(Editor: Due to the importance, depth and clarity of the message in this presentation, since which we have received the Budget.  I felt it would be less meaninful if I tried to prĂ©ce or put it into my own words, so have provided the presentation in its entirety.)

 

Craig Simmons Senior Economics Lecturer The Bermuda College:

 

Budget 2010-2011:  The PLP is in uncharted waters.  Since 1998, the year in which the party was elected to the Government, the economy has boomed.  The global recession has changed all that.  In 2008, growth was an anaemic two-thirds of one percent and 2009 and 2010 are likely to see a shrinking economy.  Government debt is on the rise. 

 

 

Fiscal prudence on the part of a government is very different than that of a household.  Governments are more like businesses to the extent that both can live in perpetuity.  Governments are different than businesses in that they can levy taxes and print money to pay off their debts.   If a government were forced to balance its budget every year, it would destabilise the economy.  

      During boom times when tax revenues are growing, the government would be obliged to spend more, thereby adding fuel to an economy when it least needs it.  Conversely, recessions are associated with declining tax revenues.  Balancing the budget would require a decrease in government spending, which would make the recession worse. 

      Over the medium term (a five to ten year time horizon), a sustainable fiscal policy is one that does not increase the ratio of debt to gross domestic product (GDP).  For most of the nineties through to the mid-noughties, the debt-to-GDP ratio declined to under four percent.  Debt build up over the long run is less restrictive.  Long run sustainability requires that increases in debt should not exceed trend growth in inflation-adjusted GDP, which is around three percent.  Recessions and natural disasters provide compelling reasons for violating the sustainability rule.  During recessions, government deficits increase because tax revenues decline, whilst during natural disasters it is because government spending rises. 

Since 2004, government debt has increased by an average of 28 percent per year, from $195 million to $700 million.  Average growth in inflation-adjusted GDP over this period was less than four percent.  By any measure, government debt is growing at an unsustainable rate.  Our public finances are arguably in as bad a state as they have ever been.  Here's why. 

First, there was no need to accelerate government spending in 2004.  The private sector was already overheated.  An appropriate policy response would have been for the Government to cut its spending rather than increase it.  That was an opportunity to amass a surplus that could have been used to fight the recession. 

Second, the debt build up has been well beyond the economy's growth potential, which is roughly equal to trend or productivity growth.  Incomes cannot rise without the backing of productivity increases.  Productivity is determined by physical capital (the quantity and quality of hotel beds, office space, information technology, and other equipment and machines), human capital (knowledge and skills acquisition), labour force and technological progress. 

Third, and what is more important, the Government has not said how it plans on bringing debt levels down.  Taxpayers and investors need to know what the exit strategy [1] looks like.  Individual consumers, business people, investors, philanthropists, etc., base part of their spending decisions on expectations of disposable income and therefore taxes.  Individuals know that debt can be paid off in only a couple of ways: reduce spending; increase tax revenue; or sell off assets.  In fact it is not clear that the Government perceives present debt levels to be problematic, even though it is likely that debt will surpass $1 billion or 15 percent of GDP by 2013 and remain there until at least 2017. 

The Government's ability to fight the recession with deficit financing is diminished because its ability to borrow has been compromised by a fast rising debt-to-GDP ratio. 

Government finds itself in an unusually tight policy environment.  A growing government sector has its own momentum.  It takes time to reduce spending, somewhat like changing the direction of a cruise ship.  In addition to $700 million in debt, there are capital projects in progress and tens of millions of dollars worth of projects planned. 

 It is difficult to see how growth in government spending can remain below four percent or how tax revenue will not decline by a similar amount.