This year has been a missed opportunity for the Bermuda Government to apply tax reforms, not only because of a further delay in meeting its target for a budget balance, but also because of the “de facto easing of its fiscal targets” by suspending contributions to the Sinking Fund. That’s the view of the Fiscal Responsibility Panel, led by Jonathan Portes. The three-strong group of overseas experts who effectively serve as the Bermuda Government’s fiscal conscience.Immigration reform and tax reforms are among key issues that need to be addressed without delay, according to the panel in its 2019 Annual Assessment.The island’s shrinking workforce and ageing population will put ever-increasing pressure on taxes and spending, the panel said.“The issue is not whether action is needed, or even what actions are needed — there is a high degree of consensus, as expressed in both our reports and those of other independent bodies and indeed within Government — but when and how. Immigration reform, tax reforms and tax increases, and changes to the structure of healthcare and pensions are all required,” the panel said.“On tax reform, we regard 2019 as a year of missed opportunity,” it added.The panel repeated its warning about external risks, including broader economic, geopolitical and environmental, which it said are unlikely to diminish in the medium term.“Given the fiscal position, and the limited progress of the Government in acting on our previous recommendations, we are concerned that Bermuda will have little fiscal or macroeconomic policy space to address any crystallisation of these risks,” the panel said.It also noted “the failure of the Caroline Bay development resulted in a significant increase in government debt”.The panel, which also featured Marian Bell and Peter Heller, said there were some positives. It mentioned the Government’s progress in setting out “a clear agenda for the reform of the financing of the healthcare system, exploring measures to address the underfunding of the pension system, both public and private, and recognising the need for major reforms to the immigration system to boost the population of working age”.It added: “While implementation of reform will inevitably take time and be politically contentious, we commend the Government’s willingness to address these complex and difficult long-term issues.”The panel’s 36-page report was released by the Government late yesterday evening. The panel outlined suggestions and recommendations for key issues it said need to be addressed with out delay.Among the suggestions it said:• Fiscal targets. “In view of the recent change with regard to the treatment of the Sinking Fund, the Government needs to set out, clearly and transparently, its fiscal strategy and associated targets for the next few years.“In our view, the government should set a new target for the fiscal balance of a surplus of at least $50 million, demonstrating a commitment to reducing the overall debt burden in nominal terms.”• Fiscal strategy and tax reform. “Meeting these fiscal targets will require significant revenue increases, given likely upward pressure on spending. “In the absence of a larger labour force it will be difficult for Bermuda to grow its way out of these problems. We continue to believe that over the long term it would be appropriate to raise tax revenues significantly as a share of GDP, in line with other similar economies. “We see no reason why Bermuda should not move from the existing payroll tax to a comprehensive progressive income tax, which would allow the proper taxation of capital income alongside labour income. “We also think it necessary to increase revenues from multinational companies registered in Bermuda, whether by increasing registration fees or, over the medium to longer term, the introduction of a corporate income tax, which would also make a major contribution to improving Bermuda’s position in international negotiations on tax harmonisation issues.• Diversification and sustainable growth. “The government’s focus on fintech, if pursued prudently, is broadly appropriate, but considerable care needs to be taken given the potential reputational risks. “More broadly, the underdeveloped nature of domestic capital markets, and the absence of a domestic market for start-up finance is a concern. “We reaffirm our suggestions from last year relating to requirements for financial statements and bankruptcy procedures and some form of target for domestic investment — in viable projects — by the island’s private and public pension schemes, which we understand is under review.”• Reforming immigration policy. “Immigration is a charged political issue for any government, given Bermuda’s difficult history; but this cannot be an excuse for inaction. The need for policy change to boost the population of working age and enable stronger economic growth is widely recognised across government, business and much of civil society. “Bold action could help kick-start the business growth and job creation — for Bermudians as well as new arrivals — that Bermuda needs to address its immense demographic and fiscal challenges.”• Spending on healthcare. “The government has now set out an ambitious, radical and in our view broadly sensible programme of reforms. In particular, moving to a single-payer system is likely to be a precondition for successful cost control. “Given the complexity of the issues, not to mention the political sensitivities, implementation will inevitably be a difficult and lengthy process. Healthcare represents a significant share of Bermuda’s economy that, without action, will only increase.“We commend the government’s approach to date and urge them to continue on this path in order to sustainably respond to the healthcare challenges that an ageing population will confront in coming years.”• Tackling unfunded pension liabilities. “As with healthcare, the government has clearly grasped the scale of the task and has a clear and, we believe, reasonably accurate view of the actions required. We urge a clear focus on raising both the pensionable age and the effective average age of retirement.• Government efficiency. “We are encouraged by the various initiatives that have been introduced to streamline and rationalise government services and public sector management and look forward to an assessment of their effects. “We also recommend strengthening the analytic capacity of the Government, most urgently in the Ministry of Finance, but also in respect of climate change.• Climate change. “Bermuda cannot afford to ignore the risks to which it is exposed. We would encourage the Government to carry out an assessment of the economic and fiscal risks that climate change might pose to the island.”The panel commended the Government for its progress on setting out an agenda for reform of the healthcare financing system and, “to a somewhat lesser extent”, pensions. It added: “But this should not be an excuse for further delay in tax reform and immigration policy. The risk of a significant adverse shock, to which Bermuda remains extremely vulnerable, continues to rise. There is no time to waste.”Mr Portes is professor of economics and public policy at the School of Politics and Economics of King’s College, London and a former chief economist at the UK’s Cabinet Office.Ms Bell is a British consultant economist, whose experience includes serving as an external member of the Bank of England’s Monetary Policy Committee from 2002 to 2005.Mr Heller is the former deputy director of the Fiscal Affairs Department of the International Monetary Fund.• Click on Related Media to read a PDF of the 2019 Annual Assessment