Government has provided its clearest hint yet that it may consider in the coming fiscal year increasing the legislated debt ceiling of $185 million to enable further borrowing.

It comes as the most significant review of Bermuda's tax structure in decades, culminates in a completed report this April.

The Government debt outstanding (excluding sinking fund balances) is estimated to be $162.5 million by March 31, 1998.

The Government policy limits borrowing to a maximum of ten percent of GDP, but with a statutory debt limit of $185 million.

The Finance Ministry, in its annual review of the Bermuda economy, has said, "Due to the increase borrowing made necessary by the capital expenditure programme, there may need to be an increase in the legislated debt ceiling during fiscal 1998/99.'' A document normally released with the budget, "Bermuda: 1997 Economic Review'' said, "Despite the rise in expenditures, the level of outstanding debt remains modest by international standards at an estimated seven percent of GDP by March 31, 1998.

"Looking forward there is renewed pressure for increased expenditures.'' The high level review of the Island's tax structure began in November, and is expected to be comprehensive, focusing on the criteria of equity, efficiency and ease of administration of the tax system.

All aspects of the current tax system are being studied and evaluated for modern day appropriateness.

The consultants are examining consumption tax alternatives, particularly in light of structural changes occurring in the tourism and retail industries.

Meanwhile, the 1997 Economic Report concludes that while the economies that influence Bermuda the most (US, UK and Canada) will probably continue their current long running expansion, economic spill-over effects from Southeast Asian problems will slow their growth rates.

What it will mean for Bermuda is difficult to speculate, although international financial firms and markets have already begun to see some effects. Economic fundamentals here remain healthy, with low and stable inflation, an expected continuation of weak petroleum product pricing, and currency devaluation in Asia leading to cheaper manufactured goods.

The balance of payments has a sizable current account surplus which will continue into next year. Foreign currency earnings from international business continue to exceed the negative balance in merchandise trade.

Government spending is on the rise, but only modestly and less than the 1998 inflation rate.

Finance Ministry officials expect a nominal rate of GDP growth of five percent in 1998, all things remaining equal.

Growth in international business continues to exceed projections and more growth is expected in the year ahead, because of significant diversification in the market. Growth is also expected in telecommunications and electronic commerce.

But the authorities are concerned that support be lent to international business wherever possible in an increasingly competitive world.

There is some Government optimism that efforts to get tourism back on track will bear fruit in the coming fiscal year. While major hotels have had a rough time, the worst hit in recent years has been small hotels, housekeeping cottages and guest houses.

The report warns: "Significant challenges remain for the tourism industry to improve the quality of its product, reduce its high cost structure, and improve labour relations.'' The economic report showed how Bermuda's Gross Domestic Product (GDP) increased by 5.3 percent to an inflation-adjusted 3.0 percent for the Government's fiscal year to March 31, 1997.

It was fuelled by international companies, which generated foreign currency earnings that grew by 19.7 percent in 1996 to an estimated $631 million.

And Bermudian firms which are active internationally had foreign currency earnings rise (excluding their earnings from exempted companies) by four percent to $138.2 million.

Taken together, the total foreign currency earnings from international business-related activities increased by 16.6 percent to $769.2 million. That is considered a remarkably strong expansion of international business, even though the 1995 growth rate was higher at 21 percent.

In fiscal 1996/97 domestic demand increased by 6.2 percent to $2 billion, with the expansion primarily in the gross fixed capital formation, up by 22.4 percent to $315.3 million.

Domestic demand is personal consumption expenditure, public and private sector investment, together with Government consumption.

Domestic demand was also bolstered by a $40-million (2.9 percent) increase in consumer expenditures and an increase in general government final consumption of $19 million or 7.6 percent.

Retail sales improved during 1997, after having been relatively flat for ten years, even though tourism was amazingly down again on the prior lacklustre year.

But the surge in international business continued to grow the current account surplus in the balance of payments, with the increase in international business foreign exchange earnings exceeding the deterioration in the net balance of merchandise trade.

That trade deficit is growing because of the increase in imported construction materials.

The Bermuda Monetary Authority has estimated a record balance of payments current account surplus of more than $160 million for the 1997 year.

Also during 1997, some 663 jobs were filled, rounding out a work force of 35,296, with 37 percent of the new positions (247) going to international business, whose direct employees reached 2,667.

Government spent $511.8 million during 1996/97. Some $73.3 million of that was on capital expenditure alone, which finished up $20 million higher than initially forecast.

Even in the fiscal year ending, while current account expenditure may exceed the 1997/98 budget by no more than one percent, capital expenditures will exceed the budget more than 14 percent, because of additional spending in education.

The value of imports to Bermuda rose to a billion dollars in 1996/97, as higher employment and higher wages led to higher employment income through international business and the increased construction activity.

Motor vehicle sales, and those of other durable goods, improved. Retail sales started to improve last May, by the summer growing at an annualised rate of 5.7 percent in real terms, despite declining tourism numbers.

Liquor sales were depressed for most of the year and food stores recorded a modest increase. Retailers catering mainly to tourists also suffered from the declining numbers.

Overseas purchases by Bermuda residents had increased sharply over 1994 and 1995, but levelled off during 1996 and 1997. Still, the stagnation in the retail sector employment levels continues.

In the first nine months of last year, an estimated $110.2 million worth of construction work was put in place, as employment and income in that sector improved significantly.

Public sector work includes CedarBridge Academy, middle schools and King Edward VII Memorial Hospital. In the private sector, it includes The Waterfront, the Atlas building and the American International building (which combined made up 80 percent of the private sector work).

Steady construction work is expected to be back for some years.

Although the performance of the world's economies were a mixed bag in 1997, those economies peculiarly important to Bermuda were strong. In the US, unemployment fell to a 25-year low, the budget deficit was controlled, inflation remained in check, the Gross Domestic Product (GDP) expanded, and, there was real income growth, strong business investment and rising equity markets which led to more consumptive spending.