Taxes are to go up and spending is to be cut by $33.1 million — and Finance Minister Bob Richards warned that public sector layoffs could come this year.

The grim news came in the annual Budget statement, which imposed 3.5 per cent cuts across the board — less than the 5 per cent proposed in the Government’s three-year savings programme.

Payroll tax, customs tax, duty on fuel and the airport departure tax will all go up, while payroll concessions for the struggling retail, restaurant and hotel sectors will be scaled back.

The payroll tax standard rate will be set at 14.5 per cent — an increase of 0.5 per cent — while “there will also be a similar increase of 0.5 per cent for most other tax rate categories”.

The employee share of payroll tax will go up a 0.25 per cent to 5.5 per cent, to share the increase between workers and employers.

Mr Richards said that the business payroll tax rate in the retail, restaurant and hospitality trades would be set at 5.5 per cent.

He added: “The yield from the revised rate structure and partial rollback for payroll tax concessions is estimated at $353 million in 2015-16.”

The tax on fuel — an extra five cents a litre — is expected to raise about $9.6 million in extra revenue, while land tax on commercial properties will also increase, from 4.4 per cent to 5.5 per cent to raise an additional $4.1 million.

Airport departure tax will jump $15 to $50 per passenger, which is expected to bring in an extra $5.5 million.

In addition, the corporate service tax rate will go up 1 per cent to 7 per cent to pull in extra revenue of $1 million.

And “various fees” for Marine and Ports services will also be pushed up, raising a further $280,000.

Total government revenue for the year is expected to be $931.3 million — $29.6 million (or 3.3 per cent) up on estimates for 2014-15.

But expenditure will still outstrip income, with an expected spend of $1.151 billion.

“Unlike previous years, this Budget includes significant increases in various taxes,” Mr Richards said. “In strategic terms, there are a number of reasons for this departure.

“First, it has been determined that the deficit will not be broken by spending cuts alone — increased revenues will be necessary.”

But he said that significant hotel projects, the redevelopment of the airport and the America’s Cup were expected to inject $930 million into the economy over the next three years — close to one fifth of the Island’s $5 billion gross domestic product.

“With the major stimulus measures already outlined, we are confident the economy will be able to withstand the attenuating effect of tax increases on growth,” he added.

The Government also announced $68.5 million for capital expenditure — bricks and mortar. Mr Richards said most of the expenditure was construction-related and involved projects that are already under way.

He also told Members of Parliament that the failure to negotiate an extension to the furlough day scheme for public sector workers had had an effect on budget planning.

“The forecast reduction in current spending is estimated at 3.5 per cent of $33.1 million after the savings from the furlough have been allocated back in the budget,” he said before giving warning of likely job losses.

“We cannot guarantee that the planned reduction in spending can be achieved without layoffs of workers in the public sector for the coming financial year.”

Mr Richards told the House of Assembly that servicing the Island’s debt will cost nearly $170 million — 5.4 per cent up on the last financial year’s $161.2 million.

That represents $117.6 million in interest payments and a $52.3 million contribution to the government borrowing sinking fund.

The Minister of Finance said that the medium-term expenditure framework had set a 5 per cent target for savings for this financial year.

“A renewal of the furlough would have enabled us to meet that target and continue our no-redundancy pledge,” he said. “This is unfortunate and undermines the credibility of this Government, pertaining to public commitments on cost reductions.

“This will not play well with the ratings agencies and our creditors.”

Mr Richards said that at the end of this financial year, gross government debt will stand at more than $2.31 billion, up from $2.185 billion at the end of this financial year.

He told the House of Assembly that, owing to Bermuda’s small size and dependency on international business, the Island was more at risk than larger countries with multiple sources of revenue.

“Lenders, therefore, are much less tolerant about debt levels for us than they are with large, diversified economies. So, in the eyes of global credit markets, there is little margin for error in the management of our economy. Second, a large and rising debt service will crowd out spending in critically important areas such as education, social services and national security. Paying debt service has to be the top priority of any borrower because if you default on your debt service, you are by definition insolvent, regardless of whether you have other assets.

“So all other types of spending have a lower priority than debt service, an amount that would make it the second largest ministry, even though it is not a ministry at all.”

David Burt, the Shadow Minister for Finance, said: “In his third Budget Statement, the Minister of Finance has embraced ideas that he once attacked, ignored the fact that jobs are still being lost and increased taxes on paychecks, land, gasoline and tourism.

“The minister now embraces increasing taxes during a recession, suspending public sector pensions, broadening the tax base, and ending payroll tax concessions; all proposals that he has attacked in the past.

Mr Burt, who said he would outline an alternative plan in his reply to the Budget next week, added: “There are tough choices that need to be made, but this Budget once again focuses on cuts and does nothing for growth. The lack of a growth strategy is laid bare by the fact the minister neglected to mention that the National Economic Report released today confirmed that 790 jobs were lost in 2014.”