Wednesday, 13 June 2012

Regeneration of Bermuda’s economy


Government’s current and near-term financial position has a strong and direct impact on Bermuda’s national economy. Government certainly must continue acquiring revenue. However Government’s need for revenue must be very carefully balanced against the more pressing need to avoid further damage and to regenerate Bermuda’s national economy. Wrong handling of Government finances can push the economy to the third hourglass consequence. Bermuda needs the fourth hourglass outcome.

Government’s Financial Policy

In layman’s terms, and consistently using $100 as the typical revenue, this was the generic situation ten years ago in 2002/03:

Government ‘s revenue $100

Government spent this on personnel $46

Spent this on Debt Service Costs ($0.126b Debt) $2

Government had this left over for everything else $52 (actual spending out of what was available was $48, and Government was paying down Debt out of this)

No borrowing. Government was paying down Debt $0

Government actually spent $96 on everything while Government took in $100. Government ended that year with a generic $4 surplus.

That pattern of Government spending held until 2004. In 2004 it changed. This is what has been budgeted to happen in 2012/13. Take note of the major impact that the huge increases in Debt Service and Personnel costs have had:

Government ‘s revenue $100

Government plans to spend on personnel $57 (no pension payment)

Must spend more on Debt Service Costs ($1.4bn Debt) $13 (six times higher!)

So Government will have this left over for everything else $30

But this is not enough so Government will borrow $19 (total of $49 spent on everything else, but this is actually less than in 2002)

In 2012/13 Government plans to spend $119 even though it expects to take in only $100 in revenue. Government is planning to end the year with $19 more Debt.

This pattern of overspending and borrowing commenced in 2004. It is now in its ninth consecutive year. It must change. We have said and we have shown what will happen if this pattern of Government overspending does not change. What, exactly can and must change? For 2012/13, here is what we believe should have happened and still should happen immediately:

Government‘s revenue $100

Government spending on personnel (reduced 25%) $43 (real personnel cost cut)

Must still spend on Debt Service Costs ($1.4bn Debt) $13 (cannot be cut)

Cutting 18% here means this is left over for everything else $44 (total spent on everything else and still much less than in 2002)

No Government borrowing at all. $0

Meaning that this time Government will spend $100 after taking in only $100. Government will end with a ‘balanced budget’ where spending = revenue.

This is the “X” point that must be reached if the debt service cost is to stop steadily eating its way up into revenue as it has been doing every year in the nine years since 2004. After the “X” point, debt service cost can either be maintained at today’s level, and increased revenue can provide funding to pay down Debt, thereby allowing for an increase in spending on everything else.

The key issue? Government must cut spending. The first real cut should have been made sooner and could have been much smaller. Since a real cut has still not been made, the first cut must now be far deeper and much harsher.

If cuts are not made, and if Government revenue continues to flatline or decrease, the third hourglass consequence is inevitable.

Call to Action

What must be done? How can Government (and Quango) personnel costs be cut? Here are five options:

1. Cut all Government (and Quango) salaries/wages by 25 percent or cut all working hours by 25 percent, going from a 35hr/37.5hr paid work week to a 26.25hr/28.25hr paid work week

2. Cut all pay:

— persons paid over $120k a year get a 30 percent reduction

persons between $70k — $119k take a 25 percent reduction

persons paid under $70 receive a 20 percent reduction

3. All personnel work four days and take every fifth day off, unpaid or all personnel work four weeks and take the fifth week off, unpaid.

4. Every person who is eligible to retire must retire, thus coming off the Consolidated Fund and going onto the Public Service Superannuation Fund (PSSF)

5. For now, retain all Government employees who wish to stay. Once the economy regenerates, encourage Government employees to consider migrating to the private sector; thus reducing the overall size of the Civil Service, while getting the Civil Service/Quangos back to optimum size — probably around 6,000. This 6,000 will be about 24 percent down from the current 7,855. It will free 1,855 Bermudians to take jobs in an expanding private sector. It will take a lot of the pressure off the underfunded PSSF.

Personnel cost cuts of the magnitude recommended will result in taking at least $120m off the current need to spend. Cuts made in the ‘spending on everything else’ category should provide savings of another $70m — $75m making overall cuts up to approximately $190m of real cutbacks. These overall cuts of $190m will move spending down to the “X” point.

Many businesses and operations in the private sector have already made deep and harsh cuts of this magnitude, and the private sector began cutting back, and has been cutting back, since 2007. Several private sector operations have gone out of business.

Without a dramatic rise or regeneration in the economy, cuts of this kind — or harsher — will inevitably occur.

By not cutting now, and thereby delaying the first real cut, we believe that Government spending policy is actively pushing the national economy towards the third hourglass consequence.

If you disagree with this call for action, then just as clearly and just as precisely, dealing with this call, get involved and say what the alternative or different action should be. Let us know what you see as the alternative or action that will avoid the oncoming reality and that will move Bermuda forward.

Discuss this with your family, friends, workmates, and MPs until a clear national decision is reached and implemented; after which Bermuda can start moving forward again. Saying nothing or dissolving into a massive public shouting match is the same as taking no action. But to take no action will ensure the outcome shown by the third hourglass. Bermuda needs the outcome shown in the fourth hourglass, it is what we owe to this and future generations.

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