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Bermuda in 2017 Economic Test Tube to the World

Our Economic Crisis “It’s not the people……’s the policies.”

Bermuda’s Fall From Grace & Our Thoroughly Discredited Economic Model Premise: Prior to 2008, Bermuda suffered from structural imbalances and an unrecognised but chronic underlying economic weakness that were the direct result of misguided economic policies adopted by both the PLP & UBP Governments. 2008 then exposed the fatal flaws of Bermuda’s Economic Model. In three short decades, the failure of UBP, PLP & OBA Governments to recognise and understand any of this has resulted in Bermuda going from

Economic Miracle to Economic Disaster

In other words….

Bermuda’s Economic Model Is Broken & It’s Time We Adopted Comprehensive Reform

Bermuda’s Basic Policy Errors The origins of some of our biggest mistakes pre-date even party politics in Bermuda.

Policy Error # 1: Our tax structure and levels of government revenues and expenditures - Pre-dates Party Politics

Policy Error #2: The changing distribution of where we live and where we work across the island - The Bermuda Development Plan ‘74

Our worst policy errors have been with us the longest. Poor decisions in both areas are now crippling Bermuda’s economy.

The 2008 Global Financial Crisis Exposed Bermuda’s Achilles Heal:

Bermuda’s Tax Revenues were Dangerously Low & Our Tax Burden was Predominantly Borne by Bermuda’s Poor and Middle Class Adopting Appropriate Economic Reforms was Only a Question of When Not If for Bermuda.

Government Revenue As Share of GDP 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0%






British Virgin Islands

World Average

Sources: OECD, World Bank, CIA World Factbook, Bermuda Budget Statement

OECD Average

Total Government Revenues of Low Tax Jurisdictions Government Revenues GDP Revenue as Share of GDP Bermuda BD$ 902 mln. BD$ 5,601 mln. 16.1% Cayman Islands CI$ 658 mln. CI$ 2,741 mln. 24.0% B.V.I. $ 283 mln. $ 909 mln. 31.1% Trinidad TT$ 45,665 mln. TT$ 179,842 mln. 25.4% Ireland € 47,098 mln. € 166,424 mln. 28.3% Switzerland CHF 168,135 mln. CHF 620,424 mln. 27.1% United States $ 3,941 bln. $ 15,516 bln. 25.4% Australia AUD 415,888 mln. AUD 1,523 bln. 27.3% World Average 28.0% OECD Average 34.1% Sources: Latest Annual Budget Statements & Nominal GDP estimates, OECD, CIA World Factbook

Government Spending as Percentage of GDP

source: Heritage Foundation

Bermuda 2014 approx. 22% Cyclically adjusted spending: 18%(excluding financial assistance & closing output gap) 18% = 16% (2003-06 average) + 2% (debt servicing payments) Number Of Countries

15-20% 20-30% 30-40% 40-50% 50-60% >60% 19 54 54 36 9 3

Only Countries With Lower Government Spending than Bermuda: Bangladesh Central African Republic Dominican Republic Ethiopia Guatemala Macau Madagascar Singapore Sudan Turkmenistan

Historical Support for Bermudian Tax Reform Bermudians Surveyed in 1978 with the Following Question: “Bermuda’s tax structure should be changed in order to put the greatest burden on those who are most able to pay?” Survey Question Met with Widespread Support throughout Bermuda: PLP Blacks – 94% UBP Blacks – 88%

Source: Frank Manning, Professor of Anthropology, in Bermudian Politics in Transition (1978).

UBP Whites – 73% Amongst Basic Democratic & Economic Recommendations for Bermuda made in the Pitt Report, the Royal Commission Charged with Investigating the Underlying Causes of Bermuda’s 1977 Riots: Progressive Reform of Bermuda’s Tax Structure

Bermuda’s Greatest Macroeconomic Policy Inconsistency: We are importing 4% of GDP annually from foreign investors to pay for our budget deficit… While allowing the island’s economic elite to export 18% of GDP in domestically derived savings to foreign markets.

As Percentage of GDP

OECD Economies with Largest Combined Current Account Surplus & Budget Deficit


Bermuda 20

Ireland Netherlands Switzerland





Spain Denmark Sweden OECD Average

Savings When Viewed as Stocks Rather Than Flows The Embarrassing Riches of the Island’s Economic Elite Bermuda Dollars Billions

Public/Private Savings Acquired 2008-2015

16 Private Sector Savings

14 12 10 8 6 4 2 0 -2 -4

Bermuda Government Debt

Bottom Line:

Our Escalation of National Debt Never Should Have Happened

Common Vulnerabilities of Micro-State Tax Havens Lack of Resilience to External Shocks - High Dependence on Foreign Trade - Lack of Diverse Industries No Monetary Independence - Members of Currency Unions, Currency Boards - No Central Bank

Less Monetary Flexibility Requires Greater Fiscal Flexibility in Counteracting Severe External Shocks

Government Revenues Versus Severity of Crises 30%


2007 Gov't Revenues % GDP Peak to Trough Decline in GDP

20% 16%








No Recession Isle of Man


-9% 3 Years Cayman



-22% 5 Years Andorra

-18% 6 Years Bermuda

-16% 5 Years Jersey

-3% 1 Year Guernsey -13% 2 Years BVI

“The Bermuda Model” (World’s Most Extreme Example of Such An Institutionally Enshrined Economic Model)

• Extreme Regressivity of Tax Structure • Labour Severely Penalised Over Capital by Tax Code • Internationally Extreme Low Levels of Government Revenues • Freedom of Private Sector to Export 100% of Domestically Derived Savings to Foreign Countries • No Fundamental Oversight of Domestic Banks, Insurers & Investment Companies • De Facto Freedom to Employ Foreign Labour Over Suitably Qualified Locals

Theoretical Economic Assumptions Explicitly or Implicitly Embodied by “The Bermuda Model” • Low levels of taxation on high income earners lead to higher levels of domestic investment and more local jobs • No taxation of Capital leads to higher levels of domestic investment and more jobs • Low levels of Government Revenues lead to greater efficiencies and more productive investments by the private sector • Mandated Private Pensions lead to broader and deeper development of local capital market • Local financial institutions most efficiently fulfill their role of intermediating local savings and investment if left unencumbered by government oversight • Foreign workers in Bermuda are inherent job creators and lead to greater employment of Bermudians

Actual Economic Outcomes of Long Term Application of “The Bermuda Model” •

Little to No Public or Private Reinvestment in Domestic Economy

Significant Attraction of High-Income Foreign Workers

Persistent Job Losses Amongst Local Work Force

Excess Accumulation of Idle Capital

Dereliction of Critical Intermediary Duty by Local Financial Institutions

Extreme Difficulty in Attracting Foreign Investment

Little to No Growth of Local Capital Markets

Hollowing Out of “Middle Class” Income Earners

Rate of Poverty Higher Than Turkey, Mexico and the US

Over Half the Population Living Paycheck-to-Paycheck

Economic Decline

Rather than a conscious programme of systematic economic coercion and oppression, in Bermuda the “Bermuda Model” is more likely the unintended culmination of ad hoc, poorly designed and implemented economic reforms. Nonetheless, Bermuda’s experiment with the “Bermuda Model” is the world’s most extreme experience with Supply-Side, Trickle-Down, Voodoo Economics

US economic reforms and changes to accepted corporate practice since 1980 have moved the United States much closer to “The Bermuda Model” • Regressivity of High End of Tax Structure • Low Revenue-to-GDP qualifying as low tax jurisdiction if not tax haven • Effective tax rate of many large US corporations is 0% • “Light Touch” Regulation • Increasing Concentration of Corporate Power & Monopolistic Pricing

G-10 Government Revenues to GDP in 2014 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0%

Source: OECD

“The Bermuda Model” as Pursued in the United States Income from capital gains in the United States is taxed at roughly half the rate of income from labour. This policy alone saved the top 1 percent in excess of $100 billion in 2013 according to the Congressional Budget Office. Although small US companies pay full corporate rates, large multinational US corporations are able to reduce if not completely eliminate their tax liability through sheltering profits offshore – often employing questionable, aggressive tax “avoidance” techniques. Indeed, Bermuda itself is used as a tax-free jurisdiction through which billions of dollars in non-resident US corporate “profits” flow annually. In a 2011 op-ed in the New York Times headlined “Stop Coddling the Super-Rich”, Warren Buffet revealed his tax incidence the previous year was 17% while the lower income employees in his office paid taxes of between 33% and 41% of their income.

US Outcomes in Pursuing The Bermuda Model In 2015, the US middle class fell below 50% of the population for the first time on record. Source: Pew Research Center

America’s poverty rate has risen to the second highest of the 34 countries in the OECD. Source: OECD

US life expectancy amongst middle-aged white Americans is declining for the first time on record. Declining life expectancies did not occur even in the 1930’s during the US Great Depression. Source: US Centers for Disease Control and Prevention

The Bermuda Model is not only socially unjust, it is inherently bad economics and leads to inefficient outcomes. Arguably, more than any other economic development in the past 35 years, it has been the conscious or unwitting pursuit of the “Bermuda Model� by countries large and small that has most threatened the stability and resiliency of the entire global economy.

Bermuda as Test Tube to the World We are now the world’s poster child for what is wrong with this model. Bermuda is a cautionary tale of what to expect in the long term if countries pursue similar policies.

“Hence, liberals also need to restore social mobility and ensure that economic growth translates into rising wages. That means a relentless focus on dismantling privilege by battling special interests, exposing incumbent companies to competition and breaking down restrictive practices. Most of all, the West needs an education system that works for everyone, of whatever social background and whatever age.” - “Liberalism After Brexit,” The Economist, July 2, 2016

Jared Diamond’s* Top Reasons Civilisations Fail to Recognise the Need to Change or Fail to Adopt Appropriate Reforms Prior to Collapse 1) Short term interests of decision makers or elites are in conflict with the long term interests of the civilisation, and (Regressive Tax Structure)

2) Factors once thought of as society’s virtues become vices. (Low Tax Revenues) * Author of Guns, Germs and Steel & Collapse: How Societies Choose to Fail or Succeed

â€œâ€Śwhile the public overwhelmingly welcomes and supports the project, and sees it as essential to the future well-being of Bermuda, there is serious and significant public concern that vested interests, and the status quo will eventually prevail. There is also concern that any outcomes will remain unimplemented, that Cabinet will not make the hard decisions which many feel are necessary to sustain Bermuda into the future, and that the population will not be willing to undergo the necessary changes.â€? - Charting Our Course: Sustaining Bermuda, Sustainable Development Strategy and Implementation Plan for Bermuda, Government of Bermuda, June 2006.

“The ideas which are here expressed so laboriously are extremely simple and should be obvious. The difficulty lies not in the new ideas, but in escaping from the old ones, which ramify, for those brought up as most of us have been, into every corner of our minds.” - Preface to John Maynard Keynes’ The General Theory of Employment, Interest and Money, December 13th, 1935.

2008 Will Change Everything 2008 will eventually be recognised as a world event of greater historical significance than either: - The Fall of the Berlin Wall - The Birth of the Internet - The Invention of the Atomic Bomb - Both World War I & II The full consequences and implications of 2008 will take years to unfold.

2008 is… …changing our understanding of economics …revolutionising the practice of central banking …reforming Governments’ tax structures world-wide …changing our relationships with markets …causing seismic shifts in political power globally …changing our values …changing our culture …changing our way of life …changing pretty much everything

Bermuda in 2017: Test Tube to the World - Robert J. Stubbs