Warning that Bermuda could face 'fiscal cliff'
Bermuda faces a “fiscal cliff” if its debt-to-revenue ratio, currently at 340 per cent, continues to rise.
An adverse but “far from inconceivable” scenario would see Government debt on an unsustainable trajectory, leading to a credit rating downgrade and higher interest rates on new debt, the risk of “large emergency tax increase and spending cuts”, and the possibility of capital flight and a foreign exchange crisis.
That’s one of the plausible scenarios for Bermuda’s future fiscal prospects, as it recovers from the Covid-19 pandemic, that is included in the Bermuda Fiscal Responsibility Panel’s 2020 annual assessment published this week.
The panel suggests reforms that include tax changes, cuts to major spending by Government departments and agencies, and a target of a balanced budget by 2023-24 followed by budget surpluses further along the road to pay down debt.
At the end of September, the Government’s net debt was $2.94 billion, with debt interest at $127.1 million. Some $354 million of that debt matures in January 2023 and will need to be refinanced at which point Bermuda would, the panel said, be “at the mercy of the credit rating agencies and financial markets” and the possibility of a ratings downgrade, driven either by external or domestic events, “would hang over the country for the foreseeable future”.
A further $402 million of debt matures in February 2024.
In considering possible scenarios for the island, the panel said: “Bermuda is gambling that international financial markets remain willing to lend freely at low interest rates; in a pessimistic scenario, it is heading for a fiscal cliff”.
The Fiscal Responsibility Panel is led by Jonathan Portes. The three-strong group of overseas experts effectively serve as the Bermuda Government’s fiscal conscience.
The panel said: “We paint a stark picture of Bermuda’s fiscal challenges, but one that is shared and recognised by the Government itself. In mid-November, the Minister of Finance [Curtis Dickinson] characterised the deficit as ’not only unsustainable, but economically and financially imprudent.’”
It added that in the next two years “even under a more optimistic scenario, Bermuda’s fiscal path will be very narrow, with its financial scope limited both by the size of the debt maturing in 2023-24 and the speed with which its financial cushion in the Sinking Fund will be drawn down by fiscal deficits, with nothing left for contingencies”.
The panel’s report includes recommendations for structural reforms that address long-term fiscal challenges.
It estimates there will be at least a $50 million gap if the Government’s budget is to be balanced by 2023-24. It recommends the aim should be to at least restore revenues to the pre-Covid-19 level of $1.1 billion by 2022-23, and increasing the follow year to meet a balanced budget target. The panel recommends an annual budget surplus target of $50 million to be achieved in 2026-27 and continued thereafter to pay down debt.
It also suggests that in the next two to three years there is an introduction of:
• a tax on dividend and interest receipts;
• an annual rental tax on owners of large and multiple units;
• an increase in taxes on sugar and other unhealthy products; and a carbon tax.
The panel said the Tax Reform Commission should look at the case for the introduction of a corporate income tax at a modest rate, in the medium to longer term.
It recommends the Government plans to restore contributions for the public service superannuation fund and contributory pension fund, and look at reforms including increases in retirement age.
The panel said there is an opportunity for Bermuda to grow the workforce and the economy through radical reforms to the immigration system. It added: “Bermuda needs to make it easier, not just for people to come to work, but to stay and contribute to the island on an ongoing basis, and eventually to settle permanently, with appropriate rights, responsibilities, and security for their families and children.”
In conclusion the panel, which also features Marian Bell and Peter Heller, said: “The Covid-19 crisis required that the Government take immediate actions to protect the population and mitigate the economic consequences for businesses and livelihoods. Bermuda’s response has, by global standards, been exemplary.
“It has successfully addressed the health crisis, in turn allowing the economy to reopen, while protecting the population. But the fiscal and debt impacts have been considerable. Measures must now be taken to preserve the gains that have been made, to shore up the public finances, and to build confidence in the Government’s fiscal plans and resilience for the future.
“While difficult decisions will have to be taken, the crisis offers an opportunity to reconsider important aspects of the public finances, society, and the economy.”
• Click on Related Media to read the Bermuda Fiscal Responsibility Panel 2020 Annual Assessment document.