Government has led us into a classic debt trap

FRIDAY, AUGUST 12: Seems such a long time ago. However it was only July last year [2010] when the Minister for Finance said that out of every one dollar of revenue that Government collects, about eight cents is immediately clipped-off to service National Debt.

One year later, in July 2011, that ‘clip-off’ has rocketed up 25 per cent. It is now over ten cents off every dollar. Out of the $940 million of hoped-for — projected — revenue for 2011/12, the minister has had to allocate $70,000,000 for Interest payments and another $25,750,000 for the Sinking Fund. That’s $95,750,000 altogether and is 10.2 per cent of that $940 million revenue and a big jump on the 8 per cent of July 2010.

With the recently announced $200k Loan Facility taken up with BNTB, the clip will start closing in on twelve cents off every dollar. Not quite sure how this ‘clipping’ works?  I’ll show you.

Last year, July 2010 —  you or the business that you work for paid Government $1,000 in Payroll Tax. You got a Government receipt for $1,000.

Government then ‘clipped off’ eight cents from every dollar, and used those eight cents to service National Debt. So your paid-in $1,000 ends up having $80 clipped off. This means that from your paid-in $1,000 (check your official receipt) Government only had $920 left and available to spend on pay, goods, and services.

Fast forward to this year, July 2011. You or the business that you work for pay Government $1,000 in Payroll Tax and again you get a Government receipt for $1,000.

Government then ‘clips off’ ten cents from every dollar, and used those ten cents to service National Debt. So your paid-in $1,000 ends up now having $100 clipped off. This means that Government now only has $900 left and available to spend on pay, goods, and services.

Heading the wrong way

Clearly, very clearly, this ‘clipping’ process is heading the wrong way. In fact, by July 2012, with fresh borrowing still required and after being brought to book, the ‘clip’ will be more than twelve cents. If the current Finance Minister remains at the helm, I believe it will go still higher in 2013; floating towards 15 cents.

Particularly galling and disturbing is that when the current Finance Minister took over from the Honourable Mr Eugene Cox, he was managing Bermuda’s national finances with a dollar clip of just one point two (1.2) cents. This meant that for every $1,000 paid in, Mr Cox clipped off just $12, leaving $988 left over and available to spend on pay, goods, and services.

And, under Mr Cox’s astute financial management, the clipping trend was heading quite the opposite way. It was trending down towards one cent and lower.

This rising trend; this visible, measurable, and undeniable upwards trend in the clip is confirmation that we have been led a into a classic debt trap.