The full text of the Opposition Finance Minister's reply to the Bermudan budget

The Budget Reply in full

The following is the full text of Shadow Finance Minister Grant Gibbons' Reply to the Budget Statement, which he delivered in the House of Assembly yesterday.

To His Honour the Speaker and Members of the Honourable House of Assembly:

Mr. Speaker,
I am pleased to present to this Honourable House the United Bermuda Party reply to the 2000/2001 Budget Statement.

One year ago, just three months after the 1998 General Election, the Progressive Labour Party Government delivered its first Budget to the people of Bermuda. Generally reassuring, their first Budget was notable for what it did not do. Many observers were relieved. Aside from a dramatic increase in spending, the first PLP Budget signaled "business as usual" and provided financial support for many programmes initiated by the United Bermuda Party Government. The Island continued to enjoy the benefits of a robust economy, which reflected decades of prudent financial management by UBP Governments.

Mr. Speaker,
What a difference a year makes. The first PLP Budget - with its unequivocal promise of no tax increases - wasn't cold before land taxes were raised, and what a whopper that hike was: a 25 percent jump in the total land tax bill. Having spent lavishly on first-class travel, entertainment, cars, road shows and self-congratulatory magazine inserts, the PLP Government gave itself $15 million-supplementary to the $36 million increase already included in the Budget. That's not small change, that's not prudent management and who's to say there won't be more?

Mr. Speaker,
The community is no longer relieved. The mood is uneasy. Self-indulgent Government spending at taxpayers' expense irritates the people of Bermuda. Our seniors, small businesses and hotels in particular felt betrayed by last year's unexpected land-tax increases. Recently announced restrictive immigration policies and bureaucratic de facto affirmative action programmes are perceived as threats to the economic well being of companies and employees alike.

Recent economic indicators offer cold comfort to the concerned. Inflation increased from 1.9 percent in February 1999 to 2.8 percent in December 1999. The balance of payments surplus on current account for the first three quarters of 1999 declined by $22 million over the same period in 1998, the first decline seen since 1995/96. Every key tourism measurement but one was down in 1999. International business expenditure has leveled off for the first time in several years, and GDP figures demonstrate that the rapid economic expansion of the nineties has slowed considerably.

Mr. Speaker,
These indicators are not signs of an economy in free fall. They are, however, signals that Bermuda's economy, steered by a new PLP crew, is drifting off course toward troubling economic waters.
In last year's Budget the PLP pledged "financial discipline in all matters". They indicated that spending would be financed "from the healthy growth in the economy that will generate revenues from the existing tax base". They declared that the Government would support "policies leading to low inflation". They stated that "the watchwords of the PLP Government are accountability, transparency and fairness".

These are impressive words that clearly contradict the record established by the PLP Government during the past year. Either the PLP Government doesn't know what financial discipline is, or they have abandoned their stated goal. They either don't understand the relationship between Government spending and inflation, or they choose to ignore it. We can only guess at the answers, because we know answers won't be forthcoming: The transparent and accountable government-in-waiting has become the inaccessible and silent Government-in-hiding.

Overview of Revenue and Expenditure for 1999/00

Mr. Speaker,
In our Reply to the first PLP Budget, we drew attention to the fact that the budgeted increase in current account expenditure over the prior 1998/99 year was $35.9 million. Effectively, this was a 7.4 percent increase in spending, about four times the rate of inflation and almost four times the projected rate of GDP growth for our economy. At the time, we were pleased to note moderation in the capital spending budget of $58.3 million, an expenditure that was slightly less than the revised estimate of $61.7 million in the prior year's Budget.

Unfortunately, during the course of 1999 the spending increased, and Parliament was asked to approve three supplementary items totaling in excess of $15 million. The revised outtake for the 1999/2000 Budget year now projects a current account expenditure that is some $40.3 million, or 8.5 percent, higher than the prior year's original budgeted expenditure. The revised capital expenditure has jumped by some $9 million to $67 million.

These results are in sharp contrast to the moderation demonstrated in the last United Bermuda Party Budget in 1998/99. This Budget showed a final current account expenditure that exceeded the prior year by only $8.4 million, a 1.8-percent increase, well within the rate of inflation and GDP growth. The final capital expenditure of $56.2 million was $16 million, or 22 percent, less than the 1997/98 year.
On the revenue side, it is interesting to note that the actual revenue for the 1998/99 year exceeded the original estimate by over $35 million and provided an actual surplus on current account of $71.5 million. After subtracting the capital expenditure of $56.2 million, the country-thanks to the United Bermuda Party Government-was left with an overall Budget surplus, after both current and capital expenditure, of over $15 million.

Contrast this performance to the PLP record in the current 1999/00 financial year. The revised revenue looks to exceed the original estimate of $551.6 million by some $18 million. After this is applied to the revised current account expenditure of $502.3 million and the revised capital expenditure of $67 million, there is a residual deficit of $12.3 million.
Bermuda's bottom line has changed from black to red. We have gone from a budget surplus to a budget deficit in just one year. For now, there is a UBP-generated safety net, because this PLP deficit has been covered by the UBP surplus from the prior year, eliminating the need to resort to even further borrowing.

Even though the economy was still relatively buoyant in 1999, the revised Budget numbers suggest a trend toward deficits and a widening gap between expenditure and revenue. This trend is ominous given an economy whose growth began to moderate in 1998, and it suggests complacency and lack of discipline in the budgeting process.

Mr. Speaker,
One week ago, the Government delivered its second Budget, but it is the first to be entirely shaped by PLP economic policy, and it will be the first to be judged accordingly.

Estimates of Revenue and Expenditure for 2000/01

The widening gap between budgeted expenditure and revenue continues in the PLP Government's second Budget. While the increase of $17.7 million, or 3.5 percent, in current account expenditure for 2000/01 over the original estimate for 1999/00 is a significant improvement over the budgeted increase from the previous year, it is still well in excess of the rate of inflation and the anticipated growth in our economy. It is also interesting to note that this $17.7 million increase was only reached following a last-minute, across-the-board effort to cut five percent from the current account expenditure in the 2000/01 Budget. While this effort is commendable in principle, we wonder whether such a last-minute effort can be made to stick, particularly given the pattern established in this year's Budget, where a flurry of supplementary items, totaling $15 million, followed shortly after the original budget document.

On the capital side, however, not even modest restraint has been shown. The budgeted capital expenditure for 2000/01 of $90.5 million is an extraordinary 50-percent increase on the original 1999/00 Budget of $58.3 million. When this capital budget is combined with the current account expenditure budget of $528.7 million, there is an increase of almost $50 million, or 8.8 percent, over
total expenditure in the 1999/00 Budget.

Apart from its potential to exacerbate our increasing level of inflation, this expansionary expenditure package is expected to add another $28 million to Bermuda's national debt. It has also required hefty increases in payroll tax and land tax on residential properties.

Mr. Speaker,
In our response to last year's Budget, we noted that the large increase in spending, without a corresponding increase in tax, was only possible due to the legacy of strong revenue growth and disciplined spending inherited from the United Bermuda Party Government. Unfortunately for the people of Bermuda, the "spend" has now been joined by "tax" and indeed "borrowing" in the PLP's second Budget.

In order to feed the 50-percent jump in projected capital spending in 2000/01, the Minister of Finance has hiked the payroll tax on most businesses by three quarters of one percent, of which one quarter can, and probably will, be passed on to employees. Although small businesses will only get a one-quarter percent hike, their employees will most likely absorb all of it.

While taking away with the right hand, the left hand has offered a concession to large businesses: A payroll credit of $2,400 for each worker employed can be deducted from the business's total payroll that is subject to payroll tax. It is not clear, however, why such a complicated artifice should be created. Is it the PLP Government's intention to remove this payroll tax credit eventually in the same way the so-called "discount" on land tax has now been decreased? Why not simply increase payroll tax by one quarter or one half of one percent?

Whether these concessions are real or illusory must be determined by each business on the basis of its own payroll. What is clear, however, is that the cost of doing business in Bermuda is now higher than it was before the PLP Government came to power.

Mr. Speaker,
Land tax has been hiked again in less than nine months. However, unlike the extraordinary May 1999 increase, of which $5.3 million was allocated to businesses and $1.6 million to residential properties, this new $3.7-million land tax will be directed entirely against residential properties. In the Parliamentary debate on the original increase, the Opposition pointed out the impact this would have on Bermuda's senior citizens on fixed incomes. Now the Minister of Finance has belatedly acknowledged that hardship by increasing the senior citizen tax exemption by a further third, or $10,000. Unfortunately, this Budget more than doubles the 1999 increase. We can only wait and see whether the promise of "broadening of the tax bands" will "significantly temper" this huge increase in residential land tax.

As for businesses, particularly those with large premises such as retail shops and hotels, the rethinking of the May land tax increase and the concessionary drop from six percent to 5.5 percent may be too little too late. These businesses still face a $4.3 million tax. This tactic gives new meaning to the old saying "I'm from the government and I'm here to help". It is particularly ironic in light of the PLP election promise to work with the private sector to reduce the cost of doing business in Bermuda.

Mr. Speaker,
Following the PLP election promise to retailers to introduce duty free shopping, the changes in the customs tariff in this Budget are insulting. The decrease in the tariff on artificial fibre clothing to 10 percent may provide some assistance to struggling retailers, but when the duty on natural fibre clothing goes from 2.5 to 10 percent at the same time, the result may be, effectively, a wash. For some smaller retailers who depend on natural fibre clothing for their trade, the increase may further undermine their margins and livelihoods.

Mr. Speaker,
We support the increase in duty on cigarettes. The further increases in company fees and user fees for Government services are perhaps to be expected from a Government looking for revenue, but they do add to Bermuda's reputation as an expensive place to live and do business.

Mr. Speaker,
The Report on the Bermuda Tax System should be released as promised in last year's Budget Statement, and serious consideration should be given to the "Duty Free Shopping" programme for tourist-oriented retail outlined in the report. In addition, the PLP Government should announce its tax policy, if one exists. A clear and consistent tax policy is a hallmark of well-managed economies, as it allows individuals and businesses to plan their economic futures with greater certainty.

External Economic Considerations

Mr. Speaker,
Since last year's Budget, the world economic outlook has brightened considerably. The Southeast Asian crisis and the associated instability that affected currency and capital markets in other developing nations has receded, and the impact of volatile capital flows has become less of a pressing issue. Urgent discussions by the G7 finance ministers aimed at fixing the global financial architecture and restructuring the role of the IMF are no longer front-page news. Overall projections for global economic growth are considerably more positive.

The US economy to which Bermuda's fortunes are intimately tied has recently broken the record for the longest expansionary period in US history, while US unemployment has dipped to a 30-year low. Inflation has been held in check by gains in productivity. Federal Reserve Chairman Alan Greenspan recently declared in his half-yearly report to Congress that the current state of the economy was "unprecedented in my half century of observing the American economy".

In the US, the Conference Board Consumer Confidence Index in December 1999 reached the highest level in its 32 years of existence, suggesting that American consumers are still very optimistic about their economic prospects. Perhaps this is no surprise, given the booming stock market, high asset prices and the intoxicating pace of IT and Internet-driven change. In the last six months of 1999, the US economy expanded at the blistering pace of 5.5 percent, and the Congressional Budget Office is projecting GDP growth of 3.5 percent this year.

Indeed, there is some irony for Bermuda - as we face a mounting debt - that the current US budget debate has been focused on the most appropriate allocation of their healthy budget surplus. Economic indicators in the UK suggest that the Chancellor of the Exchequer will face a similarly pleasant quandary when he contemplates the disposition of the UK surplus in his upcoming budget. An overall budget surplus is a high-class problem that Bermuda, unfortunately, no longer enjoys.

There are, however, some concerning indicators coming from the US Employment costs rose by 3.4 percent in the 4th quarter, mirrored by an inflation level that edged up to 2.1 percent in the same quarter. The price of oil recently exceeded $30 per barrel for the first time in nine years. In addition, both corporate and personal debt levels continue to rise dramatically.

In order to contain this torrid growth and rising inflationary pressures, the US Federal Reserve moved again at its February meeting to increase the Fed funds target rate to 5.75 percent, which has now taken US. short-term interest rates to their highest level since December, 1995.

Against this backdrop of strong growth and rampant consumer spending, there are some, including Robert Rubin, the former US Treasury Secretary, who see a paradox of prosperity in these generally optimistic US economic conditions. This strong economic performance seems to have diminished the willingness among investors, businesses and the public to exercise discipline and take the actions necessary to prolong the prosperity. Mr. Greenspan recently stated that "we cannot be lulled into letting down our guard on budgetary matters".

In Bermuda, the cost of economic complacency is high.

While the US economy is broadly diversified and continues to grow strongly, the Bermuda economy-narrowly dependent on tourism and international businessshows unmistakable signs of cooling. In 1998/99, GDP growth fell to an estimated 1.5 percent from the 4.3 percent experienced in the prior year. The contribution from tourism to GDP fell below 20 percent in 1998/99, the lowest recorded level in Bermuda's history. It has plunged further during the current fiscal year. More dramatic is the change in expenditure by international business; averaging 16 percent in recent years, growth in spending by international business dropped to less than one percent in 1998/99.

Mr. Speaker,
Many Bermudians will ask, "How can you say times are bad when they're so good?" Opposition Members are not the only ones to note the proliferation of new $60,000 luxury cars on Bermuda's roads, the staggering amount of overseas purchases by Bermudians, the renovations and additions to homes and the trips abroad.

Yet it is this rampant consumer spending - along with a hotter-than-hot construction industry - that is currently fueling what residual GDP growth Bermuda currently enjoys. Unlike tourism and international business, however, neither consumer spending nor construction is capable of supporting Bermuda's economy over the long run. In other words, the foundations of Bermuda's economy-the twin pillars-are shaky, and the PLP Government is indulging in a false sense of security.

Mr. Speaker,
Given these circumstances, the lack of restraint we see in the PLP Government's budgetary and economic approach is careless. The Government should not be increasing government expenditure by three to four times the rate of inflation and GDP growth. A 50 percent jump in capital spending is irresponsible and should be phased in to reflect Bermuda's means and our economic circumstances. It is neither wise nor acceptable for Government to fund this increase through borrowing in a time of rapidly increasing interest rates.

Government Debt

Mr. Speaker,
In the run-up to the 1998 Election and shortly thereafter, the community heard many false claims from the PLP that the United Bermuda Party had created a government debt problem.

Yet the policy of borrowing only for capital expenditure, the creation of a sinking fund to retire the debt and the self-imposed ceiling on borrowing of ten percent of GDP are all UBP Government policies. All speak to the careful and conservative manner in which UBP Governments have managed Bermuda's finances. Indeed, the AA1 ratings on our sovereign debt by Moody's and Standard and Poor's relate directly to Bermuda's significantly lower debt ratios compared to most other industrialized countries with ratios ten times higher.

We note, however, that in spite of the PLP's earlier protestations, the Minister of Finance is planning to add $28 million to the Government debt in this Budget. We also note that interest payments on this debt are now estimated to cost the taxpayer some $11 million per year, roughly equivalent to the expenditure of the entire Ministry of Youth, Sport, Parks and Recreation.

In last year's Reply to the Budget, we recommended that the existing debt be refinanced to take advantage of the lower interest rates available in the fixed income markets at that time. Sadly, it appears that the Minister of Finance did not take our advice, and by our calculations, his inaction may have cost the taxpayer as much as $3 million a year.

In the intervening 12 months, we have seen interest rates on the benchmark 10-year U.S. treasury note jump almost 1.5 percent to a little over 6.5 percent, and the credit spread for private-placement financing has increased from 1.2 percent to about 1.4 percent. This effectively means that the interest on $150 million of government debt that could have been financed at a fixed rate in February 1999 for approximately six percent has now jumped to about eight percent. This increase in interest represents an additional $3 million a year in interest payments that the taxpayer may be forced to shoulder due to the failure of the PLP Government to refinance at a favourable time.

Mr. Speaker,
Honourable Members will be aware that both borrowed funds and guarantees by Government are included in Bermuda's total debt liability. We have heard in recent weeks that Government intends to pledge tax revenue to assist Bermuda Properties in obtaining financing for the Castle Harbour resort redevelopment. While we don't object to the principle of tax incremental financing, we expect guarantees of this sort to be fully disclosed in the Budget Statement.

We also ask whether there are other programmes that have been approved or guaranteed by Government that have not been adequately disclosed in the Budget Statement. Without proper disclosure of Government guarantees, the Budget figures on total debt liability may be grossly understated. We call upon the Minister of Finance to disclose all of Government's liabilities so that the people of Bermuda fully understand what they and their children will be responsible for.

International Business

Mr. Speaker,
In any discussion of international business, Honourable Members need to remind themselves of the critical importance of this sector to our current high standard of living and our economic future. Dr. Archer's annual report for the year 1998 demonstrates, yet again, that it is the roughly 350 companies that have a physical presence in Bermuda that contribute approximately 80 percent of the $759 million that international business spends directly on the Island in the form of:
Wages, salaries and benefits to Bermudian households - $354.4 million
Payments for goods and services provided by Bermudian businesses - $148.2 million
Professional fees to banks, legal, accounting and professional firms - $193.3 million
Taxes, fees, duties and licenses to government - $63 million

It is also worth noting that the sector does not require many employees to produce these impressive results, and of the 2,872 employed by international companies in 1998, some 1,594 were Bermudians. Furthermore, when the direct and indirect effects of these businesses are tallied, the sector contributed $231 million, or almost half, of Government's entire revenue in 1998, which was available for education, healthcare, police, housing and other social services. Dr. Archer also noted that directly and indirectly international business impacts one out of every three jobs on the Island.
Honourable Members will, therefore, be particularly concerned to learn from the 1999 Economic Review that while expenditure by international business achieved annual growth rates averaging 16 percent from 1993 to 1998, it grew by less than one percent in 1998/99.

Mr. Speaker,
While the Economic Review can only speculate as to the cause of this retrenchment, it points to the impact of the Asian financial crisis on equity markets and to the uncertainty arising from Bermuda's general election in 1998. Whatever the causes, this slowdown already has had a negative impact on GDP growth and probably balance of payments and Government revenue. It would also appear that the reduction is coming primarily from those companies that have a physical presence in Bermuda, those that are responsible for 80 percent of the expenditure.

Mr. Speaker,
For Bermuda's sake, the PLP Government must not just pay lip service to the needs of international business. Like our North American neighbors, Bermuda experienced a recession in the early 1990s. It suffered an additional economic blow when the UK, United States and Canada announced the closure of their military bases in Bermuda. Only the strength and stability of the international business community during that period allowed us to weather those economic storms, manage the bases transition and successfully take over airport operations. It is the international business sector that has driven Bermuda's GDP and provided new jobs for Bermudians over the last ten years.

Today we express grave concern about the signals the PLP Government is sending to the private sector and international business in particular. The direct or implicit messages contained in policy speeches, press conferences, interviews and intemperate remarks in this Honourable House have not gone unnoticed. They are as closely analyzed by the international business community-both here and abroad-as are the signals sent by central banks, financial markets and regulatory bodies. Collectively, these signals influence the level of confidence that international business has in Bermuda, and we have seen erosion in business confidence over the past year.

These signals include, but are not limited to, the following:
Work permit delays,
Tighter restrictions on work permits,
Term limits on work permits,
Increasing bureaucratic interference in business,
De facto affirmative action programmes in hiring and promotion,
Higher costs of doing business,
Efforts to get international business to finance housing projects,
Undisciplined and extravagant Government spending, and
Lack of adequate consultation with international business before Government policy is announced.

These signals are sending a distinctly chilly message to the international business community.

Mr. Speaker,
The PLP's first Budget acknowledged the importance of attracting financial capital to Bermuda. However, an increasingly restrictive immigration policy is a sure signal that the PLP Government fails to recognise the importance of human capital to the continued success and presence of international business in Bermuda.

Over the past decade, growth in Bermuda's insurance sector has been fuelled by demand for capacity combined with a business-friendly regulatory and economic environment. More recently, innovation has allowed businesses to compete effectively, the kind innovation that is dependent on a critical mass of intellectual capital and a true partnership between the public and private sectors.

Standard and Poor's Rating Service made this point in their October 1997 analysis of Bermuda's insurance sector: "Bermuda has become integral to both the world's insurance markets and its reinsurance markets. It certainly is the home of some of the more creative minds in the insurance and reinsurance industry. And as it continues to innovate, Bermuda is likely to retain its competitive advantage."

A panel at the recent World Economic Forum in Davos remarked on the intensifying shortage of executive talent worldwide. Predicting that it would get worse during the next decade, the CEO of one of the world's leading recruiting firms warned that demand for executives from the technology sector, combined with demographic factors, was creating an unprecedented shortage. He stated, "There's no question that human capital is going to be more important to companies than financial capital in the future."

The United Bermuda Party suggests that Government look very carefully at these global trends before closing Bermuda's doors in response to politically inspired xenophobia. The PLP Government must not forget that the continued success of international business will be dependent on the ability to recruit and attract world-class employees. As one international business executive recently stated, "International business did not come to Bermuda so that Bermudians could have jobs with our companies, but Bermudians have jobs with our companies because international business came to Bermuda."

Tourism

Mr. Speaker,
The Budget Statement claims that the PLP Government "has been working hard during the past year to turn tourism around" and has "spent additional sums in the marketplace to create a `buzz' that Bermuda is back in the tourism business."

In spite of these good intentions, last year's "buzz" was effectively a fizzle. The PLP Government's first advertising campaign was terminated early due to poor results and backlash from tourist destinations on the receiving end of Bermuda's ill-conceived experiment in competitor bashing. Air arrivals experienced their worst drop in five years. There was a 7.7 percent decline in bed nights, a two percent decline in length of stay and overall lower hotel occupancies. This is a reversal of the two prior years when bednights, occupancies and length of stay were all higher, year over year. The bottom line in 1999 was that $5.7 million more dollars were spent to attract some 10,000 fewer visitors.

The only seemingly good news was the 2.3 percent rise in cruise arrivals. However, the United Bermuda Party is concerned about the increasing imbalance between regular air arrivals and cruise visitors. Honourable Members will be aware that visitors arriving by air spend some six times more than their cruise counterparts and make a substantial contribution to job security in the hospitality sector. In other words, economically, it takes six cruise passengers to replace one lost air arrival. In 1998, visitors spent over $486 million in Bermuda, of which less than 10 percent came from cruise passengers.

Caribbean destinations have learned the hard way about the importance of getting this balance right. In fact for many years Bermuda was seen as the model in this regard, because UBP Government policy had the practical effect of restricting cruise visitors to 25 percent of total arrivals. This year we anticipate that cruise passengers will make up nearly 40 percent of our visitors. Given these trends, it is regrettable that we are now 15 months into the PLP's watch and we have not yet seen a cruise ship strategy from the Minister responsible.

Mr. Speaker,
The dismal tourism performance in 1999 must be enormously disappointing to the thousands of Bermudians who work in the industry. The United Bermuda Party has always considered tourism to be the key pillar of Bermuda's economy. It provides more than 6,000 hospitality-related jobs. It also supports international business, which depends on tourism for a multitude of services ranging from airlift to accommodation. Government also benefits, as the latest Archer Report makes clear; the tourism sector directly and indirectly contributed some $120 million toward the public purse.

It is critically important to get our tourism approach right. While we have witnessed frenetic travel activity by the Tourism Minister, we are astounded that after 15 months we have yet to see an overall strategic tourism plan from the PLP Government. Simply put, if there is no roadmap how can we agree on a shared direction? Fortunately, in this vacuum, the hospitality sector "conduit group" has initiated its own tourism business plan.

Mr. Speaker,
Considering the minimal mention that tourism is given in the Budget Statement, we are concerned about the lack of a clear vision for this industry. The much-vaunted "100-day rescue mission" has apparently come and gone with nothing to show. Of the $22 million spent on marketing this year, too much emphasis has been placed on promotion. Too much taxpayer money has been wasted on extravagant road shows.

We recommend an immediate return to the shared vision encompassing all industry participants developed by the Monitor Group. We recommend that more emphasis be placed on developing our Bermuda product before we pour more money into promotion. We need to address the fact that in recent exit studies only 66 percent of visitors feel that they have received value for money. We need to understand the fundamental changes taking place in the industry-from diversified resort development to the changing role of travel agents-and create opportunities for Bermuda. We need to recognize and capitalize on the important role the Internet plays in tourism today. We must take advantage of this unique opportunity to communicate directly with our customers in a responsive and personalized manner. Most of all, Government must not waste any more time.

Mr. Speaker,
The development of existing hotels and new resorts is central to the strengthening of Bermuda's overall product. Yet important opportunities at Morgan's Point, Club Med, Belmont and Par-la-Ville appear to have been squandered through inexperience, poor handling and loss of investor confidence. Meaningful economic support for hotels, restaurants and retailers is not to be found in this Budget. Small changes in Customs tariffs and taxes reflect tinkering rather than significant relief. Hospitality and retail businesses need carefully crafted plans developed through real public-private cooperation rather than window dressing.

Specifically, we recommend the following steps:
Development of a five-year strategic plan in conjunction with the private sector, which should include development of an air-service strategy structured with existing airlines and including an aggressive policy for new airlines and services such as regional jets. It should also address the high cost of air travel to Bermuda and the increasing impact of rising fuel prices, which constitute roughly one quarter of the operational costs of airlines.
Development of a cruise strategy that balances air and cruise arrivals and recognizes the changes occurring within the cruise industry.
Reallocation of up to $10 million of promotional spending into on-Island activities and product development, including support of initiatives such as the Bermuda Explorers Network and significant support for training and development initiatives as set out in the Monitor recommendations.
Reallocation of promotional spending toward the development of a comprehensive tourism Internet strategy. The coordinated strategy should address the significant impact that this medium is having on our target customer as well as the profound changes occurring in the marketing of travel.
Development of consistent incentive guidelines and predictable tax policies that demonstrate a true understanding of hotel-industry needs.
Development of a resort-investor marketing tool, which aids and encourages investment in new and existing resort properties. The current ad hoc, cut-a-deal approach has ramifications for existing properties and potential investors that clearly have not been thought through carefully.
Creation of a Tourism Authority, properly funded and constituted with representatives from labour, industry and Government, to manage these initiatives more effectively than Government alone.

Economic Diplomacy

Mr. Speaker,
The UBP recognised some three years ago that the so-called harmful tax initiatives emanating from the OECD and the EU would have important consequences for the reputation of Bermuda as an international financial jurisdiction. This was the basis for the carefully crafted position papers and complex discussions carried on by the UBP Government in 1998. We recognise and appreciate the work that has continued, principally led by the Financial Secretary, who has apparently had extensive meetings with representatives of the US Treasury, the EU, the OECD and HM Government. We also recognise the extensive support provided by a subcommittee of the International Business Forum and by the consultants hired by Government to advise them and make representations on Bermuda's behalf. In fact, we note the additional expenditure in this year's Budget of some $330,000 toward professional fees.

Mr. Speaker,
While we recognize that some portion of these efforts must necessarily be confidential, we believe that the PLP Government is obligated to keep Bermudians better informed of progress. Ministerial statements providing nothing more than meeting and dinner schedules are inadequate and insult the electorate.

Fortunately, independent sources have informed us that the OECD Forum on Harmful Tax Practices met in late November 1999 to evaluate the more than 40 jurisdictions under review. The November meeting represented the completion of the first stage of the OECD's work, and the Forum reported its initial conclusions to the Committee on Fiscal Affairs at the end of January. The Committee on Fiscal Affairs is scheduled to use the period from January to May to finalise a report for the OECD Ministers when they meet in June of this year.

We understand that there will be further opportunity for dialogue between Forum members and the jurisdictions under review during this period and that the Committee on Fiscal Affairs is not expected to publish their listing of harmful/preferential tax jurisdictions until the June Ministerial meeting. In the meantime, the Forum will advise jurisdictions of their initial findings and will provide a further opportunity for jurisdictions to eliminate harmful aspects of their regimes if they are prepared to make a firm commitment to work with the OECD.

It is toward this latter end that we support the removal of the option that exempt companies currently have to choose between assumed remuneration or actual remuneration in their payroll tax. Currently, this choice might be construed as providing a different tax basis for local and exempt companies and thus evidence of ring fencing. It follows, however, that the $250,000 payroll-tax cap on individual salaries announced in this Budget should apply equally to exempt and local businesses.

Mr. Speaker,
The costly issue of environmental remediation at both Morgan's Point and Southside remains unresolved and will continue to impede the longer-term development of these sites.
The PLP Government has provided no further information on negotiations with the US Government. The momentum established by the UBP Government - fuelled by the successful resolution of similar Canadian claims - seems to have dissipated completely. While we have been treated to photo opportunities and broad words of support from the UK Government, in the longer term these efforts by the PLP Government could well prove to be a transitory sideshow. The Canadian experience demonstrates that Bermuda's funds will likely come from specific defence appropriation committees in the US Congress - a path pursued with some success by the UBP Government. A significant opportunity was also squandered in the disgraceful handling of the West Group in their bid to redevelop Morgan's Point.

It is also unlikely that a Minister's intemperate and irresponsible public remarks about America's lack of moral leadership will do much to advance our collective cause in Washington. As the last estimate for cleanup was in excess of $65 million, we wait in hope that some good news will come from the PLP Government on this issue.

E-Commerce and Telecommunications

Mr. Speaker,
A cursory read of the business press over the past year will underscore for even the most sceptical reader the explosive impact that the Internet and e-commerce are having on consumers and businesses, and the distribution of goods, services and even jobs. We believe that these changes will impact all economic sectors in Bermuda and present opportunities for the creation of new businesses and jobs.

The Electronic Transactions Act 1999 provides a useful legislative platform for e-commerce, and the draft code of conduct for the industry, initiated by the private sector, will reinforce Bermuda's reputation for high business standards, provided it is not heavy handed. In this new Internet space, mobility, speed and change have become the watchwords for business development. Government should function as a facilitator in close cooperation with the private sector. It should recognise that the accumulation, development and preservation of intellectual capital will be critical to Bermuda's success in building a sustainable e-commerce industry.

In regard to telecommunications, the slow progress in producing an updated Telecommunications Policy and the absence in the Budget of any duty-relief initiatives to encourage on-Island e-commerce infrastructure are disappointing to say the least.

Social Service Ministries

Public concern for housing, education, health care, public safety and senior citizens has not abated, yet the Ministries responsible for these areas receive little discussion in the Budget Statement. Individual allocations are specified, but details about the funded programmes and initiatives are vague or incomplete. The Bermudian taxpayer will have great difficulty determining the value of spending increases under these circumstances.

Housing

Prior to the 1998 general election, the then PLP Opposition was harshly critical of UBP Government housing initiatives. Our plans included building 100 new low-cost homes, renovating at least 100 derelict houses and bringing to market 54 moderately priced homes at Southside.
The PLP Government has had 15 months to act on housing. During that time, they have offered not a single new idea, and they have been extraordinarily slow in implementing the ideas they borrowed from us. In last year's Budget, we heard that the "100 houses" project would be completed at a nominal cost to the taxpayer. One budget year later, not one of these 100 houses has been built, but we note that the Government has allocated $461,000 toward operation of the project. For the benefit of the many families who are still in need, we urge the PLP Government to get on with it.

Education

We have heard promises over the past year to increase staffing and reduce class sizes. The cost of educating a child in Bermuda's public system has risen to somewhere between $9,000 and $10,000 annually, more than private school tuition. While smaller classes and more staff may lead to improvements, we believe parents and taxpayers should receive a more detailed explanation as to how their increasing tuition tax dollars are improving the quality of education.
We have consistently called for performance levels on individual schools to be made public. We believe that those responsible for educating our children and preparing them for the workforce should be held accountable for the results they achieve. We call on the Government to provide a progress report on the exciting program that we initiated in partnership with XL Capital to infuse technology into the school curriculum. We anticipate that this innovative program will play a critical role in preparing our children for the technological competency demanded by existing business and new e-commerce opportunities.

Police

Unfortunately, it is not just economic indicators that have deteriorated over the past year. For the first three-quarters of 1999 compared to the same period in 1998, the Police statistical report indicates a 19 percent jump in breaking and entering offenses. Total thefts including handbag snatches rose a dramatic 46 percent, while crimes of violence, including wounding, assault and robbery leapt 20 percent. Overall, according to Police figures the crime rate was up over 21 percent during this period. It is apparent to everyone in the community that the Police have struggled with manpower shortages all year. We wait to hear how this Budget and the Minister responsible intend to provide the assistance that the Police Service so desperately needs.

Seniors, Health Care and Pensions

For the second year in a row, the PLP Government has failed to increase the contributory pension benefit for seniors. Not only has the rising level of inflation eroded the living standard of seniors on fixed incomes, but the large increase in land tax and the rising costs of healthcare, prescription drugs and rents have exacerbated their financial situation. In addition, the Seniors' Centre promised in last year's Budget to improve access to government services has yet to materialise.

On the broader issue of healthcare, we feel it is imperative to implement Bermuda's Strategic Healthcare Initiatives and are concerned that there is no mention of progress or further financial support for consultants in the Budget Statement. The quality and cost of healthcare and access to services are issues that we feel strongly about and will be pursuing during the course of the debate.
We are still waiting for the Minister of Finance to address the annual shortfall in the civil servants' Public Service Superannuation Fund. As the Auditor has correctly noted, there is a significant shortfall between the annual contributions paid in and the benefits paid out that must be addressed in order to ensure the long-term viability of this pension fund.

Mr. Speaker,
During the course of Parliamentary debate we fully intend to address further issues such as the need for an integrated transportation plan prior to spending significant sums on fast ferries, the increasing cost and apparent delays at the Post Office and the level of funding provided by Government to sporting clubs and summer programs for our children.

Conclusion

It hasn't escaped our attention that the Minister of Finance concluded the second PLP "people's" Budget with a warning. He said, "This is the real world and someone has to pay." Unfortunately for Bermuda, truer words were never spoken. Government spending levels in this Budget mean one thing for certain: The people will pay and they will pay dearly.

But will they get their money's worth? Look back one year for clues. After additional spending of over $40 million in last year's Budget, was value obtained? Are seniors better off now than they were before their land tax went up? Has the whirlwind of expensive tourism activity produced any visible results? Has the quality of education improved? Do Bermudians feel safer in their homes knowing about Police manpower shortages? Have pockets of sloppiness been removed or added? Has drug use declined? Has business confidence been bolstered or shaken? Is there more affordable housing? Are hotels more profitable? Are retailers benefiting from promised duty-free shopping?

Mr. Speaker,
It is important to answer these questions and hold Government accountable, because it is the people who are taxed and it is their money that is being spent.

Let's make the United Bermuda Party position on spending clear. We believe in the simple principle that spending levels should reflect economic conditions and that Bermuda should live within its means. The continuation of sharp spending increases in the second PLP Budget indicate that the Government has either misread or ignored the warning signals of an economy whose growth has slowed. Under these circumstances, a more prudent approach to spending on both current and capital accounts and better prioritizing of capital projects is called for.

In the real world, economies pay and people suffer when Governments fail to adhere to sound economic principles.