Bermuda College economist Craig Simmons says Bermuda could see a severe recession, with a decline of 10 percent in gross domestic product (GDP) "a distinct possibility".

The respected commentator on the local economy said Finance Minister Paula Cox had delivered her "best Budget to date" last Friday, but added that her projection of a one to 1.5 percent fall in GDP this year was optimistic.

"Minister Cox's estimates for the decline in GDP are too low," Mr. Simmons said. "What makes this recession different is that it will affect all three foreign currency income sources: international business activity, investment income and tourism.

"The recessions of 1981, 1984 and 1989-1992 saw GDP fall by 5.5 percent, 2.9 percent, and 3.5 percent respectively. When combined with the severity of the global crisis, a fall of 10 percent is a distinct possibility."

Mr. Simmons said he had been critical of Ms Cox's previous Budgets in the past, arguing that they effectively added fuel to an overheating economy.

But this time, he said she had done the right thing by not increasing Government spending or taxes.

"She has shown that she understands that these are extraordinary times requiring both prudent and creative economic policies," Mr. Simmons said.

"First, she has maintained the level of government spending at 2008 levels. Capital spending has also been maintained at last year's level.

"We are fortunate to have capital projects on line because the decision and planning phase can last several years. On-line capital projects will target the construction sector, are temporary and are on the whole subject to a tender process that is open and therefore transparent."

Mr. Simmons said he would have preferred to have seen tax breaks for low earners and more in the way of relief for struggling retailers.

"A payroll tax exemption for individuals earning less than $50,000 would have targeted some of the most vulnerable in our community and helped businesses that employ low-income individuals," he said.

"Households at the low income threshold are more likely to spend their tax relief than save. And we need households to spend, not save.

"Additional custom duties relief for our ailing retail sector is also lacking."

Mr. Simmons said, that given the economic risks being faced by the Island, the size of the Budget deficit should not be "our primary concern" now.

"We must move beyond a static view toward one that looks at the deficit within the context of the ebb and flow of the business cycle," he said. "During boom years, Budgets should run a surplus that can be used toward deficits run during recessions. The government's debt policy should become one of fiscal balance over a seven- to 10-year period.

"In my view, the deficit could have been $350 million, the result of payroll tax and customs duties cuts of $200 million along with capital spending of $150 million.

"We should remember that our debt to gross domestic product (GDP) ratio, will remain at a respectable 11 percent, assuming 2008 GDP of $5.8 billion.

"A recovery will come and, when it does, taxpayers should brace themselves for tax increases."