Positive points in both Throne speeches
I took some time last week reading through the entire Speech from The Throne (“the Speech”) and the Reply to the Throne Speech (“the Reply”). There was actually a lot to like in both documents. What follows is not a political discussion but a brief economic commentary triggered from reading both documents.
Regulations and rules
I have a general comment on new rules and regulations. Increasing complexity and regulation benefits the large companies over the small. The larger companies have the resources and staff to throw at any new twist in a regulatory regime or new law that is enacted. The cost of compliance is a lessor burden to larger organisations and in fact only tends to entrench their dominance more.
I would caution against any rush to please everyone globally. To preserve our reputation and “good standing” in the world we must play by the rules but balance and pragmatism must ultimately win the day. We can’t simply regulate our way forward to protect the large industry players at the expense of the domestic market and our future competitiveness.
If we are serious about cutting red tape and bureaucracy, a measured pace of introduction, only after confirming that new rules are necessary, should be sought. It could be argued that a lighter touch has big advantages. If you don’t believe me listen to what came out of the recent Offshore Perceptions STEP Research Report 2016: “Overwhelming agreement (94 per cent) across the offshore respondents that compliance is a burden … 63 per cent of offshore respondents say reporting obligations are deterring clients … 51 per cent of onshore respondents saying they have seen clients moving onshore as a result of compliance costs raising charges offshore”
I agree with President-elect Trump’s recent statement: “If you want to introduce a new regulation then you need to get rid of two others”. I welcome the day when we see a speech that highlights all the rules and regulations being removed or amended to open up competition and liberalise markets. Bermuda‘s international business has historically thrived by reducing regulation and promoting innovation.
Taxes
Although not mentioned in the Speech, I wanted to note that the General Services Tax is simply a non-starter to me. I have serious concerns over a tax that puts an ever-increasing burden on the local domestic economy of Bermuda and only escalates the cost of business.
Our island continues to become polarised between a generally successful and profitable international sector and a struggling domestic sector which needs to contend with the reality of a shrinking population. This is really a regressive tax that will likely hurt the small/medium business owner in Bermuda who will either pass on the cost to the end user or suffer some margin erosion if this is simply not possible. I appreciate the need to look into ways to raise tax revenues in an effort to balance the budget but I would prefer one that spares the part of the economy that continues to try and recover and grow.
The mention of a more progressive payroll tax regime and even a lower payroll tax is far more appealing. Although I would prefer to see lower government spending and fiscal prudence. The business sector would be more supportive of tax changes if they were assured that government expenditure was going to be reduced.
One solution may be an exemption (no payroll tax) for amounts up to $30,000 with higher progressive rates above this. The downside to progressive tax system is that employers will be incentivised to hire more part-time workers and consultants. Higher payroll tax rates will also make Bermuda less competitive compared to other jurisdictions, especially if President-elect Trump significantly lowers US tax rates.
Cost of Bermuda and of doing business in Bermuda
Mention was made about the cost of Bermuda and the cost of doing business in Bermuda. This still remains one of the largest threats to the island’s future competitiveness. In a world of fluid capital and labour arbitrage, opportunities exist for companies to locate resources within the most favourable domicile. With modern day telecommunications technology, supply chains and labour pools can be located nearly anywhere for intellectual capital based businesses. Arguably one of the best ways to control costs in an economy is the promotion of competition.
Oligopolies and/or monopolies in our small economy can hamper cost efficiency with entrenched pricing and quasi control of certain markets. Promoting more balance or competition in certain fields would go a long way to reducing costs that are regressive in nature for our society and offer more affordable choices. Furthermore, if we want to help the less fortunate and lower income households a key factor will continue to be an economic rebound. According to the World Bank, on average, a 1 per cent increase in GDP per capita reduces poverty by 1.7 per cent.
Diversity
I have written about the secular challenges that Bermuda needs to address to secure a promising future. I call them the “4 D’s for Discussion: Debt, Demographics, Disparity and Diversity”. The first two I have written about since 2011. The last two more recently.
The acknowledgement of minimal diversity within Bermuda’s economy and its associated risk was commented on in the Reply. Both documents did make specific reference to developing Stem (Science, Technology, Engineering, and Mathematics) programmes for schools. I still feel this is an important “D” that is slowly being recognised.
The recent celebration of attracting SELLAS Life Sciences to the island is a worthy step in the right direction. The company establishes a start to moving outside everything “finance/insurance related” and is in a sector of high secular growth. This is important because our largest industry continues to struggle with weak pricing and disruption from the capital markets.
The consolidation we have seen does not appear to be over. The recent Argo Group and Ariel Re merger suggests there is still interest among the group to consolidate further. Recent reports by AM Best and Citigroup suggest much more consolidation is likely and we are almost assuredly to see a few more mergers over the next year. As a result any policies that encourage expansion into areas outside our core will become increasingly important to sustain economic growth and create a diverse array of jobs.
There was much more discussed in both speeches which bear further analysis. Ideas to reform education, fund entrepreneurs and protect the environment are all important topics to address. If there is one thing I have noted, however, it is that the country would be best served if those who served worked together. By adopting and combining much that was discussed in both speeches the country would have a lot of positive things to talk about.
Sources:
STEP Research Report — http://www.step.org/sites/default/files/Comms/reports/Offshore_Perceptions_2016.pdf
Speech from the Throne —
Reply to the Throne Speech-
“Pro-Poor Growth in the 1990s: Lessons and Insights from 14 Countries”-
Nathan Kowalski CPA, CA, CFA, CIM is the Chief Financial Officer of Anchor Investment Management Ltd. and the views expressed are his own. Disclaimer: This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources deemed by the author to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. Past performance is no guarantee of future results. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Investment involves risks. Readers should consult their financial advisers prior to any investment decision. Index performance is shown for illustrative purposes only. You cannot invest directly in an index.
