Simmons: Unions have reason to fight harder
Bermuda College lecturer and economist Craig Simmons answered The Royal Gazette's questions and provided his assessment of the Island's economy at the end of 2015.
• To what extent do you believe that the Island is making a recovery from the recession?
The only real evidence that the recession is over comes from monthly retail sales and quarterly gross domestic product figures.
The retail sales index has improved in each of the last 23 months; the last time that happened was in 2005.
By relying solely on RSI and GDP, both of which are spending indicators, I could rightly be accused of looking for my car keys under a nearby street light, even though I'm fairly certain that I lost them shortly after I staggered out of my favourite watering hole.
What is worse, the much-touted growth in GDP was restricted to rising salaries in the international business sector: a sector with median annual salaries of more than $125,000, according to a recent Employment Brief published by the Department of Statistics.
Working-class people, the bottom 50 per cent, on the other hand, have struggled to stay employed and their incomes are well below the Island-wide median of $64,000.
Until there is evidence of job creation, the sceptics are right to question or even deny the existence of a recovery. The problem is that jobs data is not forthcoming in a timely fashion: the most recent Employment Brief was released in May 2015 and it was based on data collected in August 2014.
The banking sector is still feeling the side effects of issuing too many loans during the debt-fuelled growth years that preceded the recession. Two indicators tell a disturbing story about the health of the banking sector and its likely contribution to the recovery effort in 2016: non-performing loans (NPL) and money supply.
The percentage of non-performing loans to total loans and NPL to bank capital remain stubbornly high (9.5 per cent and 40 per cent), according to the Banking Digest, published by the Bermuda Monetary Authority and available from its website, www.bma.bm.
To help put these figures in perspective, consider that in 2008, NPLs as a percentage of total loans and capital were 2 per cent and 7 per cent. The other more accessible indicator of the health of the banking sector is the size of the money supply, as measured by Bermuda dollar bank deposits.
For the first time since 2008, the money supply is growing: up 2 per cent for the first two quarters of 2015, but this following a 15 per cent decline since the start of the recession in 2009.
Bermuda dollar lending could follow suit in 2016, but I fear banks are still in a deleveraging mood and are unlikely to help with the recovery effort in 2016.
For the first time, we have data on the impact of October's America's Cup event. Perhaps my expectations are too high, but the initial impact is sobering.
The RSI was up by 3.2 per cent on the previous year: this is the fourth largest increase so far this year behind June (5.3 per cent), August (3.9 per cent), and April (3.7 per cent). Clothing stores benefited handsomely (up 32 per cent). AC35 spending made up 12 per cent of clothing store spending.
My overall assessment of the economy in 2015 is poor. It is difficult to see how life for the average person could have improved over last year.
Indicators to watch include arrival arrivals; the number of planning approvals, a leading indicator of changes in construction activity; and work permit approvals, a leading indicator of job creation.
• How do you assess the Bermuda Government's handling of the economy throughout 2015?
The Government has failed to build a broad enough consensus around reducing the debt.
There are two parts to this process: reductions in government spending and increases in tax revenue.
While the Government has made a start at trimming spending, there is so much more that has to be done before we can begin paying down the national debt. The politics of debt reduction are far more complex than the economics.
Recall the steps outlined in the most recent finance minister's Budget Statement. First, to reduce current spending (before debt service and sinking fund payment) below tax revenue; second, to achieve a true current account balance by 2018; and third, to sustain budget surpluses, part of which can be used to pay down the debt. The necessary reduction in spending cannot happen without a restructuring of the Civil Service. The number of ministries and departments will have to be reduced, consolidated or eliminated altogether and the provision of government services rebalanced — some will need scaling back while others will need expansion.
These are the hard economic facts. But humans, just like you, will be negatively impacted by these changes. The Government does not appear to appreciate fully the fact that for many, the pain, suffering and uncertainty that accompany job loss is devastating: equal to that of a divorce. Restructuring cannot happen without buy-in from the various unions.
The Government's approach is paternalistic and lacks an awareness of the human reaction to a bad situation.
For union members the reference point is where they are now; the choices they face are bad and worse. In these situations, humans tend to be belligerent, opting for what rational people might consider the worst option.
As it stands now, the unions have reason to fight harder than the government negotiators who have considerably less, if anything, to lose. Difficult conversations must be had and compromises made on both sides.
Debt reduction requires both increasing tax rates and the tax base: essentially a restructuring of the tax system. For example, payroll tax rates will have to increase and various exemptions eliminated. This will require buy-in from the hospitality, international business and retail sectors in particular. New taxes — corporation and value-added taxes — will also require buy-in from many quarters.
A return to economic growth, in addition to increasing the likelihood of job creation, is indispensable to debt reduction. Between 1990 and the start of the recession, the economy grew, on average, at more than 6.5 per cent, if you include inflation. Economists call this nominal growth, as opposed to real growth, which has inflation taken out.
Job creation, however, results from real growth, while tax revenues tend to rise in concert with nominal growth.
Inflation, therefore, is an important driver of tax revenue; it is also a way for the Government to reduce the size of the real debt. This helps to explain why historically, governments with large debt have either paid little attention to inflation or put into place policies that accelerate it. The Government, therefore, has an incentive to concentrate on nominal growth — unless of course you assume they are saintly public stewards.
Another concern in respect to the incentives policymakers face: I fear that the Government has discovered a new way to hide debt. It is no secret that our on-balance sheet national debt is about $2.5 billion. One of the accomplishments of the SAGE Commission's report was to make the public aware of off-balance sheet debt — in 2013, it was about $3 billion, made up of pension liabilities to the general public ($2 billion), civil servants and politicians ($1 billion).
The Government has found a way to keep a $250 million capital project off-balance sheet. Given the need for more capital projects — a replacement for the Causeway and Hamilton port facility, Hamilton waterfront development, and various quango and other infrastructure developments — will a new practice of keeping transactions off-balance sheet become the norm?
Creative accounting can extend the distance and cloud the relationship between transactions, but it cannot get around the fact that present and future taxpayers are liable for all government spending.
The immediate benefit of placing capital project transactions off the Government's balance sheet is relatively clear, but the risks are hidden and only reveal themselves in time when the present group of decision-makers have moved on.
• Part two of this interview will be published on Monday