Claims about capital spending just don't add up

WEDNESDAY, JULY 25: One of several political tales currently making the rounds is that all of Bermuda’s National Debt has been spent on Capital and infrastructure improvements. True? False?

Here are the facts. For the period 2004/05 to 2010/11, all figures quoted are from the audited statements of the Consolidated Fund as signed off on by the Auditor-General.

The figures for 2011/12 are from the Government’s June 2012 Bond Prospectus.

From April 1, 2004 to March 31, 2011, the publicly reported spending on Capital Acquisitions (small stuff) and Capital Development (big stuff) is listed in the panel, below.

The total of all reported Capital Spending between April 1, 2004 and 31 March 31, 2011 was $503,313,836 as reported in the annual audited statements for those years.

For 2011/12, Government reported projected capital spending of $65,000,000 total [June Bond Prospectus].

Therefore, from 2004 to 2012, total reported and projected capital spending is $503,313,836 + $65,000,000  =  $568,313,836.

But how much National Debt was actually taken up between 1st April 2004 and 31st March 2011? Here are the facts:

• Net Debt on 31 March 2012 (Before the June Bond) = $1,236,700,000 (June Bond Prospectus)

• Net Debt on 31 March 04 / 01 April 2004 (Handed on by Mr Eugene Cox) = $119,500,962

• Total Net Debt added in the eight years 01 Apr 04 to 31 Mar 12 = $1,117,199,378

Of this $1,117.2m, only $568.3m was spent on Capital Acquisitions or Capital Development. This means $548.9m was spent on non-capital or current items.  Thus forty-nine percent (or 49c in every dollar) has been spent on non-capital items; day-to-day expenses, personnel costs, services, and so on.

Only fifty-one percent [51 cents in the dollar] — just over half — went on Capital spending.

Of the $475m just borrowed, about $155m of new net borrowings will definitely flow into spending for 2012/13. Since only $76m is projected as Capital spending in 2012/13; the remaining $79m will go into current.

This will change the overall picture like this: $1,117.2m + $155.0m = $1,272.2m net debt borrowings to end of June 2012.  Of this:  $568.3m + $76.2m = $644.5m on Capital and $627.7m on current. So in June 2012, it’s 50.6% on Capital and 49.6% on current — “groceries and pay”.

Fact: Clearly, from the Middle School arithmetic analysis, it is not true that all borrowed funds have been expended on capital and infrastructure improvements. It is only ‘half true’.

Over $600m of all funds borrowed have gone or will go on meeting day-to-day expenses.

Special note on capital spending in general.

Government is in an accounting programme or process of ‘recognizing’ assets that had previously not been recorded as having a dollar value [things like pre-existing roads, bridges, old buildings, and so on].

Government has handled this recognition by showing an increase in capital value in the year that this catch-up accounting recognition takes place.

Typical example is FY 2008/09. In that year, Government actually spent $12.1m + $62.7m = $74.8m in real tax dollars on capital acquisitions and developments (See first set of figures.) This $74.8m is the audited and real spending on capital in that FY.

However, on page C38, Government’s Blue Budget Book shows Capital Spending of $200,271,000 in 2008/09. The difference is $125.5m. This $125.5m is arrived at like this: $200.3m spending as reported by Government minus $74.8m spending as reported and confirmed by the Auditor-General = $125.5m.

The figure of $125.5m is a purely abstract — some might call it fictional — figure. It seeks to help show the true accounting value of all the stuff that Government owns. That $125.5m is a pure ‘accounting figure’.

Any attempt to treat it as ‘real spending’ in 2008/09 is incorrect because that $125.5m was NOT spent in 2008/09. It might have been spent ten years before. This $125.5m represents the total VALUE of Government assets that were recognized — ‘brought to book’ in account-speak — in 2008/09.

Verification of what I’ve just written? The June 2012 Bond Prospectus reports that the 2008/09 deficit (excess spending over revenue) was $243.5m. This arises from spending of $74.8m Capital + $1,119.5m Current = $1,194.3m spending versus revenue of $950.8m = $243.5m deficit in 2008/09.

Warning. It’s election season. Listen carefully. Check. Verify.

Year                       Capital acquisition                 Capital development

2004/05                 $20,886,554                         $23,612,297                  
2005/06                 $22,195,510                           $27,304,868
2006/07                 $12,263,529                           $49,815,364
2007/08                 $11,980,267                           $108,867,283
2008/09                 $12,088,994                          $62,745,702
2009/10                  $7,825,370                            $107,864,942
2010/11                    $4,215,873                             $31,647,283