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Aligning Bermuda’s deficit reduction with an economic recovery circle

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In the final part of this series, we return to where we began with the Premier and his austerity budget. Austerity budgets and economic recoveries are contradictions in terms — budgets that rely solely on spending cuts to reduce deficits are not conducive to growth.

Somewhat counterintuitively, when reducing deficits, tax increases are needed to promote growth on the condition of two important caveats. The first is that, where possible, tax increases should be levied on those institutions or households with significant financial means.

Tax increases on those living paycheque to paycheque simply result in lower spending and lower growth in Bermuda. Not so for tax increases on individuals or corporations earning significant savings or profits that are leaving the island.

Fortunately, as our $3 billion in annual national savings attests, in addition to the former, Bermuda has ample of the latter. Tax increases on those exporting significant savings overseas would reduce growth in the rest of the world, but Bermuda’s growth would increase provided the second caveat is maintained.

The second caveat is that the Government cannot devote all the additional revenue to deficit reduction; government spending must increase as well. Greater government spending contributes directly and indirectly to stronger growth in Bermuda. Given our pressing demands, there is no shortage of genuine needs for additional government spending.

Chart 1

No doubt, Bermuda has the means to square this deficit reduction/economic recovery circle. Moreover, in addition to the Fiscal Responsibility Panel’s advice, the Government has been warned of the urgent need for additional revenues by no less than the United Nations. What’s more, Bermuda’s competitors in the offshore world provide more than enough evidence that such a strategy works (Chart 1).

So to whom should the Government turn in raising additional revenues? As emphasised during the Budget Breakfast on March 3, most small businesses in Bermuda do not fulfil the above criteria. Regrettably, in addition to the challenges of the pandemic, in recent years the Government’s neglect of our local economy has contributed to the precarious position of many of our small businesses.

Bermuda’s international business sector is an obvious potential source of additional revenue. Unfortunately, whenever this possibility is broached by the public with government officials, the suggestion is dismissed under the pretext that Bermuda is awaiting the results of the 15 per cent global minimum tax agreement to ensure the island’s tax system complies with international requirements.

But as these same government officials are well aware, the global minimum tax agreement is deeply flawed and may never be implemented. Moreover, the global finance industry lobbies to minimise tax as vigorously internationally as they do in Bermuda. Our reinsurance industry is rumoured to be exempt from the agreement, having lobbied successfully for a similar “carve-out” as did the City of London ... again showing its effectiveness in securing special concessions.

Chart 2

Indeed, Bermuda’s international company fees are little changed since they were first implemented in 1966. When first imposed, government fees charged on international business companies amounted to 7 per cent of government revenues, a level they remain at today despite the rise of the finance sector to dominate our economy (Chart 2).

Yet why depend solely on international business for additional revenue? To do so would shelter other potential sources earning substantial savings and profits destined for export. Three obvious such sources are the banks, large law firms and the “big four” accounting firms.

So how might this work? As stated by both the UN and FRP, Bermuda needs to urgently raise significant revenues. Seed Bermuda proposes we supplement this year’s budget with $200 million in additional revenue raised from a one-time targeted fee levied on Bermuda’s most lucrative industries: the banks, reinsurers, brokers, investment companies, big law firms and the “big four” accounting firms. Such urgently needed revenues would help us to bridge the gap between now and when we receive the new Tax Reform Commission’s recommendations.

How much would such a fee cost individual companies? Assuming the fee was levied on 100 companies, the average fee paid would be $2 million. These companies do vary in size, however, so a weighted average of payroll, profit, revenue and capital could be used to calculate each company’s share.

And how should the revenues be spent? As past recipients of David Burt’s largesse in dispensing preferential treatment, the reinsurers would no doubt want to see some assurances on their tight control. Moreover, as previously emphasised, a significant portion of the revenues would need to be spent if we are to stimulate growth.

Seed Bermuda is suggesting we apportion half the $200 million in additional revenue to eliminating the deficit and paying down debt, with the other half going towards financial assistance, social programmes and capital spending projects. Now that the Government’s detailed budget proposals have been published, itemised accounting of such additional expenditures will need to be produced for public review.

Seed’s proposal is only a one-time fee — perhaps call it a “Recovery, Relief and Debt Reduction Fee” — but, in keeping with the advice of the UN and FRP, it would forestall the inherent need for cuts in Mr Burt’s austerity budget.

Longer term, our economic recovery needs to be supported by genuine, progressive tax reform that is both professionally crafted and implemented. Indeed, a smarter, fairer, more progressive tax system would stimulate inclusive growth, reduce our cost of living and make our island more fiscally sustainable and resilient.

Robert Stubbs is Head of Research at Seed Bermuda, a local think-tank devoted to the island’s sustainability. Having previously served as Head of Research for Bank of Bermuda, Mr Stubbs is a chartered financial analyst, holds an International Bond Dealers Diploma and completed the ACAS actuarial exams

Robert Stubbs is Head of Research at Seed Bermuda, a local think-tank devoted to the island’s sustainability. Having previously served as Head of Research for Bank of Bermuda, Mr Stubbs is a chartered financial analyst, holds an International Bond Dealers Diploma and completed the ACAS actuarial exams. Seed Bermuda produces research, policy analysis, advocacy and public awareness campaigns in service to a more inclusive, resilient and sustainable Bermuda. In pursuit of its mission, Seed Bermuda encourages greater accountability from the island’s politicians and business leaders, and more active participation by the public in decisions that affect us all

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Published March 22, 2022 at 7:59 am (Updated March 22, 2022 at 7:46 am)

Aligning Bermuda’s deficit reduction with an economic recovery circle

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