“Largest Setback Since Record-Keeping Began”
[Written by By E.T. ‘Bob’ Richards, Shadow Minister of Finance] Recent events continue to underscore the different approach to public finances between the ruling PLP Government and the United Bermuda Party, as Bermuda lurches from one disaster to another.
Our approach is based upon the principle of stewardship which is about being responsible for someone else’s property. The level of care and prudence demanded in handling someone else’s money is far greater than one would require for one’s own money.
Moreover, as a steward for someone else’s assets, it is the steward who is accountable for what happens to it. Unfortunately, there has been zero accountability for the long string of mistakes made by this Finance Minister. With the PLP, the buck doesn’t appear to stop anywhere.
Last week, Government reported that the overall Bermuda economy shrank 8.1% in 2009. In the world of economics 8.1% is an exceedingly large number. That means that, after taking inflation into account, in a mere12 months, the Bermuda economy shrank back to about the size it was in 2005. This is a breathtaking and frightening retreat! It is the largest setback to the local economy since record-keeping began, and I dare say since the outbreak of the Second World War.
The Finance Minister has, predictably, blamed it all on the global recession. No accountability there. The table below tells a different story.
COUNTRY GDP GROWTH
- USA -2.6%
- UK -5.1%
- GERMANY -4.7%
- CANADA -1.7%
- IRELAND -7.6%
- BARBADOS -5.5%
- BAHAMAS -4.3%
- BERMUDA -8.1%
None of the large nations the Minister likes to compare us to have had anything close to the kind of drop we have had, and even island nations to our south have outperformed Bermuda handsomely.
There are some insights we can glean from the table above:
1. Larger more diversified nations weather economic storms better than small, poorly diversified countries.
2. Bermuda has performed worse than economies similar to ours.
3. Only Ireland has a performance in the same order of magnitude as Bermuda, and its problems have been exacerbated by massively failed banks.
My oft repeated analogy of the comparison of how much better a large eight engine B-52 deals with adverse conditions than a single engine Cessna is still perfectly appropriate. This data backs up the case. A small undiversified economy like ours (the single engine Cessna) is much more vulnerable than larger diversified economies (the eight engine B-52).
That means we cannot use debt/GDP ratios to hoodwink Bermudians into thinking that the Government’s debt levels are acceptable. But this is precisely what the Premier/Finance Minister has done time and again. The source of the tax revenues the Bermuda government uses to service its debt is from our economy, like any other country. The difference is that Bermuda’s undiversified economy is at greater risk than large diversified ones, therefore so is the tax revenue.
Common sense therefore dictates two courses of action to reduce that risk:
1. Execute sustained efforts to diversify the economy.
2. Be super cautious on debt because other country’s debt/GDP ratios don’t apply to us. Debt/GDP ratios are not risk adjusted. They should be but they’re not.
Unfortunately, this government has failed us on both these common sense approaches. There has been no serious effort to diversify Bermuda’s economy and they are still in denial on debt.
Then there’s the issue of financial planning. If you had a financial planner who forecast that your income would decline by 2.5% and then your income actually fell by 8.1% you would be looking for a new financial planner. How could the PLP get Bermuda’s forecasting so wrong? I wish I knew the answer to that question, but I don’t. We may never know because no one takes responsibility.
Planning, budgeting and forecasting is a difficult business, but that’s the job of the Finance Ministry, as it is with finance ministries anywhere in the world. Failure to properly forecast the economy’s performance has major consequences for everybody in the country, from the corporate boardroom to the family budget. In our case:
* Government badly overestimated its revenue stream because revenues are dependent on the rate of growth of the economy. It had to raise taxes to compensate for that error.
* But knowing the profound weakness in 2009, how realistic does the forecast growth of 1% for 2010 now appear? In view of the weakness in 2009, that estimate, in my view, has no chance of being close to the mark. That means that revenues for this year have been overestimated once more.
* There are promises to make cuts next year but without major cuts in THIS year’s spending (a year that’s almost gone) another government current account deficit looms large, and the debt will rise again.
* Either that or another tax hike is in the offing.
What does this mean to average Bermudians?
First, the psychological aspect of the economy is crucial: optimism promotes growth and prosperity but pessimism breeds stagnation and decline. Unrealistic optimism – such as we saw in the last two Government budgets is dangerous and the minister and her officials have plenty of blame to shoulder in this regard. So we must remain optimistic, but also be patient and determined as the immediate future will remain difficult.
Second, I urge families, as I have repeatedly urged the government, to live within their means. Control spending wherever possible.
Third, jobs will continue to be scarce, so if you have one, hold on to it.
Fourth, certain banking institutions extended 100% mortgages during the period of economic overheating. Some of those mortgages will now be in trouble, as the “irrational exuberance” of both banker and borrower have proven to be, well, irrational. This will put more downward pressure on home prices and rents. Landlords beware!
The new KEMH project will help the construction sector. It will also bring foreign exchange into the local economy and give it some levity. However, it should always be remembered that this is borrowed foreign exchange, not the earned kind. Borrowed foreign exchange has to be repaid, in this case by the users of the hospital, i.e. the Bermuda public.
I comeback to my oft-repeated point of view: If Bermuda’s economy is a wagon, it’s a one horse wagon. That horse is highly intelligent, not dumb, and it will not tolerate getting beaten. So the choice between beating that horse and feeding it is an easy one. We must feed it! As that horse strengthens it will provide us with the EARNED foreign exchange we need to employ, clothe, feed, house and educate our people. It is Government’s responsibility to enable that process. So far they have failed miserably.
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small biz says: Does anyone know what Jamaica’s GDP?
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Yng Black Mind says: Mr. Richards has finally made sense in this article to me – – – I agree with his suggestions, eventhough I may not agree with some other things listed in his article.
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David E. Chapman says: I do agree with Mr. Richards advice to the “average Bermudian” on key factors to consider in these economic downtimes. However, I also feel that Mr. Richards tells a contradicting story.
He writes “Finance Minister has, predictably, blamed it all on the global recession.”, yet then lists 7 countries that have all had notable declines in their GDP during the same period. What factor has caused them all to decline; I guess the PLP is responsible for their decline too! When I read Pemier Paula Cox’s statements, I never interpret her as saying “oh, its just the recession so we will be ok”..but she does acknowledge that it has had an impact and that is the sensible and factual thing to do.
He then writes “None of the large nations the Minister likes to compare us to have had anything close to the kind of drop we have had” but his figures on a country by country basis show that size clearly has little relevance in this analysis of GDP (due to varying output measures via country included and the diversity of the economy). Diversity is indeed the important factor but again diversity also is impacted by the WHAT INDUSTRIES a country is diverse in. Bermuda with its heavy reliance on international business would obviously be greater affected by the global recession than those with more diversity. I wonder too, Mr. Richards, who is using “debt/GDP ratios to hoodwink Bermudians”, as you put it.
In reality, his statement that “more diversified nations weather economic storms better than small, poorly diversified countries” is true. Indeed, this goes not only for economics but other aspects of life as well such as food security, environmental change, etc. However, the fact is that Bermuda is a small island state and is subject to the whims of international influences more so than most countries, even its island neighbours to the south. It is more isolated and smaller than all of the countries he lists and indeed its economic eggs are fewer in the basket. I agree that diversification is paramount but to imply that the government of the day has not shown concern with increasing diversity specifically in the realistic areas of tourism and e-commerce would be to lie. Can the government force tourists on planes when their pockets are being hit hard too? Can the government pull cruise ships here, despite the construction of modern docking facilities to accommodate the new generation of cruise liners? Yet, when the government has encouraged diversification such as the building of the cruise docks the UBP, rather than being constructive and visionary in their comments, continue to use spin, anecdotes and slander to make light of the efforts that we all must be a part of. Of course government debt is an issue, as it is with ALL nations. The BerNews opinion piece by Mr. Larry Burchall on the recent GDP figures also brings this up as an issue of forward concern and some good discussion took place there. However, again there is attempted spin to portray the government borrowing money all as an avoidable evil when even Mr. Richards himself affirms, for example: “Borrowed foreign exchange has to be repaid, in this case by the users of the hospital, i.e. the Bermuda public.” Taking this example of the tradeoffs between capital expenditure and austerity measures, would his solution be to keep the hospital in its undated state that it is in now, which in fact is less economically prudent than to move towards a private-public partnership like the one that was established to fund the hospital? Not everyone can afford to fly away for treatment. Again, contradictions.
On a personal note, when at the time Minister of Finance Premier Cox went on the Government Bonds Roadshow, I was one of those “average Bermudians” who wanted more information about the concept. I emailed then Premier Brown and Deputy Premier Cox using their publicly published email to get their opinion on the motivation and the potential long term ramifications. They both responded within the hour. At the same time I emailed UBP Shadow Minister of Finance Bob Richards as well as Party Chairman at the time Jeff Sousa (via FaceBook)…Jeff Sousa replied, Bob Richards didn’t, despite my informing his chairman that I had emailed yet received no response from him and as a young Bermudian wanted to seriously hear the Opposition/UBP’s take on things. The relevance to this article is that you are attempting to show concern at a macro-economic level when the UBP’s perennial challenge is how to mirror that concern on the grassroots level. Do you really care Mr. Richards or are you just trying to score political points?
Mr. Richards if you and the UBP REALLY care about the average Bermudian, work with the government and the average people of Bermuda…don’t attempt to hoodwink us…not all of us are as easily fooled…
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LOL (original) says: The problem we face is that all sides are trying to fool us like this is a game..
LOL
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FED UP!! says: I AGREE!! Both sides or playing us like a political football!! They are all PUPPETS on a string!! Been that way since 1609…. SMDH
Sorry everyone, human error on my part, caused comments from a political piece to be transposed to a Police article… I moved them back here manually, my apologies..
Patricia
Irony of all this is the fact that the Easter Browny has left the building and Paula who helped fill the basket is now left holding the bag.
Whats missing is the check book but thats ok her current is still open for a withdrawal…..
Arrowroot anyone?
Mr. Richards’ article is evidence that both he and Ms. Cox are lost. how can anyone not see the need to diversify Bermuda’s economy? His criticism is that we’re not friendly enough and her answer will be that we are. neither speaks of diversifying this economy. If the answer is just to do anything international business says or else, then we’re lost as a society. IB is a valued partner and should be made to feel welcome but never forget, this is about money for them and when more money is to be made elsewhere they’ll leave no matter how sweet we’ve been to them. We must grow this economy and stop pretending that the crumbs from international business are a full meal. By the way, things have truly changed; I remember the “Brown Government” the “Brown Administration” and “Dr. Brown” being loaded in every statement from the Opposition. Now, we get a piece attacking “the Finance Minister” and “this Finance Minister” but never mentioning Paula Cox by name……guess the advisors are still telling the UBP that attacking her is bad politics. What a quandary……attack the economy without ever mentioning the architect of the demise……i think they call that a fool’s errand.