Tax revenues ‘will need to increase’
An increase in tax revenue to help tackle the national debt could be included in the upcoming Budget, according to economist and lecturer Craig Simmons.
While Mr Simmons said that the island's economic recovery does appear to be gaining momentum in spite of “chinks in the armour” of the government's strategy, tax revenues will need to increase.
“Foreign direct investment is the government's principal method of economic stimulus,” he said. “Regretfully, shovels have not entered the ground for the large projects listed in Budget Statement 2015-16.
“According to the Fiscal Responsibility Panel, an independent body of pundits, planned deficit reduction is behind schedule. Annual deficits must be eliminated before debt can be reduced.
“Whilst spending cuts have been largely achieved, expected tax revenues have not materialised. Further, deficit reduction cannot happen without significant increases in tax revenue. For this reason, we should expect tax increases in this year's Budget Statement.”
Over the last ten years, revenue peaked in 2010-11 at more than $990 million. The figures then fell to $866 million in 2012-13, but are now on the rise with the Government estimating between $930 million and $940 million in revenue in the current financial year.
Expenditure also peaked in 2010-11 at $1.04 billion. While expenditure fell for two years after that, it rose again in 2013-14 reaching an estimated $1.01 billion. Expenditure for the current fiscal year is estimated to reach between $920 million and $930 million — meaning that revenues could surpass expenditure for the first time since 2007-08.
While the first three quarters of the current fiscal year have seen higher revenues and lower expenditure than previously forecast, according to the Ministry of Finance, government was still expecting a $213 million deficit for the year with debt service taken into account.
Meanwhile, the government debt has gradually risen year-on-year. While the debt fell in 2014-15, the Ministry of Finance revealed that it had reached $2.31 billion in December — the highest in Bermuda history — owing to the government drawing down on its credit facility to finance the fiscal deficit.
Mr Simmons said that research has suggested the government's present debt reduction strategy, which has relied primarily on spending cuts rather than tax increases, is more effective at reducing debt and decreasing the likelihood of a recession, but progress has been slow.
He said the deficits were expected to fall in 2015-16 and in 2016-17.
“Further, decreases in government spending will be much harder to realise.
“Thus, the time has come for tax rate increases and new taxes, that is a broadening of the tax base.
“Fortunately, the economy has stopped shrinking; the evidence suggests that this will improve the prospects of success in respect to raising additional revenue and avoiding a return to recession.
“In respect of on-balance sheet debt, if populist politics dominate sound public policy, then we are likely to see a Greek-like tragedy, where powerful constituencies — unions and international and local businesses — bully the government into submission, but only until the overseas bondholders step in to reclaim what is owed them.”
He said the greatest threats to social stability and growth lies in “off-balance sheet debt, such as pension obligations.
“Research by Carmen Reinhart and Ken Rogoff suggests that heavily indebted countries — those with debt in excess of 90 per cent of GDP — grow 1 per cent slower than countries with lower debt levels,” Mr Simmons said. “Our on-and off-balance sheet debt is in the neighbourhood of 90 per cent of GDP. Over ten years, 1 per cent less growth in addition to 2 per cent inflation translates into $100,000 of lost income per person.”
Mr Simmons said the current ratio of tax revenue to GDP is around 16 per cent, but in order to make headway tax revenue would have to increase to around 20 per cent of GDP.
“As a start, all loopholes in customs duties and payroll taxes will need closing,” he said.
“That will anger those in the hospitality and retail sectors as well as the top 1 per cent of income earners. Duties and fees will have to be increased, but more importantly, services will have to be taxed — this is a broadening of the tax base.
“If we are to cross the $1 billion Rubicon, then a service tax is unavoidable. There is no chance of that happening this year, but it is coming.
“Further, consideration will have to be given to local business paying a lump-sum type corporation tax, similar to that paid by international businesses. Corporation tax and closing the payroll tax threshold will not raise a lot of revenue; their purpose is more about fairness.”
Bermuda Environmental Sustainability Taskforce has provided this Budget wish list:
We would like to see funds set aside for search and exploration into a reformed governance system more suitable for our small and diverse community; one that:
• focuses on how we can collaborate rather than how we can oppose
• accords stature to those who contribute versus to those most adept at tearing down
• provides a mechanism for removing those who abuse their governance privileges
• provided education and training (especially in ethics and benevolence) for future governance candidates