'Tax break could boost economy'

Wiping out payroll tax for the lowest earners in Bermuda could help bring the island out of recession.

This is the verdict of economist Craig Simmons, who believes the surprising and potentially controversial answer to the current financial crisis could be more Government debt.

One option is a U.S.-style stimulus package to help provide new jobs and boost business.

Mr. Simmons has outlined proposals for a $300 million “working class” tax cut that would give Bermudians the spending power to lift the island’s flagging economy.

It is one of a number of options in a paper he produced for PLP leadership candidate Terry Lister, who has made better management of Government’s finances a campaign issue.

Current Premier Dr. Brown and Finance Minister Paula Cox, another leadership contender, have come under fire for racking up about $1 billion in Government debt — radically increasing spending over the past four years.

But Mr. Simmons believes this should be considered “spilt milk” now.

He added: “The past is the past.

We’ve got to deal with the future.”

He said whoever takes over the reins from Dr. Brown will have extremely tough choices to make — job cuts or more debt.

The Bermuda College economist is not personally committed to either option.

He stressed he was outlining the options to stimulate debate rather than advocate for one course of action.

Unemployment

But he believes Bermuda has to do something to turn around the trend of growing unemployment and failing businesses.

He said a high-risk stimulus package — that could send Bermuda’s debt spiraling above the $2 billion mark — might be a gamble worth taking.

But he warned against ploughing more money into capital projects — such as the Dockyard Cruise Ship Terminal or the new Police/Court Building — because of the Auditor General’s concerns about accountability on them.

Mr. Simmons said tax cuts are the only way to guarantee all the money goes towards rebuilding the economy. A “Bermudians only” tax break for low-income workers would immediately put money in the pockets of the poorest families — giving them more cash to spend locally.

It would also cut the cost to employers of hiring Bermudians, Mr. Simmons said.

The cuts would be combined with Customs tax breaks for retailers to help businesses.

Mr. Simmons accepted cutting taxes for the wealthy would have a similar effect but he said he put forward the “working class tax cut” proposal as a theory more in keeping with the philosophy of a labour government. He added that any stimulus package must be targeted, transparent and temporary.

His suggestion is to wipe out payroll tax for Bermudian employees earning less than $50,000 for a two-year period.

He added: “The theory is that it would provide an incentive for employers to hire Bermudians and for those who are already employed it would give them an incentive to spend more.”

The overall aim would be to bring Bermuda out of recession quickly. At that point the Government would be in a better position to make spending cuts without heaping further misery on a recession-hit nation and then begin the long process of paying off the debt.

The downside is the $300million shortfall in annual revenue — about a quarter of the annual Government budget.

That would have to be paid for by more debt — something Mr. Simmons admits would “scare the heebee-jeebies” out of people.

He added: “It would be quite frightening for people.

“The politicians would have to discuss it with the people and explain the good side of this, too.

“There’s no easy option here.

These are tough questions the people of Bermuda need to think about.”

At the opposite end of the spectrum, policymakers could opt for a politically more popular British-style ‘austerity’ approach — radically cutting spending.

But that would also involve tough choices.

About half the Government budget currently goes on salaries and there would be no way, Mr. Simmons said, to make the necessary cuts without widespread redundancies.

Boost

He estimates Government would have to immediately cull 25 per cent of its budget to balance the books.

Another downside of this approach is that it would provide no economic boost to the private sector, potentially prolonging the recession — meaning more jobs could disappear and more businesses could go to the wall.

Mr. Simmons said countries across the world are going through the same trials as they try to get to grips with the fall-out from the 2008 crash.

He said neither approach had proven to be completely successful.

He added: “The jury’s still out for me. I could make convincing arguments for either approach.”