OBA money plan signals more debt

FRIDAY, OCTOBER 14: The Opposition’s economic proposals could cost the country around $30m-a-year in additional debt — unless sweeping cuts are found to fund its promised tax breaks.

The OBA’s pre-election promise of a working class tax cut — wiping out the employee portion of payroll tax for people earning under $50,000 — would drastically cut Government’s revenues.

The policy may be a ‘necessary evil’ in the short-term, according to economists.

But it will do nothing to take care of Government’s billion-dollar debt problem and would likely require substantial additional borrowing.

It could also cause -political problems for the party — undermining its pledge to cut the debt.

The OBA’s plan — announced last week — contained few specifics on how much the promised tax cuts were likely to cost and no clear numbers on how it would be funded.

Craig Simmons, economics lecturer at the Bermuda College, said it was clearly a ‘stimulus’ plan and would require additional public debt in the short term.

And he dismissed the suggestion that cuts to Government travel and consultants would be enough to fund the tax-break.

Chamber of Commerce economic analyst Peter Everson agreed the plan would likely require additional borrowing.

He said borrowing for anything other than ‘capital projects’ like the hospital or a school, was never a good idea.

But he believes the policy has merit as a short-term measure to revive the economy and look at reducing debt in the long term.

It is difficult to be exact about what the tax cut would cost because there is no public data on how many people earn below $50k or how many of those people are already covered by targeted exemptions in the hotel and retail sectors.

But independent analysis suggest the bill would run to tens of millions of dollars.

The median national income for Bermuda, according to the most recent survey, is $57,000, meaning half the working population — around 19,000 people — earn less than that figure.

There is no public data on how many people earn less than $50,000. But even if it was as few as half of that number — 9,500 people — the tax exemption would cost an estimated $18m (4.75 per cent based on a $40k average salary for those people).

Some pundits, including Mr Simmons, believe there are more likely to be around 13,000 earning below the $50,000 mark in which case the cut would cost an estimated $25m.

“I think that is a good back-of-the-envelope calculation,” said Mr Simmons.

“To know more precisely you would need a proper study of income distribution in Bermuda.”

The OBA’s economic plan contained a second promise of a payroll-tax exemption for all new employees for the next two years.

With job losses for 2011/2012 anticipated to total around 1,000, Government’s income will dip by an estimated $8m in uncollected payroll taxes in the next financial year (14 per cent based on a $57k average salary for those people)

The exemption for new employees would mean that income would not be recovered – even if jobs started to rise.

The net result could mean a shortfall of almost $40m compared with this year.

The OBA did suggest a number of cost-cutting measures, including cutbacks on travel and ministerial pay as well as consultants. But Mr Simmons said these would barely scratch the surface.

“That would hardly be enough to cover the shortfall. Some very difficult decisions have to be made. You’re talking about either cutting civil service hours or staff or adding to the debt in the short-term.”

He said there was nothing inherently wrong with stimulus spending to dig Bermuda out of recession, given the state of the economy. But he said policymakers should commit either to stimulus or austerity.

“If you cut taxes to give people more money to spend and then you pay for it by, for example, cutting civil servants’ hours, the two policies cancel each other out.”

Mr Everson said there were cuts that could be made in Government spending. And he argued that it is hard for opposition politicians to say exactly where those cuts could be made until they got in power and got hold of the books.

He cautioned that the OBA’s plan was likely to increase debt in the short term.

“It is correct to say it will reduce the Government’s revenues.

“On the flip side, if it keeps people in jobs they would otherwise lose then this relieves government expenditure on financial assistance, housing allowance and medical costs.

“What the balance between the two would be I cannot say but would guess that Government would have to borrow more.”

He said borrowing to fund ‘current-account’ spending was always bad news.

“Essentially you’re saying we can’t raise the taxes to pay for this now. But somehow we will raise more taxes in the future.

Borrowing unavoidable

“This looks like an economic stabilisation plan to stop the economy from shrinking then plan for expansion, in which case the borrowing is unavoidable and understandable. However, every dollar borrowed now adds to the misery in the future and thus needs to be carefully managed.”

Mr Simmons said the key to reviving the economy was to create more jobs. He said tax-cuts could help achieve that but might be better directed at businesses rather than employees.

“If you put an extra $100 in the pockets of employees that can easily drip-feed overseas or go to servicing existing debt. It’s nice for them but that doesn’t really help the economy a great deal.

“Put the money in the hands of the local businesses and it helps them survive or expand and add new jobs.”

The OBA’s finance spokesman Bob Richards is off the island. Neither party leader Craig Cannonier or Miguel DaPonte, who is also part of the finance team, responded to requests for comment this week.