Fiscal Responsibility Panel Assessment Report

December 7, 2018 | 6 Comments

“Of greatest concern is the certainty of the island’s shrinking workforce and rapidly ageing population” as “this will put ever-increasing pressure on both taxes and spending.”

This was contained in the Bermuda Fiscal Responsibility Panel’s 2018 Annual Assessment, which was tabled in the House of Assembly today [Dec 7].

A Government spokesperson said, “In the 2015 Budget Statement, the former Minister of Finance announced the intention to establish a Fiscal Responsibility Panel in order ‘To increase transparency and international credibility, Government intends to establish an international, independent committee to review, monitor, assess and publicly report on the fiscal progress of the Government’.

“The panel’s more detailed remit is ‘to provide Bermuda’s Parliament, Minister of Finance and Financial Policy Council with an annual published assessment of the island’s fiscal strategy, focusing on progress in meeting our medium term objectives for public spending, taxation, borrowing and debt reduction.’

“Similar to its initial report, the panel was asked to ‘review progress towards the Bermuda Government achieving a balanced budget by 2020-2021 prospects for further progress towards meeting the aims of reducing debt and debt service to less than 80% and 10% of revenues.’

“In making its assessment the panel was asked to ‘review the impact of the most recent Bermuda Government annual budget; the credibility of macro and fiscal assumptions underlying Government projections; and the risks that could affect progress in meeting the island’s fiscal goals, offering advice where needed on ways to refine these goals, and on adjustments to fiscal strategy and tax and spending policies needed to achieve them.’

“The Panel had meetings with various institutions/individuals during the course of its discussions in Bermuda during the period November 19-24, 2018. During these discussions the Panel heard views about Bermuda’s economic prospects [and risks to those prospects] and challenges, in the short, medium and longer term. While the Panel consulted many individuals and organisations it should be noted that they are an independent panel and the judgments and recommendations made are their own.”

Panel Members

“The Panel was the same as last year and was chaired by David Peretz, an independent consultant on international financial issues who has worked in the UK Treasury, the International Monetary Fund and the World Bank, and has experience in advising on strategic and economic issues affecting small countries,” a spokesperson said.

“The other members are: Jonathan Portes, Principal Research Fellow at the UK National Institute of Economic and Social Research, whose expertise covers a wide range of economic policy issues, including fiscal policy, labour markets and immigration, poverty, and international economic and financial issues; and Peter Heller, retired Deputy Director of the Fiscal Affairs Department of the International Monetary Fund, who has written extensively on public finance issues, pensions and health care, and long-term demographic challenges.

“In closing the Minister said: ‘The Government is certain that the Panel’s Report will be a useful document to assist with the Government’s deficit and debt reduction strategy and I encourage the general public to thoroughly read the report to get a better understanding of the various fiscal challenges facing the Government’.”

Executive Summary

The report’s executive summary said, “This is the Panel’s fourth annual report. As in previous years we have had productive discussions with Ministers, officials and many others on the island and we are grateful for their advice, but all the judgements and recommendations are our own independent conclusions.

“In our previous reports we highlighted Bermuda’s vulnerability to external events and noted specific risks that could create a severe financial crisis. We have reassessed these risks: some can be or are being mitigated by determined government actions; others remain or have increased. And new ones will emerge.

“But perhaps of greatest concern is the certainty of the island’s shrinking workforce and rapidly ageing population. This will put ever-increasing pressure on both taxes and spending. On present trends, Bermuda is heading for a downward spiral of demographic and economic decline.

“The high level of government debt, unfunded pension liabilities and other contingent liabilities leaves the island extremely vulnerable. Deficit and debt reduction must therefore remain a high priority.

“We regret the Government’s decision in the 2018 budget to delay achieving budget balance by a further year to 2020/21. This target must now be met, as well as the longer-term targets of reducing debt and debt service, respectively, to 80% and 10% of revenues. And this fiscal action needs to be complemented with policies to reinvigorate economic growth, including through a decisive change in immigration administrative practices and policies.

“We make a number of suggestions and recommendations in this report to achieve these goals. The following key issues need to be addressed without delay.

Tax reform. The Tax Reform Commission was mandated to propose ways to raise government revenues from the present 17% of GDP to around 20-22%; its proposals [on which we provide detailed comments] would take revenue to about 19%, and would be an important and welcome step. Many of the measures would move Bermuda’s tax system towards a more normal combination of conventional income and sales taxes. We recommend that the Government adopt and implement the package, or something like it, as quickly as feasible, although we caution that the TRC’s recommended timescale seems ambitious given capacity constraints and the likely timing of systems development at the Office of the Tax Commissioner.

“We also recognise that the Government faces a challenge in explaining the need for tax increases to the population and business. It would help if, as we recommend, they were accompanied by action on immigration, as also recommended by the Commission, and by equally firm steps to improve public sector efficiency.

Securing faster growth. This is a necessary precondition for all other aims, including making effective progress in debt reduction. The government’s aim of diversification away from reliance on insurance and tourism is sensible but will be easier said than done: the island has few natural advantages. But compared with many island competitors, Bermuda has a world-class legal and regulatory structure. The focus on attracting new fintech businesses is appropriate as long as care is taken not to attract activities that could carry severe reputational risk.

“The underdeveloped nature of domestic capital markets, and absence of a domestic market for start-up finance is a concern. We make three suggestions here. It would help greatly if, as elsewhere, there were a requirement for all companies to prepare annual financial statements. It would also help to have in place clear legal procedures for handling company failures. And we suggest that consideration be given to setting some form of target for domestic investment – in viable projects – by the island’s private and public pension schemes.

Reforming immigration practices and policy. A precondition for faster growth is to increase the island’s workforce. It is the only realistic counter to the island’s demographic challenge from a rapidly shrinking and ageing population. Immigrants and returning Bermudians with the right skills will help to create jobs, not displace them. We welcome the Government’s evident determination to implement fundamental reform of its administrative practices and policies. The recent improvements in processing times for work permit applications are an excellent start but need to be urgently followed through with broader changes in administrative practices and policies, if Bermuda is to return to a sustainable economic and demographic trajectory.

Spending on health care. This is now the largest single area of spending in the budget, and a rapidly ageing population will continue to put upward pressure on demand and costs. An agenda for action, set out by the Ministry of Health and the Bermuda Health Council, exists: the government needs to proceed urgently. Health care coverage should be compulsory, with subsidies being redirected to help those unable to pay premia; the basic health care package should be extended to encourage preventative care as well as access to providers offering effective disease management, while preventing or postponing the need for expensive hospital care. Any premium subsidies should be means-tested; and costs should be contained, if necessary by price controls, to reduce the excessive costs [when compared to costs elsewhere] of many forms of treatment on the island.

Government efficiency. We welcome the Government’s bottom-up approach to improving efficiency, moving resources to priority areas and looking for ways to improve efficiency across Government, in particular by seeking to develop effective and linked-up IT. We recommend appointing a “champion” [with possibly a separate champion for improved IT] in the Cabinet Office or Finance Ministry to drive the process and be held accountable for results.

Tackling unfunded pension liabilities. Currently the territory’s public sector pension schemes for its employees have an unfunded liability of around $1 billion. Unless tackled, this will be a burden on future budgets. In addition, the Contributory Pension Fund also has very large unfunded liabilities, and it is inconceivable the government would allow it to fail. So debt reduction needs to be complemented by actions to address these deficits. Actions that could reduce the need for sharply increased contribution rates include raising the retirement age [which would also mitigate the expected decline in the workforce]; and, for public sector employees, basing pensions on the average of salaries over a 5-year period and actuarial pension reductions for early retirees.

A long-term debt reduction target. These difficult medium and long-term issues facing the island are becoming increasingly apparent to all. So alongside action to achieve budget balance, it would be a useful confidence-building measure to set a timescale for reaching the longer-term target of reducing debt to 80% of revenue. We suggest it would be reasonable to set a target for 10 years from now, in 2028.

“Taken together this is a challenging agenda. Work on much of it is already under way. The renewed impetus behind immigration reform is welcome. And the proposals of the Tax Reform Commission provide what up to now has been a missing piece in the strategy for achieving the government’s targets for deficit and debt reduction. If tackled now and with determination, it is an agenda that will leave Bermuda safer and more prosperous.”

The full Fiscal Responsibility Panel 2018 Annual Assessment follows below [PDF here]:

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Comments (6)

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  1. Hey says:

    PLP truly screwed up in their reign

  2. This is a joke right?

  3. Eve says:

    Are the right people paying attention? Face it….both parties are to blame and all that matters now is how soon the right people will be working together to find a solution. Bermuda’s fiscal health doesn’t just effect those living on the island it affects those who have investments in Bermuda too. US & Canada stock markets could be on verge of a correction period which will hit Bermuda too and this report will be twice as applicable.

  4. WSP says:

    Is there anything positive coming from this government,because all i read is not very positive these days.

  5. Not Exactly says:

    I’ll bet a gallon of swizzle that Burt disbands this group as he won’t want to keep hearing bad news.

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