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Experts advise Government to raise taxes

Broad-based tax increases were among the key recommendations of an independent report on the Bermuda's Government's efforts to stabilise its finances.

The Fiscal Responsibility Panel (FRP), made up of three overseas experts, suggested that the Government needed to take a “more aggressive approach” to achieve its debt reduction targets over the next eight years.

The report recommended that the Government increase its annual revenues by an amount equivalent to 3 per cent of gross domestic product — about $170 million — through tax increases and the limiting of concessions over the next three years.

In its 34-page annual assessment, tabled in the House of Assembly yesterday, the FRP warned that short-term measures to cut spending would not be sustainable and that “fundamental restructuring of government services” would be necessary in the coming years.

The FRP is chaired by David Peretz, an independent consultant on international financial issues who has worked in the British Treasury and the World Bank.

The other panel members are Jonathan Portes, a former chief economist to the British Cabinet Office, and Peter Heller, who worked as a senior manager during a near 30-year career at the IMF.

The Government aims to eliminate its annual budget deficit — this year running at about $220 million — over the next three years.

Five years after that, it wants debt servicing costs down to be less than 10 per cent of government revenues — down from this year's level of about 18 per cent. The panel was formed to run the rule over Government fiscal projections and the credibility of the assumptions underlying them, to point out risks that could affect fiscal progress and to make policy recommendations.

The standout suggestion was the need for a roughly 18 per cent increase in revenues over the next three years to achieve the Government's targets.

While the suggested increase may seem hefty, the panel argued that this would bring government revenues as a percentage of GDP — about 16 per cent this year — to about 19 per cent, more in line with other small island economies.

It suggested that the phasing out of payroll tax breaks given to the retail and hospitality sectors, worth $40 million annually, could be considered, as well as the termination of concessions on fuel, worth another $30 million.

Payroll tax could also be reformed, the panel said, with a “small increase” to the tax rate and an elimination of the cap that allows high earners to pay payroll tax only on their first $750,000 of compensation.

An increase in land tax is also suggested, as being likely to impact those who can best afford it, as well as higher international company registration fees and increased efforts to collect unpaid taxes owed.

The report said a consumption tax, commonly described as value added tax (VAT), would take years to implement given the need for an extensive consultation period and the bureaucracy to collect it. It suggested that Bermuda could alternatively raise customs duties and bring in a tax on services — with exemptions for education and healthcare.

Deficit-reduction efforts so far had been “relatively slow”, the report said, hampered by the failure of the Government and public-sector unions to agree on an extension to the furlough agreement that had previously resulted in workers taking one day of unpaid leave per month. The panel expressed doubts over the Government's trajectory to achieve a balanced budget by 2018/19, saying that the fiscal squeeze envisaged appeared “implausible without major structural change”.

The “serious demographic challenge” created by the Island's ageing population was also highlighted. The terms of public pension and health insurance plans would need to be adjusted and the retirement age raised.

The panel suggested that more immigration of working-age people — and less emigration of young Bermudians — was needed to help the Island to deal with the growing strain on public finances resulting from the larger population of retired people.

On the bright side, the panel said the prospects for growth were better than they had been for some years, “providing a window of opportunity to reduce the debt to a safer level”.

The Government has targeted some $100 million of further spending cuts by 2017-18.

“Achieving these will not be easy and will require making a start on fundamental restructuring of government services, particularly as some of the short-term measures taken to date will not be sustainable in future years,” the report states.

“There needs to be a determined and visible effort to reduce waste, strengthen efficiency and direct available resources to the highest priority areas.

“With Bermuda facing a serious demographic challenge, actions are also needed to address rising health costs and the underfunding of pension schemes that will cause increasing problems over the long term.”

The report noted that wages and salaries made up more than half of the Government's current expenditure, a high level compared with other island jurisdictions.

As such, it noted that, “planned further cutbacks in the current expenditure budget will have to be found by achieving greater efficiency in the provision of services and by a reduction in the government workforce”.

The FRP will follow up with another assessment next year.

• To read the full report, click on the link under “Related Media”.

Key recommendations: from left, the Fiscal Responsibility Panel's Peter Heller, David Peretz and Jonathan Portes (Photograph supplied)

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Published December 12, 2015 at 8:00 am (Updated December 12, 2015 at 8:20 am)

Experts advise Government to raise taxes

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