Beneath all the smoke and mirrors of Premier Burt’s Budget Statement delivered on February 25th lay the stark reality that he was proposing yet another austerity budget. As is clear from his budget proposals, our 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 Dickinson, in his first budget of the pandemic, also eschewed tax increases in favour of spending cuts, against the advice most notably of Bermuda’s Fiscal Responsibility Panel (FRP). The FRP is a panel of international experts who advise Bermuda regarding such fiscal matters.
As the Premier delivered Bermuda’s second consecutive austerity budget, he too was ignoring the FRP’s advice as their latest report clearly warns of the dangers of continued austerity. In their 2021 report the FRP stressed, “Significant risks remain, in particular that this very prolonged period of spending restraint is not sustainable, either politically or economically…”
Quite naturally, Bermuda’s current 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 elected 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:
i) Increase revenues to 20% of GDP by 2020;
ii) Produce a fairer, more equitable tax system;
iii) Enhance Bermuda’s competitiveness;
iv) Broaden the tax base; and
v) Promote simplicity and transparency
At the time, Bermuda’s tax revenues stood at 17% of GDP, so moving to 20% would require significant increases in government revenues. The 20% 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. When the tax commissioners convened their first meeting, they 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.
Bermuda’s young Premier proceeded to inform the commissioners that in initiating the reform process he 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 had also managed to secure 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 following 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 doesn’t take an actuary to do the math. 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 which 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 ARV 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 another 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.
Tax Reform Commission
2018 Tax Reform Commission Report: https://www.gov.bm/sites/default/files/Tax-Reform-Commission-Report-Final-2018-11-19.pdf
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% of GDP. In 2019, Bermuda’s tax-to-GDP ratio stood at 15% (see Chart 1), while the effects of the pandemic in 2020 lowered the ratio to 14%.
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.
So what can we learn from this sorry tale as we attempt to pick up the pieces? Three perennial problems for Bermuda are underscored by these unfortunate events. The first is Bermuda’s lack of competent policymakers (OBA as well as PLP).
No one can possibly be competent in all realms, but lack of competence becomes a particular liability when one refuses to acknowledge inherent limitations. Attracting more capable politicians to each party and developing the capacity of the island’s existing policymakers will take time, but both should be considered national priorities of the utmost importance.
Bermuda’s second obstacle highlighted here is our lack of transparency. Had the Premier not been allowed to conceal his so-called “parameters” from public view, it would have been far less likely that the reinsurers were granted such generous concessions. Greater transparency of the island’s tax reform process needs to be enforced.
In fact, greater transparency of Bermuda’s overall tax system would assist in holding our policymakers to account. A comprehensive regularly updated publication of Bermuda’s tax rates complete with individual tax concessions would be of use. Indeed, the willingness of our politicians to serve private interests at the expense of the public’s well-being suggests the island would benefit more generally from significant ‘open government’ reforms.
Finally, our third problem exposed in these proceedings is the inordinate undue influence of International Business (IB) companies in Bermuda. IB has now so insinuated itself into every corner of Bermuda’s policymaking that today it frequently is impossible to tell where in Bermuda the government ends and global finance begins.
While individual politicians and finance executives may benefit from such cosy relations, as evidenced by our tax reform debacle this often occurs to the detriment of the island’s good governance.
Of course, our challenges in these areas are interrelated. The intensity of the third increases with the first two, while the degree of the second is encouraged by the first and third, and so on. No doubt, it will take time to convert the island’s vicious circle of poor governance into a virtuous spiral.
Austerity budgets imposed during hard times often are compared with the ancient medical practice of bloodletting. Widely used down through the ages until as recently as the early 20th century, bloodletting referred to the treatment of a patient’s illness or disease by draining the patient of blood.
In Part 2 we examine implications for Bermuda’s 2022 Tax Reform Commission and our Economic Recovery
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, Robert is a Chartered Financial Analyst, holds an International Bond Dealers Diploma (ICMA) 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 our goals, SEED encourages greater accountability from the island’s politicians and business leaders and more active participation by the public in decisions that affect us all.