Too much too soon – it just doesn’t add up
Dear Sir,
The 2023 Pre-Budget Report states the intention to reach a balanced budget in 2024-25 but once again fails to explain how it will be achieved. It masquerades as a Robin Hood budget, but what it does is stall for time and increase the odds of a very bad long-term outcome for Bermuda. The purpose of this letter is to highlight the inconsistencies and provide a more realistic view.
Concerns from the report include a higher 2022 deficit, higher interest payments, increased social insurance contributions, an increasing payroll tax burden, an unspecified public sector pay increase and, yet, a commitment to achieve balance in 2024-25. Please read it for yourself, see attached quotes. It just doesn’t add up.
The 37 per cent proposed tax increase for higher-earning employees — increasing the employee rate from 9.5 per cent to 13 per cent — is extremely heavy-handed, sudden and simplistic. Such a dramatic change is not the best way to implement a national budget. The increased tax on those earning over $96,000 could equate to more than $30 million. However, instead of cutting the deficit in half, which we sorely need to do, the proposed revenue increase is largely given back by exempting 30 per cent of the workforce from the employee portion. The proposals fail to address the imbalance; it is an exercise in stalling for time.
There is no right answer when it comes to how progressive/redistributive to set tax policy but there are trade-offs. If additional inflation relief is needed, then provide that more directly via financial assistance rather than broad strokes. All working people should contribute. We should hold off setting the rate to zero on the first $48,000 until we can afford it. Start with the first $12,000 and go from there; the deficit has not yet been tamed.
If we don’t start to adjust now, internal policy will meet external events. Just look at the British Conservatives for what happens when economic policy detaches from market expectations. Here is how this could play out for Bermuda:
➔ A series of unchallenged and optimistic budgets where tough decisions are delayed — already being done
➔ Interest rates continue to rise, thus deteriorating our deficit position given the present debt level — also taking place
➔ US recession impacts Bermuda’s recovery — odds are increasing
➔ Increased cost of doing business encourages international business to relocate positions and companies elsewhere — new hires are already being scrutinised
➔ If international business reduces local headcount, government revenues will experience unexpected shortfalls — the deficit will widen further
➔ The above would lead to a fiscal reckoning when the debt must be partially rolled over in January 2027 — Bermuda will be left with no other choice but to levy substantial new taxes
The best way to reduce the odds of such a negative feedback loop is to act now. This Pre-Budget Report does not add up to a balanced budget in 2024. Suggestions for a better approach include:
1, Phase in any changes over time. A 37 per cent rate increase, with the social insurance proposal in addition, is far too much for one budget. Of course, we want concessions, but they should be deferred until a balanced budget is actually achieved
2, Keep the tax code simple, minimise exceptions, complexity and carve-outs
3, Seek ways to reduce our dependence on international business, not increase it. This proposal will both increase our reliance on international business for future tax revenue and increase the cost of doing business. Not a good combination
4, Work with and collect what is already being levied. Between payroll tax, land tax and customs duty we capture the high earners, the high owners and the high spenders
Depending on your personal perspective, certain ideas from the Pre-Budget Report read well in isolation. However, when read together, it is hard to see how the commitment to balance the budget in 2024 will be achieved. The following quotes are taken directly from the report; the topic headers have been added for context.
1, Increased 2022 deficit
“The revised budget deficit for 2022-23 is now projected to be $72 million, $2 million (2.9 per cent) more than the original estimate of $70 million.”
2, Increased interest expense
“Interest/guarantee management costs are projected to be $138.3 million, $10.5 million more than originally budgeted, primarily as a result of one-time costs associated with the recent government debt-refinancing.”
“With our recent debt-refinancing, the annual debt service cost as of December 2022 will be $129.5 million, $2.3 million (1.8 per cent) more than the previous year. This underlines the urgent need to balance the budget to begin reducing Bermuda’s debt.”
3, Income-based social insurance
“The Government will look to change Bermuda’s social insurance system from a fixed-rate contribution to one based on a percentage of income.”
4, Amended payroll tax
“Eliminating payroll tax for the first $48,000 of labour income for all employees. This proposed change will remove 30 per cent of the workforce from being liable for payroll tax.”
“To compensate for lost revenue, the next three tax bands will need to be adjusted upwards.”
“Increase in exempted company payroll tax from 10.25 per cent to 10.75 per cent.”
“On the fiscal side, it is estimated that approximately half of all payroll tax revenues derive directly or indirectly from the international business sector.”
“These proposed changes are estimated to result in $19.6 million in additional revenue for the treasury.”
5, Unspecified public sector pay increase
“The salaries and wages of public sector workers have not kept up with the increases that have been seen in the private sector.”
“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.”
6, Commitment to a balanced budget
“The Ministry of Finance regards this level of debt as a serious challenge and, therefore, has made balancing the budget a priority.”
“The Government has committed to a balanced budget in the fiscal year 2024-25, and the 2023-24 budget must make progress in that area.”
It will not be easy to achieve the commitment of a balanced budget, but it remains the stated aim. If we fail to control the deficit, we will fail to control our destiny. With the next election years away, there is no need for a feel-good budget. Tough decisions are required now. This is the time to be more realistic and stay on track. We must close the gap before our hand is forced.
WILLIAM SOARES
Smith’s
Need to
Know
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