Given its massive impact on all of our lives, it’s not too surprising that the economy has consistently ranked as the top issue with voters in polls commissioned by this newspaper in recent quarters.
And with all the pain of a six-year recession still fresh in the memory, Bermudians are all too aware of the potential for damage to livelihoods and opportunities when an economy goes south.
Both parties say they will grow the economy, with diversification a common theme, along with the promotion of existing pillars including international business and tourism.
But sceptical voters will doubtless question how much a government can do to influence an economy anyway. How much of the island’s fortunes are simply a matter of Bermuda being swept up in global economic and business cycles and how much can be attributed to government?
If you listen to politicians in power, recession is all down to outside influences and growth is down to successful policies. And vice versa when they are in opposition.
In reality, government policies in areas such as taxation, regulation, customs duties, employment, immigration and fiscal management clearly have influence on the economy.
Bermuda’s gross domestic product — a broad measure of economic activity — reached a peak of almost $6.1 billion in 2008. And even with the help of nine years of inflation, it has never scaled those heights since.
The near meltdown of the global financial system in 2008 has a huge impact on the island, with its concentration of international financial services, as it lurched into recession in 2009. The adage that when America sneezes, Bermuda catches a cold appeared to apply. However, while our dominant trading partner the US emerged from recession later that year and has continued to grow ever since, Bermuda did not return to growth until 2015.
Under the PLP’s tenure, after growing 1.5 per cent in 2008, taking inflation into account, the island’s GDP plunged 5.3 per cent in 2009 and another 10.5 per cent over the following three years.
The ship has steadied during the three full OBA years for which there is available data, with shrinkage of 2 per cent in 2013 and 0.3 per cent in 2014, followed by growth of 0.6 per cent in 2015. Quarterly data would suggest the economy contracted slightly in 2016.
Some, including the finance minister, believe that retail sales are a better measure of the economy than GDP. The Retail Sales Index dived in successive years from 2009 to 2011, but has returned to growth from a low base in the past three years and over the first third of this year.
Inflation and inequality
The cost of living has become an issue in the campaign. What is clear from Consumer Price Index figures is that inflation has slowed in recent years. During the PLP’s last four years in power, annual inflation averaged 2.3 per cent, while during the last four years under the OBA, it has averaged 1.7 per cent.
Inequality is a related major issue, highlighted by the PLP’s “two Bermudas” slogan, amid claims that the gap between the wealthy and the rest is widening.
Changes in the levels of inequality are hard to measure, given the lack of official statistics on personal wealth. However, in terms of employment income, data from government surveys confirm that the gap between the highest and lowest-paid workers has widened since 2009.
Senior officials and managers, the best-paid category in the a government employment survey, had a median annual income of $103,940 in 2015, the latest year for which statistics were available. This was up by just over 16 per cent from the $89,404 they earned in 2009. Service and shop workers, the lowest-paid group, earned $38,138 in 2015, up nearly 5 per cent from the $36,352 they earned in 2009.
Inflation rose by about 14 per cent during the same period, meaning that the higher-paid group kept pace with increases in the cost of living, while the lowest paid did not. From 2009 onwards, this gap widened under both PLP and OBA administrations, but it widened significantly more rapidly under the PLP.
When wage growth lags behind inflation — as has been the case for much of the population in recent years — people inevitably get worse off.
The number of full-time jobs in Bermuda’s economy totalled 33,375 last year, according to a survey of employers — up 56 from the year before, marking the first year of jobs growth since 2008 when the economy boasted 40,213 jobs.
Neither party has a stellar record on this issue. During the four OBA years from 2012 to 2016, Bermuda lost 2,068 jobs. At least a quarter of those were government jobs as a result of natural attrition and a hiring freeze as part of the effort to trim public spending and reduce the government deficit.
However, during the previous PLP years, the island lost more than double that number — 4,770 jobs. The truth is that government does not create jobs, except in the public sector. And given its $2.4 billion debt, whichever party wins power will be under pressure to slim down the civil service, not grow it.
Governments can encourage job growth through policies that make it less expensive to employ people, such as reducing payroll tax rates and through stimulating economic growth. However, as an article in this newspaper showed in April, the cost of employing someone in Bermuda has soared by one fifth since employment peaked in 2008, mainly as the result of a rising health costs and increased rate of payroll tax.
Rising non-wage employment costs make it less attractive for businesses to hire and provide an incentive for them to outsource and not replace staff who leave. Pay increases also become more difficult for an employer to justify.
Payroll tax generates about 42 per cent of total government revenue and has been the favourite tool for both political parties to increase revenue.
The party that wins power next week will have to balance the urgent need for eliminating the deficit with the equally urgent need to encourage jobs growth.
With its three-year projection in the last Budget statement, the OBA has mapped out how it will increase payroll taxes for higher earners, while at the same time reducing rates for anyone earning less than $137,000, as it aims to make the tax more progressive.
The PLP says it will set up a Tax Reform Commission to make recommendations to MPs with the aim of tax reform that will make the tax system fairer, enhancing competitiveness and increasing jobs.
There are other headwinds to jobs growth largely beyond government control. Technological advances are eliminating scores of jobs, a trend that is likely to continue. Look at the impact of online banking on headcount at our banks and of e-mails on the Bermuda Post Office.
Demographic forces will continue to reduce the working-age population of Bermudians. The OBA claims to have trimmed the Civil Service by more than 600 — more than 10 per cent — without making a single redundancy. Presumably this was helped by the wave of baby boomers hitting retirement, a wave that will continue for many years to come and impact most employers.
Given the demographic fact that the birth rate has declined, there will not be enough young people entering the workplace to replace the retirees. Though the parties are unlikely to discuss the issue in such terms, demographic forces make it almost certain that future employment reports will show fewer Bermudians in full-time jobs.
If the economy is not to shrink, then either more foreign workers will have to be brought in to replace the growing legion of retirees, more seniors will need to stay in the workforce, or productivity will have to rocket.
The trio of overseas expert advisers known as the Fiscal Responsibility Panel have highlighted the “serious demographic challenge” faced by the island’s economy. The panel has suggested the policy objective that “net immigration of those of working age should be positive, significant and sustained by the end of the decade”.
The panel adds: “If Bermudians wish to preserve an open and prosperous economy, with a sustainable social welfare system — a model which has on the whole served the island well — then acceptance of a broadly open, growth-oriented immigration policy is likely to be a necessity.”
Neither party is advocating anything like this in its platform, unsurprising given the sensitivity of the immigration issue.
Voters must decide who is best equipped to take on Bermuda’s complex economic challenges.
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