Public sector pay rise flies in the face of economic reality

WEDNESDAY, OCTOBER 12: Suddenly, it seems that everyone is talking about “the economy”. The Minister for Finance announces a tax relief plan on a Friday. Within 36 hours, the Minister announces changes to that plan. A big international business company announces that it is moving 105 jobs out of Bermuda. A Sandy’s hotel closes with 45 job losses. A car dealer announces five job losses, a cycle renter cuts back, a bowling alley shuts down.

However, with the publicly announced 490 job losses so far this year; with an unknown number of unannounced job losses; with the minister’s announcement of tax relief for retailers; with it now obvious that there is a big economic problem; there is something that is difficult to understand and that is waiting to happen.

Shrinking tax base

In the middle of a financial year, with every indicator pointing or trending downwards; when it is blatantly obvious that the tax base is shrinking; the Minister for Finance will announce that she is granting pay increases to Government’s 5,800 BPSU and BIU employees.

Starting in March this year, the Minister for Finance offered and agreed a 1.25 per cent salary increase for Government’s BPSU workers; later a 1.65 per cent wage increase for Government’s BIU workers. With the compulsory add-on for pension deductions, those two increases rise to 1.33 per cent and 1.73 per cent. This planned pay increase will also be back-dated 12 months to October 2010 — last year.

Government’s blue collar wages cost (in 2011/12) was estimated to be $70,593,000. So a 1.73 per cent increase will amount to $1,221,258 in added basic wage costs.

Government’s white collar salaries cost (in 2011/12) was estimated to be $325,253,000. So a 1.33 percent increase will amount to $4,325,865 in added basic salary costs.

That’s a total $5,547,123 in increased pay to Government employees AND an increase in the need to extract more tax money from Bermuda’s obviously shrinking economy and dwindling tax base (and now even less tax revenue coming in from retailers).

Make sense to you? Make sense to anybody?

Who’s wrong?

Obviously, it makes sense to the Minister for Finance and her team. Could all the rest of us lot be wrong? Is the Finance Ministry team right?

In February 2010, for 2010/11, the minister grandly announced that she would raise Payroll Tax from 14 per cent to 16 per cent and that Government would therefore have total revenue of $1,058 million. That $1,058 million revenue never happened.

Instead, one year later in February 2011, the minister was forced to admit to Parliament that revenue was estimated to be $977 million which means she came up $81 million short. 

The Minister has not disclosed what the actual revenue for 2010/11 actually was; but it will be even lower than the $977 million that she reported in February 2011. The final figure? Millions lower. Likely around $960-$965 million.

So revenue for 2010/11 will probably be about $90- $95 million less than that pie-in-the-sky forecast of $1,058 million. For 2011/12, the minister forecast much lower revenue of only $940 million. That’s $118 million less than the year before. 

Bucking the trend

Clearly, the minister expects 2011 to be a year in which Bermuda’s economy will continue trending down. So in a down-trending economy, why, why, why, is the minister now poised to grant a tax-funded pay increase to Government’s 5,800 personnel?

This intended pay increase is against the trend in the economy; against the trend in wages and salaries in the private sector; and can only be funded by taking up more taxes from a steadily shrinking economy — or by borrowing more money to fund the promised salary and wage increases.

The minister and ministry team that is making this pay decision is the same team that unwisely raised Payroll Tax from 14 to 16 per cent in 2010/11 and then hastily rolled it back in 2011/12. The same team that promised revenue of $1,058 million and then had to admit that it was coming up at least $81 million short. The same team that ran up public debt from $130 million to $947 million in just seven years —  adding debt at the rate of $117 million a year, every year, for seven consecutive years.

It seems that in October 2011, more of us lot are now waking up to the reality that there is a train coming and not only are we standing on the train track, the ministry team has put us in the middle of a tunnel.