Opinion: Bermuda’s Financial Double-Cross
[Opinion column written by Larry Burchall]
As simply as possible, but still honestly and factually, here is the full story behind Government’s day-to-day money management.
- First – Government Revenue – The Finance Minister hopes to take in $901.7m from all sources in FY 2014/15. That’s in the Budget Statement.
- Second – Priority Payments – In accordance with the Government policy referred to in various agreements with lenders, the Minister makes twice-yearly priority interest payments to foreign lenders and also sets aside funds in the Sinking Fund. These are Government’s priority Non Negotiable Costs = NNC = NANCI. The 2014/15 Budget Statement puts Nanci at $161.2m a year.
- Third – The Balance – After paying Nanci [$901.7m less $161.2m], the Minister only has $740.5m left to spend on Personnel, Operations, and Services. That’s arithmetic.
- However, the Government wants to spend $1,007.8m on Personnel, Operations, and Services. So the Minister needs $267.3m more dollars. Therefore the Minister must borrow to make up the difference. This difference is called the Deficit [See point 6]
- So the Minister borrows $106.1m in new borrowing.
- The Minister also borrows an additional $161.2m in new borrowing. But haven’t we seen $161.2m before? [See point 2. It’s the double-borrow.] Together $106.1m + $161.2m = $267.3m. That’s the Deficit [See point 4]
A minority seem to think this double-borrowing is ‘bleddy fullish’. They’re right. It is. It has been going on, with steady increases in this crazy double-borrowing, since 2004.
In 2004, the double-borrow was $11.4m. But with Tax Revenue at $782.5m, the double-borrow was 1.5% of Revenue. That was hardly noticeable.
In 2010, on Tax Revenue of $996.7m, the double-borrow hit $84.6m. At 8.5% of Revenue, this had a massive impact. This double-borrow of 8.5% of Revenue in 2010 tipped Bermuda into today’s Debt trap with massive out-of-control Debt.
Just four years after tip-over year 2010, in 2014, Bermuda is double-borrowing $161.2m. That double-borrow is now 18% of Revenue [$901.7m]. Twice what it was in 2010! Twelve times what it was in 2004!
Now, vicious cuts of 25% and higher are needed to stop this high double-borrowing process which, left unchecked, will go to 20% of Revenue, then 25% of Revenue, then 30% of Revenue. Once through the 20% level, Bermuda can expect an unavoidable national economic implosion.
No one, no one at all, will be spared in that implosion.
This double-borrowing must be pushed back under 10% of Revenue, heading back towards 1.5%.
An obvious fact.
Of every $100 spent by Government, $27 is borrowed. It happens this way:
- Government spends $1,007.8m. [See point 4, above]
- But Government only puts in $740.5m [See point 3, above]
- So $267.3m [the ‘Deficit’] has to be borrowed. [See points 4 and 6, above]
- So the $100 that Government actually spends is made up like this:
- $73 out of that $100 comes from Government’s Tax Revenue [$740.5m, point 3]
- $27 out of that $100 comes from borrowed funds [$267.3m, points 4 and 6. (Broken down even further, $16 out of this $27 comes from the double-borrowing).]
A Civil Servant on pay grade PS47 receives $179,573 annual salary. So $131,088 [$73 out of every $100] comes from Tax Revenue, while $48,485 [$27 out of every $100] comes from borrowed funds.
When Government graciously ‘gives’ $1,000 in Financial Assistance; $730 comes from Tax Revenue, $270 from borrowed funds.
When a GP car gets $10 worth of gas, $7.30 is from Tax Revenue, $2.70 from borrowed funds.
This current pattern and volume of day-to-day spending is leading to financial disaster. If Bermuda is to avoid an economic implosion, some very deep cuts – $27 cuts [27% cuts] – will have to be made.
Government’s projected 5% cut in $1,007.8m of planned spending amounts to $50.4m. But hundreds of millions of dollars [$267.3m] must be saved. That $50.4m of possible savings is far too little, far too late.
In 2014, a large number of Bermudians seem to be floating around in ‘Cloud Cuckoo Land’, self-blinded to these obvious and simple facts. They seem to believe that a beautiful longtail, carrying billions of US dollars, will suddenly appear and save us.
Bermuda’s real solution? First, fully understand Bermuda’s national economic problem. Then agree and implement viable fixes.
The first and primary fix? Grow GDP! How? Grow R—-p!
Meanwhile, continue priority feeding Nanci his current $441,644 a day.
- Larry Burchall
Larry Burchall is right. AGAIN!!!!!!
He keeps saying the same thing over and over as easy as pablum….we are broke.
But don’t worry, we are Bermudians.
We can ride out any hurricane and we can survive any war.
We can cruise and go to brunch and buy fancy cars because we byes know that money does grow on trees .
Even my 3 year old knows that paper comes from trees and money is paper hence….money grows on trees.
We are broke and jokes aside we need to implement the things that will make us “unbroke”.
This story is an over simplification of the situation because it took multi year spending to reach this level of debt and it will take multi year savings to reverse it. The Government has proposed 5% savings in the next year and that is reasonable. The suggestion that we have to save 27% in one year is not realistic at all.
But at some point the spending will have to be less than revenues, or the debt will never be paid. The longer we leave it, the greater the debt will be, and the longer it will take to pay off.
In 7 years the PLP managed to land us with a problem that will take decades to rectify.
I totally agree with Mr. Larry Burchalls recommendations. I believe it is time for the Opposition to face reality and stop b/s’ing. Bermuda is damn near dire straights and in need of more foreign $ to help regain its reputation as a “safe haven”.
I want to commend you Mr. Larry Burchall for making this so simple that even an elementary school child can see the only possible way out of the rut we are all facing
I think slashing salaries is the only option. PS47 was ok back in the day when tax revs where skyrocketing. Its crazy to pay some PS levels in this economy.
Thanks for hiring a bunch of public employees that are not needed and take 40+ sick days a year! Brilliant!
ooh Hush, go to a firing range if you want to shoot at things.
Chris Famous, BIU, BPSU, are you comprehending?!
“In 2014, a large number of Bermudians seem to be floating around in ‘Cloud Cuckoo Land’, self-blinded to these obvious and simple facts. They seem to believe that a beautiful longtail, carrying billions of US dollars, will suddenly appear and save us.”
So true and yet so sad that emotions trump facts for some. But without riling up emotions a certain Party would have nothing to leverage on as facts don’t bode well for their record or their current arguments. Good luck BDA.
Increase taxes on Bermudians in particular but increase taxes on other things as well. Leave the rich international companies alone – they can’t afford to pay more.
The solution is not getting rid of people. I would much rather have a job and pay more taxes than to not have a job at all.
Bob is not the guy. He is too draconian and uncreative.
*In 2014, a large number of Bermudians seem to be floating around in ‘Cloud Cuckoo Land’, self-blinded to these obvious and simple facts. They seem to believe that a beautiful longtail, carrying billions of US dollars, will suddenly appear and save us.*
This statement , and many others.
How many people here will be offended ? How many will feel like they’re being talked to in a condescending and arrogant manner ?
How many will attack Larry like they do Bob ?
Hardly anyone that posts on this forum attacks Bob or the OBA. 90% of people write negative rants about the PLP for just about everything under the sun.
All Larry did was state facts. He’s just another reporter in my eyes. Anybody could have wrote that article with the right figures.
There are ways to cut the yearly deficit. It means we Bermudians will have to keep making sacrifices. The government will have to strategically increase taxes and and decrease expenses. We don’t really have other options. I don’t think IB will save us.
Larry is not an elected member of parliament.. Not saying he is free to say what he likes, but Bob is certainly held to a different expectation. Bob is very smart, but with all that intelligence, he is very aloof and couldn’t fathom why the gathering at Pier 6 was so angry with him.. Many of those people are upset with some of the government policies, but the real anger in that particular instance was driven by Bob’s arrogant and condescending manner of communication since he has been in office (IMHO).. People can tolerate a bad situation, we are human, but when you add insult and disrespect to a hurting people, you get a hott mess.. My question is that why is Bob with all his intelligence, so out of touch with the community that he can’t see this???
Maybe a family member or somebody close to him can tell him to tone it down a bit.. I think he is very competent, and may have the skills necessary to help us to get out of this situation, but he needs to improve his communication skills if he wants the entire country to buy into his policies.. Take a leaf out of Premier Dunkley’s book, he is a master at making people feel like their concerns are being heard.. (Good Politician if nothing else)
Yeah Paula was so much better. She lied her face off but did it so politely you just never noticed the wool being pulled over your eyes.
Well said Larry. Now we just need to wake up.
So basically, we are borrowing money to pay interest on debt (most likely semi annual bonds) or more accurately money that has been borrowed, hence the double-borrow term… That is akin to borrowing money to pay your mortgage payments. Interesting.. My thing is that when you consider inflation, the Personnel, Operations etc will increase each year, thus you will have to continue to cut expenses each year, which is why exploring new ways to earn revenue is so crucial.
What is going to happen when the bond matures? How are we going to pay that large lump sum, or are we going to refinance (negotiate a new bond or something similar)
Yep. Borrow again. Hopefully at the same rate..
@ Impressive
If debt payments are the priority and paid first, it cannot be true that government borrows money to pay its debt. The borrowed money is to pay for government services. A minor point perhaps but we should remain technically accurate in our comments.
Mr. Burchall is correct, however, the 5% targeted savings for 2015 is not sufficient ‘to get the job done’.
Point Taken (Vote For Me) as like you say technically you are correct,, as we are not sure how each dollar of that borrowed portion to cover the deficit is being used, however if expenses somehow happen to go over budget and increase the deficit even more, I am sure my technical error would be even less significant as their might become a situation (heaven forbid) that the government has to borrow to pay interest at a particular due date
“So the Minister borrows $106.1m in new borrowing.
The Minister also borrows an additional $161.2m in new borrowing”
This is technically incorrect. The Minister completes the borrowing in one step. There is no double borrowing.
Try as he may, Mr. Burchall seems unable to write about financial matters in a straight forward manner. Very similar to one of our Ministers who seems unable to explain financial matters in an understandable manner.
The government will have to raise taxes and cut the fat. There is no other way out of the debt issue.
When taxes go up the cost of doing business goes up .So does the cost of living , which in case you haven’t already noticed , is sky high .
Thus , we become even less attractive to overseas investors than we already are . That coupled with any chance of the PLP getting back in.
The only way out is to grow the economy , somehow . At the same time reducing our expectations of the high life that we’ve had for so long.
Toodle-oo the economy isn’t growing. This isn’t the late 90′s and early 2000′s. The government of the day still needs to address the debt issue before things get really bad.
Taxes can be provisioned in a way to limit the adverse effects whilst still increasing revenue. The bottom line is government will have to operate more like a business. There’s no other way around the issue. There’s no magic bullet to stimulate the economy in Bermuda. IB unfortunately isn’t the savior. There’s a lot of global competition. Investors don’t have to come to Bermuda and changing government policies isn’t the magic bullet.
The economy isn’t growing but it isn’t shrinking like it was. Unfortunately the previous government put us in a deep long-term recession. But if we can get out of it the tax base will grow.
That was one very confusing post , and I’ve seen many here but it appears you directed it at me , so here goes.
Where did you pick up on my initial post that I thought the economy was growing ? That’s why I said it must be grown . And soon.
I’m quite aware this isn’t the late 90′s , etc , when the economic train was still operating at full (leftover UBP induced) speed. Where did you get the impression of that too ?
If taxes are in any way raised to try and help the debt situation just wait and see what the trickle down effect will be.
How hard is it to understand that ?
But you are right about one thing. There is no magic bullet. And we’re all going to have to tighten our belts a whole lot more and get used to a far less luxurious standard of living without all the frills.
Ask me or anyone else who’s lost their jobs in the last few years . People who have made REAL sacrifice , not the token 4.6% cut of gov’t workers.
Paula Cox tried increasing taxes. It just led to thousands of people leaving the island, so the following year she had to reduce taxes back to where they were originally.
The way to resolve it is to increase the size of the economy. Encourage people to come here, businesses to come here, and tourists to come here. The economy will increase in size, and tax revenues will increase. At the same time, reduce spending. Stop spending money on things, services and public employees we don’t need.
ya right: That’s the proverbial bottom-line. Sad yes, but true
Ireland have austerity measures in place to address their financial misdeeds, the latest being no more government sponsored (free water) services, everybody now pays! Free government services are no longer Free! It may be time to hand the reins over to the UK FCO……why should the OBA be made out as the bad guys? We got the government we asked for and voted for in 1998 and again and again….we mandated the spending…now its time to pay up and we’re all in denial? If I were Bob I’ll let an FCO financial wizard sort out the mess we’re in…instead of being pelted with verbal abuse.
The problem is much worse than most might imagine because Bermuda’s Government has borrowed a hard currency (US dollars) but mostly spends a soft currency (Bermuda dollars). Sooner than you may imagine, the Bermuda dollar will have to be massively devalued, which although not an impossible problem for some, will cause a very significant drop in living standards for many.
Why dnt we peg our currency to the yuan or renminbi…or one of those ME dinars….Do we have that much latitude…Why not use a portion of revenues for hedge fund trading in financial instruments. Thats the real economic engine of the world economy. Goods and services are but an apertif in the face of that juggernauting behemoth.
Yeah, why don’t we peg our dollar to the Zimbabwe Dollar then we could all be billionaires. We could use our new billions to invest in Playboy Bunnies, Beyonce concerts and Faith based tourism. Ooops, we used real money for those didn’t we.
We could still invest in magic longtails though right?
I’m going to go out on a limb and guess you are not an economist.
Yeah like Iceland did. What could possibly go wrong?
If we choose very harsh austerity measures we will only create more social unrest and this will make it harder to attract foreign investment. And companies will leave if they dont feel safe here so we must strike a balance and we must not do any thing to make matters in the short term.
Sadly poor old Larry always forget that Revenue can easily be raised in this country by taxing the rich….lets impose a three year wealth tax like FRANCE- and tax the rich i.e. the Tuckers Town, Fairylands, Point Shares, Grape Bay etc – please read the following:- http://france.angloinfo.com/money/general-taxes/wealth-tax/
Like Paula Cox tried? It was the final nail in the coffin of the economy. She ended up having to roll it back the next year.
The Laffer Curve in action.
Paula Cox was so far out of her depth she did not call the election when there was no OBA, she called it after they were formed and she went on to lose her seat. Increased the deb, lost the electiont and lost her seat. Sign of a genius????
Here you are, ‘The Real Truth’ offers proof of Einsteins statement that “Two things are infinite: the universe and human stupidity; and I’m not sure about the universe.”
The Real Truth. I assume from your post that you are joking right? No one with any concept of how our economy works would have suggested that. If it was in fact a joke, the my sincerest apologies and yes, I did chuckle
Tax the rich as suggested above and get ready to see them leave. They leave every where you start to look at their wealth. We are stuck so we have to just pull up our socks an sacrifice and cut. To begin with we have too many schools.
STARING BERMUDA in the face….. TOURISM OPPORTUNITIES that POLITICIANS continue to DENY or BLOCK…..
I was just speaking to NELSON HUNT this morning lamenting this very dire situation that perpetuates its own quagmire because of the political gridlock that exists in Bermuda. It is really starting to PISS ME OFF and a whole of other people out there.
Cannot believe Bermuda is hanging all its hopes on the AMERICA”s CUP….. or so it would seem…… LETS get this island cracking…….Gombeys dancing in the streets this fall may entertain the few that come here…..BUT what about the BIG picture…..that turns investors on and that sees new hotels built here……. You mean to tell me that the GHOST TOWN – St. Georges – is gonna get a developer to build a hotel down there without a casino ????? DREAM ON,
PINK WEDDINGS would immediately draw business to Bermuda….Churches need NOT be involved…… We are still SINKING economically and yet I see nothing NEW…..
We have said NO to GAMING, NO to Marijuana, NO to same sex marriage, NO to Beach Bars, NO to car rentals.
We bust cruise ship cabins with sniffer dogs……
We have just been slammed by TWO hurricanes…..
People are bi***ing about getting slate for their roofs….
On the positive side:
YES, BELCO/PARKS/REGIMENT/CABLEVISION/TELCO/LANDSCAPERS plus THE PEOPLE were great.
Bermudians come together when challenged !
We are still beautiful
BUT……and there is one BIG A** BUT
Why is there such great aversion to taxing the rich Family Man—-I thought this was about shared sacrifice——funny how people want to squeeze every penny out of the have nots yet allow the filthy rich to escape with everything—-To whom much is given much is required…..lets do the common sense thing and get the money from the people who hoard, sorry have it…
So, you don’t want people to come here and employ people then?
Got it.
It is simple. The rich have options. Tax them and they’ll leave to other places that are climbing over eachother saying “rich people please come here with your wealth. We’ll welcome you with open arms!”
And you’ll be sending messages to other rich people saying “Come to Bermuda and we’ll go after your wealth”.
You can take from the people who are property rich but that won’t get us out of this mess. Increase property taxes will hurt housing market. Increase property taxes on property over a certain value won’t give generate $267m/year.
Taking from the rich and giving to the poor sounds nice but doesn’t quite work in a capitalist society.
Because THE ONES THE RICH PEOPLE THAT ARE HERE WILL LEAVE AND NEW ONES WON’T COME HERE TO INVEST THEIR MONEY AND OPEN NEW BUSINESSES THAT EMPLOY BERMUDIANS. For the love of God man, read and reread that sentence until you get it otherwise you’d better hone your farming skills because your going to need them.
The Big Boys have to throw more into the pot……
I have spoken to some, who would not be averse to paying more !
But remember, we have created a TAX environment that is friendly to International Business, so it is important to keep that advantage. But on the personal side, I think people making incomes over $ 250k, should pay more and those over $ 1 million, more than that !!
The Finance Minister needs to look at that.
Had Bermuda instituted a Lottery, Internet Gaming, Resort Gaming – 20 years ago – we would have had hundreds of millions and possibly 2/3 billion ion extra revenue. AH, But the politicians couldn’t do it….. the blamed the churhes – or that was their excuse….. SAD really.
Yah..i could see how taxing those making over 250k would be useful. Afterall, the populace as a whole are socially contracted to pay down that debt so those who are wealthier should pay more for the national debt..
It is so easy to suggest what should be done with other people’s money. Have you considered that those that are making such sums of money most likely received next to nothing from its expense when the labour government was handing out unsustainable freebies. And now you’d like them to shell out their hard earned dollars to correct the mismanagement of that previous administration.
An administration who has not shown any evidence of remorse for the situation that they have put this island in since they were relegated to administering the opposition. One who has fought against streamlining and restructuring the bloated and grossly inefficient civil service they created while administering the government.
The private sector can not afford the bloat and inefficiency of the civil service. The numbers are no longer there. The civil service needs to start creating value for money while reducing its cost. This will save this island. Taxing the efficient to accommodate the inefficient is a recipe for disaster.
Ride
Didn’t Paula sign a tax agreement that is valid until 2023 saying there would be no new taxes???
Taxing financial services companies wouldn’t work. Hamilton would look like a ghost town in a month. The airport, hospital, and other infrastructure would close because you wouldn’t have enough travellers, patients, etc. justify or pay for the costs. Healthcare would implode. Everyone with an alternate passport would be gone and those that remained would be farmers and fishermen.
I suspect you’re refering to the Exempt Companies Act which says that exempt companies (i.e., IB) will not be subject to any sort of profits tax. The Act and that guarantee has been around for a very long time but it was due to expire and Paula extended the expiry date to 2035.
But that doesn’t say there will be “no new taxes”, only that International Business won’t be subject to any sort of tax on their profits.
If you remember she tried increasing payroll tax and, instead of generating more revenue, it resulted in jobs leaving the island (they still haven’t come back) and revenue actually fell.