Gov’t needs to slash its wage bill by 15%

If you think that you are not good with numbers, that’s okay. Those penalty shots are still coming. The difference?  The numerate guy or gal can see those fast moving balls. 

But let’s work through what is really a simple problem with large numbers. Please keep referring to the chart as we work through Bermuda’s unique problem.

ONE – Revenue – $871m is the Government’s revenue projection for 2013/14. The remaining revenue figures assume the modest year-on-year increases shown. These year-on-year increases are based on the Minister’s assessment that GDP [i.e. total economic activity] will remain flat through 2013 and 2014. Between July 2013 (now) and March 31st 2017, I’m assuming a total growth in revenue [and in GDP] around nine percent. More would be much, much, better. [And see Crossbar - Revenue.]

TWO – Spending on DSC + KEMH/QD.  Debt Service Cost [DSC] was forecast at $134.3m in 2013/14. Because of the planned $800m borrow, DSC will be stabilized around $138m – until the year that more money is borrowed. The $800m will take the total Debt to $2,333. The current average interest rate on the $1,533m now owed is 5.9%.  DSC for the higher $2,333 is also calculated at 5.9%. Between 2014 and 2016 there will be no contributions to the Sinking Fund. So DSC will consist of 5.9% Interest payments only.

The KEMH PPP completes April 1st 2014. Government must then start paying. From April 1st 2014, the Quasi-Debt [QD] will be around $27m. So $27m of QD + $138m of DSC = $165m of DSC+QD.

THREE – Spending on Personnel in 2013/14 is more than in 2012/13 because the Pension contribution was restored in 2013/14. So $583m should be the full cost for 2013/14. The chart shows the effect, in 2014/15 of the TUC’s proposed 5% one-time pay cut. 

The Minister has promised a balanced budget in five years (by April 2018). To achieve that, there must be at least TWO MORE CONSECUTIVE years of ADDITIONAL 5% personnel cost cuts as well as more cuts in Operational spending. The line of figures demonstrates why these cost cuts must continue. 

FOUR – What is not spent on DSC+QD and Personnel is left over for Operations. That’s stuff like Financial Assistance; school textbooks; Post Office; maintaining the airport, roads, buildings; fuel for vehicles; travel; etc… . The chart shows that spending on Operations must and will decline.

Spending must fall

FIVE – Total Spending [that’s the annual “Budget”] is the result of adding DSC+QD plus Personnel plus Operations. This total spending must and will decline.

SIX – That $800m?  Between take-up and March 31st 2017, that $800m gets gobbled up in paying DSC+QD and covering the gap between Revenue and Spending – the “deficit”. From 1st April 2017, Government must operate with balanced Budgets or go big-time ‘borrowing’ again – and everything that’s bad now will get immeasurably worse. The numbers in this line show how difficult it will be to get to a “balanced” budget.

SEVEN – The Future. Understanding the figures in the first four columns, apply the same reasoning and facts to the next three columns. You’ll see that DSC+QD, Personnel Costs, and Operations will all remain flat, but only until 2018. In 2019, Government must repay $180m because two Senior Notes are due in May and November 2019. Since Government won’t have any money in a Sinking Fund, Government will either repay that $180m out of current income or it will roll it over. 

‘Roll over’ will undoubtedly result in higher interest costs.  Currently at 5.93% ($80m) and 7.38% ($100m), this $180m is already expensive. So a DSC+QD increase is projected for 2019/20. 

Like goalposts, Government’s problem has three sides. 

Crossbar – Revenue. With flat or falling GDP, Government cannot unilaterally increase Revenue as it tried and failed to do in 2010/11. However, Government Revenue must still rise above $1,000,000,000 ($1bn). Since Government Revenue is limited by GDP, a $1.0bn tax take-up means GDP must get over the $6.0bn level. In July 2013, GDP is around $5.3bn, so GDP needs to increase by 13%.

Left upright – DSC+QD. This Debt expense is absolutely unavoidable. Increases in DSC+QD damage the economy. The numbers in the chart show where this unavoidable expense is heading.

Right upright – Personnel Costs. This is the primary controllable expense. It must be cut to where it is sustainable. The chart shows where this cost has to go.

Referee’s whistle? Personnel Costs need to be cut, and cut immediately, by at least 15%. However, a 20% cut gives a better outcome. This need for a total 15% to 20% cut is just one of the penalties for eight years of ‘own goals’ – eight years of national financial mis-management.

Everything depends on REVENUE! That is the only ball stopper. n