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Relief is welcome but it may not help those most in need

Inflation comfort: government relief for needy families needs to be better targeted

When David Burt called a snap General Election in 2020, he justified it on the basis that difficult economic problems were looming and the Government needed a mandate to take the hard decisions that would be necessary.

Hard times are indeed here. Prices are galloping upwards and causing financial hardship for many who were already reeling from the pandemic.

The Government’s immediate solution, to give money away, is not a hard decision and there are some sound reasons for it. But the devil, as ever, is in the details.

The real question is not whether people need relief, but whether the $15 million announced last Friday is the appropriate amount, whether it will have unintended economic consequences and if it is going into the right hands in amounts that will make a real difference.

It is also relevant to ask where the Premier is finding the money, given the Government’s precarious finances.

The classic definition of inflation is that it is caused by too much money chasing too few goods. If demand is greater than supply, prices will rise.

On that basis, handing out more money, while welcome to those who will receive it, will not necessarily solve the root cause of inflation and may drive prices up further.

Supporters of the relief will argue, with some justification, that Bermuda is different. Much of the inflation in Bermuda is out of the island’s control. Oil prices are determined elsewhere, as is the basic cost of virtually everything consumed on the island, since almost all of it is imported.

So increasing the amount of money, or liquidity, will not affect the cost of imported goods or fuel. But care needs to be taken when it comes to wages because labour costs are often the biggest single cost to a business. If wages rise, prices will as well, causing a wage-price spiral. The Bermuda Public Services Union made clear this week that it will be looking for salary increases. Others no doubt will follow.

However, the relief being given is unlikely to affect the basic price of goods, especially food, in the short term and it helps people facing the steepest price hikes in decades, so it makes some sense.

But is the amount being given appropriate, and is it going to the people who need it most?

The $15 million is determined on the basis of the $30 million improvement in the Budget forecast since February, when Mr Burt said 50 per cent of any increase over the original forecasts would go to relief. It is worth noting that he said then that this would be dedicated to reducing energy costs and it has now been widened to other items.

What this means is that there has been no real thought to how much money people actually need. The amount is more a matter of taking what is available in an entirely arbitrary way — if the projected budget surplus was $20 million and not $30 million, then $10 million would be made available for relief. So there has been no effort to match funds to needs, as there would be if, for example, a formula was devised to take the actual increase in food costs over the past year and to match it to the number of people in genuine need.

So, really, the $15 million is a number pulled out of a hat.

Mr Burt had already committed to cutting taxes on energy with an estimated reduction of $6.5 million, which keeps the rate where it was in February. He has said this means that without the freeze, a typical car owner would be paying $23 more when they fill up an empty tank than they were four months ago. That means a family might by now have several hundred dollars in their pockets they would not have had otherwise; an amount that should not be dismissed.

To that end, this is welcome, although on its own it is unlikely to make a massive difference to whether people who are really struggling can make ends meet. And it also helps people who don’t really need it. Indeed, the owners of gas-guzzling SUVs will benefit the most, not the person in a microcar who strictly limits how much they use their vehicle.

This is the only measure that has actually come into effect.

The biggest new relief measure rolled out on Friday were payroll tax rebates, under which people earning less than $60,000 would receive $250 back and people earning between $60,000 and $96,000 a year would receive $100.

For those earning less than $60,000, $250 is a genuine help, especially in households where there at least two people in this bracket.

The $100 for a person earning $96,000 a year is probably unnecessary. While “every little bit helps”, it is hard to see this making a significant difference to someone earning this amount, where a higher amount for lower earners would have been more beneficial.

So this looks more politically driven than a matter of sound economics, and should be rethought.

No doubt the $150 being given for each child in public education will be welcome, but the lack of accountability in this area is troubling. While ostensibly for back-to-school supplies and uniforms, there is no mechanism for ascertaining that. That is poor management.

Again, while this support will be welcomed, it is not targeted or directed at those who may need it most.

The decision to buy and give away $500,000 worth of LED light bulbs is sound. For a relatively low expenditure, the population will get 150,000 long-lasting bulbs, which will reduce their electricity bills and usage.

Walter Roban, the home affairs minister, said the bulbs will save households $5.8 million in their electricity bills per year, or about $200 per household, with senior citizens and other people in need being the first to receive them. If that is accurate, then this is a meaningful and worthwhile initiative for a relatively low cost.

Slightly more than $930,000 is being allocated as an increase in the food allowance for people on financial assistance. While it is difficult to say what the average recipient would receive under this programme — as economy minister Jason Hayward noted in the House of Assembly — it was estimated that this would result in an average of an additional $47 per person.

Again, this no doubt will be welcome, but it begs the question of whether it will make a meaningful difference over a period of several months.

Not yet in effect is $3 million, presumably resulting from the elimination of customs duty on unspecified essential foodstuffs. When this will come into effect is an open question, but it would appear it will not be until September when the House of Assembly returns to work.

Taken as a whole, this package of relief should not add to inflationary pressures in a real way, and will help people who are struggling with soaring costs.

But there are two major concerns: it may not do enough to help the people who are really in need, while throwing money at people who do not really need it. In particular, the payroll tax rebates for higher earners should be rethought.

Mr Burt also seems to be assuming, in the middle of extremely unpredictable economic times, that the $30 million improvement in government fiscal performance will carry through to the end of the year. He is counting chickens that will not hatch for another nine months.

By that time, this money presumably will have long been spent. That’s a fiscally dangerous game to play. For Mr Burt and Bermuda’s sake, it is to be hoped that the economy continues to improve and that it is not rocked by future events over which it has no control.

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Published July 22, 2022 at 8:00 am (Updated July 21, 2022 at 7:57 pm)

Relief is welcome but it may not help those most in need

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