Glide path towards three Bermudas
I was hopeful that with such a strong majority and plenty of time left in the election cycle we would have a good chance for a meaningful Budget in 2022. Sadly, it has been another year of taking the easy option. Hard-won confidence is being eroded.
Not only are we delaying what needs to be done, neither the Government nor the Opposition have articulated a clear philosophy of how fiscal balance will be achieved. Instead, the discussion comes across as inconsistent with often-conflicting policy — case in point, continued additional fees to arrive at the airport, while additional subsidies are needed for hotels. Taxes are inefficient. Tax policy without an overarching philosophy is even more inefficient.
Saying we’re on a glide path is one thing, but to be credible we can’t keep extending it. There will always being a reason to delay, whether it be Covid, recession risk, rising interest rates, global tax developments, demographics, climate change or a pending election. We now add Ukraine and increasing inflation to the list.
As the above seems obvious, I’ve been asking myself over the past year, why does the “can kicking” continue?
My conclusion for the continued deferral is because, rather than two Bermudas, we have three: Public Administration Bermuda, International Business Bermuda and Middle Bermuda.
International business and public administration coexist in a co-dependent relationship. Over the past 30 years, with the help of government policy and Bermuda Monetary Authority oversight, we have experienced a tremendous growth of international business from 6 per cent of the workforce in 1991 to 13 per cent today. This high value job growth led to a surge in payroll-tax collections given higher incomes and higher tax rates for international business — 19.75 per cent combined rate at the top end versus 5 per cent on the first $48,000. Yet instead of driving continued budget surpluses, Public Administration Bermuda grew, on a lagged basis, from 7 per cent of the workforce to 13 per cent, thus offsetting the increased revenue. See the charts summarising these trends.
The majority in International Business Bermuda and Public Administration Bermuda are most likely happy enough with current affairs. The problem is we’re on an unsustainable path and Middle Bermuda, the largest segment by number of people and the majority, is being squeezed. The economy is increasingly unbalanced and the situation for Middle Bermuda will not improve in the absence of real economic growth and reduced red tape.
So what can we do? First, we need to address our working population. Bermuda shares similar deficit and ageing demographics with many Western countries. The good news is balancing Bermuda’s budget is much more feasible than it is for most countries given international business’s strong payroll-tax receipts. Our demographic headwinds can be addressed with a modest number of additional younger, healthy earners and spenders. The advantage we have when it comes to addressing the demographic imbalance is we are small — we likely need 6,000 to 8,000 additional productive contributors to our economy to bring things back into balance. Few countries can address demographic imbalances the way we can, and the mandate to promote this policy change rests with the Government. Let’s make use of this advantage before time runs out.
Second, let me finish with an analogy: many people want to lose weight, but they must be prepared to make the necessary lifestyle changes. You won’t become healthier by just signing up to a gym. You will need to visit the gym regularly and exert yourself. Just as importantly, you will be much more likely to achieve your goal if your calories consumed are also monitored and reduced. It is not that much different when it comes to balancing a national budget. Increasing revenue and reducing spending are more effective when enacted together, rather than just focusing on one side. We need to tackle present spending. Just ask anyone who has successfully lost weight how they did it and you will most likely find it was not through exercise alone.
I believe there is reason for optimism. Bermuda still has a chance of reaching a sustainable situation, but we need to end the existing cycle of postponement. Continuing to talk about the trends, making little meaningful change and continuing to dig our financial hole increases our chance of very bad outcomes. The longer we wait, the higher the chance of losing control and being forced to make decisions we really do not like.