The gulf between reality and what we're told

WEDNESDAY, SEPT. 12: ‘Why Leaders Lie’ was initially published in 2011 by Oxford University Press. The author is John Mearsheimer, the R Wendell Harrison Professor of Political Science at the prestigious University of Chicago.

The book’s cover describes it as “...the first systematic analysis of lying at the highest levels”. The cover goes on: “.... (it) explains the different consequences that result from lying.” And continues: “Leaders more frequently lie to their own publics and democratic leaders like our own do it more frequently than dictators...”

It is an interesting and enlightening read.

But I have digressed. I have no intention of writing about lying leaders. I’m really writing about a Bermudian matter of differing evidence and of results that do not match promises.

Target

On 12th December 2011, as recorded on page 11 of her Ministerial Statement, the Seventh Minister for Finance spoke to Bermuda’s Parliament: “Mr Speaker, it should be pointed out that with the projected reduction in both current and capital spending, the Government will still seek to meet its stated target of a $150 million dollar reduction in current & capital spending as compared to last fiscal year.”

In layman’s language, Government will seek to cut spending by $150 million dollars when comparing 2011/12 with 2010/11.

What really happened? Comparing the two years, the Ministry of Finance’s own figures show this reality:

• Spending in 2010/11 — reported in the audited figures — $1,242.7m

• Spending in 2011/12 — reported in the June Bond Prospectus — $1,137.4m

• Difference between FY 2011/11 and 2011/12 — ($105.3m) Not $150m.

It is clear that the real $105m in cuts was markedly different from the promised $150m in cuts. As different as 7 is from 10.

The $150m in cuts was described and promised in mid-December 2011 when the end of the 2011/12 FY was just 109 days away.

In any well-managed financial operation, one would expect that any financial forecast made in the third quarter, when the FY is 75 per cent past, would be quite close to the 109 days away end-of-year reality.

On page 9 of that same Ministerial Statement, the Seventh Minister for Finance told the House: “...Ministry of Finance estimates that revenue for the current fiscal year will be between $920 and $930 million.”

Layman’s language? The Seventh Minister for Finance was projecting total revenue of $920 to $930 million. This projection was $10 million to $20 million lower than the $940 million of revenue put forward in the February 2011 Budget.

Did that $920m to $930m happen? No! Revenue for 2011/12 came in at a radically lower $870 million. A whopping $70 million under the Budget figure and $50 to $60 million under the revenue range forecast at the nine-month point.

Miscalculation

For financial managers who are three quarters into a FY, that is a huge miscalculation.

Something else. In her February 2012 Budget, the Seventh Minister for Finance projected revenue of $909.6 million for 2012/13. But that won’t happen.

First — Budget projections were that $10 million would come from the sale of some of Government’s surplus real estate assets (e.g. the old Police Station...). But with over 600,000 square feet of empty office space in Hamilton; hundreds of thousands more at BLDC at Southside; the still unsold British-American building on the corner of Front and King Streets; White’s Warwick supermarket site soon coming on to the market; etc, etc...; Government will never realize $10 million in asset sales before or by 31st March, 2013. So scratch $10 million of projected revenue.

Second — the combination of Payroll Tax ($312m) and Customs Duty ($200m) receipts account for 56 percent of the $909.6 million revenue projected. The Ministry of Finance has already reported that Payroll Tax receipts are down.

Importation slowing

It is known that the importation of all goods is still slowing. An overall 5 per cent reduction in these two components means an overall drop of $25 million in combined receipts. Scratch another $25 million.

Six months into FY 2012/13, a far better estimate for total Government revenue in 2012/13 is something between $875 and $885 million. However, with lower revenue in other areas, it could easily be below $875 million.

I started with a digression on ‘Why Leaders Lie’.  Do I think that the Seventh Minister for Finance and the Ministry of Finance have been lying to us? Heavens, no! Not at all!

But I do find some huge and critically important differences in national financial management realities. Do you find the same? How does one explain these differences? How?