The Bermuda Government issued the Pre-Budget Report for perusal and discussion just prior to the 2022 Christmas season at a time of generally serious financial stress, and heightened family holiday activity.

This important consultative document proposing radically significant changes in Bermuda’s taxation and contributory pension structures, has already engendered serious commentary.

Dear readers: I know you are stringently watching your own budget in this inflationary environment.

The same attention, actually even greater scrutiny, should be attuned to our government’s 2023-24 Pre-Budget Report as it sets out in draft detail how government collects your money to support government operations and manage its financial responsibilities, all derived from assessments on your personal earnings, investments, customs and stamp duty, foreign currency charges, and numerous other fees.

This review is an opportunity to exercise your common sense financial experience to evaluate the budget’s impact on all topics important to you, your family, your work environment, and your financial future.

The report is organised into six chapters:

Introduction

• The Pre-budget Report is issued each year to increase public awareness of government’s fiscal policy objectives, challenges, and accountability in order to encourage debate about the budget’s effectiveness in coping with current economic and social priorities.

• Government illuminates its adherence to Principles of Good Fiscal Policy: prudent management of risks, stable, diversified, and predictable financial management of fiscal policies, integrity of tax systems, and constructive policies with positive impact on future generations.

Economic challenges, local and global

There are many, summarised:

Globally: inflation, post Covid ongoing recovery, market interest rate volatility and monetary policy, fossil fuel trade and energy shortages, flat or slow growth in neighbouring large country gross domestic product projections, the war in Ukraine, the economic slowdown in China and more.

Locally: Bermuda’s economic indicator summary through mid-year 2022.

Average cost-of-living increase through August 2022 was 3.6 per cent, according to the Consumer Price Index.

Increases in retail, construction, employment income, imports, air arrivals, air visitor spending, registrations in new international companies and partnerships, balance of payments recording a surplus, and Bermuda’s money supply indicate that Bermuda’s economy is continuing to grow after rebounding in 2021.

Comparison to prior year

Domestically, employment income for the first six months of 2022 grew by 10.2 per cent leading to consumers boosting retail sales by 3 per cent over first eight months in 2022, thereby also increasing imports.

International business remained resilient through the pandemic and is anticipated that this “sector will continue to be the main driver of our economy for the foreseeable future”.

While some sectors, imports, construction, and tourist arrivals are below 2019 numbers, the Ministry of Finance projects GDP growth for 2022 in the range of 2.5 per cent to 4.5 per cent to a fully recovered GDP post-pandemic.

Bermuda credit ratings again were affirmed positive with stable outlook by three rating agencies.

Public debt outstanding at $3.1 billion is holding below the $3.5 billion statutory debt ceiling; however, debt service cost has increased indicating the “urgent need to balance the budget to reduce Bermuda’s debt”.

The Sinking Fund was not completely utilised, providing an option in the future to pay down $50 million of principal debt outstanding.

Government fiscal performance comparisons and fiscal year revised estimates

Revenue: $1.108 billion, of which payroll is $470 million, customs duties $228 million

Expenditure: $1.18 billion of which interest on debt service is $138 million

Deficit of $72 million

See chart attached for full breakout of projections.

Vision for tax reform

Good news for some, not so good for others.

The Fiscal Responsibility Panel in its 2021 report, stated that government should plan for an annual budget surplus of at least $50 million for the fiscal year 2026/27, but that it was unlikely to be achieved under the current tax structure.

Fundamental reforms were needed to broaden the tax base, and increase tax progressivity to increase revenues, according to the Panel. Further, government stated that the tax burden in Bermuda needs to be more fairly shared amounts of all portions of the economy, shifting away from just working people.

Since 2017, government had already begun to implement the 2018 Tax Reform Commission’s recommendations, increasing:

• Land tax

• Foreign currency purchase tax

• Immigration fees

• Various adjustments/reductions to the payroll tax structure

Future tax reform priorities as developed by a new Tax Reform commission are suggested highlights on page 15 of the report such as:

• A more complex, medium-term progressive tax regime, including various percentage levels of taxation of earnings tiers, taxation of capital earnings, interest, dividends, rental income, and labour, that will broaden the tax base

• Social insurance contributions changing from a fixed-rate (same for everyone) to one based upon percentage-of-income earned.

• Eliminating payroll tax for low-wage workers.

• More effective control and recovery of tax collection/accounts receivables now projected to increase by another unsustainable 5 per cent. In spring 2021, the accounts receivable balance was more than $350 million in unpaid taxes and fees, with more than 44 per cent deemed uncollectible.

Publishing space constraints limit our summary, readers, through page 16 of the report.

Click here to evaluate the entire document.

Stay tuned.

Part 2 on the Pre-Budget Report, features key factors framing the 2023/2024 Budget, the risks facing the Bermuda economy, policy options under consideration, Tax Reform Commission recommendations, other revenue considerations, targeted tax relief, spending considerations.

There will be commentary and questions that will be featured as well, hopefully, providing more clarity to the process as well.

Note: Family inflation budget impact has been rescheduled for February 25.

• 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, YouTube Channel coming soon. Contact her at martha.myron@gmail.com