Gov’t spending must fall for Bob’s plan to work

Minister Bob Richard decided to go for one big loan now and spread it over the next three years. So he is attacking the Bermuda Government’s financial predicament with a plan that can work. I hope it does work.

The strategic plan and best outcome is displayed in the chart. At this stage, don’t sweat picky details of $1 million here and $2 million there.  We’re dealing with — for Bermuda — gargantuan numbers and a million or two difference here and there doesn’t materially affect the big picture. 

However, this is a democracy. If you’d prefer to delve into detail, then go ahead. But you’ll go without me. 

The best way to explain Bob’s plan is to work through the numbers as shown on the chart above.

First, the basic assumption is that Bob will take up the whole $800 million in this calendar year.  That simply makes good sense.

The first impact will be to take the total Debt owed and on which interest must be paid up to ($1,469 +$64 + $800) $2,333 million. Assuming an average interest rate of 5.9%, that will mean an annual interest only cost of $138 million.  At this stage, don’t sweat the biggest number. Until 2018, its size is not important.   

The second impact is that between now and 2017, Government will not make any cash contributions to the Sinking Fund – and Bob has told us that. So Government will ‘save’ about $58 million a year; and it will earn some small amount of interest.

The consequence of the two impacts is that between now and March 2017, Bob has effectively fixed or controlled Government’s annual Debt Service Costs [DSC] at about $138 million. 

But remember that KEMH hospital project that is not costing us any money now? That comes on stream on 1st April 2014. That is when Bermuda will begin paying for that ‘free’ build. According to ex-Minister Zane DeSilva, the initial annual and on-going payment for that Public Private Partnership will be $27 million a year. This $27 million will act exactly the same as the interest costs for that $2,333 million of Public Debt. So let’s call it Quasi-Debt [QD]. 

So Bob’s real annual bill for paying for ‘borrowings’ will be $138 million on DSC + $27 million on KEMH QD = $165 million a year on DSC + QD.

So until March 2017, that $165 million is the annual ‘butcher’s bill’. That $165 million comes off before Government spends anything on ‘free day care’, Post Office subsidy, Personnel Costs, etc…

The result of the arithmetic combining of those facts is set out in the line of figures that tabulate the NET SPENDING by Government. This net spending is the total amount spent IN BERMUDA on Bermudians and services to Bermudians.  That $165 million of DSC is money that scoots overseas and does not stay here long enough to grow GDP. In fact, that $165 million acts the way a big leak in a bucket acts.

On the chart, look at the bottom line that tabulates GDP. Up to 2013, GDP numbers are as reported. For 2014, and in line with statements already made by Minister Bob, GDP is not expected to grow. Between 2015 and 2018, the chart optimistically projects some small growth in GDP. The chart reflects this by showing a 10% improvement, relative to 2013. That’s anaemic growth. Not healthy growth. But it is growth. 


Click to view full-size image.

Revenue

Now look at the top line where Government Revenue is shown. The figures up to 2013 are as reported. For 2014 to 2018, the Revenue is predicated on GDP.  The reality is that Government can only extract taxes from the ‘GDP bucket’. If the GDP bucket is emptying — which is what has been happening since 2008 — then Government must extract less or BORROW more. Everybody knows what’s been happening between 2008 and 2012. That’s right! Government was borrowing!

GDP is expected to flat-line. This creates a consequential flat-lining in all Government revenues. Government’s revenue prospects going forward are as shown in the tabulated figures. These are conservative — not pie-in-the-sky — projections.

Now the most important lines of all. These are Government overall spending and consequential net spending. These lines shows the outcomes of arithmetic additions and subtractions. The net spending line shows that Government’s NET SPENDING will and must decline.

That is the arithmetic outcome of Minister Bob Richard’s big borrow decision. This decision results in a sound and workable plan. That plan however, will work itself out within the unchangeable laws of arithmetic.

As shown by the lines on the chart graphic, a series of good financial decisions can result in ‘closing the gap’. The chart shows that the gap can be closed by March 2017, but only if spending is reduced — OR — revenue, thus GDP, rises by over ten per cent a year — every year — starting June 2013 – right now!

In Part Two I’ll explain some important details and issues that will help you see, as clearly as possible, what can and cannot be done between now and March 2017; and what is more or most likely to happen – in the real world, not the world of political rhetoric.