The financial ‘bullet’ is coming

It’s almost bullet time. 

On Friday, Finance Minister Bob Richards will announce the first real Budget that this still-new Government has produced.

Minister ‘Bob’ will use a couple of thousand words to tell us that he will cut spending and Bob may introduce a “three-year Budget”.

Despite the Budget’s spin, noise, and twists, you really only need four numbers. Once you’ve got those four, you can ignore the political clap-trap and see fact and truth.

First number — Revenue 

This is an absolute number. No add-ons, takeaways, or adjustments. It’s critically important that you get this number and compare it to prior years.  Here are the figures for prior years:

• 2011/12 — Revenue forecast was $940m. Actual (real) revenue was $914.2m.

• 2012/13 — Revenue forecast was $909.6m. Actual (real) revenue said to be $877m (*).

• 2013/14 — Revenue forecast was $871.2m. Actual (real) revenue said to be $???m.

• 2014/15 — Revenue forecast is $???m. Projected revenue will likely be $???m.

Look at the Revenue trend. See the reality. Consider GDP and the viability of Bob’s revenue projection for 2014/15.

Second number — Total Planned Expenditure

Do NOT strangle yourself with the text book stuff about Capital and Current.

For laymen, the ultimate difference is as important as between manure and excrement. Get the two numbers. Add them together. You get Total Planned Expenditure.

In 2014/15, there will be no payments to the Sinking Fund.  But Total Planned Expenditure includes Total Debt Service Costs. For 2014/15, Total Debt Service Costs must include:

• Interest on the $2,374 million [$2.374bn] Public Debt that Government has in known Bank  Overdrafts and Senior Notes.

• [MUST also include] the annual carrying cost that, in 2010, was agreed to be paid when the KEMHPPP (public private partnership) was handed over to Government. This should be around $27m. You must look for this number. If the Budget is presented with the clarity and honesty that I hope it is, this number should not be shrouded in gobbledegook.

Take Revenue and subtract Total Planned Expenditure. This produces the third number.

Third number — The          Planned Overspend.

Government Accountants dislike the word Overspend. But that is the most honest description of what actually happens.

The difference between Revenue and Total Planned Expenditure is the Overspend — if the number is negative. (If positive it is an Underspend!) Past Overspends look like this:

• 2011/12 — Revenue $914.2m – Expenditure $1,142.9m = actual Overspend of -$228.7m.

• 2012/13(*) — Revenue $877m — Expenditure $1,119.0m  = estimated Overspend of -$242m.

• 2013/14 — Revenue $871m (estimated) — (planned) Expenditure $1,202m = Planned Overspend of -$331m.

• 2014/15 — Revenue $???m – Planned  Expenditure $????m = Overspend of $???m.

Finally — the “Bullet”

The “Bullet” is the difference between the NET Total Planned Expenditure of 2013/14 (last year’s Budget) and the NET Total Planned Expenditure of 2014/15 (this year’s Budget). This number tells you the real truth about how much Bob is actually “cutting” spending on Personnel, Operations, and Services.

2013/14’s Total Planned Expenditure was $1,202m. But about $125m had to be used to feed the Elephant.

So only a part reached Bermudians. Roughly, this is what was supposed to happen with that spending. The final audited accounts for 2013/14 will show us what actually happened:

• Total Planned Expenditure [Personnel/Operations/Services/Debt] $1,202m.

• Less Total Debt Service Costs (Interest only) for 2013/14:     $125m Government’s NET Spending in Bermuda for all of 2013/14 $1,077m.

With a ten per cent spending cut, “Bob’s” numbers for 2014/15 might work out like this:

• Total Planned Expenditure [Personnel/Operations/Services/Debt] (ten per cent cut?)     $1,082m (?).

• Less Total Debt Service Costs (Interest only) for 2014/15: $149m Government’s NET Spending in Bermuda for all of 2014/15 $933m

Once you’ve done those two subtractions, one more calculation reveals the “Bullet” — the “Net Spending” on Personnel, Operations, Services.

Comparing the two sets of number shows you how deep the cuts really are. This will help you understand what can happen to you (and your household and friends and business and job …) in the next year.

Here’s the calculation (you will need to insert the real numbers for 2014/15):

• 2013/14 - Government’s NET Spending in Bermuda for all of 2013/14 $1,077m

• 2014/15 - Government’s NET Spending in Bermuda for all of 2014/15       $ 933m

Real cut in spending on Personnel/Operations/Services – The “Bullet”           $144m

[That Elephant is greedy. At a real 13.3 per cent, the NET cut shown is much bigger than the ‘official’ 10 per cent cut. The full impact of Bob’s ‘official’ cut will be larger than anticipated.]

This Middle School stuff cuts through the spin and excrement that accompanies every annual Budget.

It shoots straight to the truth. If the Budget is a ‘three year Budget’, you simply do the same Middle School arithmetic for each year.

If you have learned anything at all since April 2004, it should be that you cannot and must not place implicit faith in all Government numbers and statements. So sharpen your pencils, clear your ears, charge your calculators. Ready or not, that “Bullet” is coming. n

[* Note:  On February 10, 2014, the Financial Statements for the Consolidated Fund for YE March 31, 2013, had still not been ‘signed-off’. This is the latest ever ‘sign-off’. It is four months after the September 30, 2013 audit completion deadline, and ten months after year-end. Where I have not inserted numbers, it is because those Budget numbers are not yet known.]