Beneath all the smoke and mirrors of David Burt’s Budget Statement delivered on February 25 lay the stark reality that he was proposing yet another austerity budget. As the Budget details show, Bermuda’s deficit reduction in the coming year will be achieved not through tax increases, but, rather, spending cuts.

This is the second such budget in as many years, as former finance minister Curtis Dickinson, in his first budget of the pandemic, also chose spending cuts at the exclusion of tax increases — against the advice most notably of Bermuda’s Fiscal Responsibility Panel. The FRP is a panel of international experts that advises Bermuda regarding such fiscal matters.

As the Premier delivered Bermuda’s second consecutive austerity budget, he, too, was ignoring the FRP’s advice as its latest report clearly warns of the dangers of continued austerity. In its 2021 report, the FRP emphasised, “Significant risks remain, in particular that this very prolonged period of spending restraint is not sustainable, either politically or economically...”

Quite naturally, Bermuda’s existing budgetary challenges are commonly attributed to the adverse effects of the pandemic. Attention rarely focuses, however, on an earlier sequence of events of comparable fiscal consequence: the colossal failure of Bermuda’s 2018 Tax Reform.

In 2018, the then newly minted Premier and finance minister, David Burt, assembled a carefully selected Tax Reform Commission to examine Bermuda’s tax system and recommend appropriate changes. To guide them in their work, the tax commissioners were provided terms of reference, which included the following:

• Increase revenues to 20 per cent of gross domestic product by 2020

• Produce a fairer, more equitable tax system

• Enhance Bermuda’s competitiveness

• Broaden the tax base

• Promote simplicity and transparency

At the time, Bermuda’s tax revenues stood at 17 per cent of GDP, so moving to 20 per cent would require significant increases in government revenues. The 20 per cent target, set by the very same FRP, was deemed necessary to stem the tide of Bermuda’s budgetary red ink and bring our national debt under control. Tax reform on this scale would not be easy, but in its initial stages Bermuda’s historic 2018 Tax Reform appeared off to a good start.

Yet all was not as it seemed. Before their meeting to consider tax changes, the commissioners were informed of further stipulations. While not recognised in the official terms of reference, the latitude for potential tax changes would be more limited. It appeared further hidden “parameters” would constrain their deliberations.

The commissioners were informed that in initiating the reform process, the Premier had already made commitments of generous tax concessions to the island’s reinsurers. Bermuda’s reinsurance tax revenues would be reduced.

Moreover, reputedly in order to enhance the island’s competitiveness, the Premier introduced the added “parameter” that further revenue increases of any kind on international businesses with a physical presence in Bermuda were off the table.

Ever the keen risk managers, the reinsurers also had secured from our young premier a position for one of their very own executives on the Tax Reform Commission itself. What’s more, arrangements had been made to locate the Tax Reform Commission’s entire deliberations over the course of the next six months within the offices of a reinsurer. Leaving little to chance…these guys know their insurance.

And with that, the die had been cast. Before the tax commissioners had convened their first meeting, the Premier’s missteps had destined the island’s historic tax reform to failure. With a few deft moves of remarkable efficiency, the Premier had practically ensured the mathematical impossibility of achieving the tax reform’s full objectives.

Indeed, it does not take an actuary to do the maths. If you are raising government revenues overall, but grant significant tax breaks to Bermuda’s highest income earners who are largely foreign, who do you think has to make up the difference?

Regrettably, from there things went from bad to worse. It appeared the penal mindset that produced such a tax system in need of reform had infected the commissioners themselves, as they took umbrage with the “inequity” of Bermuda’s property taxes on the least valuable houses.

The commissioners were of the opinion that property taxes at the lowest annual rental value bands were so low, the owners of Bermuda’s least valuable housing were practically exempt from paying anything at all. This would not stand and the commissioners swiftly avenged the injustice with sharp hikes at the lowest bands. Equity restored.

Alas, there were other notable blunders in our ill-fated 2018 tax reform, the details of which will have to wait a further opportunity. Needless to say, the eventual implementation of the tax commissioners’ recommendations did not proceed smoothly. You can’t get blood from a stone and with the majority of tax increases centred on lower-income locals, the tax reform scheme soon unravelled.

Indeed, much of the Tax Reform Commission’s recommendations had to be abandoned. Of the commission’s full recommendations, very few were successfully implemented. The successes did include, of course, the reinsurers’ tax concessions.

But the foregone revenue had come at a price. As a share of GDP, Bermuda’s tax revenues now fall well short of the tax commissioners’ target of 20 per cent of GDP. In 2019, Bermuda’s tax-to-GDP ratio stood at 15 per cent (see Chart 1), while the effects of the pandemic in 2020 lowered the ratio to 14 per cent.

Not only had our derailed tax reform failed to accomplish its objectives, but the island was left with significantly lower government revenues than projected and quite possibly a more, rather than less, regressive tax regime. On the very eve of a 1-in-100-year pandemic, Bermuda’s tax reform had seriously compromised the island’s fiscal solvency and resiliency.

• Robert Stubbs is Head of Research at Seed Bermuda, a local think-tank devoted to the island’s sustainability. Having previously served as Head of Research for Bank of Bermuda, Mr Stubbs is a chartered financial analyst, holds an International Bond Dealers Diploma and completed the ACAS actuarial exams. Seed Bermuda produces research, policy analysis, advocacy and public awareness campaigns in service to a more inclusive, resilient and sustainable Bermuda. In pursuit of its mission, Seed Bermuda encourages greater accountability from the island’s politicians and business leaders, and more active participation by the public in decisions that affect us all. This is the first of a three-part series. In Part Two we consider lessons learnt from Bermuda’s 2018 Tax Reform debacle

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