February 24, 2017

The Chair will now recognise the Honourable Minister of Finance, Minister Bob Richards.
2017
/18 BUDGET STATEMENT
Hon. E. T. (Bob) Richards: Thank you, Mr. Speaker.
Mr. Speaker, Honourable Members of the
House of Assembly, Bermuda’s national motto, “Whither the Fates Lead Us ,” has often been disparaged as a passive and visionless statement of nation-al character unworthy of the Bermudian people. On the surface, it can come across that way. But before dismissing it altogether, I would urge critics to consid-er deeper meanings within those five words; meanings that actually reflect our lot in life —a dot on the
map of a big, often turbulent world —and our character, ever vigilant and optimistic, confident that our
skills and ingenuity will manage the Fates to keep us
moving forward no matter the wind.
Mr. Speaker, I begin this
Budget Sta tement
for the fiscal year 2017/ 18 with reference to the motto
because it speaks to the challenges we face today
and the qualities we need to keep Bermuda sailing on the right tack, moving forward no matter the wind. We have entered an Age of Uncertainty in which the land-scape of our life—the post -war international order —is
shifting uncomfortably toward destinations not known. The uncertainty has come upon people over the past year like a slow motion shock. You can see it in the
headlines, hear it in conversations, even feel it in the pit of your stomach, if you cast your mind to what’s
happening in the world around us.
The Fates this time have been driven by the
consequences of economic stagnation, failing states,
polaris ation and protectionism manifesting themselves
in Brexit ; “America First”; potential black lists and a
Doomsday Clock at its closest point to midnight in
more than 60 years.
Mr. Speaker, the Government of Bermuda has
an important safe- hands role to play in this changing,
turbulent world, protecting the lives and interests of the Bermudian people. When it was elected in D ecember 2012 the first order of business was to stop
712 24 February 2017 Official Hansard Report

Bermuda House of Assembly the slide toward economic collapse. There was widespread unemployment, business closures and an exodus of people. Bermuda’s debt had risen more than
700 per cent in the preceding 14 years with annual
interest payments draining nearly $100 million from the public purse, an unprecedented amount.
The cost of Government had grown enormously, far outstripping the revenues to pay for it. This
was made searingly clear in the 2013/14 Budget a few
weeks after the election when with (and I quote) “a
profound sense of frustration,” I projected a budget
deficit for the coming year of $331 million, a stagge ring number. All of these developments, mixed with a
lack of national direction, had been sapping Bermudian self -confidence.
Mr. Speaker, the new Government acted
quickly to turn things around, putting in place a twotrack plan to stimulate economic growth and to control
and reduce Government spending. The aim was to
press every button, pull every lever and work every
angle to restore Bermuda’s economic health , extend
recovery into every home and give people hope for
better days. By every measure, we have made substantial progress:
• Bermuda’s Gross Domestic Product has rec-orded growth across two years, ending Bermuda’s prolonged recession.
• Tourism, an industry once given up for dead,
is being restored through the formation and
success of the Bermuda Tourism Authority,
new hotel developments , and the America’s
Cup.
• Job growth in 2016—the first year the Island’s Jobs Survey has added to its job total since
2008 —is set to accelerate with the airport r edevelopment and the St. Regis hotel in St.
George’s.
• Improved consumer confidence has buoyed
the per formance of the once- stagnant retail
sector and fueled local construction.
• In public finances, at the end of the 2018/19
fiscal year the current account is projected to
record its fourth straight annual surplus before debt service.
In fact, the surplus will cover interest charges
and capital expenditure. This means for the first time
in 15 years the Government will not be adding to its
net debt. We will have enough to contribute a port ion
of our mandated Sinking Fund Contribution, meaning
that our net debt will start to fall at that point.
Mr. Speaker, Government’s multi -
dimensional, multi -year campaign to turn around the
economy and restore confidence has been succee ding, yet we know that ending the Great Bermuda R ecession did not end the recession for everyone. The recovery has been uneven and hardship continues for
many, most keenly through the debilitating pressures
to pay bills and put food on the table. Government
wants to help these families and individuals, but there is very little room to manoeuvre, given the intense
pressures created by deficits and debt.
Since 2014 we have reduced the deficit by
$164 million, but that still leaves a projected $135 mi llion gap between revenues and expenses. In addition, the projected debt service of our debt this year alone is $186 million, an astounding number that works out
to more than $500,000 of debt service having to be
paid each and every day per year to our creditors.
Mr. Speaker, I mention these facts to highlight
the lack of room we have to help Bermudians who
need help. Last November’s Throne Speech signaled
our intention to introduce progressive payroll tax r eform. We have since worked out a plan to provide tax relief to those who need it most , and to involve the
rest of the community in helping to resolve our still
difficult financial challenges.
The need for community support is critical. In
2013, when we were considering the scale of the
problem, I said: “Government cannot do it alone. It is
going to take new levels of cooperation and teamwork
from Bermudians in every sphere.” Now is the time for
the community to kick in to help us eliminate the def icit once and for all.
Payroll tax reform is also about introducing
the principle of fairness into our system of taxation— a
system that had become increasingly unfair to lower income earners. In effect, these reforms will require
more from those who earn more and less from those
who earn less. That is what we mean by progressive
reform.
Mr. Speaker, it is my sincere hope the tax cuts
proposed in this Budget Statement will ease cost -ofliving pressures for the thousands of people who could use a break. The cuts, which are based on the
income bands a person’s wages fall within, will see
people who earn $96,000 or less a year getting tax
cuts up to $720. Mr. Speaker, this Budget continues
our work to restore hope and opportunity to households across the Island. We are making progress, but the work to make Bermuda work again for its people is
never ending.
We will continue to keep the pedal to the metal, speaking to investors and drumming up business
to create more opportunity, security and prosperity for Bermudians in all walks of life. This may prove to be a
stiff challenge given that the uncertainties at large t oday may well undermine confidence and slow inves tment activity. I can assure Bermudians that your Go vernment will remain vigilant to the threats and opportunities—the Fates , if you will—and be ready, with
safe hands, to seize the advantage and keep us moving in the right direction.

ECONOMIC CONDITIONS AND OUTLOOK
Global Picture

Hon. E. T. (Bob) Richards: Mr. S p
eaker, global ec onomic growth is positive albeit uneven. US economic


Bermuda House of Assembly growth continues to remain moderate, but with signs
of renewed acceleration. Figure 1 indicates GDP
growth on an upward trend (that will be seen in the green bars of that graph) after cooling off for 2015. Industrial Production, which includes manufacturing (which is shown in the blue line), continues to be
somewhat weak, illustrating some of the issues of the
recent US election, where the loss of manufacturing
jobs to other countries was a critical factor in Mr. Trump’s electoral success in the so- called “Rust Belt”
manufacturing states. However, in aggregate, the se rvice economy more than compensates for losses in manufacturing, and this is evidenced by the continuing
strong trend in employment shown by the red line in
that same graph, Figure 1.
Mr. Speaker, strong employment trends are
confirmed by Figure 2, which clearly shows consumer confidence having fully recovered to levels immediat ely preceding the start of the Great Recession.
The other factor worth noting is the cost of
energy. Figure 3 traces the price of crude oil and clearly shows world crude prices have bounced signi ficantly in 2016 from a low of about $30 per barrel to
around $55 per barrel. The shaded blue area represents US supplies of crude. It is evident that supplies
are still quite high, so it should not be anticipated that crude prices would bounce back up to the $100 per
barrel level in the immediate future. What it does
mean is that the era of super cheap energy may be over, something that has definite implications for US
dollar interest rates and Bermuda’s energy bill.
The US Federal Reserve recently raised
short -term interest rates by one quarter of one per
cent and also indicated that there may be another two
rate hikes in the offing for 2017. Rising interest rates always provide a challenging background environment
for investors, particularly fixed income investors, as
rising short -term interest rates erode the capital value
of existing bonds.
Mr. Speaker, this will have challenging impl ications for our insurance and reinsurance sectors,
which are heavily invested in bonds. Also, bec ause
the Government continues to run deficits, it means
that financing those deficits will become more expen-sive. The opportunity the Government recently took to refinance bonds at ultra- low rates may not likely pr esent itself again in the near future. That is yet another
vitally important reason for Government to balance the
budget because the cost of debt is likely to increase.

EXTERNAL THREATS

The Trump Effect

Hon. E. T. (Bob) Richards: Mr. Speaker, what does
the election of Donald Trump mean for us here in
Bermuda? The answer depends, perhaps, on whether we believe he will (or can) do all that he has said he will do. He has already reversed himself on a number of campaign promises even before he became Pres ident. However, with the Republicans controlling both houses of Congress for the first time in a very long time, the US Government has the opportunity to make major shifts in policy, especially fiscal policy. The idea of a cross -border tax is particularly worrying to our
international business sector. If taxes were placed on
cash flows from reinsurance claims , it could be cat astrophic for Bermuda- based reinsurance companies.
Mr. Trump’s campaign emphasised a strong
pro-growth policy, which will likely manifest itself in
large deficit -financed infrastructure projects with little
regard for the deficit or inflation. There will also be strong attempts to reform and lower the US tax structure, something that is also likely to swell the deficit, particularly as there is no talk about paring Gover nment spending.
Mr. Speaker, for Bermuda this is likely to be a
two-edged sword. The classic Republican cutting of
taxes to stimulate growth should have a positive effect on our tourism business. More disposable income in the hands of more Americans will provide Berm uda
with a very good opportunity to increase the numbers of people vacationing on our shores. If the President’s
tax policies have the effect of “bringing home” jobs
that were outsourced to other countries, that will also present increased opportunities for Bermuda tourism.
Of course, “if” is a powerful word. I suspect
that the wage disparities between the US and many developing countries are so large that no amount of
tax engineering will be able to bring many of those
jobs back to the US. Added to that, as in the Ford Mo-tor Company’s plant in Mexico, many foreign manu-facturing jobs owned by US corporations market their products globally , as opposed to selling them back to
the States. Moreover, the march of technology, parti cularly in the area of manufactur ing, means that the re -
domiciling of manufacturing to the US would not result in the re- domiciling of the same number of jobs, as
many of them would be replaced by machines.
Realistically, however, there is a limiting factor
to the number of jobs out there to be created. The current unemployment rate in the US is 4.7 per cent. The
Federal Reserve’s definition of full employment is
4.8 per cent. Therefore, even now, unemployment has
fallen below the threshold whereby the Fed will be compelled to act, via monetary policy and interest
rates, against the inflationary pressures any further
declines in unemployment may cause.
Mr. Speaker, you have to go back to the
1960s to find a period when the unemployment rate stayed below 5 per cent for four years or more. Th e
median unemployment rate over the past 25 years
has been 5.6 per cent. A mild recession, possibly
caused by monetary tightening, sending the unemployment rate back to that level is now well within the
realm of possibility.
The other edge of the Trump sword carries
with it a very serious risk to Bermuda’s economy. Tax
714 24 February 2017 Official Hansard Report

Bermuda House of Assembly reform in the US context will definitely mean corporate
tax cuts. The scenario whereby US corporate taxes
are cut to such an extent that there will no longer be a comparative advantage to use the facilities that Bermuda offers is now possible. There is also the poss ibility that the details of tax reform could either inten-tionally or unintentionally target our insurance or reinsurance business and damage Bermuda’s compar ative advantage, resulting in the re- domiciling of co mpanies to the States with the corresponding loss of Bermuda jobs and income.
We do not know the details of US tax reform
yet; perhaps nobody does at this time. However, the
risks to our international business model are very s ignificant and we must be extra alert and vigilant.

Brexit
Hon. E. T. (Bob) Richards: Mr. Speaker, to twist
Churchill’s famous Battle of Britain quotation, “Never
was so much owed by so many to so few,” we can observe that never has so much verbiage been written by so many “experts” with so few facts, than on the subject of Brexit.
Prior to the vote last year, the conventional
wisdom was that Brexit would be either bad, or very bad, for the UK economy, resulting in a recession, which would hurt the fortunes of millions of Britons. The vote showed that Britons themselves felt differ-ently. S ince then, the UK Government has been frantically trying to figure out how to deal with the situa-tion.
The financial and economic indicators appear
to reflect the schizophrenia in the UK relating to Brex-it. Figure 4 shows that the FTSE100, the UK’s prima ry
stock exchange index (shown in red) has actually ri sen since the Brexit vote, hardly a harbinger of disas-ter. On the other hand, the blue line, representing the trade- weighted index of the British Pound exchange
rate, has plummeted during the same perio d.
Figure 5 shows UK Consumer Confidence.
While personal consumer confidence ( which is the
blue line) fell sharply after the vote, it has subsequent-ly recovered somewhat to a neutral reading. Conf idence in the General Economic Condition ( which is
the red line) has not fared as well showing a weaker trend. Mr. Speaker, while these are just four indicators
out of the myriad of clues analysts look at, it is an in-dication of the confusion surrounding the whole Brexit issue.
Here in Bermuda, it is clear that we should not
jump to premature conclusions about this issue and how it may affect us. However, the Government has
initiated consultation with the British Government on
the Brexit issue to ensure, as much as possible, that Bermuda’s interests are protected and maintained.
Perhaps the most universal concern to Bermudians relative to the UK leaving the EU is that of passports and travel access to EU countries. Current-ly, Bermudians enjoy the best of both worlds: unli mited access to the EU and visa free access to the US. Brexit threatens this position and we don’t know what the final position will be. Bermudians should be aware, however, that the Government will be doing ever ything possible to minimise the negative fallout of Brexit on Bermuda’s travel privileges .

Tax Haven Threat

Hon. E. T. (Bob) Richards: Mr. Speaker, in a recent
article in the Financial Times entitled, “US tax reform
is vital but Donald Trump’s plan is flawed,” Dr. Larry Summers, a former Federal Reserve Governor and
celebrated economist, concluded (and I quote): “There is no need to reinvent the corporate tax wheel. Let’s fix the tax we have by cutting rates, closing shelters, broadening the base and cracking down on tax ha-vens. That would be an important step to making our
economy grow fast er. It would also be fairer.”
It is noteworthy that Dr. Summers is Amer ican, not British. And although writing about the US
economy, one wonders whether he was referring to cracking down on his own domestic tax havens like
Delaware, Nevada or Wyoming, or whether he was
referring solely to the bane of the global economy —
those pesky “dots on the map.” On the other side of
the Atlantic, a number of MPs in the British Parliament are proposing an amendment to the Criminal Financ-es Bill that would enable the British Parliament to use
an Order in Council to compel Overseas Territories to
adopt the UK model of public beneficial ownership registers for companies incorporated in the territories.
Mr. Speaker, the Bermuda Government is
strongly opposed to this initiative as company bus iness, and anything that has to do with the governing
of Bermuda incorporated companies, falls squarely
within the purview of the duly elected Bermuda Gov-ernment, and the Minister of Finance in particular. This initiative is an affront to Bermuda’s constitutional rights enshrined in the Bermuda Constitution Order
and if it gathers favour in London, we will fight it with
all the means at our disposal.
Constitution aside, an Order in Council by a
large country like the UK, in whose parliament Bermuda has no representation, against the interests of a small one like Bermuda, whose laws are the creation
of a locally, democratically elected legislature, in this
day and age would be an anachronistic act typical of a time long past, and diametrically opposed to contem-porary internationally accepted principles. Such an action would place Bermuda at a distinct competitive disadvantage to other financial centres.
Mr. Speaker, public beneficial ownership registers are not the world standard, but are the hobb yhorse of factions within the UK. Bermuda prides itself on being [an] early adopter in all the global standards for transparency and cooperation, and we have the track record to prove it. Bermuda’s position is clear:


Bermuda House of Assembly we adopt global standards. The UK would be better
served to use its influence to persuade global standard-setting bodies like the FATF, the OECD and the
G7 to adopt the public register standard, instead of intimidatory tactics on Overseas Territories.
Then there are our “friends” in the EU, some
of whom appear determined to find some way to co njure up yet another black list to vilify “low or no tax jurisdictions.” Just in recent weeks, a Member of the European Parliament castigated the island of Malta as being a tax haven, even though it has a headline corporate tax rate of 35 per cent and is a member of the
EU. What does Malta have in common with Bermuda?
Nothing, except it too is a dot on the map.
It all fits into the general pattern of large po werful countries with high tax rates and low economic
growth targeting small countries to use as political scapegoats to please their constituents who are dis-contented with their economic situations. This is part
of the current international reality impacting and
threatening the standard of living of all Bermudians.

Global Initiatives in Financial Regulation

Hon. E. T. (Bob) Richards: Mr. Speaker, this external
risk is directly linked to the Tax Haven Risk. The fact
that international financial regulations are not applied equally across the spectrum from large powerful coun-tries to small islands is good reason to be very watc hful. The upcoming assessment of Bermuda’s compl iance with regulatory developments for the latest inter-national anti -money laundering standards is a case in
point.
Next year the Caribbean Financial Action
Task Force (CFATF), which is a regional unit of the global anti -money laundering standard- setting body,
the Financial Action Task Force (FATF) in Paris, will assess Bermuda’s Anti -Money Laundering (AML) and
Counter -Terrorism Fina ncing (CTF) laws, standards
and procedures. Like most of these international as-sessments, the goalposts keep changing and each
assessment becomes more stringent.
Bermuda’s National Anti -Money Laundering
Committee (or NAMLC) is working very hard to get us
ready for this assessment, which covers many more
areas than it did on the last occasion. With the in-creased global hostility surrounding the tax haven i ssue, it is critical that Bermuda pass this test with flying colours. To do otherwise would risk significant dam-age to our international reputation and put at risk our attractiveness as a first -class international business
centre, something that our international business community depends on.

The International Threat Index

Hon. E. T. (Bob) Richards: Mr. Speaker, The threat
level to our international business model has never
been as high or as imminent as it is now. These threats literally pose “a clear and present danger” to
Bermuda’s international business sector, the thousands of Bermudians who depend on that sector for their livelihoods and the economy in general. The si tuation calls for careful, calculated and targeted action by Bermuda, particularly from the Cabinet Office and the Ministry of Finance, in close collaboration with our
international business (IB) stakeholders. The Government will remain vigilant and prepared to defend against these threats.
I am moving from international to local.

Bermuda

Hon. E. T. (Bob) Richards: Mr. Speaker, the Berm uda economy continues its overall recovery from the
long and painful six -year recession. Figure 6 shows
quarterly gains in GDP in 2015 and 2016, except for a brief pause in Q1 in 2016.
If anyone ever had any doubts about the effect an America’s Cup- type event could have on the
economy of Bermuda, one only has to look at the jump in Q3 2015 GDP when Bermuda hosted one of the World Series events. That World Series jump is
why Q3 2016 shows a year -over-year decline against
Q3 2015. The hosting of the AC35 finals plus the ot her concurrent maritime activities during May and June
2017 will have a much greater positive impact on our
economy over the short term and longer term.
Mr. Speaker, Figure 7 shows monthly year -
over-year percentage changes in retail sales. The blip
downward in October 2016 is due to an unfavourable comparison to October 2015, the month we hosted the AC35 World Series event. Other readings are, in the main, positive, reflecting continuing gains in strength in retail sales in Bermuda. Beneath the hea dline numbers, the motor vehicles sector led the way with average monthly growth of 11.2 per cent. Building materials, which had been particularly weak, started to pick up in the third quarter with monthly growth rates averaging 13.5 per cent. Apparel stores continued
weak.
Mr. Speaker, Figure 8 is a rough indicator of
the volume of goods crossing the Bermuda frontier.
While we don’t know what is in these containers, we can see that the downward trend of numbers of con-tainers reversed itself in 2014, and that trend conti nued in 2016. While these numbers ignore items i mported by air, Bermuda’s imports are directly connec ted to the combination of consumption and infrastruc-ture spending in the Island, as most things have to be imported. Consumption and infrastructure spending are two of the three main engines of GDP, the third
being exports of services.

Tourism

Hon. E. T. (Bob) Richards: Mr. Speaker, the hard
work of the men and women at the Bermuda Tourism
716 24 February 2017 Official Hansard Report

Bermuda House of Assembly Authority is finally starting to bear fruit for Bermuda
Tourism. It was never going to be easy turning around
a declining trend that had been in place for 30 years,
but the evidence clearly shows that Bermuda tourism is on the comeback trail, generating jobs and career opportunities as things progress.
Figure 9 shows trends for the all -important ai r
leisure visitors and cruise visitors through December 2016. Measured against 2015 results for the same period, leisure visitors by air grew 17 per cent to 164,321, the highest volume since 2007, while cruise visitors rose 5.4 per cent to 397,880.
Figure 10 shows the upward trend for total air
visitors, including business visitors and those staying with friends and family. Total arrivals were up 11.2 per
cent. The quality of 2016’s success is further under-scored by the fact that leisure air arrivals grew e very
month compared to 2015. These are impressive r esults that auger well for the future.
Mr. Speaker, it is the combination of marketing and sales professionals with investment/business professionals that make the BTA a unique and effec-tive force in Bermuda’s campaign to revive the tourism sector.
Interest in Bermuda as a tourist destination is
clearly on the rise. A vital component of this develop-ment is the work by the BTA, with the support of the Government, to increase airlift to the Island, a critical bridge to growing visitor arrivals. The results to date are impressive, with 11 per cent growth in air capacity
in 2016. That growth combined with the BTA’s sharp, nimble and well -targeted marketing efforts saw big
jumps in arrivals from key US markets in 2016—New York up 46 per cent, Connecticut up 27 per cent,
Washington DC up 24 per cent, Boston 13 per cent
and Philadelphia 8 per cent.
One of the most encouraging developments in
the 2016 result is the younger type of visitor we are beginning to attract. BTA figures indicate that 76 per cent of the growth in leisure air arrivals was from peo-ple under the age of 45— a remarkable turn for a destination that just a few short years ago was saddled with a reputation for being old and stale.
Mr. Speaker, the practical impact of tourism’s
growth in 2016 was a 10 per cent jump in hotel occ upancy and an 18 per cent jump in spending by air and
cruise visitors to $266.6 million from $225.7 million in
2015. This is money going into local businesses and
paycheques, supporting day -to-day lives of Bermudians.
Another aspect of Bermuda Tourism’s turnaround is the increased interest in Bermuda from an investment standpoint. This can only happen if Bermuda offers potential investors a business environment and incentive packages that are attractive and competitive. Efforts on the investment front in hotel properties by the BTA and the Government are mani-fested by major projects at Morgan’s Point (which is going to be called Caroline Bay resort, condos and marina), The Loren (which has just opened), Surf Side
(which is to become Azure) and the soon- to-break
ground St. Regis in St. George’s.
These infrastructure projects are an integral
part of the growth plan the Government envisioned
when it took office in December 2012, and ar e the
result of our strategy to create jobs for Bermudians
while working to eliminate the Government deficit so
that we can start reducing its debt —the two- track
strategy. We are making progress on both fronts.

America’s Cup

Hon. E. T. (Bob) Richards: Mr. Speaker, 2017 is the
year of the 35
th America’s Cup— Bermuda’s America’s
Cup.
Bermuda, as the host venue, will be on the
world stage as thousands of visitors, sponsors, partic-ipants, visiting vessels and members of the intern ational media descend on the Island. In addition, mi llions are expected to follow the events through inter-national media coverage and online. Bermuda and our tourism product will receive unprecedented worldwide exposure.
As we sit here in this Chamber today, AC35 is
already a triumph—an economic triumph. One just needs to take in the view from the Commissioner’s House at Dockyard to see what I mean: A worksite buzzing with activity, buildings being built and reno-vated, new land taking shape, trucks and machines
moving about, with Bermudian manpower and skill
making it all happen. The scene is an example of Government’s economic strategy coming to life.
For those who say AC35 is an event for
“elites” that will have minimal impact on the average Bermudian, consider this: These elites from abroad
are Bermuda’s customers, many of them new customers. Bermudians benefit by providing them with goods and services for which they will be well able to pay top dollar. AC35 skeptics should visit Dockyard to see for themselves fellow Bermudians, men and
women working hard, making a difference.
Mr. Speaker, collectively, the teams have r eported spending over $22 million on their team base
operations in 2016 alone. This expenditure does not include team salaries and spending by team members and their families on local goods and services. Local
spending by team operations, as well as team me mbers and their families includes goods and services provided by restaurants, transport services, construc-tion and trades, wholesale and retail operators, secur ity services, marine services, shipping and forwarding
companies, telecommunications providers, service
industries, small businesses and real estate professionals.
America’s Cup will be a boon for Bermudian
entrepreneurs, as it was for dozens of them during the World Series event in October 2015, only this year on a much bigger scale. There is also major legacy value


Bermuda House of Assembly to AC35 that will last long after the event is over. The
event itself will generate global exposure for the I sland, positioning Bermuda Tourism for long- term success.
Moreover, it represents a major opportunity to
deepen the BTA’s campaign to re- brand Bermuda as
an exciting, dynamic and top- drawer destination. It is
a once- in-a-lifetime opportunity for the Island, and we
must take full advantage of it. Jobs and opportunity for
the short term and the long term depend on it.
Mr. Speaker, travel a few miles from Dockyard
to Morgan’s Point and you will find a vast develo pment site where Bermuda’s largest marina is being built. Building foundations are f inally visible after
months of constant work involving backhoes, bulldo zers and dump trucks. Again, you will see men, women
and machines at work building the first phase of this mega- project to transform Morgan’s Point into a toptier visitor resort featuring the exclusive Ritz -Carlton
Reserve brand.
The Government committed taxpayer dollars
to support these two developments: $39 million for land reclamation at Dockyard, and $18 million to r ehabilitate Morgan’s Point, which was left in an unus able state by the US Navy. In building infrastructure to support the America’s Cup and making a huge swath of polluted land useable again, the Government used public dollars to support developments that will be-come catalysts for long- term economic development
and employ ment.
Mr. Speaker, the East End will see similar
spikes in development activity. The Airport Redevel-opment Project will soon break ground and Gover nment’s promise to get a brand new hotel built is on the verge of being fulfilled. With a dedicated cruise ship returning to the Old Town and a new marina in the
works, 2017 is set to be the start of a renaissance for
the East End, a community that for so long has been overpromised but underserved.

International Business

Hon. E. T. (Bob) Richards: Mr. Speaker, International Business remains the bedrock of Bermuda’s econ-omy. The dominant sector remains insurance and r einsurance. Figure 11 shows trends in major indicators in the Bermuda Insurance market. Premiums were flat
year over year at $152 billion while tot al assets r etreated marginally to $583 billion. Capital and Surplus
however, rose to $214 billion.
Globally, the insurance market continues to
experience a glut in capital resulting in soft renewal rates, which has driven the merger mania in the market place. The mergers have reduced the number of
players, and thus the number of employees, but the financial strength of Bermuda insurers remains very strong.
Although captive insurance, the genesis of our
insurance business, was excluded from the Solven-cy II exercise, Bermuda remains the premier captive
centre in the world. There were 13 new captive com-panies incorporated in 2016 compared to 22 in 2015.

Other Segments of International Business
Bermuda Business Development Agency (BDA)

Hon. E. T. (Bob) Richar ds: Mr. Speaker, with the
goals of job growth, increased GDP and reputation enhancement, the BDA is focused on educating the marketplace, differentiating the Island from our rivals, market penetration and product development.
Activity in 2016 yielded positive results as
shown by the establishment of our first Chilean cap-tive, the physical presence of a life- science company,
the return of the world’s leading asset allocators to use Bermuda as their platform and continued devel-opment of the trust and private client sector. As the welcoming arm for new business, the BDA helped 17
companies establish themselves on the Island in
2016, with research indicating the creation of at least 146 jobs through companies that had received BDA assistance.
Mr. Speaker, also during 2016, the BDA team
participated in no fewer than 62 different conferences and events. Highlights included asset management events at Madison Square Gardens and the Flatiron Room in New York, attendance at Posidonia in Greece, the Artemis conference i n Singapore and
Hong Kong, RIMS in San Diego, private client events
in Europe and Asia, and America’s Cup World Series
events in New York and Chicago.
The BDA brought five events to Bermuda during the year, including the Legal Week Private Client Forum Americas at Tucker’s Point in February, RC44 Bermuda Cup, ALARYS Latin America Congress,
World Alternative Investment Summit, and the Aer opodium aircraft registration conference. The BDA also
facilitated the return of events we originally brought to Bermuda, such as the Transcontinental Trusts Conference, the Regulatory Compliance Association sy mposium, the Global Fund Forum, and the ILS Bermuda Convergence. Such events have synergy with Berm uda’s hospitality industry, particularly during the less busy shoulder season.
For the year ahead the Agency will further develop Family Offices and target advisors to Chinese
wealth, continue its penetration of the Latin American
market for captive and trust products, develop cross -
sector messaging for healthcare risk solutions, edu-cate the US market on the value and advantages of Bermuda’s new LLC legislation, and promote the I sland as a hub for high- level, life -sciences, bio- med
companies.

Construction

Hon. E. T. (Bob) Richards: Mr. Speaker, construction
is an important area of employment in Bermuda. Al t718 24 February 2017 Official Hansard Report

Bermuda House of Assembly hough some of the blockbuster projects have not yet
commenced, the sector is already expanding.
During the first three quarters of 2016, the estimated value of work put in place grew from $58.9
million in 2015, to $76.9 million in 2016, an increase of 30.6 per cent. Work performed on residential co nstruction projects accounted for 37.7 per cent of construction activity. Offices, shops and warehouses con-tributed 29.1 per cent of the total, and the Industrial
Plant and Other category represented 12.6 per cent of
total activity in the construction industry.
Together, these three categories accounted
for 79.5 per cent of all work put in place between January and September 2016. During that time period,
71.7 per cent of the construction work performed was
performed by the private sector and 28.3 per cent by
the public sector.
During the first nine months of 2016, 41 new
dwelling units were completed in the residential sector
of the industry, which represented an increase of
three units or 7.9 per cent year -over-year, which hal ted the downward trend that occurred in this segment of the construction industry over the past several years.
Mr. Speaker, it is clear that while the sector
has started to expand as a whole, there still appears to be enough slack in the sector for the major projects that are waiting in the wings —the airport redevelopment, the St. Regis hotel in St. George’s —to make a
major impact on local employment in construction.

Property

Hon. E. T. (Bob) Richards: After three years of sharp
recovery from the recession doldrums, Bermuda
property markets corrected in 2016. Prices softened
across all sectors except for luxury condominiums.
There was also a fall in the volume of transactions as unit sales and total dollar value, including home, land and commercial sales, fell in 2016.
Mr. Speaker, in 2016, in the residential sector
the number of luxury homes sales fell by 50 per cent
year over year, with only seven recorded sales with an Annual Rental Value (ARV) of $126,000 or more. Me-dian sales prices fell 25 per cent to $3.5 million in this
category. Half of the purchases came from Bermudi-ans with most foreign buyers coming from Britain.
Luxury condominiums saw some firming of
sale prices with average prices increasing 7 per cent
to about $910,000 compared to 2015. Bermudians represented 80 per cent of those buyers. Foreign
buyers were mainly from the United States, South Af-rica, and Switzerland.
The residential rental market in 2016 r emained stable. Rental activity was supported, in part, by long -term properties accommodating teams from
America’s Cup, thereby reducing the overall market inventory typically available for long- term tenants. The
latest average asking rental rates are one bedroom, $1,800 per month; two bedroom,$2,800 per month;
three bedroom, $4,500 per month.
External threats, including US tax reform and
Brexit, are likely to cause caution for buyers and keep
prices steady. There may be some stimulus due to
America’s C up.
Employment

Hon. E. T. (Bob) Richards: Mr. Speaker, the latest
jobs figures from the Department of Statistics show
that, as of last August, year over year, there were 56 more jobs reported than the previous year. This is an important positive change in direction from the prev ious many years.
As outlined in last year’s Budget Statement
employment is a ‘lagging indicator.’ The burst of activ ity we have seen with our own eyes in Dockyard, Mor-gan’s Point, and Pink Beach are clearly not reflected in these numbers, as the data shows an increase of
only 10 jobs in the construction sector.
It should also be noted that the Jobs Survey
includes people who have retired and/or left the wor kforce for other reasons and whose positions have r emained vacant or discontinued. This is of particular note with respect to Government where 169 fewer
jobs were reported evidencing the hiring freeze policy and early retirement drive to reduce the size of Gov-ernment through attrition. Positions vacated by early retirement are not allowed to be filled for at least two years. The public should be reminded that this has
occurred despite there having been no layoffs in Government, in accordance with stated policy.
Mr. Speaker, the ageing and retirement of baby boomers is a statistical fact that has worked to shrink the workforce. As retiring baby boomers fall off the rolls of the workforce, they are not being replaced
by equal numbers of young people because there are
fewer of them.
Unfortunately, we do not have a system of estimating jobs in the economy that is more timely. Not-withstanding this, it is clear that the dampening effect
of demographics and consolidation in the IB sector
needs to be counterbalanced by growth elsewhere. This is well recognised by the Government, hence the focus on growing tourism and capital projects already mentioned, plus the airport redevelopment project and the St. Regis that are about to commence.

Banking

Hon. E. T. (Bob) Richards: Mr. Speaker, banking is
always a strategically important sector in any ec onomy, as banks enable virtually all transactions in the economy and provide a store of wealth, as custodians
of the savings of members of the community. More over, as intermediaries, banks recirculate savings of those with surplus funds to those who are in need of
funds through their loan and credit facilities. Banks are also our primary conduit to foreign exchange —


Bermuda House of Assembly something vital in Bermuda. Therefore, the behaviour
of banks has a larger than life impact on the fortunes
of the economy at large.
Figure 12 shows the credit trends over recent
years. Year -over-year, banks lending marginally d ecreased and is now in excess of $1 billion less than it was in 2008.
Mr. Speaker, during the recession banks’ nonperforming loans increased substantially, as B ermuda
real estate, the collateral that banks most often used to secure their loans, experienced the first major cor-rection ever. Figure 13 illustrates that banks have been working these non- performing loans (NPL)
down. These NPLs have had the effect of a brake on lending by local banks.
Meanwhile, on the deposit side, the picture
has been very gloomy. Ultra- low interest rates, coupled with various fees, have had the effect of custo mers experiencing negative rates of return on their savings. Ever increasing international pressure on banks
to tighten up “know -your-client” documentation has
strained relationships with established customers, especially long -term customers who reckon that the
bank already knows who they are. It is a difficult time
to be in the banking business and to be a bank customer.
One bright shaft of light through the gloom
was the successful Initial Public Offering (IPO) by Bu tterfield Bank in 2016. This transaction recapitalised the bank and retired the preferred shares that carried
a Bermuda Government guarantee. The bank is now
on a more solid financial footing and the Government has about $180 million less in contingent liabilities outstanding. The decision to back Butterfield Bank by the Government during that time of crisis was of cri tical importance, and a good one that has worked out
well for the bank and the community at large.

Pension and Seniors

Hon. E. T. (Bob) Richards: Mr. Speaker, Bermuda,
like most other countries, currently provides retired
individuals with a combination of Social Insurance from the Contributory Pension Fund (CPF) and an occupational pension from their employer. Last year Government promised that it would consider adjusting pension payments from Social Insurance pending the
report of our actuarial consultants. After receiving the
report the payout from Social Insurance was i ncreased by 5 per cent in September 2016.
Unfortunately, there are still many seniors that
are struggling to make ends meet, and with the high cost of healthcare find themselves in financial straits.
It is an unfortunate fact that a large percentage of
Bermudians on Government Financial Assistance are seniors. Government is looking into the various as-pects of this problem, particularly the cost of healthcare, to ameliorate the situation. A number of issues have arisen as it relates to
the Occupational Pensions system and its ability to meet the needs of both pensioners and members at
large. We are in consultation with the Pensions Com-mission to make the system more responsive to the needs of users but at the same time ensuring that the assets are sufficiently protected so that they are there
when members actually retire.

National Deb t

Hon. E. T. (Bob) Richards: Mr. Speaker, the Serenity
Prayer crystallises the context of the National Debt: “God grant me the serenity to accept the things I ca nnot change; courage to change the things I can; and
wisdom to know the difference.”
Earlier in this Budget Statement I said the external risks for Bermuda are probably the highest they have ever been. We will continue to monitor the situation and do what we can to mitigate the risks, fully
aware that executive decisions related to those risks are in the hands of foreign governments and corpor ations, not us. Meanwhile, the Government and legisl ature of Bermuda can do much to mitigate our own internal risks.
For two consecutive national budget stat ements I have been emphatic in characterising the N ational Debt as the single biggest threat to the future
prosperity, standard of living, and social stability of the
people of Bermuda.
Figure 14 shows the trend in Net Public Debt
over the past 10 years. In spite of my repeated exhor-tations on this subject, there are some who remain skeptical about the seriousness of this threat, even though the independent Fiscal Responsibility Panel has made a similar declaration on two consecutive
occasions. In their 2016 report they said (and I quote)
“Bermuda’s economy faces a number of risks and u ncertainties in both the short and longer term. Our judgement is that with Brexit, the US elections, and the impending evaluation of the island’s anti -money
laundering/counter -terrorism financing regime, these
risks have increased. The current level of government debt—combined with very large potential liabilities
from government guarantees and underfunded public pension and health insurance schemes —means that
any negative shock resulting from these or other factors, internal or external, could have very serious ec onomic consequences. Reducing government debt and
debt service costs mitigates these risks and will make the island’s economy more resilient to any such shock; it must therefore remain an overriding priority.”
Mr. Speaker, how does the size of the Natio nal Debt affect the average Bermudian? Here are the facts: Government performs certain critical functions that directly or indirectly impact the quality of life of everyone on our Island. Four functions that immedi-ately come to mind are: health care, public education, the social safety net, and national security. While
720 24 February 2017 Official Hansard Report

Bermuda House of Assembly many of these services are free, they all come at a
cost, which is paid for by taxpayers. In this upcoming
fiscal year, the Budget estimates the cost of Healt h
Care to be $163 million, public education $126 million, social safety net $87 million, and national security $147 million.
Even if you are healthy, can afford private education, are gainfully employed, don’t need the social safety net, and are law -abidin g, these four services
will still impact you because many other people around you rely on some or all of them. The small size of our community is such that no amount of individual wealth can completely insulate anyone from the negative effects of an erosion of these services. They are
crucial to maintaining the social fabric of our society, and in the coming fiscal year they will cost $523 mil-lion.
Despite their priority importance, the Gover nment has a higher priority and it comes to us not by
choice but by necessity. That top priority is debt service, estimated to cost $186 million in the next fiscal year—now the largest line item in the Government’s
budget. For every dollar of revenue that Government takes in during this upcoming year, 17.7 cents will
come off the top to service the debt. In 1998 it was
2.8 cents.
The greater the debt, the larger the debt service costs; the larger the debt service costs the less money Government has available for crucial social and safety services. The danger point here i s simple:
increasing the national debt will increase debt service and crowd out Government’s ability to perform its core services to the community.
So, Mr. Speaker, when you hear people sa ying we should have borrowed money to do this or that, or borrowed the money to build something, like a new
airport terminal, the real consequences of such an
action is debt service costs crowding out of Gover nment’s ability to fulfil its obligations to the people of Bermuda for education, health care, social services, and security. Such casual attitudes to the National
Debt are both irresponsible and dangerous. The Blue Ribbon Panel was particularly sensitive to the “high risk” of adding to the National Debt, which it described as a “national threat.”
If debt and debt service are allowed to soar,
credit rating agencies will downgrade Government
debt, which would increase the cost of servicing the
debt. In this scenario, if Government cannot pare back spending on social programmes, the debt will increase even further and initiate a vicious downward spiral of downgrades until credit markets ultimately deny the Government access to credit, crippling its ability to
provide services. We would then have to go, cap in
hand, to some outside entity for aid, thereby losing control of our own finances to outside entities and our
good reputation as a well- managed jurisdiction (as
some other islands already have done). Mr. Speaker, Moody’s, one of the two main
credit rating agencies, publishes reports on all the countries it rates. Bermuda with its A2 rating has a debt service score using the metric of interest/total revenue of 11.8 per cent. Countries with the same A2 rating like Botswana with interest/revenue score of 1.1 per cent and Poland with a score of 4.3 per cent
are in much better shape than us using this metric, even though Botswana is a poor country. Of the Moody’s grouping of countries with ratings ranging from Aaa to A3, Bermuda has the second highest i nterest/revenue score. What this means is that if we don’t stop the debt from growing we will fall out of this
peer group and be downgraded. If we added, say
$300 million to our national debt for a capital project, we would risk this very thing happening.
Also, all but one of the local banks depend on
the Government’s credit rating for their own credit rat-ings, so there will be credit contagion from Gover nment to the banks as a result of poor Government f inancial management, putting our entire banking sy stem and Bermudians’ bank savings in jeopardy.
Mr. Speaker, Bermudians’ other favourite
store of value, real estate, would also plummet; tri ggering mortgages being called and people losing their homes.
No one, absolutely no one, wants any of this
to ever happen (although we know we got a taste of some of this already during the last recession). But as
leaders, Government must protect against such risks
by taking action now, so that it never happens.
Therefore, the threat posed by the size of the
national debt is not merely an academic threat, or a
problem that can be viewed as someone else’s prob-lem, or “Government’s problem.” It is a threat to us all—every man, woman, and child who calls this I sland home.
These are the reasons that the OBA Gover nment has set eliminating the annual deficit, balancing the budget, and paying down the national debt as its top priority. Pursuing this objective has framed all the
budgets this Government has presented during it tenure, and it shapes this 2017/18 Budget as well. The elimination of these risks involve cutting spending, stimulating job- creating economic growth, and i ncreas ing revenues where and when necessary.
Mr. Speaker, Figure 15 shows we are making
good progress. Eliminating the deficit will stop debt from growing. Our Sinking Fund will guarantee money is put aside for debt reduction. As the deficits get
smaller and smaller, the growth in debt will eventually cease. To eliminate the deficit, we must have a Go vernment that is committed to stay the course and not
be tempted to engage in costly adventures that may
be politically popular but will ultimately impair Go vernment’s ability to fulfil its obligations to the people. This Government is committed to prudent fiscal man-agement that will enable us to have the fiscal space to


Bermuda House of Assembly deliver the social programmes that Bermudians expect and need.

Capital Market Activity
Hon. E. T. (Bob) Richards: Mr. Speaker, in October
2016, the Government successfully accessed the i nternational capital markets when it issued a US$665
million, 10 -year bond offering due January 2027. This
resulted in a record low coupon/yield of 3.717 per
cent, the lowest ever for Bermuda. The results also recorded a spread over US Treasuries of +195 basis points (bps), a record low spread, and 30 basis points
cheaper than the Government’s previous capital market borrowing.
This was a resounding endorsement of the
Government’s financial and economic management of the Bermuda economy by the credit markets. It is im-portant to note that although the Government issued a
total of $665 million in new bonds, the increase in
Government debt was $188.9 million. The rest of the new issue was used to retire more expensive existing bonds.
The new issue and tender offer were expected to reduce annual debt interest expenses by about US$4.0 million, or 2 per cent of the current def icit. Local Bermudian investors also contributed addi-tional demand in excess of US$100 million.

Tax Reform

Hon. E. T. (Bob) Richards: Mr. Speaker, as announced in our 2016/17 Budget Statement the objec-tives of tax reform would be to increase the fairness of the Payroll Tax structure, simplify the Customs Tariff, broaden the tax base by introducing new taxes on
services, and raise the overall tax revenue collected
by Government to help reduce the overall budget def icit and balance the budget in three years. We also stated that these measures would be implemented over a three- year period, one of which has almost
passed.
Mr. Speaker, the Fiscal Responsibility Panel
and the Government agree that the budget cannot be balanced without raising revenues. Sixty per cent of Government’s tax revenue comprises of payroll taxes and customs duties: 39 per cent payroll taxes and
21 per cent customs duties. This means that any significant increase in revenues for Government will, vir-tually by necessity, include upward adjustments to these two classes of taxes. Therefore, the first major steps towards that goal are reforms to payroll taxes and customs duties.

Payroll Tax

Hon. E. T. (Bob) Richards: Mr. Speaker, most of the
efforts this past calendar year have been concentrated on reforming the payroll tax structure including ex-tensive consultation with private sector stakeholders.
In addition to raising taxes to help to ultimately balance the budget, the other primary objective was to inject fairness into the structure.
The current structure has always been unfair
to lower income employees, as the flat rate structure imposed an unfair heavy burden on lower income e mployees compared to their higher earning counter-parts. In the early days when payroll taxes were very low and formed a relatively minor proportion of Gov-ernment’s overall revenue intake, this situation may have been viewed as either tolerable or a minor quirk in the system. As payroll taxes rose, it became the
Government’s largest revenue earning tax, making the
regressive nature of the structure intolerable. This i nequity has long been acknowledged by former Gov-ernments, but this OBA Government, as a Gover nment of action, has seized the nettle and made the decision to do the right thing—to make the system
fair.
To numerically model the effect of changes in
tax rates on employees we have used bands of income levels from Department of Statistics data (and there are five of them):
1. wages equal to or less than $48,000;
2. wages greater than $48,000 and equal to or less than $96,000;
3. wages greater than $96,000 and equal to or less than $235,000;
4. wages greater than $235,000 and equal to or
less than $900,000; and
5. wages equal to or greater than $900,000.

Mr. Speaker, Department of Statistics have
data of how many people have wages/salaries within
each of these wage bands, and during this fiscal year
the Tax Commissioner received more detailed data
from employers, in order for us to model the outcomes of various Payroll Tax options. This enabled us to es-timate what effect various tax rates would have on employees, employers, and Government revenues.
The legacy of past indiscretions, regarding the
handling of the public purse, has been a burden on the people of Bermuda over the past five years. B ecause of past indiscretions and poor money manag ement, and the subsequent fiscal adjustments that have been necessary, the majority of public officers
have had no increase in pay in the past five years.
Meanwhile inflation has continuously nibbled away at the buying power of those salaries, resulting in a decline in real incomes: i.e., incomes adjusted for infl ation.
In the private sector (ex -International Bus iness) wages have also been stagnant or reduced, resulting in an erosion in real incomes. This is real life evidence why careful, prudent financial and economic
management on the part of the Government is so cri tically important to so many Bermudians, regardless of them being employed in the public sector or private
722 24 February 2017 Official Hansard Report

Bermuda House of Assembly sector, whether they are retired or still in school. Poor
fiscal judgment and expensi ve lapses in governance
by the Government can have long lasting effects on
the people, long after that Government is gone.
Mr. Speaker, new tax rates for employees for
each band will be as follows (and there is a table here that I will try to get through):
For wages in the first band (Less than or
equal to $48,000) currently it is 6 per cent; for the next
fiscal year it will be 4.75 per cent; provisionally for the
following year it is 4.25 per cent.
For the next band (between $48,000 and
$96,000) currently it is 6.0 per cent; for the next fiscal
year it will be 5.75 per cent; provisionally for the sub-sequent year 5.50 per cent.
Greater than $96,000 but under $235,000 it is
currently 6.0 per cent; for the next fiscal year it will be
7.75 per cent; provisionally for the following year it will
be 9.00 per cent.
Greater than $235,000 (and less than or equal
to $900,000) currently it is 6.0 per cent; it will be
8.75 per cent next year; the subsequent year prov isionally 11.00 per cent.
The above is the marginal tax rate schedule
for our reform. It illustrates the rate at which various levels of income are taxed. As income rises, each do llar of income above the previous level is taxed at a higher rate.
Mr. Speaker, in recognition of the difficulty
many people have experienced during this period of
adjustment, Government is seeking to give tax relief
mainly to the two lowest bands of wage ranges stipu-lated by the Department of Statistics. This is the most important part of payroll tax reform and is the part that result s in an increase in take home pay for people
who earn less than $137,143 a year. Over threequarters of the population earn below $137,143 and
should benefit from a reduction of the employee’s por-tion of the Payroll Tax.
Therefore in the situation where an employer
is currently passing on the maximum amount of 6 per
cent to an employee, an employee earning in the lo west band (1) will receive a tax cut of up to $600 per year in the next fiscal year 2017/18. The next band (2) provides for a tax cut of $600– $720. The next band,
band three, provides for a tax decrease of $720, but that band is where things cross over, so it is $720 to
an increase of $1,713. The top band provides for an
increase of $1,713 to $29,000.
Employment tax on employers will also be affected using the same approach, that is having the tax
burden falling more on larger companies than on small business. And we have a table in front of us, Mr.
Speaker , which I will just try to go through for the listening audience:
• Companies with payroll greater than $1 million, the tax rate will be 10.25 per cent;
• For payrolls between $200,000 and $500,000
[the tax rate will be] 7 per cent; • For payrolls less than $200,000 [the tax rate
will be] 1.75 per cent;
• For payrolls between $500,000 and $1 million [the tax rate will be] 9 per cent;
• Exempted undertakings, 10.25 per cent;
• Government, Government Boards, Parish Council, and the Bermuda College, 0 per cent;
• Taxi, farm, fish and educational, sporting and scientific institutions, 1.75 per cent;
• Charities, Schoo ls, Religious Institutions, cu ltural organisations, 0 per cent;
• Economic Empowerment Zone, 0 per cent;
• BHB, Corporation of Hamilton and St. George’s, 3.5 per cent; and
• Hotels and restaurants with annual payrolls
greater than $200,000, 6 per cent.
The maximum taxable salary level, the socalled salary cap, has been in place since 2010. After extensive consultation, the cap will be raised from $750,000 to $900,000 per year.
Mr. Speaker, traditionally, payroll taxes have
been a tax on employers who were allowed to pass a
certain percentage of that tax on to their employees
through deductions. Government seriously considered splitting the payroll tax into two separate taxes —one
on employees and another on employers. CARTAC, the IMF advisory agency, recommended this. This
action would have allowed us to achieve our reform
objectives as it would have forced employers to make tax deductions from their employees. As many people know many international companies pay both emplo yee and employer portions of the payroll tax, at their own discretion, not at the direction of the Government.
After considerable consultation, Government
decided not to split the payroll tax into two separate taxes as our objectives could be achieved under the current structure.
To assist wi th the implementation of the r eformed payroll tax system, the Office of the Tax
Commissioner will have posted on their website today
a payroll tax calculator which will illustrate how the employee portion of the tax will be calculated under the new marginal tax rate structure.
Mr. Speaker, in fiscal year 2014/15 nonlegislated concessions to hotels, retailers, and resta urants totaled approximately $31 million. The rollback of these concessions was started in fiscal year 2015/16, and in this fiscal year Government will fully withdraw all such concessions.

Customs Duties

Hon. E. T. (Bob) Richards: Mr. Speaker, the Customs Tariff acts as a general revenue raiser, a tax on
certain final consumptions goods, an excise on tobac-co, alcohol, and motor vehicles, and provides protection to local domestic producers. Currently the cus-toms tariff applies to goods at 10 rates varying from 0 per cent to 33.5 per cent. A standard rate of


Bermuda House of Assembly 22.5 per cent applies to the highest number of tariff
lines. Higher rates apply to a few goods such as t obacco, alcohol, motor vehicles, and petroleum products.
In the 2016/17 Budget, Government announced that we would commence preparations for the introduction of a single unified tariff. This work has
been completed and Government has model led the
impact of progressively harmonising the multiple rates
into fewer rates while increasing the customs duty revenues. Now, Mr. Speaker , I have got a list, a table,
below which I do not intend to read out individually, but I will describe some of the highlights.
Mr. Speaker, actually unifying rates was ult imately impossible as raising the zero and lower rated goods would have been inequitable. Hence the three lowest rates remain the same as they contain several goods which are considered essential. Thi s will avoid
placing extra burdens on the least well off. These i ncreases in duty rates will increase Customs Duty by approximately $19.5 million.
Imposed excise duties will also be increased
to continue the process of increasing the revenue yield from indirect taxes. These increases in specific
excise duties on alcohol, tobacco, and petrol will i ncrease revenue by approximately $10.3 million.

General Services Tax

Hon. E. T. (Bob) Richards: Mr. Speaker, last year we
said, “In order to broaden the tax base, a new se rvices sales tax, to be called the General Services Tax (GST), will be levied on turnover from the provision of most services by service providers to the public. It is proposed that this GST will be levied at a rate of 5%. As this is a change that will require significant adjus tments in operations, billing, and reporting on the part of service providers and collecting, tracking, and e nforcement on behalf of Government, this tax will not be implemented until April 1
st 2017 at the earliest.”
Unfortunately the consultation period has
been delayed due to extensive consultation relative to payroll taxes. It is not envisioned that the GST will be implemented before April 1
st, 2018. Government’s
commitment to spreading the tax burden over a broader cross section of the community remains i ntact, despite these delays. As plans for this tax become more well defined we will be reaching out to
stakeholders for their input and comments.

Financial Services Tax (FST)

Hon. E. T. (Bob) Richards: Mr. Speaker, last year we stated that, “Notable exemptions to the General Ser-vices Tax will be in the sectors of banking, insurance, and health care. Small service providers will also be exempted from the tax.” The formula of a percentage of sales or turnover is clearly not appropriate for cal-culating taxes on banks and insurance companies. However, pursuant to Government’s objective of diversifying its tax base, we are introducing a new tax to
be called the Financial Services Tax which will be for banks, local insurance companies, and Money Ser-vice Businesses. When applied to banks the tax will be calculated as 0.02 per cent of assets. The tax as
applied to local insurance companies will be a tax on
gross premiums earned, excluding premiums from
health insurance. The rate of tax will be 2.5 per cent of
non-health related gross premiums. Finally, the rate of
tax for the Money Service Businesses will be 5 per
cent on their aggregated incoming and outgoing transmission volume.
Fees currently paid by banks and local insurance companies accrue directly to the Bermuda Mo netary Authority to pay for supervision and regulation carried out by the BMA. The new FST is expected to generate about $11.4 million per year. The financial services tax will be introduced in April 2017 (thi s
April.)

Company Fees

Hon. E. T. (Bob) Richards: Mr. Speaker, Gover nment has reviewed company fees, both incorporation fees and annual fees. One of the principal consider ations in this area is the international competitive land-scape with other jurisdictions. Owners of such com-panies can be very sensitive to the costs of setting up an exempted company, and even though the capital in
such companies might be in the hundreds of millions
of dollars or more, a decision to not incorporate in Bermuda mi ght turn on just a few dollars’ difference in
incorporation costs. Therefore, incorporation fees have not been increased.
Permit Companies, sometimes referred to as
Overseas Companies, are companies incorporated in another jurisdiction but who desire to conduct bus iness from Bermuda, essentially setting up a “branch” in Bermuda. Bermuda’s company framework has al-lowed such companies for many decades and they
have had to pass the same rigorous vetting process at
the BMA, as though they were actually incorporating a company in Bermuda. Mr. Speaker, in recent years Permit Companies have been at the eye of the inter-national storm as it relates to the “tax haven and tax avoidance” debate, as such companies are mostly
part of elaborate structures that allow multinational
corporations to reduce their global tax liability.
Mr. Speaker, let me emphasise that, as far as
we know, there is nothing whatsoever unlawful about these structures. If there were evidence of unlawful activities, we would not allow them to use Bermuda as
a platform. However, in view of the current transatla ntic crossfire over multinationals’ tax burden, their
presence in Bermuda has meant that our excellent international reputation has become a casualty; a re putation which the Government has a duty to staunchly
defend. The defence against reputational risk comes
724 24 February 2017 Official Hansard Report

Bermuda House of Assembly at a significant cost. Therefore, we are raising the annual Government fees on Permit Companies that fall
into the class of “investment/holding/trading” from $1,995 to $25,000.

Land Taxes

Hon. E. T. (Bob) Richards: Mr. Speaker, after last
year’s difficult adjustment for the deterioration in ARVs
for Bermuda properties, land taxes for this upcoming year will remain unchanged.

2016/2017 FISCAL PERFORMANCE
Hon. E. T. (Bob) Richards: Mr. Speaker, I will now
focus on the forecast financial results for the current
2016/17 fiscal year.
The Government is forecast to earn $985.3
million in revenue in 2016/17. This is $11.6 million
(1.2 per cent) less than the $996.9 million in the orig inal estimates and is due mainly to lower than expected Customs Duty receipts, sale of land to non-Bermudians, and all other revenue receipts.
The projected 2016/17 operating expenses of
Government are $932.1 million or $10.4 million (1.1 per cent) higher than the $921.6 million originally budgeted in 2016/17. These increases were mainly as a result of the following:
• $6.7 million to fund the cost of Civil Aviation
and Maritime Administration as the legislation
to set these Departments up as Quangos was not passed until October 1
st, 2016;
• $2.5 million to fund operating grants to the
Gaming Commission;
• $3.4 million to fund critical repairs required to bus and ferry fleets leading up to and including the America’s Cup Events;
• $2.8 million to fund a legal settlement;
• $3.4 million to fund Paraprofessionals and substitute teachers in the Ministry of Educ ation.

These amounts were offset by underspends in
staff cost as the Government has continued its efforts to gradually downsize the Public Service with head-count reducing by just over 100 during this fiscal year.
Mr. Speaker, revised capital expenditures for
the year should come in at $85.4 million or $1.7 mi llion (2 per cent) below the budget allocation of $87.3
million.
Debt service cost for 2016/17 are $7.6 million
(5.9 per cent) below budget.
Therefore, the Overall Deficit is now estimated
to have been revised slightly up by $12.8 million or a 6.4 per cent variance. The forecast deficit for the f inancial year ending March 31, 2017 of $212.2 million
is $7.9 million less than the original 2015/16 deficit estimate.
PUBLIC DEBT

Hon. E. T. (Bob) Richards: Mr. Speaker, as at March
31
st 2017, gross public debt will stand at $2.484 bi llion, and debt, net of the Sinking Fund, will stand at
$2.398 billion.
The Sinking Fund balance is projected to be
approximately $86 million at the end of this fiscal year.
Mr. Speaker, as of March 31, 2017, the net
debt/revenue ratio will be 244 per cent, and the debt
service cost/revenue ratio will be 18 per cent. There is
still much work to do to bring this situation into line with our targets of 80 per cent and 10 per cent, r espectively.
Government will have to incur new borrowing
of $135 million to finance the 2017/18 deficit, and as at March 31
st, 2018, it is estimated that gross public
debt will s tand at $2.629 billion, and debt, net of the
Sinking Fund, will be $2.481 billion.

THE BUDGET

Hon. E. T. (Bob) Richards: Mr. Speaker , again, we
have a table here which I will just read the highlights
of as we refer to it extensively a little bit later:
• Revenue for the upcoming fiscal year, rev enues are forecast to be $1,042,349,000;
• Current Account Expenditures, $923.5 million;
• Current Account Balance (excluding debt ser-vice) is to be a surplus of $118.9 million;
• Interest on Debt will be $124 million;
• Sinking Fund Contribution, $62 million;
• Surplus Available for Capital Expenditures,
$67.2 million (that is a deficit, excuse me);
• Capital Expenditures will $67.5 million; and, therefore
• The overall Budget Deficit is forecast to be
$134.7 million.
Mr. Speaker, the highlights of the 2017/18
Budget feature a 1.6 per cent decrease in total expenditures of $19.0 million from last year’s budgeted figure. Revenues are forecast to rise by 4.6 per cent
or $45.4 million. The Current Account Balance, before
debt service charges, is budgeted to be a surplus of
$118.9 million.
However, the Current Account Balance, after
debt service including the Sinking Fund Contribution,
is a deficit of $67.2 million. This represents a drop in
the deficit of $44.9 million, or 40.0 per cent. The overall deficit is budgeted to be $134.7 million, a drop of $64.4 million or 32.3 per cent when compared to the
2016/17 original estimates.
The projected Current Account Balance (excluding debt service) indicates whether revenues can support the da y-to-day running of Government, excluding finance costs and capital expenditure. This year’s budget, with a surplus of $118.9 million in Cur-rent Account before debt service, represents an i mprovement over the 2016/17 surplus with revenues


Bermuda House of Assembly sufficient to cover the day -to-day running of Gover nment and 95.9 per cent of the interest cost. This represents another fiscal milestone along the road to fiscal sustainability.

Revenues

Hon. E. T. (Bob) Richards: Mr. Speaker, the est imates for 2017/18 indicate Government revenues of $1.042 billion, which is $45.4 million, or 4.6 per cent,
higher than the original estimate for the previous year.
The 2016/17 budget put in place a three- year
plan to balance the budget.
Some underestimate the importance of balancing a budget; but a balanced budget is the only way to ensure long- term prosperity for Bermudians.
Government believes eliminating the deficit is the si ngle most important step we can take to grow the economy and create jobs.
It reinforces our credit rating, supports lower
interest payments, and stimulates greater consumer and investor confidence.
It strengthens our ability to respond to the unavoidable and unforeseen in an unstable world.
Mr. Speaker, while reducing Government expenditure has been, and still remains a focus of the Government, achieving sufficient savings in expendi-ture to balance the budget in the short term is becom-ing increasingly difficult considering Government’s current structure. Therefore, Government must aggressively focus on increasing revenues through actions such as tax reform and limiting concessions.
The strategy, reforms, and actions that the
Ministry of Finance are contemplating in order to meet the Government’s revenue target for 2018/19 year are as follows:
Payroll Taxes —The Ministry’s proposed r eforms to the Payroll Tax structure make it progressive, as well as meeting additional revenue targets. To ac-complish these objectives the following will be impl emented:
• Introduction of progressive taxation for em-ployees;
• Increasing the tax cap to $900,000;
• Completing the roll -back of non- legislated tax
concessions for hotels, restaurants, and r etailers;
• Appropriate setting and enforcement of no-tional tax amounts for owner -managed bus inesses; and
• Review of compliance and enforcement pr ocesse s within the Office of the Tax Commi ssioner.

The yield from Payroll Tax following the r eform and full rollback for payroll tax concessions is estimated at $439 million in 2017/18, which will be 41.9 per cent of total Government revenues. Customs duty and excise taxes— Mr.
Speaker, the Ministry of Finance proposes to progres-sively harmonise the multiple tariff rates into fewer rates while increasing the customs duty revenues. Additionally, the duty on fuel will be raised by 5 cents per litre in April 2017 to achieve additional Customs
revenue of about $5 million. Finally, the duty on cigarettes and tobacco and beer, wines and spirits will be raised in April 2017 to achieve additional customs revenue of about $5.3 million. Customs Duties for 2017/18 are forecast to be $223.7 million, or 21.5 per
cent of total Government revenues.
General Services Tax and Financial Services Tax—Mr. Speaker, the GST will be introduced
in 2018/19. As banking, insurance, and Money Service Businesses will be exempted from the GST fo r
technical reasons, it is proposed to introduce a finan-cial services tax on local insurance premiums (exclud-ing health), bank assets, and incoming and outgoing
wire transmissions. The financial services tax will be
introduced in April 2017. The yield from the financial
services taxes will be $11.4 million.
Company licence fees for certain Permit
Companies will be raised from $1,995 to $25,000.
Finally, Mr. Speaker, Government anticipates
$3 million in receipts from sale of Government proper-ty that is surplus to requirements.

Expenditures

Hon. E. T. (Bob) Richards: Mr. Speaker, after car efully considering the current level of spending required
to efficiently operate the Government in its current form, and the various unavoidable obligations of the Government, the Ministry of Finance has set the over-all budget expenditure including current account and
capital account outlays, debt service, and the Sinking
Fund Contributions at $1.177 billion. The level of cur-rent and capital account spending forecast in the 2017/18 Budget is $19 million lower than the amount approved in 2016/17.
Despite additional cost due to hosting the
America’s Cup, the level of current account spending projected in the 2017/18 Budget, excluding debt ser-vice, is only $1.9 million higher than the budgeted ex-penditure approved for last year.
In May and June Bermuda will host the 35
th
America’s Cup. In order to deliver on our contractual commitments and promises, the total Government budget for America’s Cup- related direct and indirect
current expenses during the 2017/18 fiscal year is
estimated to be $31.8 million.
Mr. Speaker, during the finalisation of budgeting packages for the 2017/18 budget cycle, Ministries had requested extra funding for programmes already in place and some new programm es. The Gover nment recognises the need to control the growth in public spending and is mindful of the potential impact
that increased operating expenditures can have on
726 24 February 2017 Official Hansard Report

Bermuda House of Assembly the overall fiscal performance. Accordingly, we have
limited increases to priority areas which include i ncreased funding to the Ministry of Education for enhancements to the Public Education System to meet the diverse needs of our public school system; addi-tional funding for the Ministry of National Security in order to meet the public’s expectations of safety and
security; and supplementary funding for the Bermuda
Tourism Authority to ensure the continued strengthen-ing of our tourism industry.
Mr. Speaker, the above increases and others
were partially offset by reductions in other expendi-tures, with the most notable being a one- off $25 mi llion reduction in the Government’s annual funding to the Bermuda Hospitals Board (BHB). Three years of concerted efforts to become more efficient has placed the BHB in a more stable financial position. Consi dering the relatively strong liquidity position of the BHB, it is anticipated that the BHB can withstand the one year
reduction in funding. Furthermore, a reduction in funding in relation to the former Department of Airport O perations has allowed the Government to provide addi-tional funding to the Bermuda Tourism Authority.

Debt Service

Hon. E. T. (Bob) Richards: Debt service costs for the
2017/18 Budget are projected to be $186.1 million,
0.7 per cent lower than the 2016/17 allocation of $187.4 million. This represents $124 million in interest
payments and a $62.1 million contribution to the Sinking Fund. The reduction in debt service cost is at-tributable to the refinancing of our $200 million 5 per
cent loan facility and higher -coupon bonds through a
new US$665 million 10- year bond issue with a record
low yield of 3.717 per cent. This issue resulted in annual interest savings of approximately $5 million.

Expenditures

Hon. E. T. (Bob) Richards: Mr. Speaker, the Go vernment is committed to making sound cap ital inves tments which will enhance the country’s infrastructure and improve economic growth. The capital expend iture component of the 2017/18 Budget is set at $67.5 million, $19.5 million lower than the 2016/17 original estimate. The most significant items of capital development expenditure in the 2017/18 Budget relate to
school maintenance ($3.2 million) and road works ($3.5 million). While most of the planned investment is related to construction projects, there is provision also for major IT development and new buses.
In conclusion, as the Government’s Finance
Minister, my objectives are to manage the public purse in ways that safeguard the economic well- being
of the people of Bermuda, and to use my policy -
making authority to expand opportunity, fair pla y, and
the promise of a stable and prosperous future. This Budget progresses each of these objectives. To do this work, I rely on the support of my colleagues, listen to the views of people from across a wide spectrum of the community, and on the expertise
of a skilled and motivated team of public servants at the Ministry of Finance.
These are the safe hands Bermuda needs in
an age of uncertainty. We will remain vigilant to the dangers and the opportunities —carried forward, as
they always are, by the Fates —and keep Bermuda
moving forward, no matter the wind.
Mr. Speaker, just on a personal note, I would
like to extend thanks to my Ministry of Finance staff,
particularly the Budget staff headed up by Mrs. Tina
Tucker, and, of course, the redoubtable and very expert and hard- working leader of the Ministry of F inance, the Financial Secretary, Anthony Manders.
Thank you very much, Mr. Speaker .

[Desk thumping]

Minister?
Hon. Jeanne J. Atherden: Thank you, Mr. Speaker .
Via the K. Margaret Carter Centre (KMCC)
letters have been forwarded to various businesses
seeking their cooperation in partnering with K. Marg aret Carter and the disability community to provide em-ployment opportunities for persons with disabilities. And it is envisioned that these businesses will provide
work that can be done in a sheltered workshop setting


Bermuda House of Assembly and, therefore, the communities will provide work experience.
On top of that, Mr. Speaker , K. Margaret
Carter provides coaching skills to disabled persons in
the community, and they also actually go to busines ses and help the individuals actually perform the tasks
so that once they understand the skills they can act ually do it by themselves.
We recognise that it is important to do this so
there is also an employment programme where per-sons with disabilities come to the K. Margaret Carter Centre and they learn the skills that are necessary to get a job, obviously, with just things like time keeping,
being able to understand jobs, and so this is the way
the Government is trying to make sure that persons with disabilities have the opportunities and will contin-ue to do so.

Yes, thank you, Mr. Speaker .
I am not sure if this is appropriate, given that
we have just read from the Budget, but I wonder if the
Minister can speak as to whether or not the Gover nment would consider a certain type of tax relief for
employees who hire those persons that live within our
community that have a disability, which represents (this is according to the World Health Organization) almost 10 per cent of our population?

Minister?
Hon. Jeanne J. Atherden: I do not have that information at my fingertips, but I will actually get that i nformation out because my understanding is that this
happens . . . it is an ongoing process, it is not [just]
one time. But I will actually go and find out who is ac-tually out there participating and when the last lot of letters was sent.

Minister?
Hon. Jeanne J. Atherden: Mr. Speaker, obviously,
the Government is trying to make travel accessible for
people with disabilities on two fronts.
One relates to working with the Corporation of
Hamilton as well as the Civil Engineer to make sure
that the sidewalks in Hamilton have been modified so that persons with disabilities can travel all around
Hamilton. Also with respect to planning, making sure
that when persons have modifications to their homes they can make sure that those persons can actually get out of their homes so that they can actually go out and take advantage of being in Hamilton.
The second thing, which is something which is
related more specifically to the K. Margaret Carter, the K. Margaret Carter is in the process of getting a sec-ond bus, and the second bus will allow them to ar-range to collect individuals who are disabled from, not only their homes, but from some of the community homes so that they can go out on trips and take advantage of seeing Bermuda and expanding their
range of activities.

Yes. Thank you.
Yes, MP De Silva for a supplementary.

SUPPLEMENTARIES
Hon. Zane J. S. De Silva: Yes, Mr. Speaker , thank
you very much.
Minister, you mentioned the sidewalks around
the city, is there a plan . . . because there are still
many sidewalks that need adjusting, as you probably
know, is there a plan that lays out the sidewalks in the city that have not been done that shows when they will be done?

Minister.

Hon. Jeanne J. Atherden: Mr. Speaker , as I indica ted that we are working with the Civil Engineer to talk
about how these renovations . . . how these modific ations can be made. And I say working with the Civil
728 24 February 2017 Official Hansard Report

Bermuda House of Assembly Engineer because as you can appreciate, this would
have to be something that would be done by the Corporation of Hamilton, so we obviously are encouraging them and we continue to do so.

Good question, Honourable Member .
Minister.
Hon. Jeanne J. Atherden: Mr. Speaker , I must admit
I have not seen the plan, but now that the Member
has raised the fact that there is one in existence, I will find out where it stands. Because obviously, over time, the sidewalks have been modified and if there is something, I will just look to see where it is and who has some funds for that.
Thank you.

—if the Honourable Minister
could answer the fol lowing . . . provide us with information as to what steps the Government is taking to ensure that existing Government facilities have ac-cessibility for those of us living within our community that are disabled?

The Sp eake
r: Yes, Minister?

Hon. Jeanne J. Atherden: I am aware that, obviously, when modifications are made to Government buil dings that accessibility is one of those things which occur. In terms of a particular programme to make them


Bermuda House of Assembly accessible, I do not know and I will have to look that
up. But all I know is that when modifications are made
accessibility is one of those things that are consi dered.

Thank you, Mr. Speaker .
I appreciate the Minister’s candour with r espect to the programme. Could the Minister indicate
whether or not there is actually a detailed plan that the Government has implemented with respect to addressing issues of accessibility for those persons in
our community that have disabilities, as it relates sp ecifica lly to Government buildings and Government
lands and parks?

Minister.
Hon. Jeanne J. Atherden: Mr. Speaker , as I indica ted, I am not aware of a plan, but I must admit this is
peaking my interest because if the former Gover nment actually had a plan in place, then I am sure there
should have been some financial resources. So I will
go and look for the plan and then where the money was.
Thank you, Mr. Speaker .