Burchall: How To “Feed” Debt Service Costs

October 7, 2014

[Opinion column written by Larry Burchall]

Last week I ended: “Now and into the future, the absolute and unbreakable new rule – new since 2010 – is: “First! Feed Nanci!” From Financial Assistance to Civil Service pay, everything else is now in second place – or lower. [Nanci = Non Negotiable Costs = Debt Service Costs = Interest + Sinking Fund]

Bermuda’s new creed is: “First! Feed Nanci!” Which leads to the question – How?”

Government’s tax revenue is limited by GDP

If we agree that there is a chronic annual shortfall between Tax Revenue likely to come in and the level of Spending that is desired, and that this annual shortfall is at least $225 million, we can focus on the answer to “How?”

There is a well-defined forty year-old relationship between Government Revenue and GDP. This indicates a real-world top limit to the amount of Tax Revenue that any Bermuda Government can extract from Bermuda’s GDP. Since 1968, that Government tax extraction rate has oscillated between 15% and 17%.

With nominal GDP around $5.6 billion [the 2013 figure reported by DoS], the Bermuda Government can expect to extract a maximum 17% [around $950 million] as Tax Revenue. Only once between 1968 and 2013, did that extraction rate exceed 17%.

That happened in 2010/11 when Government tried to suddenly extract 18.4% from GDP by doing a bigtime increase in Payroll and other taxes. What Government tried to do was to jump from taking 15.8% in 2009/10 to suddenly trying to take 18.4% in 2010/11. Predictably, this huge 16% attempted Tax increase – a clear Tax over-reach – created a disastrous result.

The result of that ill-timed Tax over-reach is now seared into Bermuda’s national memory! Whump! Down went the economy!! Whoosh! Gone went the jobs!!

With current and near future anticipated GDP levels, Government’s maximum tax uptake is limited to a likely maximum of $950 million. That upper limit exists because of generic economic – not man-made or political – laws and principles. [Recall that disastrously unsuccessful Tax grab?]

That $950 million maximum is still way short of the $1,277 million minimum needed [see last week] to run Bermuda without borrowing or making deep cuts. Revenue would still be short by about $325 million.

Do the arithmetic.

How do we fix that? Cut! Cut! Cut government costs ….. OR ….. Grow! Grow! Grow the economy.

Growing GDP is a fundamental requirement

If Bermuda’s GDP is to grow to so that it can provide that missing $225 – $325 million of Tax Revenue, then Bermuda requires an additional minimum GDP of $1,325,000,000 [up to $1,912,000,000]. [$225m is 17% of $1,325,000 GDP & $325m is 17% of $1,912,000,000 GDP]. How does Bermuda achieve an additional $1.325 billion in GDP?

Two ways to grow GDP

One – Increase the number of active workers which consequently increases the total economic activity on the Island, thus increasing the tax base and on-Island circulation of money. That translates into more people than now, doing more units of work and creating more units of spending. More people eating more loaves of bread, drinking more litres of wine, using more watts of ‘leckalight, using more residential, commercial, and office accommodation, etc…

Two – Keep the number of active workers and residents exactly the same as now [34,277 workers & about 60,000 residents], but increase the productivity and economic activity of each individual worker and resident and somehow [Harry Potter style?] increase the tax base and on-Island circulation of money. That means the same number of people as now, doing more productive work and creating more spending. That translates into the same number of people individually eating a lot more bread, individually drinking a lot more wine, individually using a lot more ‘leckalight, and somehow – and individually – using more residential, more commercial, and more office accommodation, etc…

At peak in 2008, GDP output per worker was $152,000 [$6.11bn GDP/40,213 filled jobs]. In 2013, GDP output per worker was $162,600 [$5.57bn GDP/34,277 filled jobs]. That’s an apparent five year 7% increase in individual worker productivity in a declining economy.

To achieve the needed minimum of $1.325bn added GDP, today’s 34,277 workers filling today’s 34,277 jobs would each have to add another $38,700 in GDP output per worker. So – from today – every one of those 34,277 workers would have to suddenly, consistently, and successfully start working around 25% smarter/faster/harder/longer/more efficiently.

One immediate consequence would be to push the working hours for Bermudians and residents way above 2013’s reported medians of 34.7 hours per week [for Bermudians]; 36.0 hours [for Spouses of Bermudians]; 36.6 hours [for PRC’s]; and 40.5 hours [for Non-Bermudians]. [DoS LMI Report for 2013.]

If the said-to-be 3,000 unemployed Bermudians were put back in work and produced at the $162,600 GDP output level, they would add $488,000,000 to GDP. However, that would be $837,000,000 too little leaving Tax revenue about $142m short. [And $604,000,000 if at the enhanced productivity, but still coming up $721,000,000 short with Tax revenue still short by $120m].

Adding people means increasing ResPop

Alternately, add 8,150 additional jobs, with each worker delivering, more or less, the same GDP output as in 2013. This would provide the $1,325,000,000 of added GDP, and $225m of additional Tax revenue. [8,150 filled jobs x $162,600 GDP output per job= $1,325,200,000 x 0.17 Tax Uptake = $225,250,000].

If Bermuda cannot achieve massive 25% increases in GDP output per existing worker, then adding workers is the only other option.

That is arithmetic. Not politics.

Where would those 8,150 additional workers come from?

With about 3,000 unemployed Bermudians, the answer falls from heaven. Put 3,000 unemployed Bermudians back to work while, in parallel, adding another 5,150 from somewhere else. These other 5,150 warm bodies would have to be imported from the world beyond North Rock.

The best way to add 5,150 additional workers? Bring back 5,150 of the more than 18,000 Overseas Bermudians [OB’s] – our own brothers, sisters, sons, and daughters.

However, most of those 5,150 of those OB’s must come as investors – not jobseekers – who must become new and additional [Bermudian] Business Residents. With their dependents – our sons and daughters-in-law, our grandchildren, our nephews, our nieces – that’ll probably be at least another 10,000 or more warm bodies.

These OB’s must possess the financial capital, intellectual capital, technical skillsets, and willingness to return home, set up new foreign exchange earning global businesses, and help power Bermuda to a $7.0bn plus economy that is operating successfully in today’s highly competitive global economy.

What if we cannot pull back enough of our own Bermudian people? Then we must import? Whether OB’s or ‘foreign people’ – their numbers will increase Bermuda’s ResPop.

That’s arithmetic. Not politics.

What and where are the alternatives?

I’d like to see and hear all the non-histrionic arguments that say and show that the generic conclusion that Bermuda needs to grow ResPop is, somehow, wrong.

Let’s see those arguments… Let’s hear those arguments…. If alternate real facts exist, put those alternate facts out there for all to see….. From anyone, anywhere, high in heaven or here on earth, let’s see those arguments.

Don’t slink off and grumble and mumble in dark corners. Put the arguments.

[PS – If we do not grow our GDP (economy), then, at his current feeding average rate of $170 million a year – and soon going higher - Nanci will simply gobble us up. Do not forget that little spider! Don’t ever forget him! This isn’t a pub or after-the-game discussion. It’s far more serious. Nanci is real! All too real!]

- Larry Burchall

Read More About

Category: All, Business, News, Politics

Comments (14)

Trackback URL | Comments RSS Feed

  1. jt says:

    “I’d like to see and hear all the non-histrionic arguments that say and show that the generic conclusion that Bermuda needs to grow ResPop is, somehow, wrong.
    Let’s see those arguments… Let’s hear those arguments…. If alternate real facts exist, put those alternate facts out there for all to see….. From anyone, anywhere, high in heaven or here on earth, let’s see those arguments.
    Don’t slink off and grumble and mumble in dark corners. Put the arguments?”

    Me too. In the absence of these factual arguements the new work permit policy seems to be addressing precisely what we need.

    • Charged says:

      An excellent article but we know what is happening in some communities that frequent Western Union. Groups here in the 1980s and up to about 2000 used to spend it here but we remain silent as we now watch so much of it being sent home to stimulate their economies whilst ours dies. So if we keep bringing them in we will NOT see the spending on island that you are so rightly say is needed. So let’s fix that somehow. It is even noticed when they eat out…they drink less alcohol even if it is provided free because they don’t wish to have the boss see them have a beer.

  2. Well Said says:

    Thank you for injecting a blast of realism into this dialouge.

    All the spinning is a great luxury that Bermuda simply can’t afford at this point.

    Its like spending on a credit card–its fun while its happening–but at one point or another, we have to pay the interest and balance.

    Bermuda has reached that point.

    I only hope that everyone, politicians, union leaders and the broader community –realize this soon as kids futures depend on it.

    Thanks for the very astute analysis.

  3. betty dump says:

    Ok Mr. Burchall. I have read your pieces and I fully agree that we need to increase ResPop. What you haven’t addressed is how to do this. How do we attract guests to live in Bermuda? Who do we wish to attract? How can we increase ResPop but still protect Bermudians? How do you convince those that oppose this idea that it is actually beneficial for Bermuda? What time frame do we plan to achieve this end? I think many people agree that a ResPop increase is beneficial. Unfortunately many don’t. They feel threatened by this and will vehemently oppose it. Some of their concerns are real and some are just emotions taking over rational thinking. How do you convince these ones of your idea? How do we ensure that their worst fears aren’t realized if we do increase ResPop?

    • I believe he has answered your questions. “You can lead a horse to the water but you can’t force the horse to drink the water”.
      I’ve mentioned this before and will mention it once again because it is relevant. Having a dream is like holding a glass figurine—it’s fragile and will shatter as soon as you let go of it. As the poet, (Langston Hughes) advised, we must “Hold fast to dreams, for if dreams die, life is a broken-winged bird that cannot fly.” What does it mean to cling tenaciously to a dream?For starters we keep hold of our dream by refusing to let adverse circumstances dissuade us from following it. Quitting is more about who we are than where we are. Most people give up on their dream far too quickly. They often blame external challenges for halting their progress, but in actuality, they have surrendered to internal doubts or fears. The only guaranteed way to lose a dream is to stop trying to achieve it.

  4. cicada says:

    What happens in your models if many government jobs were cut but all the people were found new work in the private sector?

  5. Need Peace says:

    How are the bottom-feeders factored in this equation? By bottom-feeders I mean, the imported cheap labor that sleeps more than twelve in a one bedroom apartment. That send their money earned out of Bermuda and eat either on their jobs or you may see them fishing for their meals. As I see it, we’re losing in accommodations, food, clothing and maybe taxes in some cases where their employers may be relunctant to pay. IMO these jobs were used as supplemental incomes for Bermudians in the past. Back to my original question, how are the bottom-feeders factored in?

    • WTF says:

      Need Peace….by bottom feeders presumably you mean less fortunate people from poorer countries that are working really hard, far away from their homes to feed their families? I trust you don’t go to church on Sunday if this is how you think. ENTITLED MUCH?

    • Keepin' it Real!...4Real! says:

      you must know the answer to your question…what are bottom feeders? they feed off of the bottom…they get what ever manages to slip past everyone elses hungry mouths…were you expecting anything else? so im sure they’re factored in.

  6. Need Peace says:

    @WTF – this is not the time for you to get all emotional about foreigners being able to feed their families that are overseas, when people in this country need the same! People only do what they’re allowed to do, so as much as I’m not speaking to them but about them and what effect they are having on our struggling economy. If our country becomes like their country do you think they would hang around? I think not! Can someone answer my original question please?

    • WTF says:

      Need Peace. I hope you don’t also refer to struggling Bermudians as “bottom feeders” as well. If a foreigner applies for a job and works hard, why is it their fault their employed? If an employer puts and ad in the paper and no one applies so he hires a foreigner, why is it the foreigners fault? If a Bermudian doesn’t apply because he doesn’t want to work the hours required or doesn’t like the pay, then why blame the foreigner for taking the job?

  7. bluebird says:

    This is very easy to “RESOLVE”
    Just cut spending from the Government.
    If you have a pay-cut or a down size do you continue to “BORROW” money so that you can still live the same lifestyle??????

  8. bluebird says:

    Our economy is evolving .
    The PLP/BIU did a $2.5Billon dollar “STIMULAS”.
    We have a weak economy and still owe $2.5Billion Dollars.
    We are going to have to cut the non-productive “BLOOD SUCKERS”
    Wish all you want as the economy is not coming back with such a “HUGE” Civil Service “HUGE” Debt and too many regulations and Taxes.
    YOU ARE KIDDING YOURSELF,if the Government does not CUT CUT CUT.

  9. Barclay Simmons says:

    An excellent article and directly on point. We now need to address the question of “how” to increase our ResPop numbers.

    We must support efforts to bring companies to Bermuda that require a skilled workforce and have existing products and customers, preferably customers based in the US so that we can increase our foreign dollars. Companies most of all that have employees. If we use software as an example, in the short term many of the jobs will be filled from abroad, as a relatively small number of Bermudians have focused on this industry. In the short term the workers from abroad will fill empty apartments and help Bermudian owners to pay mortgages and weather the storm. A significant percentage of middle class wealth is in real estate, so this is a way to directly inject capital into the average Bermudian’s hands. In the long term Bermudians will train for jobs that they know are available, and this offers opportunity to people who may not be interested in the careers in abundance at present.

    The international software industry is also not correlated to the insurance industry or the tourism industry. As an island we need diversification.

    I am in full support of efforts to trim expenses, but I also support the creation of new revenues by bringing new businesses and new people to the island.