We could fall off fiscal cliff

The first step in solving any problem is to accurately define the problem.  I hope this article accurately and clearly explains why Bermuda will run out of cash in 2016 (within three years!) without a drastic change in the annual budget process — how much money government collects and spends each year. In my opinion the cash concern is a critical problem. It is not a partisan political problem. It is a Bermuda problem!

The chart gives a numerical summary of the problem, assuming that the annual deficit can be reduced by 15% each year:

The chart shows that if government reduces the annual deficit by 15% per year, (which will not be easy), Bermuda will need to borrow more money before March 31, 2016 in order to pay its expenses.  If the deficit can be reduced by more than 15% per year, government can delay borrowing until after March 31, 2016 but it will still have to borrow more money before March 31, 2017. At that time, Bermuda will be able to borrow a maximum of $200m based on the current $2.5bn debt ceiling. If we borrow more money however, interest costs will be higher than the current debt and our ability to repay will become more difficult since debt would approximate 50% of GDP.  There may also be a ratings downgrade for Bermuda.

My rationale

Bermuda’s budget deficit in 2013(14) is $332m and government will borrow $800m in 2013.  Based on the recently announced salary agreement with the unions, next year’s deficit - 2014(15) - will be at least $21m lower than the current deficit, which equals the estimated 4.6% savings on salaries.  This translates to approximately 6.3% of the overall deficit in 2013(14) - $21m divide $332m = 6.3%.  I then arbitrarily added 8.7% to arrive at the 15% annual target for deficit reduction that I used in my example.

Whilst the overall target of 15% is arbitrary, I think it is reasonable because the impact is to reduce government spending by $50m in 2014(15) and a further $42.5m in 2015(16).  This reduction must come from either government salaries, government services or equipment purchases since the debt payments are fixed and cannot be eliminated.

It can be shown mathematically that the only way to avoid the above scenario without an increase in revenue would be to have an annual reduction in expenses of at least $45m in the next 2 budget years.  A balanced budget would then be required for 2016(17), representing a one off reduction of $221m!  The deadline for a balanced budget could be extended to the 2017(18) budget year if government can cut annual expenditure by $75m.

A review of the most recent budget shows that at least 50% of government expenditure relates to salaries.  Therefore, half of any savings must come from salaries – over and above the recently negotiated agreement!!

Conclusion

There are other factors including increases in revenues, KEMH funding requirements, debt service for the $800m borrowing, declining GDP etc. that will impact any final decisions that are made but the overall message is clear.  Some will dismiss the government’s cash challenges as either a ‘PLP problem since they left such a large debt’.  Others may say ‘it is an OBA problem since they are the current government.’  Both sentiments indicate ignorance about the seriousness of the problem.

Despite the tone of this article, it is not a doomsday call. I hope I have accurately defined the problem for everyone and caused them to think about how they can help to solve it. We can fix the problem together but there are no easy answers. The time to act is now.

I plan to expand on these ideas and propose a model for finding a solution in future articles. I await the recommendations of the SAGE Commission as a first step. 

Writing here in a personal capacity, Anthony Richardson is a former Accountant General with more than 20 years’ experience in accounting. He is also an Alderman on the Corporation of St George and a former PLP candidate in constituency 12, Devonshire South Central.

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