Simply put — we don’t have enough revenue

It’s like a chess game.  BKt to K5. Hieroglyphics to the unknowing. Plain language to chess players.

Same with Minister Bob’s July move.  ND$1,574bn to ND$2,324bn. It’s code or plain.

Just for fun, and to help you, I’ll decode it and explain the secret.

ND$1,574bn means National Debt was $1.574bn (that’s $1,574,000,000).  The second figure means that National Debt grew to $2.324bn (that’s $2,324,000,000).

Taking that first figure of $1.574bn, here’s some key information. The average rate of annual interest on that whole $1.574bn was 5.9%.  That meant that the annual interest cost, at that 5.9%, was $92,866,000.

Bob makes his July move and borrows $0.75bn (that’s $750,000,000) and National Debt zooms up to $2.324bn. Ugh! But because Bob gets a lower rate of interest (he got 4.854% on that $0.75bn) the average rate of annual interest DROPPED. It fell from 5.9% to 5.19%.

That means that the new annual interest cost, at that 5.19%, was $120,615,000.

This is $28m higher. However, it is lower than it might have been if the average rate of interest had stayed at 5.9% or had gone higher. [Annual cost would have been $137m or more…]

Smart move. Shake the man’s hand the next time that you see him.

But Bob also did something else. By making the big borrow and planning to use the funds as he says he will, he has also fixed – stabilized – annual Interest costs. He has changed that from a steadily rising variable, into a constant – at least until April 2017.

Translation? In each of 2014/15, 2015/16, 2016/17, the annual interest cost on this new Debt figure should remain at this new $120.6m.

The challenge

Bob’s challenge? How to make Government spending reach a closer match with Government revenue. Over the past six years (2008/09 to 2013/14), Government took in or expects to take in $5.524bn. However, in that same period, Government has spent or expects to spend – actually overspend - $7.029bn. [Sadly, over that time and out of that total spending, about $425m went on DSC.]

Bob’s promise to match spending with revenue – “balance the budget”- means that between now and April 2017  – at the latest – he will do just that.

Given that Government revenue is tied to GDP; given that GDP is currently stuck at $5.5bn; given that the most that Bob can suck out of the GDP honeypot is stuck around $900m a year; it looks as if in the three years between 2014/15 and 2016/17, Bob will get not more than $3.0bn (that’s $3,000,000,000) maximum in total revenue.

Bob’s promise

If Bob keeps his promise, that means that between now April 2017, Bob will spend not more than $3.0bn. Take out the known constant of $363m on Interest, that leaves $2.64bn ($2,637,000,000) total left for spending on Personnel, Operations, and Services.

Spread that over three years and in round figures, you get $880m a year available for spending – after paying $120.6m a year in Debt Interest costs.

So an average $880m a year available for spending in each of 2014/15, 2015/16, 2016/17. But remember that between 2008/09 and 2013/14, that same annual spending [total spend less Debt Service] averaged $1,100m a year.

In other words the pattern of spending – AFTER Debt Service – was $1,100m a year from 2008 to 2013. Now the pattern of spending between 2014 and 2017 has to become $880m a year.

All of this is simple Middle School M1 mathematics. I hope you understand it. If you don’t, what else can I do?

Take the test

Four questions for you.  Note that these questions are at the standard of the old ‘Eleven Plus’ exams.

A – (i) Bob has already made a maximum $30m cut in spending on Personnel. Does Bob have to cut Personnel costs even more between now and April 2017? [60 pts]

B – Between 2014/15 and 2016/17 inclusive, how much revenue is required to enable Bob to spend an average $1,100m a year on Personnel, Operations, and Services? [40 pts]

Bonus questions worth a total of 50 points.                                             

C – If Personnel costs should be around or not more than 50% of total spending, what should the maximum Personnel costs be if Bob’s average spend is $880m a year? [20 pts]

D – If Personnel costs have averaged $550m annually from 2008 to 2013, what percentage must be cut from that $550m in order to get to the number that you calculated in Question C? [30 pts]