February 19, 2016

Yes. Honourable Members, I should
like to make a few brief comments about the sudden
and unexpected outburst that occurred last Friday in
the visitors’ Gallery.
First, while I know Members know this, inside
these Chambers, demonstrations of any sort are not
permitted. Our rules are clear on this, as well as the
governing legislation, the Parliament Act 1957, which provides that any member of the public who wilfully
disturbs the House of Legislature while in session
commits an offence against the Act, which is punis hable by the courts.
Secondly, Members and the public should
also be assured that I have spoken with the police,
who are responsible for security here at the House of
Assembly, to ensure that there is better control.
And finally, and most importantly, I take this
opportunity to put the public on notice that any attempt
at future disruptions inside the House of Assembly will
not be tolerated. These Chambers are the plac e for
debate and not public demonstrations. The place for demonstration is, as it always has been, outside of our
building and these Chambers.
Thank you.

MESSAGES FROM THE SENATE

The Chair will recognise first the Ho nourable Premier. Premier Dunkley, you have the floor.

STATISTICS (CENSUS OF POPULATION AND
HOUSING) ORDER 2016
Hon. Michael H. Dunkley: Thank you, Mr. Speaker,
and good morning, colleagues.
Mr. Speaker, I have the honour this morning
to attach and submit for the consideration of this Honourable House of Assembly the Statistics (Census of
Population and Housing) Order 2016, proposed to be
made by the Minister responsible for statistics under
the provisi on of section 5(3) of the Statistics Act 2002.
Thank you, Mr. Speaker.

Thank you, Premier.
Are there any objections to that?
The Chair now recognises the Honourable
Deputy Premier, the Minister for Finance. Mr. Bob
Richards, you have the fl oor.

NATIONAL ECONOMIC REPORT OF BERMUDA
2015
Hon. E. T. (Bob) Richards: Thank you, Mr. Speaker.
Mr. Speaker, I have the honour to attach and
submit for the information of the Honourable House of
Assembly the National Economic Report of Bermuda 2015 .

Yes, and the Chair will now recognise
the Deputy Premier, the Honourable Minister of F inance, Minis ter Bob Richards.

2016/17 BUDGET STATEMENT

Hon. E. T. (Bob) Richards: Thank you, Mr. Speaker.
Mr. Speaker and Honourable Members of the
House of Assembly, m ost Bermudians remember Hurricane Fabian. In its aftermath, BELCO swung into action to restore pow er throughout the Island. You
could see linemen working overhead and underground, hour after hour, day after day , and yet your
power might still not have been restored. That is b ecause electricity is delivered by way of a complex i nterconnected distribution network, and even though
BELCO might have repaired most of the major trunk
lines, many of the local lines might still have been down. So even though major progress was being
made, it was easy to get frustrated because your
lights might still have been of f.
The Bermuda economy is like the BELCO di stribution network, only much more complex. The Government, the Ministry of Finance in particular, like
those BELCO linemen, has been tasked to fix it and
bring the whole network back up. Major parts have
been repaired , but many of the local lines that bring
power to individuals may not yet have been com-pletely restored. The thing is, like BELCO, the major parts of the network have to be repaired first before
power can be restored to many individuals.
Many people across the Island continue to
experience difficulties every day because the restor ation of the economy has not yet reached them. While we understand and sympathi se with the frustration s
some Bermudians may now feel, like the BELCO
linemen, we will restore your power. We have already
repaired major parts of the economy and are now r epairing the parts of the economy that touch you.

Yes.

Hon. E. T. (Bob) Richards: Thank you.
Mr. Speaker, the economy is growing once
again after six years of contraction.
The major parts of the economy —the trunk
lines, if you like —would be international business, i nward investment, consumer confidence, property va lues, bank credit and, last but by no means least, gov-ernment solvency. All of these are much stronger than
when we first took the reins of g overnment.
The reason government solvency is so important is because, like the BELCO linemen, Government
needs the necessary tools to get the job done. But when we took over the g overnment in 2012, many of
the tools were broken or locked away because of the
high level of the national debt and the stubborn go vernment deficit. So, in order to unlock our most powerful tools —government spending— we have to repair
the debt problem first. Failing to do that risked bring-ing the whole ec onomy down.
Mr. Speaker, we are winning the war on spiralling public debt. We are wrestling the deficit to the
ground. Our progress, and the prospects for further
economic growth that it signals, have created a wi ndow of opportunity that enables us to conf ront more
vigorously the fiscal challenges that cloud the future of every Bermudian.
Our first order of business in this regard is to
eliminate the deficit, which is the difference between
what government spends and what it takes in. The
continuing deficit has been driving our debt, and the
huge costs to service that debt, to levels that threaten
Bermuda’s solvency. To illustrate, debt service costs
in [fiscal year] 2016/17 are projected at $187.4 million.
Debt service will soon overtake the Ministry of
Health as the largest expense in Government if not
aggres sively addressed. This situation undermines
our ability to support the needs of the Bermudian people. We are going to fix it.
From d ay one, we approached our work with
urgency because the situation was so serious for
people without work , and because our fiscal situation
was cratering. In the three years since, we have worked every possible angle, following a two- track
strategy to stimulate economic activity and bring much
needed control to the public purse.
We do this , fully aware that economic recovery is never even, coming to some before others. But our overriding mission remains —that is, to extend the
recovery into every household across the Island. This
is our commitment , and the Budget Statement for the
2016/17 Financial Year continues the work, building
on a solid record of progress that is moving the Island forward. For example:
• We have worked our way out of t he Great R ecession, with five consecutive quarters of GDP [gross domestic product] growth;
• The property market is stabili sing, signa lling a
return of value to the family home;
• Credit is starting to expand;
• Upticks in economic activity have become positive trends —in retail sales, in construction
permits, in company for mations and consumer
confidence;
• Hotel developments are taking shape across
the Island, with groundbreaking for a St.
George’s hotel just a few months away;


Bermuda House of Assembly • The airport project will break ground later this
year, creating hundreds of jobs for Bermudians;
• With the badge of excel lence inherent in Solvency II equivalence, Bermuda’s insurers and
reinsurers —the core of our international bus iness sector —are well positioned to freely
compete in the EU; and
• The Government deficit has been slowed, with
the Current Account this current year recording a surplus before debt service for the first time in more than seven years.

This Budget, accordingly, represents the first
year of a three- year plan to eliminate the deficit, after
which we will be in a position to begin paying down the public debt. We will make this happen by broadening the tax base, and doing so through progressive
measures that require more from those who e arn
more. We will speak to this plan in detail later in this
Statement, but the time has come to broaden the
commitment to solutions that will benefit us all.
Our work to grow the economy and to get our
financial house in order is about building a solid foundation upon which Bermudians can go about their
daily lives with confidence, optimism and pride, kno wing their homeland works for them. This Budget will take us closer to that goal.

ECONOMIC CONDITIONS AND OUTLOOK

Global

Hon. E. T. (Bob) Richards: Mr. Speaker, globally,
there are three mega- trends shaping the world at this
time: US economic recovery, dramatic slowing in
China and slumping oil prices.
Chart 1 before you shows major economic i ndicators for the US. The green bars show growth in
GDP at about 2 per cent. The red line in the upper
pane shows the trend in employment continuing to be
quite strong. The blue line represents manufacturing,
which is weakening, while the services component of
the economy continues to keep GDP growth on a
positive track.
The Federal Reserve has finally signa lled the
end to unprecedented monetary support after the r ecession by raising short -term interest rates in December. Char t 2 shows, however, that longer -term rates,
which more closely represent Bermuda Government borrowing costs, have been on a rising trend since the
middle of 2012. As Government continues to have to
borrow to fina nce budget deficits , plus refinance exis ting debt, rising interest rates pose a significant threat
to government finances in the future.
Another mega- trend in the global economy is
the downward shift in China’s economy to slower
growth. As the Chinese economy gets to be very
large, it was always expected that the pace of growth would slow. Now it is actually happening, and stock
markets in China and other Far Eastern countries that
feed off China are experiencing that deceleration.
While there is no recessi on in China, the slowing
growth rates is having a dampening effect on the
global economy.
The third mega- trend is the further collapse in
the world price of oil (shown in Chart 3) . Saudi Ar abia’s decision to produce enough oil to maintain its
global market share, in its attempts to undermine
fracking producers in the US, has resulted in a major
glut in the supply of oil. So far , the fracking industry
has survived the lower -price environment. Global demand for oil is still rising at over 1 million barrels pe r
day, but with excess supply , we do not expect to see
a major rebound in the price of oil any time soon, par-ticularly with more supply coming on- stream with the
lifting of sanctions on Iran. It is cheaper oil that has
underpinned the st ruggling recoveries of many oil -
consuming nations, including Bermuda. Indeed, the
collapse in the price of energy that Bermuda imports
from abroad has been a significant factor in the r esumption of growth in GDP.

Bermuda

Hon. E. T. (Bob) Richards: Mr. Speaker, economic
activity in Bermuda appears to be steadily improving.
This improvement has been the result of external factors already described, as well as internal factors. I nternal factors include the Government’s success at
restoring confidence in Bermuda as a place to c onduct business and as a place to live.
Chart 4 shows year -over-year change by
quarter in GDP over five years. The year 2014 ind icated positive growth for two of the four quarters ,
while 2015 registered positive growth for the three
quarters available for that year. The fourth quarter is
likely to continue that growing trend with blockbuster results generated by the America’s Cup World Series
event in October.
On the consumption front , Chart 5 shows percentage changes in Retail Sales over a period of 12 months. The Motor Vehicle segment of this index has
been the strongest, followed by Food and Liquor Stores. As expected, Service Stations were relatively
weak and Building Materials w ere mixed. Apparel
Stores continue to struggle.
These figures underscore the return of conf idence in the consumer sector of the economy, a sector that was hard hit by the long recession. Chart 6 shows the number of containers crossing our frontier
each year. Clearly, anything can be in a container,
either consumer goods or capital equipment. Ho wever, the volume through the waterfront is an indicator
of broad demand on- Island. The year 2015 registered
19,067 containers versus 16,562 the previous year —a
clear sign of growth.
664 19 February 2016 Official Hansard Report

Bermuda House of Assembly There has been some public debate about
whether the recession in Bermuda is over. “ Recession” is a word clearly defined in economics as a period of at least two consecutive quarters of negative
GDP growth. Bermuda has had four consecutive quar-ters of positive GDP growth, so the recession is over.
But does that mean everyone is enjoying
good times? No, it does not. Does it mean jobs are
there for everyone? No, it does not. Does it mean that
everybody has received an increase in pay? No, it does not . Does it mean the economy is generating
enough demand that there is widespread opportunity
for multiple jobs, as in days gone by? No , it does not.
Does it mean that every business is profitable? No , it
does not .
What it does mean is that the vicious circle
Bermuda experienced in recent years —the most s evere since the end of the Second World War —is f inally over.
This was a downturn that evaporated conf idence, causing the inflow of job- supporting inves tments to stop and the outflow of residents to start. This was the one-two punch that led to serious har dship across the economy, including :
• declines in consumer spending and the Ber-mudian jobs that relied on it;
• the loss of rents from vacated housing that
supported mortgage payments, leading to
loan defaults and foreclosures ; and
• reduced business volumes that triggered further job losses and the need for tax breaks
that helped businesses survive, but also
harmed Government’s fragile finances and
swelled its deficit.

Mr. Speaker, that vicious circle is ov er. But
have we now entered a virtuous circle where the main
drivers of the economy are firing on all cylinders, generating plentiful jobs and enabling Gov ernment to satisfy the demands of all sectors of the community, as
well as pay off its debt? Are we t here yet? No, not yet,
but that is the goal we continue to pursue.
International Business

Hon. E. T. (Bob) Richards: Mr. Speaker, the term
“international business ” covers the entire spectrum of
offshore businesses centred in Bermuda. The dom inant sector remains insurance and reinsurance. Chart
7 shows trends in major indicators in the Bermuda
Insurance market. Premiums are up, as well as total
assets, which total more than $609 billion. Capital and Surplus were flat year over year.
Globally, the insurance market is experiencing
a glut in capital , resulting in soft renewal rates. It is
this glut that has driven the merger mania strongly evident in the markets in the last few years. The
mergers have reduced the number of players , but the
financial strength of Bermuda insurers remains very
strong. On the regulatory front, the good news is that
Bermuda acquired Solvency II equivalence in the
European Union. The participation of Bermuda insurers and reinsurers in the EU market is very significant,
and the failur e to achieve equivalence in Europe
would have set the Bermuda participants back co mpetitively and driven jobs out of the Island. With Solvency II equivalence, Bermuda companies can freely
participate in the EU on an equal footing with their
European compet itors. Equivalence is also a stamp of
approval for Bermuda as a top- quality jurisdiction, and
for this validation to come from a part of the world
which is home to tax vigilantes , who attack our bus iness model, really puts Bermuda in a class by itself.
Achieving Solvency II equivalence was an effort that spanned eight years. It was an effort where
the private sector, the Bermuda Monetary Authority
and the Government teamed up to make what appeared to be the impossible become a reality. I would
like again to congratulate Mr. Jeremy Cox and his
team at the BMA [Bermuda Monetary Authority] for
successfully spearheading this important effort.
Captive insurance, the genesis of our insurance business, was excluded from the Solvency II
exercise. Bermuda remains the premier captive centre
in the world. There were 22 new captive companies
incorporated in 2015 versus 14 in 2014.

Other Segments of International Business

Hon. E. T. (Bob) Richards: Mr. Speaker, the Bermuda Business Development Agency ( otherwise
known as BDA), an agency partially funded by Go vernment, is responsible for developing and promoting
business development efforts across key industry sectors. New markets explored include Latin America and
Canada, which have yielded positive growth results. Trust and private client business is being developed in
promising Asian markets through competitive legisl ation that enables us to promote Bermuda as a prime location for family offices.
In Asset Management, BDA has continued to
push for equivalence for Bermuda- based fund managers under Europe’s AIFMD [Alternative Investment
Fund Managers Directive ] regime, attracting fund
managers to physically set up a Bermuda presence with a focus on emerging managers, cross -marketing
with the ILS [insurance- linked securities] and trust
sectors and attracting more high net worth individuals.
In international commerce, BDA is aggressively developing shipping, aviation and international
arbitration, developing and refining the so- called
“near-shore” proposition, Canadian e- commer ce and
marine- related life science companies.

Construction

Hon. E. T. (Bob) Richards: Mr. Speaker, construction
is an important area of employment in Bermuda. A lBermuda House of Assembly though the blockbuster projects have not yet commenced, the sector is already expanding.
Evide nce of this comes from the Department
of Planning, where new planning applications rose to
567 in 2015 from 458 in 2013. Building permits are an
indication of the projects that are actually being built.
The number of building permits also increased to 903
from 701 in 2013. Two major projects, the St. Regis
hotel [resort] in St. George’s and the new airport terminal, are expected to break ground this year , creating hundreds of construction jobs. Infrastructure preparation for the America’s Cup will continue to create many opportunities for Bermudians.

Tourism

Hon. E. T. (Bob) Richards: Mr. Speaker, one of the
Government’s most important goals since coming to
office has been to rebuild the Island’s tourism industry. Our efforts have focused on the formation of the
Bermuda Tourism Authority ( or BTA) to grow the tourism economy and on working with investors to build
and revitalis e hotel properties across the Island.
We are making progress on both those fronts.
Since its formation in April 2014, the BTA has
made significant progress in re- setting the Island’s
marketing image. It has finally crawled out of business
relationships that were less than advantageous to
Bermuda and strengthened its ability to market the
Island in an extremely competitive environment. Wi th
a new advertising agency, a new PR firm, new social
media and website platforms, the BTA is well pos itioned in 2016 to achieve its aggressive growth objectives for Bermuda tourism.
One of the keys to achieving those objectives
is securing enough airline seat capacity to meet demand. In the first quarter of this year, as a result of Government working closely with airlines , and prudent
BTA– airline marketing partnerships, airline seat c apacity to the Island will increase 8 per cent. This will
provide great er access to the Island for vacationers
and greater opportunity to lure business and leisure groups —a performance area that lagged in 2015 as a
result of poor group sales before the start of the BTA.
Group travel is critical to a healthy tourism i ndustry, providing it with a base of business that can be
used to manage favourable pricing for individual vac ationers. It is f or this reason the BTA re- organis ed and
redeployed its group sales team in 2015 —a change
that has helped get group sales on the books for 2016
and 2017. These bookings are essential to maintai ning the industry’s employment levels on a year -round
basis.
More cruise ships will visit the Island in 2016,
including more occasional visits to Hamilton and St.
George’s by smaller ships that attract visitors with
deeper pockets. The schedule projects a 10 per cent
increase in visitors and a 12 per cent increase in spending, for an estimated $91 million in total spen ding.
In keeping with its mandate to grow the tourism economy, the BTA in 2016 will all ocate about $1
million to support entrepreneurs whose product ideas promise to enrich the on- Island experience for visitors
and stimulate spending.
To support its activities, the Bermuda Tourism
Authority grant will be increased by $1 million. In add ition, the Tourism Authority f ee, which is payable by
hotel owners directly to the BTA, will be raised from 2.5 per cent to 5.5 per cent to achieve additional
revenue of about $4.3 million for the BTA.

Property

Hon. E. T. (Bob) Richards: Mr. Speaker, Berm uda
property has long been a favourite investment vehicle
for Bermudians and the most common form of security
for loans in Bermuda. Soon after the 2012 election,
the Government saw serious danger in plummeting
property values. Their sharp decline, coupled with the
departure of many guest workers, froze local credit
markets and increased foreclosures. It was critica l that
we take steps to stabilis e property markets. This effort
involved specific steps to open up the market s, as well
as broader steps to rebui ld investor confidence in
Bermuda.
The latest report from property company
Coldwell Banker confirms that Bermuda property market prices have now stabili sed, with bargain hunters
active in the marketplace. It is anticipated that a total
of 300 properties will have been sold in 2015, up from
209 in 2012—the worst year on record. In 2008, w hen
the market was overheated, 714 sales were recorded.

EXTERNAL THREATS

Hon. E. T. (Bob) Richards: Mr. Speaker, Bermuda
continues to face external challenges, which are ec onomically existential in nature. The hostile regulatory
and tax environment that I described last year has
continued virtually unabated.
Bermuda continues to take hits in the trans -
Atlantic crossfire over corporate taxation. High- tax
European nations, seeking even higher tax revenues,
have targeted multinational corporations doing bus iness in their respective countries. This initiative has
been spearheaded by the OECD [Organization for
Economic Cooperation and Development] . Their pri ncipal targets are large US multinationals that have historically used the international network of double
taxation treaties to minimis e their overall tax burden.
The OECD, throu gh the so- called BEPS initi ative, which stands for Base Erosion Profit Shifting, the
BEPS initiative, is attempting to redress these arrangements by implementing a new arrangement tied
to transfer pricing practices, called CbC ( which means
Country by Count ry) reporting. This new model will
666 19 February 2016 Official Hansard Report

Bermuda House of Assembly require each multinational enterprise to report to every
country it does business in to delineate how much
business and profit it has in that and other countries.
Many Bermudian companies, including those not US
based, wi ll be caught in this CbC reporting protocol,
along with its administrative burden. The Bermuda
Government is still studying how much administrative
burden this proposal will have on us. We are also
consulting with the affected Bermuda companies and
watching the strategic moves our number -one client
country, the US, will make in this area.
Since Bermuda has many US multinationals
with holding and other types of companies here, we
often get caug ht in the crossfire of anti -tax haven
rhetoric. This rhetoric is often biased and ill -informed
about Bermuda, causing us unwarranted reputational
harm. Government conducts information sessions with
key opinion makers, informing them about the real
Bermuda story , as opposed to the sensational, stereotypical nonsense that often can be found in the international media.
To further dispel the misinformation, we do
three things:
• Communicate the message that Bermuda
embraces international standards of transparency and information sharing, when fairly applied;
• Publicly and selec tively challenge erroneous
statements that seek to stereotype Bermuda; and
• Demonstrate the value proposition that Bermuda brings to the global economy.

When we point out Bermuda’s proven expertise, capacity and track record to insure, protect and
pay clai ms to customers against catastrophic events
around the world, thereby enabling further economic
growth, it causes even our most zealous critics to
pause.
In some countries, there is an irrational fix ation on punishing low - or no-income tax jurisdictions —
on principle. An example of this is Bulgaria, which had
placed Bermuda on its national blacklist. However,
due to our continuing work in Europe, I am pleased to
report that Bulgaria has informed us they will remove
Bermuda from its national list once they ratify the Multilateral Tax Convention, which they anticipate doing
by this April 2016.
The rhetorical and real feeding frenzy for the
tax dollars of multinationals is replete with double
standards. Some of the countries that vilify Bermuda
as a tax haven ar e themselves some of the biggest
tax havens in the world. Delaware and Nevada rank among the world’s biggest tax havens, right up there
with the City of London. So the international debate
about tax havens is not only about transparency, c ooperation and information sharing; it is also about
competition —hypocritical competition. The irony of all of this is that if the OECD
eventually gets what it wants, the consequences will likely be catastrophic to the very same economies
they represent. If those trillions of dollars (yes , Mr.
Speaker, trillions of dollars !) of alleged unpaid taxes
are actually collected, multinationals —the very e ngines that create all those jobs and wealth across the
globe— will be severely damaged. Corporate earnings
will plunge, stock pri ces will collapse, unemployment
will soar , and pension funds that depend on those
stock prices will become impaired. A global recession
greater than that of 2008 will likely be precipitated,
and Bermuda will be sucked down that vortex. This is
a classic ca se of having to be careful what you wish
for.
Mr. Speaker, it has been suggested in some
quarters that Bermuda should introduce a low -level
corporate income tax to eliminate or at least blunt attacks on us from international tax vigilantes.
There are a few reasons the Government
does not think this is a viable move:
• Firstly, Ireland, as a low income tax jurisdi ction, has had to endure the same w ithering attacks as we have;
• Bermuda’s principal offshore business , is
(re)insurance, an industry notorious for very
wide swings in profit. This would mean similar
swings in Government revenue—so mething
that Government revenue planning would not be able to tolerate; and
• Three, l ast but not least, the Bermuda Government has given a legally binding undertaking not to introduce such a tax.

BERMUDA GOVERNMENT FISCAL POSITION

Hon. E. T. (Bob) Richards: Mr. Speaker, Hubert
Smith’s vision of Bermuda being “another wor ld” is
poetic and romantic, but in terms of finance, the vision
is far from reality. Bermuda is definitely part of the
world of finance, both as a source of finance as well
as a user of finance. (Re)Insurance assets act as a
source of fi nance for the rest of the world, greater than
$0.5 trillion, and the Government is a user of finance
from the outside world, greater than $2 billion.
This financial interconnectivity with global f inancial markets means Bermuda cannot make up its
own rules. Instead , we must play by the rules of the
financial world or suffer the consequences. This is
why we constantly refer to credit rating agencies and
the opinions of institutional investors. The cost and availability of credit to support our borrowing needs
depends on their opinions.
Our international business [IB] partners, as i nstitutions domiciled, managed and regulated in Bermuda, are subject to the same global financial rules
as the Government , and hence the fate of i nternational business is connected to the fate of the Bermuda Government. Bluntly put, if the Bermuda GovBermuda House of Assembly ernment is downgraded, many of our IB partners get
downg raded too.
So, the linkages are clear: Deteriorating credit
worthiness of the Bermuda Government not only
threatens the job security of public servants , it threatens the job security of those people employed in international business , and the job security of all those
companies and individuals employed in providing ser-vices to international business. This constitutes most
of the Bermuda economy.
Mr. Speaker, Bermudians need to be clear on
this critical point: The plan to eliminate the deficit, the reduction of public debt, the public declaration of f inancial targets , and the actual progress toward meeting those goals is not just some theoretical exercise
by the Minister of Finance —an exercise that does not
really affect the man o n the street. The interconn ectivity between IB, our number -one industry, and the
Government means that Government’s success in
eliminating the deficit and reducing the debt will have
a decisive impact on the future economic health of this entire country and the future prospects for jobs for
Bermudians.
Mr. Speaker, in last year’s Budget Statement,
to boost international transparency and credibility, I announced that Government intended to establish a
committee of independent, internationally based economists to publicly assess Bermuda’ s fiscal situ ation. The Fiscal Responsibility Panel (or FRP, as it is
now called) was formed, and three prominent international, independent economists were appointed. The
FRP deliberated, met with a wide cross section of
Bermuda society and published its first report in D ecember. Their report was written and published wit hout any oversig ht or approval from Government.
It concluded that (and I quote, Mr. Speaker)
“Bermuda’s economy faces a number of risks and u ncertainties, short term and longer term. The c urrent
level of government debt —taken together with very
large potential liabilities from [government ] guarantees
and underfunded public pension and health insurance
schemes —risks turning the possible impact of any
one of these into a serious setback for t he Island’s
economy. Reducing government debt and debt service costs are therefore a priority. Meeting the aim of
a balanced budget in 2018/19 is appropriate.”
Mr. Speaker, there is no doubt that the bi ggest threat to the future prospects of the way of lif e we
enjoy in Bermuda today is the problem of the Government deficit and public debt. Left unchecked, it
threatens, as already stated, the job security of Bermudians in both the public and private sectors. It
threatens seniors, whose pension incomes come f rom
the Government. It threatens the quality of health care
received by Bermuda residents, as very substantial Government subsidies support the hospital. It threat-ens those on Financial Assistance, a Government -
funded support service. And finally, it threa tens our
children who depend on public education. Chart 8 shows the percentage of taxes and
other government revenues relative to GDP, and how Bermuda compares to other small island economies.
Bermuda is third lowest , at 16 per cent versus the a verage of 22 per cent. If we were balancing the budget
at 16 per cent , we would perhaps have bragging
rights, but under the present circumstances , this chart
suggests our revenue base is insufficient to meet
minimal expenses of the Government of an economy
our size.
The FRP also observed (and I quote again),
“Progress on fiscal consolidation so far has been cautious and incremental. A more aggressive approach
will be needed to meet bal anced budget and debt targets.”
Government agrees with that statement. But
there has been a good reason for caution, and that
was the overall weak state of the Bermuda economy.
We inherited an economy that was broken and in free
fall. The first order of busines s was to stabilis e the
economy and restore confidence. These objectives
have be en largely achieved, and they form a platform
upon which a growing economy can be built. Now is
the time for implementation of a plan to eliminate the
deficit in three years and thereafter start paying down
the public debt.
The question is, How do we do it ? So far ,
Government has relied on achieving efficiencies by cutting costs, efforts described by the FRP as
(quote/unquote) “cautious .” On this point, the FRP
further observed (and I quote again), “With almost
85% of the Budget presently spent on wages and
salaries, grants and contributions, and debt, it is clear that if further savings are to be made there would
need to be a significant rationalization of public service provision and this will require difficult policy dec isions.” In plain language, signifi cant cost reductions
from here on will likely result in redundancies and/or
outsourcing.
The only other policy option remaining is to
significantly increase revenues over the next three
years. FRP also observed that (and I quote again) ,
“Economic growth pr ospects over the next few years
look better than for some years, providing a window of
opportunity to reduce debt to a safer level.”
Therefore, to assist with the elimination of the
deficit in three years, Government has set the objective of increasing annual revenues by $150 million
over three years, which is about 2.5 [per cent] to 3 per
cent of GDP. This will be achieved by restructuring
and broadening the tax base, coupled with modest
increases. Government will also have to continue with
its cost -saving s efforts on the expenditure side, as the
above- mentioned revenue increases will not alone be
sufficient to completely eliminate the deficit.

ECONOMIC STIMULUS

668 19 February 2016 Official Hansard Report

Bermuda House of Assembly Hon. E. T. (Bob) Richards: Mr. Speaker, the Go vernment’s two- track strategy not only requires the
controlling of Government spending, but also the
stimulation of economic activity. It would be easy for
Government to simply borrow money to fund infr astructure projects, as in the past; however, under the
present debt conditions, such a strategy would not be
prudent.
The adjacent table lists infrastructure plans
over the next five years. Some of these have already
started. You will note that some have been assigned a value of zero . They represent ideas that have not yet
been sufficiently fleshed out, s o they have been assigned a value of zero. However, once further devel-oped, they could be very significant in value. Most of these items would not be financed from public debt.
As these projects become reality, they will provide the
local economy, and the local job market in particular,
with the stimulus needed to expand jobs and income.

DEMOGRAPHICS

Hon. E. T. (Bob) Richards: Mr. Speaker, at the most
basic level, the scope for personal opportunity ap-proaches zero if there is no economic growth. Opportunity depends on growth , and today the scope of o pportunity is narrowing because demographic trends
are working against growth. In short, we n eed growth
to grow opportunity.
One way to look at the situation is to see
GDP, Retail Sales, Capital Expenditure and the size
of the workforce as aggregates, or totals, of many thousands of individual transactions taking place in our economy. It stands to reason that, all other things
being equal (as they call it in economics, ceteris par ibus), the more people who are resident on the Island,
the greater those aggregates will be and the greater
the scope for personal opportunity.
The equation that we quoted a few years back
says the sa me thing in another way:

Change in GDP = Change in Productivity +
Change in Population.

Let us look at change in population. This d epends on the difference between the net flow of imm igrants in and emigrants out, and the relationship b etween births and deaths. Emigration and immigration have been, and may always be, controversial. Birt hs
and deaths are not, but they are actually more impor-tant.
Chart 9 shows the ratio of live births to deaths
on the Island over 20 years. In 1996, there were two
babies born for every person who died. In 2014, there
were six babies born for every five deaths. We are
barely maintaining our numbers these days.
Also, the age profile of Bermudians has
changed radically over the past 50 years. Fifty years
ago, Bermuda schools were bursting at the seams with so -called “baby boomers ”—people born shortly
after the close of World War II. Today these same
schools are far less populated. Baby boomers are
now seniors , or soon to be. They and their children
have not been making babies at the rate of their parents and grandparents .
These two demographic changes —the decreasing birt h rate and the ageing population —are
having profound effects on economic growth and on
demands for Government resources. The FRP ident ified and analy sed this issue in some depth in their
report.
A stagnating population will likely result in a
stagnating economy, assuming no major increases in
productivity. In view of our falling birth rate, the only
avenue to population growth is net immigration, which
is the difference between people coming to Bermuda to live minus those leaving to live abroad.
Mr. Speaker, Bermuda’s immigration doctrine
dates back, at the very least, to 1959, when baby
boomers were, well, booming. We needed to keep people out of Bermuda to protect the potential oppor-tunities for our burgeoning popu lation. Fast forward to
today. The demographics have rev ersed, but the doctrine has not.
Today we need to encourage people to come
here to live, to grow the population, to grow consumer spending, to grow earnings on foreign capital, to grow
the tax base, to live in our vacant hom es and thereby
grow opportunities for Bermudians.
From an age perspective, we need more
young well-educated people in our Island not only to
help grow the economy, but to re- balance the current
imbalance between retired seniors, who are major users of the heal th care system, and the younger ,
healthier working population, who are supplying the
funds, through their health care premiums, taxes and
pension contributions, to pay for the care of our se niors.
Mr. Speaker, making the reversal of the longestablished im migration doctri ne will be difficult, just
as in breaking an old habit. But doctrines, laws and
policies are like the iOS of your iPhone. They have to
be updated, or else they will no longer serve the purpose of today’s users. We need to update our imm igration policy to better serve Bermudians today and
tomorrow. This is the reality and logic behind the
Government’s new Pathways to Status initiative.

EMPLOYMENT

Hon. E. T. (Bob) Richards: Mr. Speaker, the latest
jobs figures from the Department of Statist ics show
that, as of last August, year over year, there were 298
fewer jobs reported than the previous year. This is not surprising, as employment is a lagging indicator . Let
us refer back to Chart 1 for the US economy, where
we see the recession ended in the second quarter of
2009 , yet employment continued to fall for several


Bermuda House of Assembly quarters after that. In fact , employment did not su rpass its level when the recession ended until well into
2011. That is not an unusual pattern, and that is what
we mean when we say employment is a lagging ind icator. GDP in Bermuda started to expand in about the middle of 2014, so job numbers measured in August
2015 should not be expected to register job growth
yet.
Mr. Speaker, it is not like flipping a light
switch.
It should also be noted that the Jobs Survey
includ es 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. Of the 298 f ewer
jobs reported, 225 were Government. During that period, Government was implementing its hiring freeze
policy and early retirement drive —to reduce the size
of government. Positions vacated by early retirement
are not allowed to be filled for at least t wo years. In
this regard, this initiative can be viewed as successful ,
and therefore the hiring freeze will continue throughout the next fiscal year as well.
Anecdotally, it is known that many Bermudians who have retired or otherwise lost their former jobs have become entrepreneurs —small business
owners and operators —or part -time workers. Such
employment may not be captured in this survey or the
Employment Survey. We also know that there has
been a significant pick up in employment in the construction sector relating to hotel construction and the
America’s Cup infrastructure build- out. A visit to Doc kyard will convince anyone of that. These activities also may not have been captured in the surveys.
Mr. Speaker, the powerful demographic d ynamic of ageing baby boomers is at work in our economy, as outlined in the previous section, and it is also having a dampening effect on the size of the wor kforce. 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. Thus, all other things being equal, the workforce
is being shrunk by this demographic fact.
The data contained in this survey should be
interpreted carefully and intelligently. There are those who conclude that the shrinkage of the workforce
must be the result of emi gration from Bermuda or
people giving up on seeking work. There is no statist ical evidence to support such conclusions. However,
the a geing and retirement of baby boomers is a stati stical fact that ha s worked to shrink the workforce.
Nevertheless, the need to create jobs in the economy
remains paramount , and the Government is doing all it
can to make it happen.

BANKING

Hon. E. T. (Bob) Richards: The role of banks is crit ical in any economy, particularly one where there is a lack of viable alternatives available to individuals and
businesses who seek credit. Chart 10 shows trends in
the total Bermuda dollar and foreign currency loans to
Bermuda residents. In 2015, for the first time since
2011, there i s evidence of a significant increase in
bank lending in the economy. This is a positive development because, all other things being equal, the
economy cannot expand without an increase in credit
flow.
Chart 11 shows the trends in non- performing
loans ( or NPLs). NPLs remain well above acceptable
levels, albeit problem loans appear to be trending
downward. Repairing problem loans is an important
prerequisite to the expansion of bank lending. Ho wever, the stabili sation of the price of property, the most
common form of loan collateral, has helped in the
march to normalise bank lending markets.
Merger and acquisition activities in the local
banking sector have had the effect of delaying Go vernment’s plans for banking reform. In terms of e mployment, the sector continues to shed jobs. We are
concerned that there are a large number of Bermudians who have former banker in their resumes. Our
efforts at banking reform envisage an expanded bank-ing sector that will provide a greater variety of banking
services for our int ernational business partners ,
thereby enabling former bankers to put their skills and
experience to work.
For a number of years , the Bermuda Monetary Authority has been shepherding the Financial
Stability initiative. Out of this effort, the Financial Policy Council ( or FPC) was formed. The FPC convened
for the first time during the fourth quarter of 2015 and
performed a high- level review of all risk factors that
had the potential to undermine the Island’s financial
system.

TAX REFORM

Hon. E. T. (Bob) Rich ards: Mr. Speaker, in last
year’s Budget Statement, I announced Government’s
intention to commission a review of Bermuda’s tax
system. Government subsequently asked a division of
the IMF [International Monetary Fund], known as
CARTAC (which stands for Cari bbean Technical A ssistance Centre), to conduct an analysis of Bermuda’s tax system. CARTAC, which speciali ses in issues of
small island economies, was given certain guidelines
by Government, three of them:
• No income tax;
• No value- added tax, or VAT ; and
• The need to raise revenue to help eliminate
the defici t.

Like the FRP, the tax economists from
CARTAC consulted widely before providing their r eport. CARTAC recommended many widespread changes to our tax system , and many of their recommendations form the bas is for the tax reform meas670 19 February 2016 Official Hansard Report

Bermuda House of Assembly ures I am announcing today. These measures also
take into account consultations with major stak eholders and modifications by Government.
Mr. Speaker, the entire tax system, excluding
various government fees, can be placed into thr ee
basic types of taxes: taxes on remuneration, such as
Payroll Tax; taxes on consumption, such as Customs
Duties ; and taxes on property, such as Land tax.

Payroll Tax

Hon. E. T. (Bob) Richards: An important part of T ax
Reform consists of changes to the payroll tax structure. Currently, payroll taxes are payable by the employer at rates up to 14.5 per cent of the remuneration
paid to staff members. Up to 5.5 per cent of that tax
may be recovered by the employer from employees.
Government is currently cons idering reforms
to the payroll tax structure to make it more progressive and to yield additional revenue. The current struc-ture takes little or no account of the ability to pay of employers or their employees. It therefore puts a
heavi er relative tax burde n on lower income emplo yees. The challenge is to weigh the desire to make
payroll tax more equitable against the needs of the
Government to raise revenue and its impact on bus inesses.
In order to get that balance right , Government
will continue its consult ation with business, receiving
more detailed data from employers, in order to model
the outcomes of various payroll tax options. This will
be performed over the coming fiscal year. The restructured payroll tax system is to be implemented in fiscal 2017/18.

Implementation

Hon. E. T. (Bob) Richards: While the reformulated
Payroll Tax structure is slated for implementation for
the next fiscal year, the demands on Government to
reduce the deficit are immediate. Therefore, as an
interim measure, Payroll Tax, as it is currently const ituted, will remain in place for another year, except that
standard rates will be adjusted to 15.5 per cent, an
increase of 1 per cent. There will a lso be a similar i ncrease of 1 per cent for most other tax rate categories.
The rate of tax recoverable from employees will be set
at 6 per cent .

“Notional” Taxable Payroll

Hon. E. T. (Bob) Richards: Mr. Speaker, the payroll
tax system has remained virtually unchanged for the
last 20 years. An integral part of this system has i ncluded s o-called “notional salaries ,” for payroll tax
purposes . (I am going to call them notionals from here
on in. ) Such notionals are applied to people who are
self-employed or principals in small business or pr o-fessional practices, such as health care and profes-sional advisory services in a business or legal context.
A review of these notionals indicates wid espread and flagrant abuse. Government intends to
conduct a thorough review of all notionals in the sy stem, with a view to updating them to reasonable and
fair levels. It is not the intent to penalis e entrepreneurs
in small or embryonic businesses. Each case will be decided on its own merit after the provision of quant itative data. Where feasible, for professionals, notion-als will be based on occupational benc hmark salaries
found elsew here in Bermuda. This notional loophole is
an inequitable feature of our tax system t hat is long
overdue for reform.
In addition to the changes in the payroll tax
area, legislation providing concessions for new Ber-mudian hires wil l be allowed to expire at the end of the
current fiscal year.

Consumption Taxes

Hon. E. T. (Bob) Richards: Mr. Speaker, often when
explaining Bermuda’s tax system to people from
abroad, we describe it as a consumption- based sy stem. This refers primarily to customs duties on goods
crossing our frontier. But goods form a diminishing proportion of our services -based economy. Gover nment will therefore, as part of our tax reform plan, alter
the structure of customs duties , as well as broaden
the tax system to include services.

Customs Duties and Excise Tax

Hon. E. T. (Bob) Richards: The current customs tariff
imposes a selected number of excise duties on alc ohol and tobacco products, petrol and passenger veh icles. Excises account for about half of all revenue collected on imports. In 2017/18, the Government will seek to establish a separate statute from the customs tariff to impose excise taxes. Separating the impos ition of excise taxes from customs duties would i mprove the transparency of the fiscal system. T his tax
will be payable at the frontier, just like customs duties ,
and will be administered by HM Customs.
In 2016/17, currently imposed excises will be
increased to begin the process of increasing the rev enue yield from indirect taxes. These increases in specific excise duties on alcohol, tobacco and petrol will increase revenue by approximately $14.7 million.
With regard to customs duties , in 2016/17 the
Government will commence preparations for the intr oduction of a single unified tariff.

General Servic es Tax

Hon. E. T. (Bob) Richards: Mr. Speaker, in order to
broaden the tax base, a new services sales tax, to be
called the g eneral services tax (or GST), will be levied
on turnover from the provision of most services by


Bermuda House of Assembly service providers to the public. I t is proposed that this
GST will be levied at a rate of 5 per cent. As this is a
change that will require significant adj ustments in operations, billing, and reporting on the part of service
providers and collecting, tracking and enforcement on
behalf of G overnment, this tax will not be implemented
until April 1st, 2017, at the earliest. Notable exem ptions to the general services tax will be the sectors of
banking, insurance, and health care. Small service
providers will also be exempted from the tax.
The net uptake from this new tax is antic ipated eventually to approximately be $50 million per
year.

Land Taxes

Hon. E. T. (Bob) Richards: Government already announced, at the end of 2015, the new land tax rates
applicable to the new Annual Rental Values (ARV) list.
The long recession has had the effect of lowering
ARVs across Bermuda. Not adjusting the actual tax
rates would have resulted in a loss of revenue by
Government of $19.2 million. Clearly, under the cu rrent circumstances, Government cannot absorb such
a loss. Therefore, tax rates on the new ARVs have been adjusted to retain Government’s total revenue
intake to be the same as it was last year. The exem ption from l and tax for seniors in their own homes will
be adjusted down to $42,000 from $50,000. The origi-nally announced level of $29,000 was issued in error.
This adjustment keeps the exemption the same as
under the old regime.

Concessions

Hon. E. T. (B ob) Richards: Mr. Speaker, during the
recession, payroll tax concessions to hotels, retail and
restaurants were extended so that such enterprises
could retain the number of jobs being filled to the greatest extent possible. These concessions started
being rolled back last year , and the roll back will continue over the next two years.

Simplification

Hon. E. T. (Bob) Richards: Mr. Speaker, large corporations around the world, irrespective of what industry
they are in, are today actively engaged in initiatives
involving reducing complexity in their organis ations
and operations. Simplification reduces costs and i ncreases the organis ation’s ability to effectively manage and control itself. One of CARTAC’s themes was the need to simplify the Bermuda tax code and the
customs tariff. The simpler the rules are, the fewer
man- hours are needed to oversee and enforce them,
making the system more efficient. The Customs Tariff
has become complicated and confusing to administer
over the years. The tax reform plan will ther efore seek to simplify it and other revenue- raising regulations , to
make them efficient and user -friendly.

Office of the Tax Commissioner

Hon. E. T. (Bob) Richards: Mr. Speaker, major
changes to our tax system will increase pressure on
the Office of the Tax Commissioner . (I will refer to it as
“OTC .”) One of the fundamental tenets supporting the
tax struct ure we ha ve always had in Bermuda is to
keep taxation simple so as to avoid the necessity of
creating a large bureaucracy to administer it. The
OTC is s till relatively small, and this Government i ntends to keep it that way.
Mr. Speaker, it has been noted that only
25 per cent of taxpayers currently file their taxes
online using the existing e- Tax system. This rate is
unacceptably low and must be raised dr amatically
during the coming fiscal year and beyond. Too much
of the OTC’s time and resources are devoted to processing manually filed tax returns, and this will become
particularly burdensome as it deals with the changes and reforms outlined here today. S teps w ill be implemented to incentivis e the public to use the online f acilities , which are far more [time] efficient for taxpayers
and the OTC officers. Since the overwhelming majority of Bermuda taxpayers have c omputers and online
access, taxpayers should think of online filing as
merely another app available to online users, but its
primary purpose is to facilitate payment of taxes. It is
already available and ready to be used.
A new filing policy will ther efore be impl emented on April 1
st, 2016 , for taxpayers of gross annual payrolls in excess of $1 million per year. It will be mandatory for taxpayers over that threshold to file
electronically , using the e -Tax system. Manual tax
returns from these taxpayers will not be accepted.
Accepted methods of payment , using the e- Tax sy stem, are direct debit from a local bank account or via
credit cards.
Mr. Speaker, we strongly encourage all taxpayers to avail themselves of the efficiency and convenience of electronic filing , which is fast, reliable and
accessible 24/7.
With a more efficient deployment of r esources, the OTC will be able to get more aggressive
as it relates to compliance and enforcement. The m ajority of taxpayers in Bermuda are responsible when it
comes to paying their taxes , but there will a lways be
those who deliberately flout the law. Government will
pursue those individuals to the greatest extent of the
law.

AIRPORT REDEVELOPMENT

Hon. E. T. (Bob) Richards: Mr. Speaker, the Master
Development Plan prepared by the former G overnment in 2008 concluded th at Bermuda needed a new
purpose- built terminal and that the existing terminal’s
672 19 February 2016 Official Hansard Report

Bermuda House of Assembly useful life would expire in 2008. Since then, the facility
has continued to deteriorate.
Moreover, the site of the present terminal re nders it vulnerable to storm surge from Castle Harbour,
as happened with H urrican e Fabian. No amount of
patching up can reduce that vulnerability —the term inal needs to be moved. The 2008 Master Plan reco gnised that and recommended another location. This
Government is using that recomm endation.
The construction of a modern airport terminal
implies many large risks , which form obstacles to
moving forward: first and foremost, financial risk. The
Government does not have the money or borrowing
capacity to fund such a large undertaking. Sec ondly,
operational ri sk: There is no one locally who has the
expertise or experience in designing and building
modern airport terminals, so the risks of a Bermudabased company learning on the job would likely result
in massive overruns. Thirdly, there is the risk of quality
control.
The facts are simple. This is a facility we
need , but we, Bermuda, do not have the financial c apability nor the know -how to build it. We need an
overseas partner.
Of course, an overseas partner is nothing new
as it relates to our airport. The American military built
the airport, occupied and operated everything there except the terminal itself for over 50 years. When they
left, we had to depend on the British company Serco
Plc for 20 years to operate key parts of the facility. S o,
engaging an overseas partner to facilitate progress with respect to our vital gateway has worked for us in
the past and is nothing new.
This time , our overseas partner is Canada,
the Government of Canada. The arrangement is built
upon a Government to Government agreement which
provides solutions to the obstacles preventing us from replacing the crumbling facility. The Canadian Go vernment is represented by Canadian C ommercial
Corporation (or CCC). The prime subcontractor is A econ, Canada’s largest infrast ructure development
company, which has the expertise and experience in airport development we need. As concessionaire, Aecon will arrange financing from institutional investors
abroad, and that debt will not form part of Bermuda’s
national debt. The projec t will pay for itself from rev enues it earns during the life of the concession period.
After the debt is repaid, there will be a profit -sharing
arrangement between Aecon and the Bermuda Government.
At a time when Bermudians have been crying
out for projects to create jobs, this project fits the bill. Aecon does not intend to import an army of Canadian
workers to build this terminal. It will be built by Be rmudian subcontractors and workers by the hundre ds.
This project is a major job creator for Bermudians,
something no Bermudian could object to.
The project continues to gather momentum. A
number of major milestones were achieved in 2015 in the airport development process. Firstly, Government
was succe ssful in negotiating a workable Letter of E ntrustment from the UK Government. This settled any
questions relating to the Bermuda Government’s authority to enter into an agreement with CCC.
Secondly, the airport development agreement
was signed to move the development process into
Phase 2. This was an interim agreement that ushered
in the most important phase of the entire process ,
where final specifications, detailed cost estimates, legal contracts, and engineering and architectural details are developed, along with subcontracts to local
contractors.
Thirdly, two town hall meetings were held, one
in St. George ’s, the other in Hamilton, to communicate
the various important features and rationales for this project and dispel various misstatements and myths that were floating around out there in cyberspace.
Work continues both within the Ministry of Finance
and the Ministry of Tourism Development and Transport, and with our partners , to fill in the “gaps ” ident ified by the Deloitte report that we commissioned t o
ensure value for money in the project. We will fulfil all
requirements stemming from the Letter of Entrus tment.
Fourthly, both ministries have actively engaged in consultation with the staff at the airport to address any queries they may have had. The Gov-ernment has committed that no jobs will be lost and
that their compensation packages will remain secure.
That consultation continues.
Finally, geotechnical and other related techn ical studies that were conducted by local expert service providers removed any uncertainty as it relates to
the capability of the ground , where the new airport will
be built , to support the new terminal building. This is a
demonstration of how Aecon will use local expertise
where it is available. Upon financial close, construction will commence, creating hundreds of jobs for
Bermudians.

AMERICA’S CUP

Hon. E. T. (Bob) Richards: Mr. Speaker, following
the success of the Bermuda Louis Vuitton America’s
Cup [AC] World Series event in October, attention is
now focused on continuing pr eparations for the 2017
AC Event Village at the Royal Naval Dockyard and associated site works for additional team bases on the
South Basin dock.
The WEDCO land reclamation project in the
South Basin will be the primary location for the Amer-ica’s Cup Event Village. It is a collaborative effort led
by WEDCO and the Ministry of Public Works , with
technical assistance from the ACBDA [America’s Cup
Bermuda] . The tendered project is currently ahead of
schedule and on budget , with financing for the pr ojected $39 million reclamation cost provided by a local banking institution.


Bermuda House of Assembly Following Oracle Team USA and SoftBank
Team Japan, Groupama Team France and T eam
BAR, UK, are scheduled to set up bases on the South
Basin dock before the end of 2016. Artemis, the
Swedish team, has nearly completed cons truction of
their base and boat building operation at Morgan’s
Point. They employ ed over 70 local workers for that
project.
Mr. Speaker, since April 2015, Oracle, Art emis, and Team Japan have established business o perations in Bermuda, with a cumulative spending of
over $10.2 million to date for fiscal 2015/16. This local spending excludes additional economic activity generated by the relocation to Bermuda of some 147
America’s Cup team employees , along with their fam ilies, who have become fully integrated and are utili sing goods and services provided by restaurants, transport ation services, construction and trades,
wholesale and retail operators, security services, m arine services, shipping and forwarding companies, telecommuni cations providers, service industries,
small businesses , and real estate. To date, two teams
have accounted for more than 80 houses and apar tment rentals from local landlords, primarily in the central and western parishes.
In addition, some 390 workers were employed
in America’s Cup -related projects in the Royal Naval
Dockyard, valued at over $4.9 million. Approximately
70 subcontracting companies were involved in the
projects. This amount does not include local spending
associated with sectors such as transport, shipping,
shipping agents, hotels and airlines.
A detailed economic impact assessment for
the October Bermuda World Series event is in the process of being finali sed. The hotel, retail, transportation and restaurant sectors of the economy all r eported healthy spikes in activity in the lead- up to and
during the World Series event. It is anticipated that total additional spending will exceed the $1.7 million
original estimate for the event. More than 60 local
vendors provided retail, food and beverage, and direct
professional services over the three days of the event.
In addition, there was the extraordinary visibility Ber-muda gained from television and media coverage, as
well as visiting sponsors and spectators. The media exposure is expected to continue this year , with co nfirmed Louis Vuitton World Series events in Oman,
New York, Chicago, the UK , and France, where Bermuda, as the host venue for 2017, will be prominently
featured.
In the current fiscal year, the estimated $11.7
million in America’s Cup -related expenditures, inclu ding $4 million in sponsorships and $4.9 million in cap ital costs , are on budget, with the capital development
projects on schedule.
Mr. Speaker, the total Government budget for
America’s Cup- related expenses during the 2016/17
fiscal year will be $24 million. This amount includes $5
million for the third tranche of the $15 million commi t-ted sponsorship to the America’s Cup Event Authority
that will be spent in Bermuda, and $15 million in capital spending on infrastructure and si te preparations for
team bases and event sites for the AC35 Finals from
May through June of 2017. The remainder will be all ocated to operational costs.
So, Mr. Speaker, in response to those asking,
Why is the Government spending all this money on America’s Cup when there are so many other worthy
things upon which we could spend?, the answer can
be summed up in three words: j obs, rents and income.
In addition to the continuing economic impact
and excitement generated by the AC teams and international World S eries Events, Bermuda will further
benefit in 2016 through the America’s Cup Endeavour
Programme, which focuses on the development of
young Bermudians both on the water and through the
school STEAM educational programme. The selection
of a Bermuda youth team to represent the Island in
the Red Bull Youth America’s Cup in 2017 will also
provide young Bermudians with world- class exposure
and opportunity.

GOVERNMENT DEBT

Hon. E. T. (Bob) Richards: Mr. Speaker, Chart 12
shows the increase in public debt from a low of $197
million in 2007 to $2.217 billion by the end of 2016.
This chart illustrates the path taken to the present
precarious position of public finances. One could ri ghtfully say to this Government, Well, you’ve been in
power for three years now . Why haven’t you fixed the
problem?
Firstly, one needs to appreciate that this is a
very big problem that will take time to fix. Secondly, to stop the debt from rising, the annual net deficit needs
to be slowed down, then eliminated. Only then can the problem of debt reduction begin to be addressed. One
could also rightfully ask, What and how have you
done so far?
Chart 13 sheds light on that question. This
graph shows the year -over-year percentage change in
public debt levels. Clearly, between 2008 and 2012 ,
the situation was out of control. Since that time, the
increase in debt has slowed substantially.
Last year , the year -over-year growth in debt
was 10 per cent. The objective of this budget is to lay
out a specific pathway to get that down to zero.
The Fiscal Responsibility Panel recommended that we dispose of the debt target ratio of
debt-to-GDP. We agree with that, as it has been a
point I have been making for many years. Gover nment agrees with the aim of meeting the 80 per cent
Debt-to-Revenue target and t he 10 per cent Debt -
Service -to-Revenue target.
Mr. Speaker, the Ber muda Government lives
off [credit] . As the deficits will continue for the next
three years , Government will still have to have a borrowing requirement. We have a credit facility with a
674 19 February 2016 Official Hansard Report

Bermuda House of Assembly local bank for that purpose. The total net debt is getting close to the authori sed limit, but it is not antic ipated that that level will be breached in the fiscal year
2016/17.
There is also the requirement to retire outstanding debt as it matures. Chart 14 shows the m aturity dates of existing debt. As these mature, the
Government will have to refinance these bonds in i nternational credit markets. S o, refinancing will be real
world tests of our credit worthiness, determining the
availability of credit flow and its cost.

Sale of Fixed Assets

Hon. E. T. (Bob) Richards: Mr. Speaker, every ba lance sheet has two sides: assets on one side and liabilities plus capital on the other. The irony of the
Government’s debt situation is that, on the asset side
of the bal ance sheet, there are literally billions of do llars’ worth of assets, all owned by the Government.
So, despite the precarious debt situation, our assets far exceed our liabilities. Unfortunately, this does not
help very much until and unless these assets c an be
converted into cash to assist us in meeting our oblig ations.
During 2015, Government conducted a survey
of the assets it owns , but does not need for any for eseeable purpose. A number of properties have been marked for sale by way of public auction. T his will be
done in an orderly fashion so as not to distort the
market.
The proceeds of these sales will be placed directly into the Sinking Fund for debt reduction.
Such fixed asset sales require the approval of
Parliament , and Honourable Members can anti cipate
the appropriate notices of motion in due course.

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 P ension Fund ( or CPF) and an occ upational pension plan from their employer. In a perfect
world , the social insurance should provide a first tier ,
or basic , pension, which would most likely be suppl emented by a second tier , or occupational , pension.
Through no fault of their own, currently a number of
retired persons are not receiving an occupational pe nsion and are therefore relying on their social insurance as their sole source of income. Obviously, this is not
an ideal situation, and the Government continues to
do its utmost to ensure that seniors who rely heavily
on their social insurance benefits are cared for suit ably.
Mr. Speaker, notwithstanding the above, the
CPF benefit provides an important base retirement
income. The Government is aware that pension ben efits under t he CPF were last increased by 3 per cent in August 2011, and this is causing some difficulties for
some of our seniors , as other expenditures have been
rising.
I can report that the latest a ctuary report for
the CPF is due to be completed this quarter. This r eport is for the period August 1
st, 2014 , and will be t abled in this Honourable House as soon as it is completed. At that time, I shall have a better understan ding of the financial position of the fund and prudently
consider increasing pensions and other benefits under
the Contributory Pensions Act 1970 in August of this
year, when the benefits under the Act are uplifted.

2015/ 16 FISCAL PERFORMANCE

Hon. E. T. (Bob) Richards: Mr. Speaker, I will now
focus briefly on t he forecast financial results for the
current 2015/16 fiscal year , as they form the foundation for the 2016/17 Budget.
The revised revenue forecast of $935.4 million
is $4.1 million (or 0.4 per cent) more than the
$931.3 million in the 2015/16 approved budget and is
due mainly to strength in customs duty receipts and payroll taxes.
The forecasted 2015/16 operating expenses
of Central Government are $921.8 million, or
$9.1 million (1 per cent) higher than the $912.7 million
originally budgeted in 2015/16. This resulted from i ncreased demand for financial assistance, the cost of
minimum revenue guarantees for certain airlines ser ving the Island, legal aid and other legal costs incurred by Government. These amounts were offset by u nderspends in staff costs, as the Government has continued its efforts to gradually downsize the public ser-vice.
The Government has remained steadfast in
prudently managing expenditures.
Revised capital expenditures for the year
should come in at $57.3 million, or $11.4 million (16 per cent) below the budget allocation of $68.7 mi llion.
Debt service cost for 2015/16 is slightly below
budget.
The overall deficit, therefore, is revised down
by an estimated $7.8 million, or a 3.6 per cent var iance. The forecasted deficit for the financial year ending March 31, 2016, of $212.2 million is $87.5 million
less than the 2014/15 deficit.

[Desk thumping]

Public Debt

Hon. E. T. (Bob) Richards: Mr. Speaker, as at
March 31
st, 2016, gross public debt will stand at
$2.335 billion, and debt , net of the Sinking Fund, will
stand at $2.217 billion. In 2015/16, the Government executed a $200 million two-year term loan facility
agreement with the Bank of NT Butterfield & Son to


Bermuda House of Assembly meet some of its financing requirements. As at
March 31st, 2016, the Government has drawn $150
million of this facility.
The Sinking Fund balance is projected to be
approximately $118.2 million at the end of 2015/16.
In 2016/17, certain Government notes will m ature. Government will draw from the Sinking Fund to pay off $90 million in p rivate placement notes. This
will reduce our debt interest costs by $5.3 million.
The financing required to fund the 2016/17
deficit is estimated at $199.4 million. Government will
have to incur new borrowing of $150 million, as a portion of the deficit can be funded from the Butterfield
loan facility.
As at March 31st, 2017, it is estimated that
gross public debt will stand at $2.444 [billion ], and
debt, net of the Sinking Fund, will be $2.357 billion.
Mr. Speaker, in 2013 the Government s et up
debt-related targets, or rules, that were appropriate for
an economy the size of Bermuda’s. These rules committed the Government to keep public debt at such levels that the net debt -to-GDP ratio would not
exceed 38 per cent. A dditionally, Government recognised the desir ability of achieving a net debt -torevenue ratio that would not exceed 80 per cent and a
debt service cost -to-revenue ratio that would be below
10 per cent. We stated these were targets we would
work toward over the medium term. The Gov ernment
reaffirms these limits, except for the net debt -to-GDP
ratio, which the FRP has recommended we drop. With
determined action , they are achievable.
As of March 31
st, 2016, the net debt -torevenue ratio will be 237 per cent, and the debt service cost -to-revenue ratio will be 18 per cent. There is
much work to be done to bring about our situation to
be in line with our targets.

2016/17 BUDGET ESTIMATES

Hon. E. T. (Bob) Richards: Mr. Speaker, the budget.
We have a table in front of us. I will read off
some of the highlights for the estimates for 2016/17. Revenue, $996.935 million. Current Account expend itures, excluding debt service, $921,643. Current A ccount balance before debt service, a surplus of $75.292 million. Interest on debt, $129.050 million.
Sinking Fund contribution, $58.375 million. Surplus
available for capital expenditures, a deficit of $112.133 million. Capital expenditures, $87.620 mi llion. Overall budget deficit anticipated to be $199.393
million.
Now, Mr. Speaker, the highlights of the
2016/17 budget feature a modest 1 per cent increase
in expenditure of $8.9 million from last year’s budgeted figure. Reven ues are forecast to rise by 7 per
cent, or $65.6 million. The Current Account balance
before debt service charges is budgeted to be a surplus of $75.3 million. However, the Current Account b alance after
debt service is a deficit of $112.1 million. This repr esents a drop in the deficit of $39.1 million, or 25.9 per
cent. The overall deficit is budgeted to be $199.4 mi llion, a drop of $20.7 million, or 9.4 per cent , when
compared to the 2015/16 original estimates.
The projected Current Account b alance (excluding debt service) indicates whether revenues can support the day -to-day running of the G overnment,
excluding finance costs and capital expenditure. This year’s budget, with a surplus of [$75.3] million in Cu rrent Account before debt service, represents an i mprovement over the 2015/16 surplus , with revenues
sufficient to cover the day -to-day running of the go vernment and the annual contribution to the Sinking
Fund. This represents another fiscal milestone along
the road to fiscal sustainability. The next milestone will be to cover current expenditure including all debt service costs.

Revenues

Hon. E. T. (Bob) Richards: Mr. Speaker, t he revenue
estimate for 2016/17 is $996.9 million , which is $65.6
million, or 7 per cent higher than the original estimate
for the previous year.
The Government has already implemented
certain spending reductions in our medium term fiscal
framework. This w ork must continue, though it is recognised that additional fiscal gains must come from
revenue increases.
In order to reduce the deficit and provide for
much needed services, the Government considers it
appropriate now to increase our revenues. Accor dingly, in 2016/17, the Government will increase payroll
tax, customs duty on fuel, tobacco and alcohol , and
implement the biennial review of government fees.
The standard rate of payroll tax will be set at
15.5 per cent in 2016/17, an increase of 1 per cent.
There will also be a similar increase of 1 per cent for
most other tax rate categories. The limit on taxable
wages for purposes of payroll taxes will remain at the
$750,000 level. The rate of tax recoverable from e mployees will be set at 6 per cent in 2016/1 7, up from
5.5 per cent. This is so that the increase may be
shared by both employer and employee.
Payroll concessions currently in place for the
hospitality, restaurant and retail sectors will be partially rolled back in 2016/17, with businesses in th ese
sectors paying a rate of 8 per cent. The yield from
payroll tax following the revised rate structure and partial rollback for payroll tax concessions is estimated at $390 million in 2016/17.
Mr. Speaker, the duty on fuel will be raised by
8 cents per litre in April 2016/17 year and 5.5 cents for
[fuel imported by ] BELCO , to achieve additional c ustoms revenues of about $11.7 million.
The duty on cigarettes and tobacco, and beer,
wines and spirits , will be raised for the April 2016/17
676 19 February 2016 Official Hansard Report

Bermuda House of Assembly year to achieve additional customs revenue of about
$4 million.
Government fees for an array of services pr ovided to the public will be increased by about 4 per
cent for most fees , and the anticipat ed increased yield
should be $1 [million] to $2 million.
Finally, Mr. Speaker, Government anticipates
$3 million in receipts from sale of government property
that is surplus to requirements.

Expenditures

Hon. E. T. (Bob) Richards: Mr. Speaker, against the
background of moderately improving economic condi-tions, Government has set the overall budget expendi-ture, including current account and capital account
outlays, debt service and Sinking Fund c ontributions ,
at $1.196 billion. Mr. Speaker, this increased level of
spending will enable the Government to service our
debt, strengthen infrastructure, educate our children,
and provide health care and security for our citizens
and assistance to the less fortunate among us.
The level of C urrent Account spending pr ojected in the 2016/17 budget, excluding debt service,
is $8.9 million higher t han the budgeted expenditure
approved in the previous year . This increase includes
additional Financial Assistance and other grants, i ncreased government overheads due primarily to
health [insurance] premiums, and the expiry of the
partial suspension of Government’s matching contr ibution to the Public Service Superannuation Fund. These increases and others were partially offset by
reductions in other expenditures such as professional services.
Mr. Speaker, since March 31
st, 2013, Current
Account spending levels have been reduced by $74
million, or 7.4 per cent. This is good news, but the Finance Ministry’s Medium Term Expenditure Fram ework (MTEF) called for a 15 per cent spending reduction over a three- year period. Whilst we have had
some success in cutting cost s, it has become increasingly difficult to implement further reductions under the
current Government structure and the formulaic a pproach to expenditure cuts in previous budgets. The
Ministry remains committed to the MTEF, but moving
forward, it is cle ar that the Government must revise its
approach in order to implement further savings, either
by way of increased efficiencies or through reforms in
the way services are delivered and departments are structured.
The Government is confident that the short -
term sacrifices being made by way of increas ed expenditures will realis e long -term benefits to the country.

Debt Service

Hon. E. T. (Bob) Richards: Debt service costs for the
2016/17 b udget are projected at $187.4 million, 10.3 per cent higher than the 20 15/16 allocation of
$169.9 million. This represents $129 million in interest
payments and a $58.4 million contribution to the Sinking Fund.

Capital Expenditures

Hon. E. T. (Bob) Richards: The capital expenditure
component of the 2016/17 budget is set at $87.3 mi llion to meet the Government’s infrastructure needs
and to support the key pillars of our economy.

CONCLUSION

Hon. E. T. (Bob) Richards: Finally, Mr. Speaker.

[Inaudible interjection]

Hon. E. T. (Bob) Richards: Mr. Speaker, nobody
likes tax increases, not the Ministry of Finance, not the
rest of the Government, not the business community,
not the man in the street. Some of the measures out-lined in this Budget Statement will not be popular. But
debt service has become the second largest “ ministry ”
in Government. It is stealing from the future of our
children and their children. It is constricting our ability
to respond to people’s needs. It is weakening our abi lity to maintain the infrastructure that supports ever yday life. It is threateni ng our solvency and, with that,
our financial independence. So we must get to grips
with the deficit and debt problem because they stand
between us and a secure future.
The economic turnaround we were elected to
bring about was never going to be easy, but we have
made solid progress . I have been very impressed by
the work of my colleagues to make things happen, big
and small. They have been helped by Bermudians in
every sector, bringing to bear hard work, expertise and pride to end t he Great Bermudi an Reces sion.
Everyone should be proud of this accomplishment ,
and we see it as a sign that, beneath the shot and
shell of our political life, Bermudians are working t ogether effectively on the common goal of a better t omorrow.
The three- year plan we are putting i n place
shows light at the end of the tunnel in the form of a
deficit that will no longer exist. Eliminating the deficit
will free us to begin paying down public debt that narrows our options and bleeds our resources.
The tax reforms that will help free us from the
burden of that debt constitute a major change in the tax structure of the Island —broadening the tax base
coupled with the intention to introduce more progressivity into payroll taxes, because we must account for
the challenges lower income people have with the
cost of living. This recovery must work for the people as it happens.
Our mission is to get the Island’s economy in
all its mani festations back on solid ground so that


Bermuda House of Assembly people can grow, plan and build the life they want.
This budget will help us do just that.
Thank you, Mr. Speaker.
[Desk thumping]

Thank you, Honourable Member.
The Chair will now recognise the Honourable
J. J. Athe rden.

PUBLIC HEALTH AMENDMENT ACT 2016
Hon. Jeanne J. Atherden: Mr. Speaker, I am intr oducing the following Bill for its first reading so that it may be placed on the Order Paper for the next day of meeting: the Public Health Amendment Act 2016.

The Spe aker: Thank you. Thank you, Honourable
Member.

OPPOSITION BILL

REFERENDUM AMENDMENT ACT 2016
[Disallowed]

I have no problem. I have no problem. I
understand [Standing Order] 28(1). There is also another portion, which is always why it is important for the Speaker to have knowledge of the Bill. It is b ecause there is a part of [Standing Order] 28(1) which
678 19 February 2016 Official Hansard Report

Bermuda House of Assembly indicates that there is an exception to [Standing O rder] 28(4). And that exception is if the Bill impacts the
Consolidated Fund.