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Richards: time for a public-sector pay cut

Pay cuts for civil servants should be on the table as the Government deals with the huge fiscal impact of the Covid-19 crisis, a former finance minister said.

Bob Richards said the Government was likely to face a revenue shortfall in the region of $200 million this fiscal year as projected tax income failed to materialise from the battered economy.

Curtis Dickinson, the finance minister, has identified capital spending, hiring freezes, training and supplies as areas in which he can cut spending.

Mr Richards pointed out that personnel expenses made up nearly half of government spending.

“I would have thought they should be working out something with the unions to get some sort of reduction in compensation to civil servants,” said Mr Richards, who was finance minister in the One Bermuda Alliance government between 2013 and 2017.

“During my time we were faced with a similar type of situation, though not as acute as this. We negotiated a 5 per cent furlough for a little less than two years. I know civil servants didn't like it, but it was very helpful.”

That deal, which involved government workers taking one day of unpaid leave per month between September 2013 and March 2015, saved the Government about $35 million.

“If the minister got civil servants to agree on a 10 per cent cut in compensation, through furloughs or a pay cut, that's worth about $50 million to the Government over a year.”

Salaries, wages, employer overheads and other personnel costs amounted to nearly $500 million in Mr Dickinson's 2020-21 Budget, announced in February.

Mr Dickinson said on April 15 that with the debt ceiling raised to $2.9 billion, the Government had about $220 million of borrowing capacity left.

Mr Richards said that may not be enough, as the Government could find itself nearly 20 per cent short of its $1.12 billion revenue projection at a time of increased spending to fund relief programmes.

“The economy is in a dire situation,” he said. “The travel industry — airlines, cruise ships, hotels — have been in the crosshairs of this pandemic worldwide.

“A big part of our economy relies on travel in one way or another and a lot of government revenues are connected to those things.

“With a back-of-the-envelope calculation, it's not difficult to come up with a shortfall of $200 million.”

Unemployment will impact payroll tax income, while the lack of visitors will hit passenger and hotel occupancy taxes.

The new transport infrastructure tax, designed to raise $11.1 million through a charge on cruise ship passengers, could yield nothing, while even land tax income could be hit as some householders and landlords would be unable to pay it, he added.

Mr Richards said the Government had a moral obligation to help the unemployed who have no way to make a living, as it has done with its $500-a-week unemployment benefits programme. However, it was “up to the finance minister to try to find the money for it”, he added, and negotiating temporary concessions with civil servants would help to achieve that.

Governments in the US, the European Union and Britain have effectively printed money to fund massive relief packages, but Bermuda has no central bank to do the same.

“They've produced that money out of thin air to give to people,” Mr Richards said. “Bermudians, consciously or unconsciously, are expecting that kind of assistance from the Bermuda Government, which does not have the ability to create the money out of thin air.

“The financial implications of this, for the Government, are very difficult.

“So far, the finance minister has not said a great deal about it, perhaps rightfully so. The extra borrowing capacity he got approved by Parliament, is probably not going to be enough.”

People were looking to the Government “to provide a financial bridge until the economy opens up again”, Mr Richards said. “In view of the amount of debt the Government has now, that's going to be an issue.”

And there should be little expectation of overseas rescue funds heading Bermuda's way.

“Bermudians should be aware that the Bermuda Government does not have access to the [International Monetary Fund] or the World Bank because we're not independent,” he said.

“As far as aid is concerned, we don't qualify for USAID, or the UK's Department for International Development, or the equivalent in the EU.

“Why? Because when they look at Bermuda's GDP [gross domestic product] per capita, we're wealthier than they are.

“The only entity we can approach for assistance is the UK Treasury. So our constitutional situation and our previous standard of living means a lot of doors are closed to us.”

Bermuda's economic reality is that “a lot of the money in our economy is in international business, but in terms of people, many Bermudians are involved in retail and tourism, in terms of employment and ownership”, Mr Richards said. “That's the sector that's been hit the hardest.”

He said there was a lack of detailed information on what struggling sectors were asking for from the Government, unlike the US, for example, where the situation was “chaotic, but transparent”.

Mr Richards continued: “We don't seem to know anything about what's going on here. Either people are suffering in silence or they're asking for help and it's all being kept under cover.

“Who's in the most dire straits because of lockdown? I would have thought that businesses with high overheads and no revenue are the ones who would really be suffering. Retail was already on life support before this thing started.

“I would not be surprised if we saw some major casualties in the retail sector. Even if they were allowed to open next week, some would not be able to.”

On the Government's handling of the public health crisis, Mr Richards said: “I think the Premier has done an excellent job in communicating to the Bermudian public and asking people to do things they don't naturally want to do.”

He added: “It's not an easy thing for a politician to deliver bad news.”

Reopening the economy will involve tough decisions ahead.

Mr Dickinson has set up the Economic Advisory Committee to seek advice from “key stakeholders in the Bermuda economy and community”.

Mr Richards supports the approach of getting diverse input, but added he was “leery of large groups” that can become difficult to manage. You have to get input from various sources, but at the same time be careful it doesn't degenerate into some kind of talking shop that takes ages to come to a resolution,” he said.

“There's an urgency to have a plan, but you have to balance the diversity of the inputs with the efficiency of the process. You have to get the balance right.”

Revenue shortfall ahead: Bob Richards, the former finance minister (File photograph)

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Published April 27, 2020 at 9:00 am (Updated April 27, 2020 at 7:46 am)

Richards: time for a public-sector pay cut

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