Bob’s big idea

budget bermudaThe political scandal that has roiled the local scene this week has had one effect – it has distracted attention from the Budget, which Finance Minister Bob Richards will unveil tomorrow.

The big question that he should be answering is this: Is the economy growing, and if so, at what rate?  

People often treat the economy and the Government’s fiscal position as one and the same. They’re not. In the short term, you can have a healthy, growing economy and a Government with a budget problem, and you can also have a struggling economy and a perfectly balanced budget. Over time, one will catch up with the other, but there is no direct correlation.

Where the state of the economy does matter for the budget in the current circumstances is this: If the economy is growing, then that will lead inevitably to improved Government revenues, barring a major change in taxes. If the economy is contracting, that will lead to shrinking Government revenues, again barring any major changes.

Apart from that, Government actions can help to spur the economy, or they can exacerbate problems. The increase in payroll tax rates by the PLP Government at the beginning of the recession made the economy worse. So did its failure to reduce Government spending and personnel in a measured way then. Reductions in payroll tax for retailers and duty breaks for hotel renovations will have done something to have propped up the economy. The economic activity generated by the hospital project will have as well, although paying for it is a different matter.

What steps Richards takes tomorrow depends on the performance of the economy this year and what the outlook is like for next year.

If the economy is growing, then Government revenue will improve, and assuming that spending is capped, that will mean a narrower budget deficit going forward, although it may not mean that the current account is balanced. Ironically, a growing economy would also mean that the Government could look at reducing public sector employment, and thus reducing the biggest Government expense, since those job losses would be offset by growth in the private sector.

If the expectation is that the economy is still shrinking, then cutting public employment is harder because it would set the economy further back. 

That may not be necessary. The good news is that the economy seems to be recovering, albeit slowly.

The most recent indicators are mostly positive. Although retail sales dropped in December, they had improved in the previous two months. The latest employment survey suggested that the unemployment rate had fallen and there had been a slight uptick in filled jobs. Although the methodology of determining unemployment through a survey is a little suspect, the trend is going in the right direction, so that’s a positive.

Air visitor arrivals rose in 2013, with most growth occurring in the second half of the year. More importantly, visitor spending was also up.   

On the international business side, there are also encouraging signs. The rise in incorporations suggests Bermuda is recovering its position as a leading domicile, especially for the insurance industry. Gradually, the rise in incorporations will lead to more companies establishing a physical presence in Bermuda and there is some evidence of this already.

Imports also rose in 2013, which is a good sign.

That doesn’t mean everything is rosy, however. Construction, which drove much of the economic growth in the local economy before the recession, remains in dreadful shape, with activity a fraction of what it was. The glut of office space and the Island’s reduced population means that will not change much, barring a new hotel project or two. Public sector capital spending will be limited as well due to the deficit.

Jobs growth in tourism and international business is likely to be limited and the shake-out in the banking sector is continuing too. So growth is likely to be slow.

What does that mean for Mr Richards and tomorrow’s Budget?

He is likely to report a slight improvement in 2013-14 Government revenues, although spending may have risen as well due to increased demand for financial assistance. That’s worrying because at some point Mr Richards has to get the budget balanced again, and then start to pay off the debt, whose service costs are taking up more and more of Government’s revenue and hamper its ability to act.

For 2014-15, he may well forecast GDP growth and therefore some increase in payroll tax and Customs duty revenues. But the pressure will be on to control costs as well, and here the problem is trickier. Some of the SAGE Commission recommendations will presumably be in the Budget.

Mr RIchards’ big idea is to privatize some Government services by essentially turning civil servants into shareholders. Whether civil servants are cut out to be entrepreneurs is debatable, but the plan has two merits. If these services are sold to the private sector, that will result in windfall revenues for the Government that can be used to cut  the deficit. At the same time, they should cut Government expenditures, thus closing the deficit. That’s the idea, anyway.

The problem is choosing what services to privatize. Some services, like the Shipping Register, actually make money for Government now. And no business person in their right mind is going to want to take on a service that is bleeding money, which is true of a lot of Government services.   Of course, Government can provide a grant to these services to deliver them, and hope that private sector efficiency will enable the service to be delivered better than it would be in the public sector, but there has been mixed success with this in the past.

In the end, as has been noted before, the real answer is growth. The economy needs to expand faster than is currently the case. This Government appears to be pinning its hopes on gaming (that word again) but that’s a hefty gamble.  

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