Tax and spend: time to act
Depending on your political views, the Minister of Finance either has his hands tied by Covid or he has kicked the can down the road with the 2021-22 Budget. Either way, Bermuda cannot afford to continue down this path and the time to act is now.
Every year we delay, it increases the chance of drastic measures in the future. Current policy is just deferring the hard choices. I fully appreciate large countries are doing the same, but running our debt towards 60 per cent of gross domestic product isn’t appropriate for Bermuda, given our size, openness and pegged currency, and we can do better.
I believe most of us would like to see Bermuda prosper for the next generation. We need to start talking specifics and make some difficult changes to reduce the deficit.
Governments have three main options to improve their fiscal position: increase taxes, decrease spending or grow the economy. The magnitude of our challenge means this is isn’t an either/or decision; it must be some combination of the above. To help put things in perspective that, let’s look at some facts and figures:
• Increased exposure to rising interest payments (Exhibit 1). In early August 2020, when we last borrowed additional funds, the yield on US ten-year US Treasuries was 0.55 per cent; at the beginning of March it reached 1.55 per cent, an increase of one percentage point. Keep in mind for every such increase in interest, tax collection must increase by more than 3 per cent just to stand still — this leverage is because we now have $3.35 billion of gross debt outstanding against government revenue of just under $1 billion
• Relying on growth alone is not realistic. It would take $800 million of additional GDP to offset the 2021 projected $125 million deficit; we haven’t seen that kind of growth in a long time. Growth alone is much easier said than done and, while part of the solution, we can’t afford to rely solely on the possibility/hope of accelerating growth
• Unless we control our spending, raising taxes will not help (Exhibits 2 and 3). Per the August 2020 Bermuda Job Market Employment Brief, public administration accounted for 12 per cent of Bermuda’s jobs (3,964 out of 34,378 filled jobs) while in the Cayman Islands the figure in public administration is only 7 per cent (3,191 out of 47,394). In addition to the outsized share in terms of number of jobs filled, the median gross income for public-administration positions in Bermuda is 123 per cent of the median gross income overall ($76,878 versus $62,693).
• Target tax/GDP. Pre-Covid, government revenue for 2020 was projected to be $1.1 billion. This equated to 15 per cent of 2019 GDP. Those who argue 15 per cent is too low are overlooking two key points specific to Bermuda; the first is we don’t need to spend 2 per cent or more of GDP on external military as many counties do and the second is the substantial benefit of international business activity to Bermuda’s revenue. If you disagree that 15 per cent is enough, then please consider Cayman is running a budget surplus with just 14 per cent Tax/GDP (2019 figures). We should be able to do the same, or better, given the higher number of international business jobs in Bermuda than in Cayman. The Cayman Islands is our most appropriate comparison on this measure. Be wary of those that use “many other Caribbean economies” as their comparative. See Exhibit 4 for why this is the case.
There is no free lunch here. Spending reductions are painful and so are tax increases. More accommodative policies should help growth, but that alone will not be enough. We need to start course correcting now and phase it in over time. The 1 per cent spending increase for 2022 and a further 1 per cent in 2023 as outlined in the recent Budget puts too much pressure on 5 per cent successive annual revenue increases as the solution. The reason for the lack of detail to date is because this is hard.
Unfortunately, the challenge is not going away; it is compounding.
• All figures taken from gov.bm and eso.ky