Unless it grows, our economy could die in 2017

In the first part of this column on Wednesday, I explained how, in order to create jobs, we must re-build tourism and boost our resident population. We must also recognize that the job market for Bermudians is very narrow. These are three key factors — but there are more. 

FOUR: There has been a change in the relationship between foreign and Bermudian workers.

In Tourist Bermuda, the foreign worker came to assist Bermudians play host to Tourists. The Bermudian was always centrepiece and knew it because Tourism was based on sun, sea, sand, and social interaction with ordinary Bermudians. 

This kind of broad social interaction was unknown in the rest of the world. Bermuda, all 13,440 acres of it, was the Tourist’s playground. All Bermudians of all ages and all races and all social statuses knew how Tourist Bermuda worked.

In Business Bermuda, the whole element of the foreign workforce involved in International Business is in Bermuda only because the work that they do happens to be located in or done from Bermuda. These IB workers or executives – Business Residents — have not come to Bermuda to see or interact with Bermudians. Business Residents do not live in hotels and they do not expect or require hosting or entertaining in the way that Bermudians hosted and entertained Tourists.

Bermudians ceased to be hosts. Bermudians metamorphosed into support staff for Business Residents working in a relatively invisible business that operated from Bermuda. Non-Bermudians went from being co-workers alongside and with Bermudians to being a separate element that only sought and needed Bermudian infrastructure support and services. 

This was an unseen but massive social change that very few people recognized or understood. This is the socio-economic change that seriously began in 1987 and that had been completed by 1997.

Bermudian workers are now sideline infrastructure support workers supporting Business Bermuda. They are no longer the centrepiece workers who created and sustained Tourist Bermuda. 

FIVE: Bermuda is racing against runaway Debt.

In 2003/04, out of every $1.00 of revenue, Government spent about $0.02 on Debt Service. With inflation running around $0.03 per year, that $0.02 was equivalent to a zero expense/cost. As well, Government was running, and had been running, a balanced budget.

In 2013/14, out of every $1.00 of revenue, Government must now commit $0.15 to DSC. If Government does not reign in its spending and continues – as now – to borrow $0.31 out of every dollar that it spends in Bermuda, then by 2016/17, Bermuda’s net Public Debt will have soared to at least $2,800 million. Full DSC [including paying for KEMH] will be running at $250 million a year – or higher. The 2013/14 Government Budget is severely unbalanced.

Government’s practical tax raising ability is limited to about 17% (maximum) of GDP. This is not an academic limit. It is Bermuda’s historic, practical, and real world upper tax limit. 

Government’s National Economic Report of Bermuda for 2012 projects that Bermuda’s GDP will be around $5,364 million in 2013. That indicates a maximum possible – 17% — tax uptake of $910m.  If GDP rises to $6,000 million, then a 17% tax uptake can provide about $1,020 million. 

But any rise in GDP will mandate, require, and demand a significant rise in Bermuda’s residential population.  How big a population rise?

At least a 4,000 to 4,500 person population increase between now and 2016. Of that total population increase, at least 20%, or about 800 to 900 persons must be high-end investors or high-end knowledge workers. But remember that Bermudians – Bermudians in total — are in marginal but actual population decline. 

Absent any increase in GDP, Government must cut its spending by internally shifting costs. Cut Personnel (remove at least $150 million); transfer these Personnel savings to Operational Costs (add back that $150 million); and thereby reduce its need to borrow by $150 million.

Failing to make this internal shift will mean that annual borrowing must continue at the over $300 million annual rate during the next four years. This will cause Public Debt and DSC to zoom upwards.  Zooming DSC will strangle Bermuda’s economy.

That strangulation will occur because Revenue will stick around the $900 million level. However, DSC will quickly reach and surpass 25% of $900m million Revenue. Alongside that, Personnel costs, if unchanged at around their current $590 million, will then be 66% of $900 million Revenue.  

The combination will see at least $0.91 out of every $1.00 of Revenue committed to just those two items. 

 The need to borrow will then be well over $400 million a year and Government will be borrowing over $0.40 out of very $1.00 that Government spends in Bermuda. 

From here on, look for the IMF to arrive.  

This particular problem is created by DSC’s zooming growth. DSC went from 2.5% of Revenue (2007/08) to 15.4% of Revenue (2013/14).  Without those internal cost shifts, DSC will certainly reach and exceed 25% by 2016/17. 

For Government’s real tax revenue to even reach $1,000 million, Bermuda’s GDP must get back up to at least $6,000 million (last seen in 2008). This mandates that Bermuda’s residential population must grow and that Government must shift its costs.  

So what’s that one core issue?

It is: “Grow or die.” 

Insufficient GDP growth? The funeral service will be in 2017.