He says that, in one of those strange economic twists, the surge in reinsurance company growth post-9/11 and Hurricane Katrina turbo-charged the economy but also made Bermuda too expensive for more cost-conscious international companies like captive managers and fund administrators who then started to reduce their presence.
But he also acknowledges that this trend was exacerbated by government policies, namely:
- “Term Limits;
- Large increases in taxes, particularly payroll taxes; and
- Government corruption (which tarnished the island’s international reputation and led to large government deficits and higher taxes).”
This is basically correct. I would argue that the sale of Bank of Bermuda to HSBC also added to the excessive amount of liquidity in Bermuda and much of that money was then invested in real estate which both created a bubble there and increased prices and costs for our customers.
And the Government does need to take some of the blame for the overheating of the economy as well. Rather than using the tools it had to slow growth to sustainable levels, it positively encouraged it and went on a spending binge which has left public finances in their current dire state.
If, as was discussed at the time, Government had issued a bond to suck up some of the HSBC liquidity, we would be in better shape today, simply because debt payments being made by Government would be going to Bermuda residents who in turn would spend or reinvest the money here.
Comeau says we now need to look at those causes and redress them in order to turn the economy around.
But simply fixing the mistakes is not enough now. Bermuda cannot assume that the value proposition that worked in 2003 will work now. The world has changed and Bermuda has to as well.
So it’s a two-stage process. The first is to fix the mistakes. So far term limits have been dropped and immigration policies relaxed.
There have been some efforts to reduce taxes in certain areas, but the Finance Ministry has shown a reluctance to actively reduce taxes across the board (either payroll tax or Customs duty) in order to kick start the economy. The natural fear is that tax revenues gained from economic growth will not offset the reduction in revenue caused by lowering the tax rate. But I think there has to be a magic number where the gains can be achieved.
On corruption, there was a hope that the new Government would end that perception. But they have so far failed to actively determine whether there was any validity to the perception that parts of the government under the previous administration were corrupt and there is now concern as a result of Jetgate that this government may not be squeaky clean. There is no evidence of this, but perception is a dangerous thing.
So what else can be done? The Bermuda Tourism Authority (BTA) and the Bermuda Business Development Agency (BDA) need time to start showing results and there need to be efforts to encourage new forms of business to Bermuda.
Service industries need to do a better job of encouraging new businesses (opening a new bank account or getting a new phone line remain exercises in extreme frustration) while there also needs to be some relaxation of the Employment Act, which is now acting as a deterrent to job creation, along with the costs of taxes and benefits.
A quick note on the PRC controversy: This is an example not of a bad policy, but of bad communications. There is a strong argument to be made for giving Bermuda status to PRCs. There are legitimate fears of displacement as well, especially for black Bermudians. And there are politicians who will exploit those fears to death. But no one is making the opposite argument with very much force – namely that this step will give security to a group of people who are already here and working and are committed to Bermuda. This step will send a message to the world that Bermuda welcomes and wants foreign direct investment which in turn will generate jobs and better incomes for Bermudians.
It’s not too late to make this case. The Government communications team needs to get on with it. And Michael Dunkley needs to get in front of this issue along with his strongest Cabinet Ministers and not leave it all up to Michael Fahy. More on this later.