Your dollar is worth less than you think

As Bermudians squirm and wiggle and wonder in Bermuda’s still deteriorating economic situation, some really novel and strange views are being tossed around. I won’t go into the ‘Alice in Wonderland’ stuff that is far, far out; but I will explain one situation that is supremely important. 

Understand these two things and you will be less easily fooled by a person who pours a river of rhetoric words and spouts spurious numbers.

FIRST. Every Government dollar is a deeply devalued dollar. Here is how that happens.

Government takes up $100 in tax dollars [from all sources].

Government must then make its first priority payment. That payment is to service Debt.

Right now, Government is paying interest at an average 5.19% on $2,324,000,000 of Debt.

That amounts to $120,615,602 per year [round it off to $121m] – in this year.

In this year, Government  projects that it will take in $871,200,000 [round it off to $872m].

Do the subtraction: Revenue [$872m] minus Priority payment [$121m]. That leaves only $751m available for spending. [Check the arithmetic….] 

So Government starts with $872m in revenue but ends up with only $751m to spend. 

So the real value of all Government revenue is ‘devalued’ by the fact of having to make that priority payment.

So the real value of $872m is actually the $751m that’s left over after making that forced – first – priority payment.  

So when it comes to the real value of the Government dollar that gets spent in Bermuda on Bermudians, it is the value AFTER that priority payment is made.

Do the maths and express the answer as a percentage: $751m divided by $872m = 86%

ANSWER:  By the time it reaches ordinary Bermudians, the $100 taken up in tax dollars has been devalued by 14% and only $86 actually reaches Bermudians.

Statement of fact: Every $100 of Government revenue gets devalued by 14%, and is only worth $86 by the time that it is spent on Bermudians.

SECOND. An alternate view.

In order to spend $100 on Bermudians, Government must first take up $116 in tax dollars. That is, Government must ‘overtax’. Here is how that works.  

Because of the priority payment on Debt service, Government must take up excess dollars, siphon off dollars to make the priority interest payments, and is then left with the balance available for spending in Bermuda on Bermudians.

Here is the arithmetic:  Take up $116 in tax. Siphon off 14% of $116 to interest payments. Taking off 14% leaves 86%.  And  86% of $116 is $99.76 [round it up to $100].

So $116 in tax uptake is equal to $100 of tax spending. So all Government tax uptake is discounted by 14% before it re-appears as tax spending.

Proof?  $872m taken up in tax dollars in 2013/14. But this is discounted by 14%. The arithmetic is: $872m x 0.86 = $750m [rounded up].

So paying out $100 in Government costs means taking up $116 in overtax, slicing off 14% ($16), and then spending the remaining $100. 

This mess that’s been growing ever since the Seventh Minister for Finance took over in 2003. Now, in 2013, it’s a monster mess.

I hope you understood the arithmetic. If you did, that’s good. But if you didn’t, get someone to work through it with you so that you do understand it.  Understanding is vitally important. It will enable you to intelligently sift through most of the garbage and craziness that is being spouted in torrents as some people rage about SAGE.

At the bottom of it all, lies the ugly hard fact that today’s Bermuda Government dollar is an 86c dollar. Not a 100c dollar. This absolute and vicious reality sits beneath and inside every financial issue and makes bad things worse.