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Risky business

No guarantees: Jaché Adams, adviser to the Minister of Finance, David Burt, Premier of Bermuda and Minister of Finance, and Arianna Hodgson, Junior Minister of Finance, gather at Veritas Place before the delivery of the Budget Statement (Photograph by Akil Simmons)

David Burt has produced a Budget that will have surprised many with both its range and ambition.

Given the challenges facing Bermuda, it would have been reasonable to expect a cautious Budget that attempted to continue to bring the economy and the island’s indebted public finances back in a steady and measured way.

The Premier and finance minister may well feel he is being measured, but he is also counting on a lot going right to ensure that this Budget will succeed.

Mr Burt is essentially kicking the can down on the road on Bermuda’s debt, counting on strong economic growth this year to enable him to meet his target of a balanced budget next year and, with it, the beginning of reduction in a debt burden that is now taking 12 per cent of government income to service and is in effect the island’s fourth largest ministry. Only health, education and national security cost more.

He may turn out to be correct, although much depends on the bullish projections of gross domestic product for 2022 and the coming year being accurate, and in terms of real growth, that will also require that inflation slows down.

It also needs everything to go right, and that would be optimistic given how unpredictable the world has become.

While tourism should continue to recover this year, any return to pre-pandemic levels depends on the reopening of the Fairmont Southampton hotel.

Mr Burt’s assurances on this had a slightly hollow tone, but perhaps that is because there have been so many unfulfilled promises. On the one hand, he said further legislative amendments were required to safeguard the Government’s guarantee. He also said the developers had secured the capital for the project. And he declared work will now begin in the second quarter of this year, with a 2024 completion still “the target”. It is difficult to take any of this seriously until there are shovels in the ground.

Mr Burt was more bullish on the proposals for Morgan’s Point, although this plan raises many questions.

While it makes sense to finish the buildings that are already under construction at the site, and it may also make sense for them to be used as housing and to drop the hotel element of the project, it would appear that the Government, through its wholly owned operating company, is undertaking all of this — and that gives rise to uncertainty, as Mr Burt himself admitted.

It appears the Government intends to borrow $130 million for the first phase of the project, with at least part of that borrowing secured by a government guarantee. So $130 million will be borrowed with the help of a guarantee to recover the $165 million that the Government had to spend to make good the guarantee its predecessor in government committed to. This seems to mean that before recovering any money, Bermuda will be $295 million in the hole.

When he was shadow finance minister, Mr Burt rightly warned against issuing guarantees to businesses, noting they were needed only when there “is some doubt as to the ability to repay”. That he should be now proposing one for Morgan’s Point, on top of the $75 million guarantee given to the Fairmont Southampton, seems more than a little ironic.

If in fact Morgan’s Point is government-owned, and if it is able to borrow the money, it is hard to square this with Mr Burt’s promise of a balanced budget next year. But it may be that this will be an off-balance-sheet transaction.

If so, it joins an ever-lengthening list of off-balance-sheet guarantees the Government has issued. Leaving aside the $758 million guarantee issued to the Bermuda Hospitals Board, the Government is the guarantor of a further $212.7 million at present. That number would rise to $287 million with the $75 million guarantee for the Fairmont Southampton and to somewhere north of $300 million with the second Morgan’s Point guarantee.

Mr Burt’s other gamble concerns the global minimum tax.

This proposal, for all countries in the world to levy a 15 per cent tax on corporate profits, has been building momentum for some time, despite it trampling on countries’ sovereignty and ignores that different countries have different means of raising taxes.

Nor was it certain that it would clear the US Congress since the Republicans gained a majority in the House of Representatives.

So it was surprising to see Mr Burt speak of it as a virtual certainty in the Budget and in surprisingly positive terms, all the more since he had time earlier in the statement to rightly explain just how important international business, and especially the insurance industry, is to government finances and the economy as a whole.

There is no doubt that the minimum tax is a serious threat to how Bermuda’s economy is structured. It may well be that if every country in the world is going to levy this tax, then some or even most international companies will remain in Bermuda especially where a market already exists. But since a large part of the reason they are in Bermuda is because they pay no corporate income tax, they may equally decide to move elsewhere.

There is no room for flippancy on this. The stakes are enormous. If Bermuda gets it wrong, it could destroy the one thing keeping it afloat.

Mr Burt went on to muse that perhaps Bermuda could become a “mid-shore” jurisdiction, which “means that Bermuda must be a place where talented people from around the world desire to live and work”.

He added: “Simply put, we must make Bermuda a place that is more attractive for global talent looking to relocate so that they can assist in powering our island’s economic growth into the future.”

For many this will come as a remarkable admission for the leader of a party that has spent half a century rejecting, in one guise or another, this very idea.

It may be that the Progressive Labour Party is the only party that can bring about such a reform. But it has to be accompanied by meaningful efforts to make the island welcoming to the very entrepreneurs and talent that Mr Burt now seems keen to attract.

If the long-a-birthing fintech experiment proves anything, it is that Bermuda needs to think carefully about the kinds of industries it can attract. There is much to be said for governments creating frameworks where business can thrive and then getting out of the way, but Mr Burt is again showing the kind of interventionist impulse at Morgan’s Point that is the very antithesis of this.

More worryingly, Mr Burt has again thrown his weight behind the idea of medical tourism as a cure for the island’s economic woes.

Medical tourism can be successful, but it seems to require two forms to make it work. One is to be based in a country where healthcare is reliable and cheap — and Bermuda is assuredly not the latter. Alternatively, medical tourism thrives at major teaching hospitals where cutting-edge and highly sophisticated medicine is practised. Again, that is not Bermuda, and the chance of it becoming so are vanishingly slim.

Bermuda should instead consider expanding on the areas where it is already successful. Its success as a centre for property casualty insurance, itself based on captive insurance, led to the one true success story of the past decade in life reinsurance. Bermuda can continue to grow in these areas and perhaps should continue to incrementally expand on these areas instead of pipe dreams such as medical tourism.

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Published February 18, 2023 at 8:00 am (Updated February 17, 2023 at 10:24 pm)

Risky business

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