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Hard choices ahead for Mr Burt

Budget blues: delivering a “good” budget depends largely on economic growth, which shows little sign of happening

On Friday, David Burt, the Premier, presents his first full Budget since he took back the finance portfolio after Curtis Dickinson resigned a year ago.

Mr Burt delivered last year’s Budget, but it was very much a combined effort in which Mr Burt only had time to tweak the work already done by Mr Dickinson. This year, Mr Burt will be able to say the Budget is all his own work.

That’s a double-edged sword. If it goes down well, Mr Burt can take the credit. But if it is unpopular, there is no one else to blame.

The latter course is more likely, not because Mr Burt is necessarily hellbent on inflicting suffering on swathes of people, but because there are no easy choices in this Budget.

And the reason for that is that Bermuda’s economy remains more dead on its feet than dynamic, Jason Hayward’s recent claims that it is on the right trajectory to the contrary.

It is also true, as the Minister of Economy and Labour stated, that budgets and economic health are not always correlated. You can have a growing economy and a budget deficit, and you can, at least in theory, have a budget surplus in the middle of a recession.

But it is a lot easier to devise a budget when the economy is growing than when it is stagnating. At best, Bermuda’s economy is delicately poised. What growth there may be is more of the green-shoot variety than the hardy perennial. The wrong budget decision could do immense harm.

At the same time, Mr Burt must raise enough revenue to meet the Government’s spending obligations and to begin the process of reducing the national debt.

If the economy was in stronger shape, this would be easier to do; tax revenues would be rising and some government spending would be easing, especially demand for relief.

But that is not the case, and the Government should take some of the blame for this, although that is unlikely.

Gross domestic product figures, which tend to be at least six months out of date, suggest economic growth in 2022 was flat, having shrunk in the second quarter of the year after growing in the first quarter.

GDP in 2021 was up 5.4 per cent after the pandemic year of 2020, but remained smaller than in 2019.

Retail sales through last October were down on a monthly basis for eight of the previous ten months. Overseas purchases rose significantly in October, which suggested that people had disposable income and were spending it, only not in Bermuda. That was bad for retailers and retail workers, and for the economy as a whole. Once that money leaves Bermuda, most of it is not coming back.

Employment is also difficult to read since the most recent statistics are for 2021. But they were not good then. More than 1,000 jobs were lost from 2020 and more than 3,000 from pre-pandemic 2019.

International business jobs did grow to 4,400, the highest number in 15 years, but this was offset by losses in the tourism sector and elsewhere. Some of those jobs may have come back as employers hired after the pandemic, but it seems unlikely that they have recovered to 2019 levels.

And as long as the Fairmont Southampton is mothballed, it is going to be hard for the hotel sector to recover or add jobs.

So most key indicators suggest that any economic growth was fairly limited. Mr Hayward did point out last Friday that the real estate sector was booming.

It may well be true that prices are rising, which is a positive sign, but if Mr Hayward speaks to realtors, he may find that’s because of historically low inventory, which becomes a simple matter of low supply leading to higher prices.

As for the future, Mr Hayward revealed that the Ministry of Finance is projecting economic growth of between 2.5 per cent and 4 per cent this year, a number that presumably will come out in the Budget.

That would be welcome news if the forecast was right; but history shows they rarely are. In the absence of reliable statistics, gauging the economy relies on anecdotal evidence is necessary.

In a recent survey, few business owners or chief executives were optimistic about the overall economy, although more were positive on the outlook for their own companies.

That is an odd contradiction. If enough individual businesses do grow, then that will be positive, but weak consumer confidence is worrying and it also suggests CEO confidence is quite brittle.

So if the signs for the economy are mixed, Mr Burt has a problem because he cannot be certain that economic growth will drive revenues up enough to meet the Government’s spending commitments.

At the same time, bills need to be paid, so he will be tempted to raise taxes.

The Pre-Budget Report indicated as much, but the proposals to raise payroll tax on international business and high earners had a frosty reception from the people who generate most payroll tax revenue.

Given how mobile international companies and their employees are, Mr Burt could do more harm than good if tax increases drive people away. That was the experience in 2010 when Paula Cox, as finance minister and premier, did just that.

But that leaves Mr Burt with few options. He can nibble around the edges with incremental tax increases on sin taxes and the like. But, short of risky payroll tax increases, there is little room to raise revenue without stunting what growth there is.

He could make a committed effort to get government spending down, but faces the same problem as his predecessors. More than half of government spending goes on personnel costs and another 13 per cent goes on debt service, which leaves little room for cost savings unless Mr Burt bites the bullet on job cuts, which seems unlikely.

In the end, Mr Burt needs to focus on growth if he wants to deliver a budget that can both restrain taxes and delivers support to the people who need it.

Doing that begins with turbocharging the economic recovery plan, which has achieved almost nothing since being launched two years ago, while also finding ways to encourage more employment and jobs growth. Like it or not, that requires some form of immigration relaxation. Mr Hayward says the right things on this, but then does nothing.

If Mr Burt wants to be remembered as great post-pandemic leader and finance minister, he needs to get his economy and labour minister delivering.

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Published February 16, 2023 at 8:00 am (Updated February 15, 2023 at 11:23 am)

Hard choices ahead for Mr Burt

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