There is reason to celebrate the first Budget surplus in many many years, but the way in which that surplus was achieved sullies things.

An accounting sleight of hand shuffled the “mandatory” sinking fund contribution to capital spending thereby avoiding another deficit.

Moreover, the surplus is really window-dressing in that it amounts to about one-tenth of 1 per cent of gross domestic product. An earnest effort at debt reduction will require surpluses in excess of $150 million or 2.5 per cent of GDP.

By the Government’s own reckoning, there are no plans for earnest debt reduction before 2023.

This raises questions about the Government’s commitment to reaching its debt targets: debt service-to-tax revenue and debt-to-tax revenue. The first target is 10 per cent. In 2018, the ratio of debt service-to-tax revenue was 18 per cent.

Debt service will have to increase significantly above the near $200 million budgeted in 2018. Thus, for the foreseeable future, debt service will have to be the single largest expenditure item — bigger than health and education.

The second debt target is for a debt-to-tax revenue ratio of 80 per cent; presently, it’s just under 230 per cent. The time has come for the Government to share with taxpayers its idea of when those targets are likely to be met.

The elephant in the room is the need for higher taxes. Reaching the Government’s target, without raising tax above 20 per cent, is near impossible. As a result, the near $30 million increase in taxes will have to increase by another $80 million over the next three years if a serious dent is going to be made to our $2.5 billion debt.

A reasonable time frame for the achievement of these debt targets is around ten years. But this can only be achieved with significantly higher taxes.

The largest tax hikes are on land, both residential and commercial. For residential owners in the lowest tax bracket — under $1,000 per month, the increase is huge in percentage terms — 340 per cent — but in dollar terms they will see their tax bill increase from $88 to $300.

Owners in the second bracket — $1,800 per month — will see their tax bill increase by around 50 per cent. Those at the top — where rent is around $35,000 a month — will see a 9 per cent increase, which translates into $13,000.

I understand the reluctance to increase the employee portion of payroll tax, but a restructuring of the employer portion is long overdue.

Further, a restructuring need not involve any increase in tax. Employers should enjoy marginal tax bands the same way employees do.

The present system is based on an employer’s total wage bill. If that wage bill tips into the next bracket, then an employer taking on a single employee could see their total payroll tax increase by tens of thousands of dollars. This is a job killer.

Marginal tax brackets solve this problem by only increasing the tax on new employees. As a result, the burden on the employers is significantly reduced.

The increase in foreign currency purchase tax has probably gone as far as it can. Further increases will lead to evasion as Bermuda residents start stashing their US dollars under a mattress as well as opening US dollar accounts.

The plan to reduce interest rates on mortgages will invariably increase the debt by way of loan guarantees. Presently, the Government has guarantees totalling $555 million. It’s difficult to get a handle on the dollar value of this new guarantee, but there are risks associated with government-backed mortgage lending.

US government-sponsored enterprises — Fannie Mae and Freddie Mac — failed miserably in this regard. Based on a back-of-the-envelope calculation, the guarantee could pump an additional $16 million into the economy.

Perhaps it is too much to ask that the Government begins to address its off-balance sheet debt of around $3 billion. While not as urgent as the on-balance sheet debt of $2.5 billion, the Government must turn its attention to this ticking time bomb.

On the expenditure side, it’s gratifying to see spending not increasing in inflation-adjusted terms.

• Craig Simmons is a senior economics lecturer at Bermuda College