Taxes, fiscal balancing and my apology

  • Economic calculations: the level of Bermuda’s debt and its size relative to GDP could remain static under current circumstances. Note: we assume budget expenditures include $60 million in capital expenditures and revenue remains flat compared to 2018-19 (Source: Government of Bermuda and Anchor Investment Management Ltd)

    Economic calculations: the level of Bermuda’s debt and its size relative to GDP could remain static under current circumstances. Note: we assume budget expenditures include $60 million in capital expenditures and revenue remains flat compared to 2018-19 (Source: Government of Bermuda and Anchor Investment Management Ltd)


Back in 2012 I began writing articles on Bermuda’s escalating deficit which was ramping up at an alarming rate. At the time it was not front-page news or rarely discussed extensively. Bermuda’s fiscal situation now features prominently, and I am often asked to comment on it.

It also is a large part of the focus of the Fiscal Responsibility Panel and its annual report. Now, however, I fear I made a big mistake. In fact, I would like to apologise. You see the intent was not to foster a myopic and somewhat obsessive focus on the level of debt at the expense of truly more important considerations.

I fear that the debt is now being used as “air cover” for all types of fiscal policies at the expense of Bermuda itself. Specifically, balancing the government purse and dealing with the deficit should never be paramount to the economy itself. In fact, the best way to deal with the debt would be a combination of economic growth and budgetary constraint.

Economic growth, in fact, will help solve a huge swath of problems that the island faces including entitlement deficits and even healthcare. Taxing, of course is not the solution. We will never be able to tax our way to prosperity. At this stage with the economy either in recession or teetering on the brink, it would seem unreasonable to dramatically alter the taxation environment as doing so will surely tip the economy into a downward spiral and, ironically, make tackling the debt more difficult.

It is also noteworthy that the level of debt and its size relative to GDP could remain static under current circumstances. The estimated required primary surplus (surplus before debts servicing) can be calculated as shown in the accompanying table (Fig 1).

Note that we assume budget expenditures include $60 million in capital expenditures and revenue remains flat compared to 2018-19.

Thus, we are there — panicking at this point is not necessary. This assumes, of course, the Government does take a hard stance on controlling their expenditure and the economy manages to flat line at 0 per cent real GDP growth or 2 per cent nominally (assumes 2 per cent inflation).

The tax burden per Bermudian citizen has risen significantly over the past five years and some of the proposed taxes would likely do economic damage. Bermuda has been able to absorb some of the increased tax burden thanks to the America’s Cup and the strong US economy, which has driven a rebound in tourism.

For those who would take this opportunity to state that delaying the rebalancing of the budget by a year or two is a failure of government, I would caution their intent. It is far more important, at this stage, to nurture the economy and maintain a competitive and accommodating business environment than eliminating the deficit during an economic downturn.

Bermuda finds itself in a very uncertain environment of rising populism, nationalism and regulatory uncertainty. What is needed is a focus on lowering the cost of doing business, simplicity and an implicit push to increase employment on the island.

Many of the proposed taxes would do just the opposite. Thus, for anyone who decides to rail against delaying the complete elimination of the deficit, I would suggest that they may be threatening the very future on the island itself, since collecting more and more taxes from a shrinking tax base will have a very unfavourable outcome.

This is not to say that we should give this government or any government of Bermuda a long-term “hall pass” to wander as they please. The fact is, we should be willing to accept a delay in fiscal balancing if the Government holds the line on expenses and even attempts to lower them. If the government is not committed to arresting inefficient and wasteful spending then I would be the first to cry foul, and for this, I will never apologise.

Nathan Kowalski CPA, CA, CFA, CIM is the chief financial officer of Anchor Investment Management Ltd. and can be contacted at nkowalski@anchor.bm. Disclaimer: The sole responsibility for the content of this article, lies with the author. It does not necessarily reflect the opinion, policy or position of Anchor Investment Management Ltd. The content of this article is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy or for any other purpose. The information and opinions contained in this material are derived from proprietary and non-proprietary sources deemed by the author to be reliable. They are not necessarily all-inclusive, are not guaranteed as to accuracy and are current only at the time written. Past performance is no guarantee of future results. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Investment involves risks. Readers should consult their professional financial advisers prior to any investment decision. The author may own securities discussed in this article. Index performance is shown for illustrative purposes only. You cannot invest directly in an index. The author respects the intellectual property rights of others. Trade mark or copyright claims should be directed to the author by e-mail

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Published Feb 4, 2019 at 8:00 am (Updated Feb 4, 2019 at 12:14 am)

Taxes, fiscal balancing and my apology

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