Analysis: What Story The Budget Numbers Show

[Opinion column written by Larry Burchall]

In the furore over the Budget, no one took a clinical and dispassionate look at the numbers to see exactly what story the numbers tell. I’ve done that. Here’s the full backstory and it is all in the numbers.

Financial Management: Financial control

There are severe long-running problems within Government’s financial management team. This shows up:

• The half-year November 2014 ‘report to the nation’ indicated that revenues were tracking on line to come in around the $900m mark; following a Budget projection of $901.7m. This did not happen.
• Revenues are now estimated to come in around $876m for a $26m undershoot. For a $900m a year operation, this is a major and undesirable variance.
• That Revenue undershoot joins up with a Spending overshoot. Spending was projected to be $1,169m. It looks like it will be $7m higher at $1,176m.
• Undershoot and overshoot combine to give a $33m gap that pushes 2014/15’s planned and projected deficit higher, going from $267m to $300m ($299,912,000).

This indicates that Government’s overall financial management can be a lot tighter. This is an internal management issue. It is a primary factor in the big step-up in the deficit. The consequence of this management fault is the perceived need to borrow even more than previously projected.

Financial reporting.

Tight control over spending combined with fast accurate reporting of revenue enables any senior financial management team to monitor week-to-week and month-to-month movements. The Government of Bermuda has been handling funds, in its own right, since 1620. So there should be almost four centuries of experience to draw on.

Government’s annual Financial Statements of the Consolidated Fund [FSCF] are supposed to be ready for dissemination by September 30th of every year. Thus the 2013/14 FSCF should have been ready by September 30th 2014. As of this day, those Statements have not been ‘tabled’ in the House of Assembly.

The 2012/13 FSCF were not ‘tabled’ until March 2014. The FSCF for 2011/12 were not ‘tabled’ until November 2012. Those for 2010/11 were not ‘tabled’ until February 2012. The last four FSCF have been between two and six months late.

All the financial managers in the pantheon of financial managers within the Government of Bermuda are persons with intelligence, university degrees, professional certifications, and experience in their financial specialities. There are no $45,000 a year people running the Ministry of Finance.

This persistent lateness of financial statements indicates and confirms long running problems with Government’s senior financial management team and the team’s professional output.

Political Will: 2015/16 Budget

Following the Budget 2014/15 projection of deficits of $182m for 2015/16 and $120m for 2016/17; the Minister for Finance has announced that these have now been revised. For 2015/16, it’s $38m upwards to $220m. For 2016/17, it’s $31m upwards to $151m. And there is a new deficit of $127m for 2017/18.

Everybody understands that deficits must be reduced, and reduced fast. Instead, we learned that deficits will increase. We learned that between now and March 2017, we are likely to see an additional and above forecast $100m poured ‘down the deficit drain’. This is exactly opposite to the desperate need to cut spending.

That is a serious political and financial management flaw. It is this combined flaw that leads to the perceived ‘need’ to go back to the lending trough and borrow again before 31st March 2016.

The Minister forecasts fresh and additional gross overseas borrowings of $151m in 2016/17 and $127m in 2017/18.

Total forecast borrowing by March 2018? A whopping $403m [$125m in 2015/16; $151m in 2016/17; and $127m in 2017/18]. That $403m, after paying off the $90m due in 2016, will push the Gross Debt higher to reach $2.498bn by 1st April 2018; and this is shown in the Budget Statement.

In the process of going back to the markets for an added $403m, like Barbados, Bermuda will suffer Credit Ratings downgrades. At a highly likely 7.5% Interest rate + 2.5% Sinking Fund contribution, this borrowed $403m can ADD a minimum total of $40m a year to the current $169.9m Nanci. The annual cost of that added Debt will take total Nanci to $207m less the $7.5m ‘saved’ on the $90m paid down on the two Senior Notes due in 2016. Nanci will end up hitting $199.5m in 2016.

Time bought. Time lost.

In December 2013, the Minister for Finance flew through heavy political flak, raised the Debt ceiling, and borrowed that $800m. In so doing, he actually bought about 40 months of time. That $800m could have and, as he said in mid-2013, was intended to cover all the Financial Years 2013/14, 2014/15, 2015/16, and 2016/17. All it required was applied political will joining up with tight financial management.

So far, that joining up has not happened.

Instead, the Minister says that he must go back to the lending trough by March 2016 to borrow an ominously portentous $125m. He says he needs to do this in order to plug the financial holes and gaps that opened up in the twelve months between final $800m loan take-up in December 2013 and final Budget preparation phase in January 2015.

These holes had opened up primarily because of background issues with financial management and political will.

Action

The tactical logic of borrowing that $125m by March 2016 is dwarfed by the strategic fact that the Rating Agencies will commence kicking Bermuda to the curb as soon as that first new loan request is made. The 2015 Rating Agency action will be completely justified by their pre-knowledge – as publicly forecast in this Budget Statement – that Bermuda intends to and, resulting from by weak political will and inadequate financial management, Bermuda will be forced to come back for more. Downgrading is inevitable.

Downgrading means a rise in the general rates of interest demanded by lenders who will be ‘covering their increased risks’.

This planned ‘too early’ application has been precipitated by weak financial management combining with weak political will. Somewhere, somehow, someone must understand that, and do something about that.

Do not borrow. Do Not Borrow. Do Not Borrow.

Immediate Action

End this 2015/16 Budget Debate by introducing a tiny amendment to the Minister’s ‘warrant’. Have that ‘warrant’ run only until September 30th 2015. Have a new and second Budget ‘debate’ so as to release the second half of the funds for the remaining six months of FY 2015/16.

Scrub the plans to borrow that additional money.

Use those six months to traverse this tiny 13,000 acre 60,000 person coral atoll to explain to all Bermudians just what it is that they face.

Bermudians deserve that chance. Bermudians do not deserve the series of kicks in the stomach that will start coming, when, not if, WHEN Bermuda gets a sharp downgrade, or series of downgrades.

Minister, have the courage to break with precedent and buy that last fragment of time.

I do not believe that my fellow Bermudians are stupid. I believe in my fellow Bermudians.

- Larry Burchall

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