Don't that believe our debt to GDP ratio is healthy - it's like a Greek myth

FRIDAY, APRIL 13: The ancient Greeks believed that Zeus lived on Mount Olympus ruling over the Greek pantheon. In modern Bermuda, today’s relationship between GDP and National Debt is believed, by some, to be good. Both beliefs are myths. One is three thousand years old, the other, three years old.

FACT ONE: In 2012/13 Government hopes for $909.6m revenue. In its Budget Statement, Government says it will allocate $115.8m to service the $1.4bn (net) Debt that will accumulate in 2012/13.

FACT TWO: From Fact One, Government will allocate $12.73 out of every $100.00 of revenue to service this Debt. Not sustainable.

FACT THREE: In 2012/13 Government says it will spend $171m more than it takes in, and will borrow another $200m in order to achieve this.  In 2012/13, Government plans to spend $119 for every $100 of revenue.  Not sustainable.

FACT FOUR: Because of Facts Two and Three, in 2012/13, out of every $100 that Government plans on spending, Government must borrow $16. Not sustainable.

FACT FIVE: If Government spending continues to exceed Government revenue — as will happen in 2012/13 — then Government’s borrowing need will continue to grow. In very short order, Government will be forced to allocate $14.00, then $16.00, then $18.00 out of every $100.00 of revenue in order to service its Debt. Not sustainable.

FACT SIX: From Facts Two, Three, and Five, Government will be borrowing $18, then $20, then $22 out of every $100 that it spends. This internal borrow to spend ratio will worsen faster than the ‘cost-to-service-debt’ ratio. That’s an arithmetic fact - nothing to do with politics.

FACT SEVEN: From Facts One to Six, the ability to pay the rising Debt Service Cost is the most important measure. The changing relationship between Debt Service Cost [DSC] and Debt looks like this:

• 2004: $11.4m DSC was 1.5% of revenue; Debt was 3.9% of GDP

• 2005: $13.6m DSC 1.7% of revenue; Debt 4.6% of GDP

• 2006: $18.3m DSC 2.1% of revenue; Debt 4.7% of GDP

• 2007: $23.3m DSC 2.5% of revenue; Debt 5.9% of GDP

• 2008: $27.6m DSC 2.9% of revenue; Debt 9.3% of GDP

• 2009: $34.8m DSC 3.8% of revenue; Debt 14.4% of GDP (ratio doubled from 2007)

• 2010: $84.9m DSC 8.6% of revenue; Debt 18.7% of GDP (DSC doubled from 2009)

• 2011: $100.2m DSC 11.5% of revenue; Debt 21.0% of GDP

• 2012: $115.8m DSC is 12.7% of revenue; Debt 24% of GDP.

FACT EIGHT: A higher Debt to GDP level that is said to be ‘comfortable’ and ‘easy to manage’, and which is still far lower than ‘those other countries’, could see Bermuda’s Debt to GDP ratio rise to 48 per cent. This would be the 2012/13 result if Debt to GDP was higher:

• Debt: $2.64bn if Debt is 48% of GDP ($5.5bn).

• DSC: $211m per year.

• $211m: 23% of current revenue of $909.6m.

• Government would have to borrow another $95m to get through 2012/13.

• Government would be borrowing $24 out of every $100 that it spends.

FACT NINE:  Countries that are not in economic crisis but that have high Debt to GDP ratios pay most of their DSC to their own nationals in their own national currency.

For instance, Japan’s Debt to GDP ratio is 228 per cent (in 2011). Japanese lenders own 80 per cent. Paying Interest in Japanese yen means 80 per cent of the interest payments re-circulate within Japan’s national economy.

FACT TEN: All of Bermuda’s DSC floods out of Bermuda in foreign currency to foreign lenders; opposite to what happens in Japan.

Because of Bermuda’s huge outflow of foreign dollars to foreign lenders, Bermuda’s Debt to GDP ratio is the wrong — possibly the worst — measure of national economic health. The best and commonsense measure is the relationship between Government Debt and actual or likely Government revenue. This relationship provides the best measure of Government’s ability to handle its Debt. Both are going the wrong way; Government revenue is falling, Government Debt is rising.

In measuring Bermuda’s 21st Century situation, Bermudians and others who intone the Debt to GDP mantra are like ancient Greeks praying to their ancient Greek pantheon. 

If I am wrong, expect the Minister and Ministry of Finance to deliver a nuclear strike and obliterate me. So lookout for a mushroom cloud over Devonshire.

If I am right, expect, once again, the “sound of silence”.