increases for petrol and the Regulatory Authority has restricted rises in electricity prices. But neither of these measures are sustainable. David Burt, the Premier and finance minister, will come under increasing pressure to reduce duties on fossil fuels, which would reduce government revenues.
He has also said he will use revenues from the Travel Authorisation policy to fund the direct payments. But given that the TA fee is a disincentive to tourism, this again is unsustainable.
Mr Burt has said his refusal to allow retail fuel prices to rise has contained inflation. He is wrong in this because he in fact capped fuel increases in March — but inflation was already low before then and it constitutes such a tiny part of the Consumer Price Index that it would take a huge change to make a difference.
But Mr Burt is right to want to contain spending on fuel — it amounts to a massive drain on Bermuda’s foreign exchange, not to mention carbon’s contribution to climate change, about which Bermuda of all places should be concerned.
So it would make sense for Bermuda to push for more solar power along with other forms of alternative energy, and for a far better take-up of electric cars. Fewer fossil fuels are used to generate the electricity that drives an electric car compared with internal combustion engines. And if Bermuda increased its use of solar power to generate electricity, the harm done to wallets and the environment is dramatically reduced.
So Bermuda should incentivise the use of solar power and the ability to import electric cars as a matter of urgency. This is a better long-term solution than price controls or handing out cash.
Both of these approaches require substantial capital outlays. There are some private sector mechanisms in place to enable people to install solar arrays in an affordable way. The Government is talking about doing more of the same.
Electric vehicles already benefit from not paying customs duty, but a reduced vehicle licence fee could be offered also for electric cars and bikes. Importation of second-hand electric vehicles is another consideration.
Mr Burt has also said the Government will cut customs duties to 0 per cent on essential foodstuffs. This makes sense. There may be some losses to government revenues, but these can be made up if people can afford to eat and therefore do not need government handouts.
As Mr Burt has said, it is important that these duty reductions are passed on to the public, and the decision to publicise these prices therefore makes sense. There is a risk that this will create a new bureaucracy, so it is important to ensure that does not happen.
These measures, and others like them, do two things: they help to contain costs by reducing prices. And they In turn should encourage growth, thus helping Bermuda’s economy and increasing jobs.
There may be some revenue costs to the Government as a result, but these should be offset by growth in other areas.
By establishing a framework for businesses to grow, everyone gains. This is how Bermuda can work its way out of its problems.