Forget OBA, UBP, PLP, BDA, and 1834. It is 2013 and Bermuda is dealing with an arithmetic reality. 

For Government’s revenue to rise, GDP must rise. GDP can only rise if economic activity in the private sector increases. Any private sector increase can only be driven by an increase in on-Island demand for goods and services. Any increased demand will be foreign driven. 

Demand will be foreign driven because the only alternative is for Bermudians to suddenly start spending and consuming more of everything. 

Buy and eat more bread. Buy and use more ‘leckalight’. Buy and wear more clothes. Businesses must suddenly pay more in salaries and wages. Employees must suddenly receive more pay. Etc…. 

If you think that through, you’ll realize that you and your Bermudian family, friends, neighbours, and businesses, cannot create and consume more of everything and thus make Bermuda’s economy zoom upwards.

Even though the Ministry of Finance still refuses to admit it, since 2008, Bermuda’s residential population has fallen. All by itself, this fall in residential population has caused a four-year long recession. For four years, GDP has declined and thus lowered Government’s ability to get tax dollars.

If you understand that, you will understand that regenerating Bermuda’s economy requires increasing on-Island demand. Increasing on-Island demand means increasing Bermuda’s residential population. Increasing Bermuda’s residential population means re-attracting residents. 

Re-attracting residents means getting foreigners or Bermudians to return to Bermuda, set up and operate businesses in and from Bermuda, thus creating fresh new on-Island demand.

Detractors will rant, rave, fume, holler, shout and suggest that I’m an idiot. That’s fine. But after the hubbub is over, let’s hear the alternative that rebuts all that I’ve just outlined. 

Once GDP starts rising, Government Revenue can start rising. Until GDP rises, Government revenue will remain flat and will — as now — hover around the $900 million level.

So GDP must rise.

Gross domestic product

Economic theory and practical experience confirms that a Government can boost GDP by spending. Or by giving broad tax relief. If the Government helps grow GDP by giving tax relief, Government gets the reward of an increased GDP which provides a richer tax base and thus Government Revenue eventually goes up. It’s like giving a hand-out now in order to get more later. Tax relief can work.

On the other hand, when Government reduces its spending, this spending reduction acts like a drag on the economy, slowing growth in GDP. If Government raises taxes by a significant amount, that too causes a slowing in the rate of growth of GDP. This is what happened in Bermuda in 2010/11 when Payroll Tax was bumped up [See top chart].

So Government spending action has an impact — positive OR negative — on GDP growth.  

Examine the bottom chart. See the line that tabulates net Government spending, which is what is spent in Bermuda on Bermudians. That net spending is what impacts on GDP. Observe the fact that Government’s net spending is declining.

That means that right now, Government’s real spending action has had and still has a negative impact on GDP growth. This is a legacy matter. 

This is what Minister Bob got stuck with on December 21, 2012. Since December 2012, this legacy situation has worsened.

What happens when the $800 million is used up?

Either Bermuda will be climbing out of its debt hole, or — with the whole world watching — Bermuda will plunge deeper and into national economic ruin. 

By March 2017, and as shown on the chart, Government spending MUST match revenue.  

By March 2017, GDP must be growing materially. By March 2017, the drag exerted as the consequence of reducing Government spending must no longer have material impact. By March 2017, growth in GDP must outpace the drag exerted by reductions in Government’s net spending.

From 2017 on, Government must run balanced or surplus budgets and must not borrow again.

Also, commencing April 2018, payments into the Sinking Fund should re-start because we will be facing the payback, between 2019 and 2022, of $820 million. 

Alternatively, we will be forced to rollover that $820 million but at much higher rates of interest than the 5.9 per cent average annual interest currently being paid on that $820 million and the rest of Bermuda’s debt. 

What does this mean to me today?

It means that today and for thirty-six months of tomorrows, Government must cut its Personnel Costs and reduce its Operational spending. But in doing this Government must still maintain social stability and, where and when possible, help private sector growth. 

Essentially, Government must retreat to a corner, but keep supplying goods and services and maintain infrastructure. Government must do that whilst NOT damaging or harming Bermuda’s economy or impeding national economic growth any more than it is on this day; or any more than it will continue to do in the remainder of 2013, and through all 2014, 2015, and 2016.