Gov't might have to slash personnel costs by 25%

WEDNESDAY, JANUARY 23: New Finance Minister Bob Richards has confirmed my strategic overview of Bermuda’s national finances.

Government spending is trending downwards. It will continue to trend down during Bob Richard’s first stint as Finance Minister.

But that is just the opener. In his first ministerial presentation, the new Finance Minister unveiled an ugly monster.  

Finance Minister Bob Richards reported that Government’s personnel costs were 46.8 per cent of Government expenditure. That is the monster.

The new Finance Minister said: “The total revenue raised… for fiscal 2011/12 was approximately $914.2 million… Current expenses for fiscal 2011/12 were $1.246 billion…”

$583 million is 46.8 per cent of $1,246 million. This $583 million in personnel costs should be added to the $96 million required for 2011/12’s Debt Service Costs [DSC]. The combination is $679 million.

That $679 million in personnel + DSC comes out of Government’s revenue of $914 million. In 2011/12 that left only $235 million for “everything else”.  

But Government spent a lot more than $235 million on “everything else”. In 2011/12 Government borrowed and spent a total $567 million on “everything else”. 

For eight consecutive years, since 2004, the previous regime had been borrowing-to-spend on “everything else”. That process caused DSC to keep climbing.

From 1968 until 2004, the combination of Personnel Costs and Debt Service Costs had always been kept below fifty per cent of total Government revenue.

This meant that more than $0.50 out of every revenue dollar went back out on Government services.

That changed. Between 2004 and 2012, the percentage spent on personnel and debt rocketed to seventy-four percent. By 2012, only $0.26 was going back out on Government services.

Between 1968 and 2003, Government did not borrow-to-spend. In 2003, Government ran a small surplus. For the first time, in 2004, Government borrowed two cents out of every dollar that it was spending.

Between 2004 and 2012, that borrowing-to-spend rocketed up from two cents to twenty-six cents. That’s right! By 2012, out of every $1.00 that Government spent, Government was borrowing $0.26.

Even with Bob Richards and the OBA in charge, even with reduced spending, the momentum of eight consecutive years of financial mismanagement still forces Bob to borrow $0.18 out of every $1.00 that will be spent in order to finish off Financial Year [2012/13].  

Consider the monster revealing numbers in the chart below left.

Solution? Can’t cut DSC. But DSC must stop rising. Still must spend on “everything else” like police, prisons, road maintenance, etc… However it is done, Government’s exceptionally high personnel costs must come down. DSC must stop rising.

Government’s monster problem is its $583 million in personnel costs. Savings made from personnel cost cuts must go straight to operational costs, materials, and services. And even here, savings must be made.

Hairpin turn

The problem is as obvious as a car running too fast down a hill with a hairpin turn at the bottom. Hit brakes. Slow down. Get control. Braking means cutting costs. The only major cost that can be cut is personnel cost.

How big a cut? Already three years too far downhill, start thinking about a 25 per cent cut in overall personnel costs. That takes out $140 million. Transfer that $140 million to services etc…  Simultaneously cut back on the need to borrow-to-spend $140 million in this ninth year of this eight year long borrow-to-spend spiral.

Look into next year, 2013/14. With Bob forced to borrow at least another $175 million, in 2013/14, DSC will climb at least another $15 million to reach $130 million.

Without cuts in and for 2013/14, the combination will increase to $713 million [$583m personnel costs (after restoring PSSF payments) + $115m as DSC for 2012/13 and beyond + $15m DSC added for 2013/14 and beyond].

In Bermuda’s still declining economy, this new Government cannot defy economics and raise taxes to push Government’s actual 2013/14 revenue materially past $900 million.

In 2010/11, in Bermuda’s declining economy, unwisely, the previous Government tried a tax increase. The predictable and powerful negative consequence hit Bermuda’s economy in 2011/12. It still affects Bermuda in 2013.   

Until Bermuda’s economy grows and creates new and additional real tax revenue, the brakes will have to go on and stay on. It’s hit brakes or hit the wall!

Cut personnel costs.

(*) All ‘Government’ personnel received an average 1.5% pay increase in August 2011.

(**) The $880m revenue is the Minister’s projection for 2012/13.

(***) The apparent pay reduction is a result of the one-time non-payment into the Public Service Superannuation Fund (PSSF).