Why Government is having problems raising revenue

Ten years ago, in the days when Total Annual Debt Service Cost [TADSC] was $11.4 million a year, Debt was $119.5 million, and Government revenue actually exceeded Government spending; the Elephant of that time had the impact of a pet rabbit.

Fast forward to 2012/13 when Revenue was projected to be $910m and TADSC was projected to be $130m.  

The 2012/13 Elephant was eating up the first $130m of Revenue, leaving only $780m for spending on Personnel and Operations.

However, it turns out that in 2012/13, Revenue fell short and came in at only $877m. But did the Elephant take less?  

No. The Elephant got the same $130m. So Government ended up with far less. Instead of $780m left over after feeding the Elephant, Government only had $747m for Personnel and Operations. [Government actually took $81.5m from revenue and $50m from the Sinking Fund.] 

In 2013/14, Government projects $872m Revenue. We now know that the 2013/14 Elephant needs $122m. So Government will have $750m left for Personnel and Operations.

For 2014/15, with a still declining economy, Government is unlikely to receive more than $900 revenue. The Elephant will still gobble up the new and higher $149m. So that will leave only $751m for Personnel and Operations. 

The trend

Do you see the trend?  Do you see that in 2012/13, 2013/14, and 2014/15; Government only had and will have the same dollar amounts for Personnel and Operations as the old Government had in 2006/07 when Government actually had $753m left over for Personnel and Operations. 

Do you also see that, according to the Government’s monthly Consumer Price Indexes, the basket of goods that cost $100 in 2006 was costing over $122 by December 2013. 

This means that in 2013, the Government was trying to run 2013 Bermuda with dollars that had less buying power than 2006 dollars.

You couldn’t run a household like that. Government cannot run a country like that — not without having some severe financial and then social problems.

What causes the ‘short money’ problem?  It’s that need to priority feed that cash-eating Elephant.

In 2013, feeding the Elephant requires taking the first $14 off every $100 of Revenue. Then, with the remaining $86, Government tries to run the country. In 2014, Revenue will still be stuck under $900m, so it gets worse. In the coming FY, the Elephant will demand the first $16 of every $100 ($149m out of $900m).

Why can’t Government just increase taxes?

Can’t Government just increase taxes? Any competent economist or national financial manager will tell you that in a declining or flat-lining national economy a Government cannot increase taxes without further reducing economic activity. 

In FY 2010/11, advised by its Civil Service economic advisors and financial managers, and in a declining economy; the previous Government decided to increase taxes in an attempt to extract an additional $124m in Tax Revenue.

Tax disaster

The result? Disaster! They only got an extra $80m and the economy tanked. Businesses closed. Employment decreased. GDP went down even further.  The next year, in 2011/12, Government rolled back that 14 per cent payroll tax increase.  

In 2011/12 Government only received $914m in total Revenue; followed by 2012/13 with an even lower $877m in Revenue. This $877m was $113m LOWER than the $990m that Government had received in Tax Revenue two years before in 2010/11.

If any lesson was confirmed from that bad 2010/11 decision, it is that taxes cannot be materially increased when an economy is declining. I don’t think that this Government will repeat that mistake, even though many of the ‘top advisors’ from 2010/11 are still in place.

Why is Government Revenue stuck under or around $900m?

Especially in an isolated narrow tax base service economy like Bermuda’s, a Government’s tax raising ability is completely dependent on the level of national economic activity. Specifically, the Bermuda Government’s tax raising ability is dependent on Bermuda’s GDP [Gross Domestic Product]. So there is a practical limit to what tax revenue can be extracted.

We’ll explore that, in detail, in the third Section; but I’ll lead in by saying that historically — going back forty-five years to 1968 - the Bermuda Government has generally extracted taxes at something between 15 per cent and 17 per cent of GDP. 

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