Grim forecast delivered
Bermuda has been warned that on present trends it is heading for a downward spiral of demographic and economic decline.
Experts added that the Government has taken a significant step back from fiscal targets set a year ago, with projected lower revenue and higher spending than at first forecast.
The independent Fiscal Responsibility Panel said the decision to delay achieving a balanced budget by a further year to 2020-21 was regrettable, and the new target “must now be met”.
The red flags came in the annual assessment of the island by the three-strong panel, which highlighted a shrinking workforce and ageing population as “perhaps the greatest concern” facing the island and its economic future.
The report said the situation would put increasing pressure on both taxes and spending. The panel was chaired by David Peretz, who has worked in the UK Treasury, the International Monetary Fund and the World Bank.
This is the fourth consecutive year it has reviewed and reported on the fiscal progress of the Government. The panel said Bermuda needed to reinvigorate economic growth “including through a decisive change in immigration administrative practices”.
Their report explained: “A precondition for faster growth is to increase the island's workforce.
“It is the only realistic counter to the island's demographic challenge from a rapidly shrinking and ageing population. Immigrants and returning Bermudians with the right skills will help to create jobs, not displace them.”
The panel said that recent improvements in processing times for work permit applications were “an excellent start”, but that they must be followed through with changes in administrative practices and policies.
The island's elderly dependency rates will soar from about 25 per cent at present to 40 per cent in 2026, as the share of seniors in the population climbs from 17 per cent to 25 per cent.
The panel warned that was “an extraordinarily rapid rate of change” by the standards of most developed countries.
The report said: “The threat this poses can hardly be overstated — this would be a downward spiral of demographic and economic decline.”
The island's financial predicament was highlighted by figures that showed that net government debt has increased fourfold in the past ten years from about $500 million to $2.42 billion.
The ratio of government debt to revenue was around 50 per cent a decade ago, now it is more than 220 per cent.
The panel said that high level of government debt, unfunded pension liabilities, and other liabilities left Bermuda extremely vulnerable.
It added that public sector pension schemes alone have unfunded liability of around $1 billion. The expert panel expressed regret at Government's decision to delay achieving a balanced budget until 2020-21.
The report said: “This target must now be met, as well as the longer-term targets of reducing debt and debt service, respectively to 80 per cent and 10 per cent of revenues.”
It added the 2018 Budget projection for revenues is $20 million lower than the projection made in 2017, but current spending is projected to be $24 million higher.
The panel recognised policy changes and developments, such as the new sugar tax, relaxation of the 60:40 rule to encourage foreign investment, and clear signals to a more open immigration policy.
It also welcomed the unfreezing of positions and additional resources in the Office of the Tax Commissioner.
But the panel said the Government collected taxes that amount to 17 per cent of gross domestic product, but this needed to be increased to around 20 to 22 per cent.
The Tax Reform Commission's proposals, released last month, would take tax revenue to about 19 per cent.
The panel said that was an important and welcome step and it recommended the proposals “or something like it” should be implemented as soon as possible.
It also highlighted the cost of healthcare and said an agenda for action set out by the Ministry of Health and the Bermuda Health Council existed.
The panel said: “The Government needs to proceed urgently.”
The report added that Bermuda had to promote growth through economic diversification beyond insurance, reinsurance and tourism.
The panel said the Government's focus on promoting fintech, while liberating regulations that have inhibited the growth of the likes of global law firms and banks, was appropriate.
But it cautioned against excessive focus on particular niche products, such as digital and cryptocurrencies, where there were significant financial and reputational risks.
The report said: “Many have stressed to us the potential risks to this reputation if something were to go wrong with any of the new businesses attracted by Bermuda's fintech strategy. Regulating these businesses effectively must be a high priority.”
It recognised Government's successful $620 million debt refinancing action last month and added: “Recent reports by the main credit rating agencies have been positive, emphasising Bermuda's political and economic stability, and noting the new government's continued commitment to fiscal sustainability.”
But the panel said these were not grounds for complacency because, while Bermuda is reasonably well insulated from some global economic trends, it remained vulnerable to external developments, including regulatory changes and the effects of wider financial crises.
The panel concluded the report with a list of key problems that had to be addressed “without delay”.
It said: “Taken together this is a challenging agenda. If tackled now and with determination it will leave the territory in a much safer and more prosperous place. Work on much of it is already under way.
“The renewed impetus behind immigration reform is welcome. And the proposals of the Tax Reform Commission provide what up to now has been a missing piece — how to achieve the Government's targets for deficit and debt reduction.”
The Fiscal Responsibility Panel held meetings with individuals and institutions during the course of its discussions in Bermuda from November 19 to 24.
The other members of the panel were Peter Heller, a retired deputy director of the fiscal affairs department of the International Monetary Fund, and Jonathan Portes, principal research fellow at the UK National Institute of Economic and Social Research.
Curtis Dickinson, Minister of Finance, said: “The Government is certain that the panel's report will be a useful document to assist with the Government's deficit and debt reduction strategy, and I encourage the general public to thoroughly read the report to get a better understanding of the various fiscal challenges facing the Government”.