Finance Minister's revenue projection is pie in the sky

Ministers of religion deal with the God in the sky. Ministers of Finance, some of them, deal with pie in the sky.

From 1998 to March 31, 2003, Government spent less than it took in in taxes and fees.

For five consecutive years, Government had an annual surplus.

Starting April 1, 2003, Government began spending more than it took in. In 2003, Government spent $10,000,000 more than it took in in taxes and fees. 

But the cash surpluses built up over the previous five years meant there was surplus money to ‘burn’.

Things changed. In 2004, Government spent $26.3 million more than it took in.

In 2005, it spent $31.8 million more. In 2006, $68.9 million. In 2007, $94 million. In 2008, $254.9 million. In 2009, $247.4 million.

Over-spend

For seven years, Bermuda Government’s spending grew much faster than slower-growing Bermuda Government revenue. 

In the February 2010 Budget statement, Minister for Finance Paula Cox planned to spend $1,134,700,000 against a hoped-for Government income of $1,058,300,000.

The Minister planned an over-spend of $76,400,000.

This 2010 over-spend is back to the over-spending level of 2006 but not back to the balanced spending level of 2003.

I do not argue with the Minister’s spending plan. It is the Minister’s Parliamentary right and national duty to make spending plans and then spend as the Minister sees fit. 

Spending is under the Minister’s absolute control.

Of course, that does not mean that a spending decision is good, best or even right. 

As always, time and consequences will determine that.

Time and consequences are now determining the value of the decisions made by Ministers for Finance in Greece — and the consequences in Greece are plain for all to see. I disagree with the Minister’s revenue projections. 

Revenue is not under the Minister’s control.

The Minister can raise taxes and impose higher fees but those actions may not result in actual higher revenue to Government.  

For example, an increase in payroll tax rates can cause job losses.

Fewer people working means fewer employees pay payroll tax.

With fewer people working, the overall impact of the payroll tax increase might be to increase unemployment and thus decrease total payroll tax collected.

A 40,000-person workforce returning a pre-increase payroll tax revenue of $400,000,000 can, with job losses, easily become a 38,800 workforce — three per cent fewer — returning an after increase payroll tax revenue of $400,000,000, which means no increase in tax revenue.

The ultimate consequences of this Ministerial decision? An increase in unemployment and living expenses.

If Government provides a social welfare safety net in the form of financial assistance, there also has to be an increase in the Government expense of financial assistance.

In layman’s language, the consequence of the Ministerial tax increase decision is a ‘boomerang expense’. 

No Minister for Finance can fully control Government revenue.

For 2010/11, the Minister for Finance projected that Bermuda’s economy would “return to positive growth in 2010, perhaps in the range of one per cent (page two, February Budget statement)”.

That projection is Ministerial pie in the sky.

To achieve even one per cent growth, there must be no reduction in the international business sector.

This sector now contributes more than 80 per cent of our foreign exchange and drives or underpins more than 70 per cent of all economic activity on this island.

National income from tourism, currently in deep doo-doo and struggling to provide nine per cent of our foreign exchange, must not fall further than it fell in disastrous 2009, when income from tourism plummeted 17.6 per cent.

Page six of the Ministry of Finance’s Economic Report (on 2009) says: “International business, business services, hotels and construction accounted for 1,005 job losses” but there was growth in “education, health and social work (347)”.

So there was no growth in the private sector but there was growth in Government.

This pattern of growth is completely unsustainable. It creates false economic growth.

Eventually, all Government funds come from the private sector, either from individuals who work in the private sector or companies and businesses operating in the private sector.

For real growth in 2010, there must be real increases in tourism income (not just in tourist arrivals), real increases in employment in the international business and business services sectors and no further reduction — in fact a material increase — in private sector-funded construction.

This is what it will take to achieve growth of just one per cent.

Some Ministerial decisions operate against growth. The decision to raise payroll tax and approve other general cost increases is such a decision.

It is acting as a brake on the private sector’s ability to grow.

Government’s general attitude towards inter-national business is not expansive and welcoming.

It is tinged with xeno-phobia and ringed with restrictions. There is little real incentive for international business to expand its Bermuda footprint.

This is noticeable and has already had an impact.  

International business shed 72 jobs in 2008 and dropped more than four times as many (328) in 2009.

In 2010, if this slide continues, there will be further international business job losses and real, as well as relative, decreases in payroll tax and some other fees to Government. 

This will happen despite the Minister’s recent 14 per cent wrong time rise in payroll tax.

Also, there may be a slight dip in total foreign exchange earnings. Given all that, between April 1, 2010, and March 31, 2011, it is highly unlikely the combination of tourism and international business will provide the 13.3 per cent year-on-year Government revenue increase the Minister projects in the February 26 Budget statement.

Instead, 2010 could be another year of negative growth, as happened in 2009 when the “economy is likely to have contracted by as much as 2.5 per cent (page two, Budget statement).

Crisis

Given that the Budget statement is prepared by exactly the same people who, between 2007 and 2010, made the $613 million debt blooper, set off the ‘Operation Desperation’ overdraft crisis and created today’s need for the $500 million sovereign bond issue, I do not believe, nor do I have any worthwhile evidence, that their projection of a one per cent increase has any merit. Their projection is pie in the sky.

However, it is the Finance Minister who bears final and personal responsibility.

Reality? In 2010, Bermuda’s economy will likely be further mashed up by, and because of, the recent faulty financial planning, bad money management and execrable decision and policy making.

Change the money managers. Change now.