NATIONAL BUDGET 2007/08

Presented By

The Honourable Paula A. Cox, JP, MP

Deputy Premier & Minister of Finance

Government of Bermuda

February 16, 2007

Good afternoon ladies and gentlemen,

Bermuda occupies a unique place in the world. Through vision, hard work and

prudent management of opportunities we have developed as a prosperous,

dynamic, sophisticated and cosmopolitan mini-metropolis.

We have coped well with the challenges of globalisation, riding the waves of

technological change while making the necessary adjustments to remain

competitive. In all of that, this Government has not lost sight of the social contract

? the commitment to taking care of the needs of our people.

In many ways, we represent a standard of excellence, a 'gold standard' if you

will. We must nurture it, protect it and ensure that it works for all of us ? bar none.

That is the story of the National Budget 2007/08: nurturing growth in an equitable

manner in order to enhance the well-being of our people.

Today I stand before you to report that the state of our economy is strong. Yet

not everyone is benefiting to the degree they should in a country that is said to be

the third richest in the world.

We must do more.

We must do better.

We must demonstrate compassion.

We must recognise that doing good is more important than doing well.

We must see more of a real commitment to the social contract and taking care of

our neighbour.

Everyone knows of the good works and sacrifices made by people up and down

this Island ? ordinary people who wish to make a difference by doing

extraordinary things to change their community. The time is always right to do

right.

They are doing good.

There are still many who have unmet needs. Our CURE statistics are nothing to

be proud of. The advancement of Bermudians in the upper echelons of the

private sector work-place, the advancement of black Bermudians in particular, is

inadequate at best.

There is a saying: those to whom much is given, much is expected.

Bermuda is a goldmine for many from a business perspective. Yet a select few,

who come here to do business by their actions or inaction, tarnish our reputation

and cause us harm. They think that it will be business as usual. Not so.

We have a reputation to protect and to safeguard and we will do so wherever it

may lead.

Some believe they can profiteer at our expense. Not so.

As a new Government we believed in the sincerity of those who said that they

wanted to treat people fairly ? with equity, regardless of race, colour and creed.

Some were not being truthful. Indeed, their business practices and hiring

practices demonstrated their lack of good faith and good will. They were not

doing good.

This Government provided an enabling framework so that businesses could

flourish. We listened. We dialogued. We heard the challenges of doing business.

We heard about the costs of doing business in Bermuda. We know, only too well,

of the need for Bermuda to remain competitive as a jurisdiction and to provide an

effective and efficient regulatory framework.

Although we do not regulate the costs of professional services and service providers, in those areas within our remit, we did seek to do much to lower the

costs of doing business by our tax policies and duty relief. In large measure,

there have been no appreciable tax increases. We relied on our Islands'

flourishing economy and the dynamic economic growth to increase the tax yield.

This occurred.

We thank all those who continue to work so tirelessly in the public and private

sector to make Bermuda more competitive and a premier jurisdiction. Yet despite

all that was done by the Government to foster a more level playing-field for

business and business owners, not everyone has done all that they could do to

assist and to provide meaningful opportunities for Bermudians to develop in their

careers.

So, we must do more to win the hearts and minds of all of Bermuda so they

realise the need to provide the necessary tools and training to help those most in

need. Those who follow the Government's lead, by showing a willingness to work

with, for and to the betterment of the people of Bermuda must be acknowledged

and encouraged by tangible incentives.

Budget Principles

While there will be some increases to help pay for the incentives, now is not the

time to raise taxes across-the-board on Bermuda's people.

Now is the time however to demonstrate that we will provide encouragement and

assistance to those who demonstrate a willingness to not only devise good ideas,

but also who are prepared to invest the sweat equity to translate a good idea into

reality.

Last year, Government ushered in an 'Age of Empowerment'. As the initiative

developed and took hold, an area in North East Hamilton was identified as an

Economic Empowerment Zone (the "Zone").

The work that has been done to date, through the good offices of the Bermuda

Small Business Development Corporation in collaboration with area stakeholders

and professionals, has been superb. The level of volunteerism and the

commitment to doing good to assist in the uplift of a very special community has

been most gratifying. The offers to assist continue to pour in and there is a real

commitment amongst Government, the Bermuda Small Business Development

Corporation, the residents and the stakeholders to create a new era for the Zone.

During this Budget Session, Government will bring forth an amendment to the

Industrial Development Act 1968 to formally delimit the boundaries of the

Economic Empowerment Zone and thereby enable the residents and business

owners in the Zone to access the available concessions.

A partnership between the Bermuda Small Business Development Corporation

and the Whitman School of Management at Syracuse University is to be sealed

to further expand the raft of assistance to fledgling and existing entrepreneurs.

This is in addition to the legislative changes and the incubator/construction

initiative.

The development of the Zone has caught the attention of our young people and

has inspired them, and has emboldened them to come together for the benefit of

our community. In particular, I refer to an organisation of young people, young

entrepreneurs who are prepared to step into leadership roles amongst their

generation. This group of young people has formed an organisation called Youth

on the Move Bermuda or YOM. They have gone even further and have formed a

company with charitable purposes.

YOM approached the Ministry of Finance directly to assist with start-up funding.

After a series of discussions with the Ministry of Finance and the Bermuda Small

Business Development Corporation, YOM has subsequently finalised their

business plan and organisational structure. It is impressive.

YOM's goals for their membership and their peers are to encourage teamwork,

networking, positive social interaction, self awareness and entrepreneurship.

YOM members are required to perform a specified amount of community service

as a way of giving back to the public. They are doing good.

They wish to make a difference in their community and to help revitalise North

East Hamilton. They came to the Government, not seeking a hand-out but to

partner in a social enterprise initiative to improve their community. They have

stated that they want to give back as young people and as young professionals.

Their aim is to work to effect change and to help other young people avoid the

pitfalls and roadblocks that can often sabotage positive development.

YOM will receive grant funding in the amount of $250,000 in 2007/08 to support

their planned activities for the year.

The Ministry regards this grant as a form of seed capital and has taken it out of

the $1 million of venture capital that was earmarked in the Government Reserve

Fund for the Bermuda Small Business Development Corporation in 2004/05.

New start-up businesses in the Zone will have a concessionary payroll tax rate of

4.75 per cent in their first twelve months of operation. We will monitor very

closely their success in the first year to facilitate the transition to the tiered payroll

tax structure at the beginning of their second year of operation.

In another area, hotels will be granted an extension to the period during which

they are charged payroll tax at a reduced rate of 7.75 per cent. The months of

November and March will be added to the current period of December through

February.

Tour boat operators will receive various forms of relief in 2007/08 including dutyfree

fuel, a reduced rate on spare parts and an amendment to an existing

concession to allow sales of existing vessels to overseas purchasers without a

claw-back on the 10 per cent duty concession. This Owners' Association and

their industry are not forgotten as an arm of tourism in Bermuda.

We know also that further assistance is always appreciated by our senior

citizens. Accordingly, in 2007/08 Government will increase pension benefits in

the Contributory Pension Fund by 4.5 percent and the HIP prescription drug

benefit for seniors will get a similar increase, raising the benefit to $1,200 per

year.

Also there will be an additional two medical visits per annum thereby raising the

total to four covered medical visits per year for everyone insured with HIP.

Benefits for war veterans will be increased to an appreciable extent. Specifically,

medical, dental and pension benefits will be enhanced, with the pension benefit

being doubled from $400 to $800 per month.

Bermuda's Economy

The economy is in a good place. In 2006:

? The balance of payments was on track record a surplus in the range of

$825-$850 million

? GDP growth is now forecast to exceed the target range of 2.75-3.0%

? Inflation rate held steady at 3.1% in 2006; same as 2005

? Employment level up by about 2 %

? International business and tourism posted strong results, with the latter

posting an overall increase of 23% in total visitor arrivals

Government's outlook for 2007 is positive with the expectation that the sound

macro-economic trends will continue:

? GDP is expected to grow in the range of 3.0-3.25%

? Inflation rate to hold in the region of 3.0% (if oil prices hold steady)

? Balance of payments to remain in surplus

? Standard & Poor's upgraded economic outlook for Bermuda in 2007 from

'stable' to 'positive'

Review of 2006/07 Revenue and Expenditure

Turning quickly to a review of financial developments in 2006/07, the revised

estimate of total revenue is $856 million, approximately $21 million above the

original estimate of $835 million. The major revenue sources contributing to this

favourable outcome were customs duty, payroll tax, and land licence fees.

Current programme expenditure in 2006/07 has been revised to $822 million

which is about 2 per cent above the original estimate of $806 million.

Given the nature of fiscal developments during 2006/07, Government projects

that the net public debt outstanding at March 31, 2007 will settle at about $206

million.

As we look forward and plan for the future, Government remains committed to

prudent and sensible borrowing for investment in infrastructure and other hard

capital assets. Bermuda's public debt to GDP ratio at this time is about 4 per cent

of GDP.

During our tenure in charge of the public affairs of our country, successive

Progressive Labour Party administrations have been frugal and attentive to the

fiscal values of fairness and equity, maintaining borrowing levels well within the

country's ability to repay.

Consequently, this Government has consistently received excellent reviews from

the major credit rating agencies on its debt management performance and its

record of overall economic management. The most recent was given by

Standard & Poor's Rating Services ("S &P") just prior to the Christmas Holiday

period when it affirmed Bermuda's 'AA' long-term rating and revised its outlook

and upgraded Bermuda's ratings from stable to positive.

In its media release, S&P stated, "The positive outlook reflects continued

vibrancy in Bermuda's international business sector amid ongoing sound

economic management."

Government is holding to that course.

Revenue Estimates 2007/08

Government proposes to collect total revenues of $917 million in 2007/08, about

seven per cent higher than the revised revenue estimate of $856 million for 2006/07.

Most tax rates will remain unchanged but there will be a handful of increases in

particular areas.

With respect to payroll tax, the standard rate of 13.5 per cent will remain the

same in 2007/08 but the salary cap will be increased from $235,000 to $350,000.

It is anticipated that the upward revision of the salary cap to $350,000 will yield

an additional $10 million. The total yield on payroll tax is projected to be $292

million.

The pre-existing salary cap of $235,000 provides an exemption on the payment

of payroll tax for that portion of remuneration that exceeds $235,000. This

differential needed to be addressed as the real effect of the ceiling is that those

whose remuneration is less than $235,000 are paying payroll tax on their entire

salary.

Some are doing very well and there is no compelling argument against the

principle that those who derive the greatest benefit from Government's sound

macro-economic policy management should contribute a fair and equitable

portion towards the provision of public goods and services.

Accordingly on a going-forward basis, Government will address this anomaly in a

reasonable and pragmatic manner by instituting a biennial review of the salary

cap.

Customs duties are expected to contribute $247 million towards the total revenue

estimate in 2007/08.

Land tax is projected to yield $53 million in 2007/08. The increased yield from the

land tax is related to the new residential and commercial premises that have

been added to the valuation lists during the course of the last year.

There will be no increases in bus and ferry fares in 2007/08.

Passenger taxes also will remain unchanged in 2007/08. Given the outlook for

visitor numbers in 2007/08, Government estimates that passenger taxes and

hotel occupancy taxes together will yield about $41 million.

As I noted earlier, in many ways Bermuda represents a 'gold standard' as a

domicile for international business. Therefore, it behooves us as Government to

take all reasonable steps to maintain, sustain and protect our jurisdiction's

precious reputation. In that regard, we must keep abreast of best practices in our

regulatory regimes.

The costs of maintaining the good name of Bermuda's company registry has

increased in recent years as it has been necessary to undertake investigations

and associated actions under the Companies Act to address issues of noncompliance.

We have reviewed what will be required to ensure that the Registrar

of Companies is appropriately resourced to deal with enforcement matters

related to non-regulated institutions.

To assist in defraying the increased expenditures in these areas, Government

proposes to increase an array of fees under the Companies Act 1981 by 5 percent to have effect from April 1, 2007. The increase is both appropriate and

modest in all the circumstances. The additional yield should amount to about $3

million in 2007/08.

Finally, foreign currency purchase tax will be amended with effect from April 1,

2007. The rate is presently 0.25 per cent and was last revised in 1994. The rate

will be increased to 0.50 per cent. That means that those who are liable for the

tax will now pay 50 cents for every $100 of foreign currency purchases. The

increased yield from the tax is projected to double to $15 million in 2007/08.

The National Expenditure Budget 2007/08

Fiscal prudence is a hallmark for successful management of the economy. The

Ministry of Finance works to ensure that Government is efficient and lives within

its means. Ministries, Departments and Government Quangos have to derive

maximum value from their expenditure budget. However, rising healthcare costs,

an ageing population, education and the training and development of our labour

force, investment in infrastructure as well as the need to maintain a proper

security environment will continue to demand high public spending.

The National Budget 2007/08 has therefore directed resources to the following

items:

? The continued growth of our domestic economy by encouraging a

diversified economy and increased economic opportunities for the

business environment.

? The redoubled commitment to our future by a comprehensive systemic

review of the public education system.

? A revitalised sustainable tourism sector with the active participation of

Bermudians employed at all strata of our hospitality industry.

? The focus on achieving a flexible and responsive labour market that has

the necessary incentives to encourage adequate training and

development opportunities for the local workforce.

? The focus on an expanded offering of options for our seniors both in terms

of seniors facilities as well as enhanced health insurance products.

? The continued focus on providing a range of affordable housing options.

? The encouragement of a more responsive, innovative and efficient

environment with an 'at your service' Government approach.

The focus of government's expenditure is on delivering essential public goods

and services, promoting sustained and non-inflationary economic growth and

preparing Bermudians for the challenges and opportunities that lie ahead of us.

The National Budget 2007/08 is balanced in terms of the allocation of resources

to where the need is greatest. This is so that there is a good distribution of

budget provisions for the varied and the myriad demands in economic

development, social development, defence, security and government

administration.

The private sector and wider public has called for increased manning to be made

available in the Department of Immigration, the Department of Planning, the

Ministry of Finance, the Registry of Shipping, the Bermuda Monetary Authority,

the Bermuda Police Service, the Corrections Service, the Customs Department

and a host of other areas of Government. That comes with a price and a cost and

it cannot always be done in one fell swoop, even when there is a demonstrable

need.

Government's total combined current and capital account budget for 2007/08 is

just over $1 billion. The planned budget for the provision of the essential raft of

public services such as education, health, housing, law enforcement, transport,

waste management and other services is $862 million. The planned Capital

Expenditure Programme has a proposed budget of $141 million. The residual

element of $22 million reflects a provision for debt service and a contribution to

the Sinking Fund that is available to pay down long term public debt.

The planned spending on public goods and services in 2007/08 represents about

18.5 per cent of GDP. It is within the long term target range of 18-20 per cent of

GDP that was set as a public spending guideline during the Progressive Labour

Party's first term in office. Our plan was to grow the economy for the benefit of all

of Bermuda's people.

In our political philosophy the bundle of public goods and services is viewed as a

social dividend to the community, an economic distribution to the community that

should be increased in a managed and purposeful manner to bring about greater

social equity.

In 1998 when we took office, GDP was just over $3 billion. Today, Bermuda has

a $5 billion economy as a result of the sound and effective economic

management of three successive PLP administrations. We have grown the

economy and in accordance with our political philosophy, we have increased the

social dividend ? from the 15 per cent that it was in 1998 to 18.5 per cent in

2007/08.

Independent opinion polls suggest that generally the people of Bermuda have

been pleased with Government's economic and social policy achievements.

Therefore our intent is to continue to strive for those policy objectives that meet

the social needs of our community through the provision of innovative, helpful,

useful, and uplifting public programmes and services.

The recently opened Sylvia Richardson Care Facility in St. George's is a shining

example of such programmes, services and facilities. This new Facility sets a

new standard for the care of seniors in 21st century Bermuda. The new

educational facilities for The Berkeley Institute are another magnificent example

of the new standard.

Government has set the stage for our people's success.

The Honourable Premier has indicated that he expects much of the Government

in terms of delivery and swift execution. The people have a right to no less.

Each Government Ministry has been provided with the resources needed to

deliver on its mandate in 2007/08, including the new programme initiatives

highlighted in the 2006 Speech From The Throne.

The high policy priorities continue to be education and training, health, housing,

care of seniors and sustainable capital spending on social infrastructure about

which I shall comment upon in a moment. My colleagues will provide comment

on the budget highlights for their respective Ministries.

The Ministry of Finance is provided with a budget of $127 million in 2007/08. The

Ministry's main purpose is to provide overall financial management and control of

all government activities and to supervise the Bermuda economy generally.

There have been comments made over the years about the need for Bermuda to

do more to hone its competitive edge. The prevalent view is that in order for

Bermuda to further outdistance itself from competitors it must be seen to have a

credible world-class regulatory environment. We have good regulatory standards

but a 'world-class regulatory environment' comes with a price tag in terms of the

additional required resources. There is the additional expense of time and travel

in ensuring that at the relevant international fora Bermuda is represented in order

to best protect our national economic interest.

Accordingly, additional resources have been added to Ministry of Finance

Headquarters to provide for a dedicated treaty management and administration

function and to strengthen the business development and policy advisory teams.

In addition, the Registrar of Companies has an increased allocation to address

issues of non-compliance with those companies that would harm Bermuda's

national interest through reckless, self-serving behaviour that offends against our

law and regulations.

The Bermuda Small Business Development Corporation is provided with

additional resources in 2007/08 to maintain the momentum in the roll-out of the

'Economic Empowerment Zone' in North Hamilton. The grant to the Bermuda

Small Business Development Corporation has been doubled to $3 million to

support the inter-related initiatives in this strategy.

In addition, there is a provision of $1.5 million for the Caribbean Catastrophe Risk

Insurance Facility (CCRIF). Following the devastating hurricane season in 2004,

CARICOM Heads of State invited the World Bank to establish a fund that could

assist countries in their region that suffer substantial damage due to hurricanes.

The World Bank took up the project in January 2006 and the CCRIF is due to

become operational by April 2007.

Participating countries will gather at the World Bank Headquarters in Washington

DC in late February 2007 to formally commit to their participation.

Government has committed through its participation in the Caribbean

Catastrophe Relief Insurance Facility to making provision so that monies are

available to fund disasters in Bermuda should this occur. Our contribution can

also help to defray in some measure the plight of others. Government's

participation constitutes advance preparation for known risks and also a

commitment to helping others ? this is doing good.

Capital Expenditure 2007/08

The capital component of the National Budget 2007/08 is $141 million. Of this

amount, $102 million, or 72 per cent, is for the continuation or the completion of

existing projects that are underway.

New projects have not been added to the plan unless there was more than a

reasonable chance of starting the project in 2007/08. As a result, the anticipated

spending on projects in the Capital Expenditure Plan for 2007/08 was reduced

from an initial sum of $220 million to $141 million.

Work on the new Hamilton Police Station and Courts is due to begin in June

2007. Similarly, work on the runways and aprons at the Bermuda International

Airport will continue throughout 2007/08.

Of the $41 million in new projects, nearly one-half of that allocation or $20 million

is for a second cruise ship pier at the Royal Naval Dockyard. The new dock will

be able to accommodate the larger vessels that have become the standard in the

cruise industry. In addition, following the discovery and remediation of air quality

issues at CedarBridge Academy, Government has included funding of $1.5

million for a phased programme of testing, cleaning and remediation for all other

public schools including pre-schools.

Other projects in the plan for the first time include renovations to the Pembroke

Rest Home and an allocation to begin restoration work on Bermuda's public golf

courses beginning with the Port Royal Golf Course.

The combined total of the current and capital components of the 2007/08

National Budget is $1.025 billion. With estimated revenue of $917 million and

cash in hand of $20 million, the projected borrowing requirement in 2007/08 is

$89 million all of which will be used to finance the unfunded elements of the

capital budget, namely, the investment in hard assets represented by schools,

facilities for seniors, infrastructure work, government buildings and vehicles and

equipment.

Given the strategic linkages that the Ministry with responsibility for housing has

forged with the private sector it was thought neither necessary nor prudent at this

stage to set aside the initial level of funding for housing that was originally

anticipated given that the Minister of Public Safety & Housing has been able to

effectively leverage monies received from the public purse in public-private

partnerships with private sector developers in order to minimise the upfront

capital expenditure required from the Government.

Further it should be noted that a housing bond may be floated by the Bermuda

Housing Corporation so that the wider Bermuda public can invest by subscription

to the bond.

Conclusion

Let me conclude by restating that Bermuda is in a good place economically.

Government's record of sound economic management continues and the outlook

for 2007 is positive.

As a community, most of us have done well. As Government we want more for

our community and more from our community.

We want better results from our public school system.

We want closer alignment from corporate Bermuda to Government's workforce

objectives with respect to advancement of Bermudians.

We want improved care for our seniors.

We want more effective law enforcement and better results from programme

interventions with offenders in our Corrections facilities.

We want our corporate partners to raise the bar in the realm of social

responsibility.

We want greater community involvement in positive social programmes designed

to assist our youth.

Government is intent on doing better so that the people of Bermuda will benefit.

The budget judgments in 2007/08 will help to enhance the welfare and well being

of our people by distributing the economic rewards in a fair and equitable manner

such that these key policy priorities are advanced.

Government's role is to make Bermuda a world-class jurisdiction on all fronts. We

want social and racial harmony, a sense of community. We want to be inviting as

a place where socio-economic and racial and ethnic differences do not threaten

our social fabric. We want to see equity and social justice for all. We want to

have an honest dialogue on race and a commitment to wide-reaching reforms to

improve the life of the people of Bermuda. We acknowledge that across the

board even more has to be done to economically empower our people and

businesses.

We intend to make this happen. We intend to continue to build on past success

and current success so there is a legacy of leadership and a commitment to

social justice and equity.

We have confidence in the future.

I now cede the podium to the Honourable Premier and my Cabinet Colleagues.

Thank you.