Finance Minister Paula Cox told business people yesterday that she had striven to limit Government spending in the face of hefty financial requests from her Cabinet colleagues.

And she added that the large increases in Government current account spending were down to social needs at this time and the increases would not continue at the current rate.

Ms Cox was speaking at a breakfast hosted by the Bermuda Chamber of Commerce at the Fairmont Hamilton Princess, three days after she delivered a Budget statement which hit members of her audience with higher rates of payroll tax and social insurance contributions.

"Some of you may think we're spending a lot, but we have pared down the plans of Ministers and ministries, who want to invest and spend considerable amounts on services and infrastructure," Ms Cox said.

Requests for capital projects had come in at $400 million, she said, a figure that was whittled down to $155 million in the Budget for the coming financial year.

In a question-and-answer session after the Minister gave her overview of the Budget, one questioner pressed Ms Cox on the Government's soaring current account expenditure, asking whether the rising spending year after year was sustainable and when "the time for belt-tightening" would come. He said Government was spending six percent more in the current financial year and planned to spend nine percent more in the coming year.

Ms Cox said: "This is not going to continue. This is happening because of particular social needs at this time... Point noted. Point taken."

She added that the time would come for "ZBB" (zero-based budgeting), which would reduce spending increases, "not through cutting our budgets, but through realignment of our priorities".

Peter Everson, past president of the Chamber, asked Ms Cox about the decision to raise the rate of payroll tax from 13.5 percent to 14 percent. The rate applies to all companies with a payroll of $1 million or more.

Mr. Everson said Bermuda had a "knowledge-based economy" reliant on educated professionals, and increasing payroll tax meant that the cost of employing such talent, in competition with countries like the US and Canada, was rising at greater than the 3.6 percent official inflation rate. The half-percent payroll tax rise amounted to a 5.7 percent increase in costs for employers, he said, and labour-intensive businesses would suffer disproportionately.

With some companies already outsourcing to Halifax, Nova Scotia, and elsewhere, because of the cost of doing business on the Island, Mr. Everson said at a time when Government was expanding educational opportunities through free Bermuda College education, "physical opportunities for jobs are being decreased".

Ms Cox responded that in terms of the options Government could take to raise the extra money it needed, this was the fairest method. The Government had rejected options such as income tax and tax on savings.

A raise in payroll tax was, in terms of horizontal equity (the practice in which people from the same income bracket are taxed similarly), the most "relatively painless" option, Ms Cox said.

Accountant Gregory Haycock added his concern that payroll tax "keeps on going up". He then asked why Ms Cox had not favoured a reimbursement system for free College, instead of parequires people to pay up frontying students up front and then having to go through the "awkward and embarrassing" process of recouping the grant if the student failed. The Budget allocated $1 million to a plan to give free Bermuda College education, with those who fail their courses having to pay back their grants.

Ms Cox revealed that the Finance Ministry had favoured a reimbursement model, but had deferred to the Education Ministry's wishes, as this was a matter of education policy. "This is education policy, so we deferred to the Ministry of Education," Ms Cox said. "The reimbursement model requires people to pay up front and the Ministry of Education felt that people who can't afford to pay would have a further disincentive."