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From global tax to climate change: risks facing Bermuda economy

Risk awareness: Bermuda’s economy faces many challenges (File photograph by Akil Simmons)

This is part two of commentary on the Pre-Budget Report 2023-24 — in part one, we covered the first four chapters.

A budget is not an actuality. It is a projected financial plan for an defined period of time.

It is our current leaders’ fiscal plan for managing our government, an entity in itself, albeit non-corporate by providing a careful assessment of and a guideline for receiving money (income), spending (expenditures), borrowing, investing in infrastructure and community social programmes, and saving the residual capital.

The ultimate goal of a these projections is arrive at the end the specified financial time frame with a balanced budget whereby revenue equals expenses.

Why? The business of government is service, but never at a profit.

There is no such thing as government money!

While a budget does have significant influence on an actual financial outcome, the true test of complete financial management is represented in the components of financial statements of the Consolidated Fund of the Government of Bermuda, audited with the financial seal of approval - the Auditor General’s unqualified opinion.

Chapter 5: framing the 2023-24 Budget

This is the largest section, pages 17-24, encompassing:

• The 2020 general election campaign platform and 2022 Throne Speech

• Economic considerations

• Taxation sensitivities

• Continued fiscal consolidation to reduce deficits on the path towards a balanced budget, investment and support for the initiatives within Bermuda’s Economic Recovery Plan, zero-based budgeting and associated tools

• Recommendations from the 2022 Fiscal Responsibility Panel report

• Feedback from the Pre-Budget Report in advance of the fiscal year 2023-24

Summary of the standout details

Risks facing the Bermuda economy: projections, of any sort, are by their nature subject to uncertainty, the future is unknown, the future carries risks, and rewards, too.

Appropriately, any Budget statement should carry a reasonable review of the risks, unknown circumstances, and outside influences that could change the projected outcome.

Global tax initiative risk: Bermuda faces a pressing challenge, with international developments on corporate taxation potentially posing a threat to Bermuda’s business model.

Essentially, the global minimum effective tax (15 per cent) to ensure that multinational’s profits are taxed somewhere by some country on a jurisdictional basis may impact low-tax basis jurisdictions.

The question arises as to how and whether this new tax initiative will impact Bermuda’s international business/finance section with the accompanying loss of employment in the sector as well as the ripple effect in supporting services and direct/indirect local economic revenue.

Immigration and the labour force: focus on growing the working-age population to support economic growth and boost tax revenues, address the challenges of an ageing population and improve the solvency and sustainability of public pension funds and healthcare over the long term. See government position paper addressing the challenge of an ageing population.

Impact of global warming and climate change: Bermuda Institute of Ocean Sciences research published last week provides another confirmation of rising sea levels, contributing to the frequency and severity of coastal flooding and erosion, (for example, the airport and St George’s) on a regular basis.

Occurrences of coastal inundation that at present are deemed to be extreme events will be within the normal daily tidal range in as little as 20 years. (See 1870 photograph helps researchers chart sea level change.)

Insurance industry risk: Bermuda’s re/insurance sector is exposed to climate risk but according to the Government, appears sufficiently well capitalised to deal with increasing extreme weather and natural catastrophe events, benefiting from increased investment returns, higher premiums, and increased insurance penetration.

Risk of rising global interest rates: interest-rate fluctuations are subject to capital market forces, economic policies, Federal Funds Rate, other global bank decisions, and other causes.

The possibility of a sustained interest rate increase having an impact on Bermuda government debt is a serious risk.

Inflationary risk: the concern is that a longer term inflationary, rather than temporary, environment will continue to affect commerce and every-day living due to the island’s reliance on imports.

Policy options under consideration

Payroll tax changes for employees and businesses, the most consequential ever, have already seen significant media coverage.

Payroll tax concessions provided as temporary relief during Covid-19 will end.

Tax Reform Commission recommendations: a flat withholding tax on services outsourced by local companies, interest and/or dividends of local companies, fee band tax structure on international company assessed capital.

Other revenue considerations:

• Increasing tax on luxury imported items

• Impose a tax on local manufactured cigarettes

Targeted tax relief

Elimination of self-employed double taxation, increase dividend ceiling to $10,000, a new hire payroll tax exemption, expansion of retail/hospitality customs duty relief to personal care sector, tax relief for maternity/paternity leave, duty-free school uniforms, amended duty relief for small licensed tourist facilities.

Spending considerations

Public Sector Pay Increase: Government has indicated that public sector blue-collar workers will receive a pay rise under the Budget plan, given that increases have not kept up with the private sector or rising inflation.

Tourism investment: Government will consider additional investment in this sector, a major driver of jobs in the economy.

Investments in technology: Government must continue to increase its own technology infrastructure for protection against cyberattacks, security of data, efficiency and effective performance. Additional capital expenditure will be needed.

Retention and capacity building in the public service: Government has a key priority for training and human resource development for public officers to increase the capacity of the public sector so that the Government’s objectives can be achieved in as cost-effective and efficient a manner as possible.

Additionally, government pay scales are no longer competitive with the private sector, especially for specialised roles like legal, engineering, compliance, and finance, which sees the Government lose its top employees to the private sector.

Additional investment will be needed to ensure that specialist roles can be compensated at a level that attracts and retains experienced staff and reduces reliance on external consultants.

Ageing population needs: construction of additional senior facilities, rather than acute hospital care, can ensure more efficient care, better use of public funds, and free hospital space that can drive revenue.

Finally, the successful execution of Economic Recovery Plan is vital for future economic growth in Bermuda, according to the Fiscal Responsibility Panel who has endorsed Government’s plan, but cautioned against delayed execution.

Martha Harris Myron is a native Bermuda islander with US connections, finance journalist (22 years) to the Royal Gazette, a Google News Contributor, author: Bermuda’s First Financial Literacy Primer, Bermy Bermuda Island Finance Blog. Contact - martha.myron@gmail.com

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Published February 11, 2023 at 7:48 am (Updated February 11, 2023 at 7:48 am)

From global tax to climate change: risks facing Bermuda economy

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