Financial experts warn tax boost could lead to inflation
Bermuda faces the risk of inflation if a cash windfall from the corporate income tax is used to boost government spending and slash other taxes, a financial advisory group has warned.
The ninth annual report of the Fiscal Responsibility Panel noted “huge potential benefits” from the tax, approved in the House of Assembly on Friday and scheduled to come into effect in 2025 — but recommended a “stabilisation fund” to counterbalance the volatility of fluctuating revenues.
The island was advised by the panel to make “an early and binding commitment” to set aside a “substantial” proportion of the net revenues to reducing debt.
It called for any decisions on the allocation of tax revenues to be undertaken “transparently on the basis of independent expert advice and scrutiny”, with the recommendations enshrined in law.
It also called for a “progressive” overhaul of Bermuda’s tax regime including “the introduction of a personal income tax at a low rate”.
The Opposition stands by its call for the Government to earmark revenues from a corporate income tax that comes into effect in 2015 for cutting the island’s $3.1 billion debt.
The One Bermuda Alliance backed its amendment, brought on Friday to the debate in the House of Assembly on the tax, which would have required the funds earned to offset “Bermuda’s stifling debt and address our crumbling infrastructure”.
Douglas De Couto, the shadow finance minister, said debt interest, which amounted to $130 million this year, held back investment in “crucial social issues” such as healthcare and housing.
He said interest costs were the equivalent of a fourth-largest annual budgeted expense, behind the $199 million allocated for health, $139 million for education and $131 million for national security.
“The OBA amendment was no reflection on the technical content of the CIT Bill, which we cautiously support, while being mindful of the potential risks to our island, risks also noted by many Progressive Labour Party MPs.
“Unfortunately for Bermuda, the OBA amendment was not able to proceed, but it did enable a robust public debate on Bermuda’s precarious fiscal situation.”
Dr De Couto said the suggestion had come from many sources.
“Feedback we have received from across the island confirms that for most people, this is the right thing to do.
“In fact, the idea of using CIT income to pay debt and fix infrastructure is so sensible that it was explicitly recommended by the Fiscal Responsibility Panel’s most recent 2023 report tabled in the House on Friday, and supported in concept by the former finance minister.”
He called on the Government to explain “its plans, not merely promises, for fixing our debt and infrastructure, and how the Government will ensure it will commit to those plans”.
The independent panel, established in 2015 to assess the Government’s efforts to rein in debt, highlighted that the corporate tax would not yield revenues until the 2025 fiscal year, meaning it would be “unlikely to be of significant benefit” to government finances until 2026.
It compared the profits of international business to the variability of oil prices, posing a risk of shortfalls in years of low revenue, and warned that channelling the gains into domestic tax cuts or increases in the Government’s spending “poses serious macroeconomic risks”.
The report added: “In particular, given the nature of Bermuda’s economy and supply constraints, there is a serious risk that it would simply result in boosting prices throughout the economy, including consumer goods and real estate.”
Inflation would ramp up the cost of living, potentially rendering some domestic businesses less competitive.
The panel advised the Tax Reform Commission to shift the island from payroll tax — particularly the employer portion — to “an individual income tax that would also tax income from capital”.
“This would both make the system more progressive and could help reduce the cost of labour, especially for international business, thus boosting employment.”
The report said the additional revenues flowing from the corporate income tax marked an unprecedented opportunity to overhaul the tax system “to give Bermuda — for the first time in its history — a modern and competitive tax system, one which helps to create fairness across the residents of the country, while also helping to make the economic environment and costs of doing business here attractive for international business”.
It stated that failure to restructure taxation would mark “a major missed opportunity”.
The 2023 report followed a visit by the panel from November 19 to 24, and it noted that the island’s economy had “strengthened over the past year, driven by international business”.
The Government got high marks for proceeding “expeditiously but carefully” on the CIT, which would levy 15 per cent of the profits of multinational enterprises with more than €750 million (about $808 million) of annual revenue.
The panel added: “The hardest part, however, is still to come.
“It is vital that the Government put in place a framework that ensures that any additional revenues are allocated in a way that retains international business, maximises the long-term benefits to the people of Bermuda and mitigates the very serious risks we have identified.”
David Burt told MPs during the debate on the Corporate Income Tax Act 2023 that an opposition proposal to commit the revenues to cutting the island’s debt was premature.
The amendment put forward by the One Bermuda Alliance was dropped because it applied to the Government’s finances and therefore could only be brought by a government minister.
The fiscal responsibility panel said that despite “a handful of well-publicised projects that appear to be stalled or delayed”, the Government made “encouraging” strides for economic diversity, singling out the investment announced in September by Google for sub-sea communications cables to be routed through Bermuda.
The panel also found that employment had risen close to its pre-pandemic levels.
“Although there will be little deficit reduction in 2023-24, largely due to the increase in capital spending, the plan remains for a balanced budget in 2024-25 and for continued progress towards the targeted surplus of $50 million in 2026-27.”
The panel recommended that the island continue to leverage its traditional expertise in insurance with fintech, but should “avoid a focus on cryptocurrencies”.
The island was urged to continue diversifying beyond insurance and fintech to take advantage of its natural advantages, including its strategic ocean location.
The panel called on the Government to tackle barriers in the banking system that limited access to credit for the island’s residents and businesses.
It added: “Guarantees for commercial businesses pose a substantial risk and should be significantly curtailed.
“Guarantees virtually never should be issued to back commercial projects.”
The panel advised the island to prepare for its “high risk from climate change”, which it said should be “incorporated into all government strategies”.
“Of particular concern to Bermuda would be rising sea levels and flooding, increased or intensified tropical storm activity, freshwater shortage, and changing weather, including reduction or loss of the Gulf Stream.”
• The read the full report, see Related Media
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