Bermuda’s international business chiefs said they would swallow increased taxes if the Government continued to cut its costs and pushed ahead with reforms in the public service.

Insiders added that the sector wanted to see the Government live up to its pledges to make the Civil Service more accountable, close loopholes in the payroll tax system and ensure better collection.

The Budget increased payroll tax by 1 per cent to 15.5 per cent and imposed a new 5 per cent services tax, the General Services Tax, to take effect as early as next year.

The employee part of payroll tax will rise by 0.5 per cent to 6 per cent as a result of the increase.

Mr Richards said the payroll tax hikes were temporary as the entire system was under review to make it more progressive and ease the burden on lower-income workers.

Stephen Catlin, deputy chairman of the Association of Bermuda Insurers and Reinsurers, who gave the official reaction to finance minister Bob Richards’s fourth Budget statement, said: “Globally, the ratings agencies are watching with keen interest and will be judging Bermuda’s sovereign rating after an assessment of Bermuda’s Budget plan.”

During the two-hour delivery in the House of Assembly yesterday, Mr Richards warned that the financial credibility of the country and the international business sector were closely linked.

He told MPs: “Our international business partners as institutions, domiciled, managed and regulated in Bermuda, are subject to the same global financial rules as the Government and hence the fate of international business is connected to the fate of the Bermuda Government.

“Bluntly put, if the Bermuda Government is downgraded, many of our IB partners get downgraded, too.

“So the linkages are clear: deteriorating creditworthiness of the Bermuda Government not only threatens the job security of public servants, it threatens the job security of those people employed in international business and the job security of all those companies and individuals employed in providing services to international business.

“This constitutes most of Bermuda’s economy.”

Mr Catlin said: “ABIR companies understand that there is still much to do to secure a prudent and sustainable fiscal position for Bermuda.

“ABIR companies in the current business climate are themselves grappling with necessary expense controls so we understand why expense controls are a key component of a balanced approach to reduce Bermuda’s debt burden.”

Mr Richards told the House of Assembly: “The plan to eliminate the deficit, the reduction of public debt, the public declaration of financial targets and the actual progress towards meeting those goals is not just some theoretical exercise by the Minister of Finance — an exercise that doesn’t really affect the man on the street.

“The interconnectivity between IB, our number one industry, and the Government means that Government’s success in eliminating the deficit and reducing the debt will have a decisive impact on the future economic health of this entire country and the future prospects for jobs for Bermudians.”

International business leaders explained that new taxes were bearable, but that the sector wanted to see “the fundamentals get corrected”, including closing loopholes like notional salaries for payroll tax purposes, which apply to the self-employed, principals in small businesses or professional practices such as healthcare, legal or professional services offices. Mr Richards said that, in the future, each case would be judged on “quantitative data” and, where possible, based on professional occupational benchmark salaries found elsewhere in Bermuda.

He added: “A review of these notionals indicates widespread and flagrant abuse.”

And he said: “This notional ‘loophole’ is an inequitable feature of our tax system that is long overdue for reform.”

The Budget statement added: “In addition to the changes to the payroll tax area, legislation providing concessions for new Bermudian hires will be allowed to expire at the end of the current fiscal year.”

Business chiefs said they “gave the Government credit” for cutting expenses and noted that the Caribbean Technical Assistance Centre, called in to review island taxes, had praised the Government’s improved financial oversight.

One added: “We support some revenue raisers, we support the payroll tax change and a new kind of payroll tax and a services tax — as long as the fundamentals get corrected.

“That’s closing loopholes like the notional structure and addressing the not very good enforcement of the payroll tax system.”