Government debt: $500,000 per day problem
Imagine what the Bermuda Government could do with half a million dollars — every single day. It’s a relevant question as we approach the General Election as this is the amount the island spends to service its huge debt.
The estimated $186 million in interest payments and money set aside to pay down principal later on, exceeds spending on the Bermuda Government’s largest ministry, Health and Seniors, by a full $23 million.
And it amounts to about $75 a week for each registered voter.
The impact the $2.4 billion net debt has in limiting what the Government can do should make it a major issue for voters.
It restricts what the rival parties can promise in the ongoing campaign — or to be more accurate, it will put tight limits on what they would be able to do in reality, once in office.
Voters would therefore be wise to eye with suspicion promised major capital projects or expensive new initiatives that come without price tags or specified means of funding.
Bermuda’s net debt was just $277 million in March 2008. In the nine years since, it has grown almost ninefold.
During the campaign, there will inevitably be much discussion of who is to blame for the island’s indebted plight, as voters consider who is best equipped to tame the debt beast.
What is clear from the numbers is that debt growth has slowed in recent years.
The March 2008 to March 2017 period included five Progressive Labour Party budgets, which resulted in net debt growth of an average $272 million per year, while the four OBA budgets have seen the debt grow by $230 million per year.
In percentage terms, the PLP’s five budgets grew the net debt by an average 41 per cent per year, while the OBA’s four budgets grew the net debt by an average 13 per cent annually.
There are multiple reasons why public debt might rise more steeply in a given period than another. Bermuda’s economy was in recession between 2009 and 2014, a situation that put government revenues under pressure as the tax base contracted, while increasing the need to spend on social programmes and economic stimulus.
Then there is the effect that a growing debt itself has on year-to-year finances of a growing debt burden. Each year the government posts a deficit, the debt grows and so do debt-servicing costs for the following year, making it progressively more difficult to balance the budget.
As an example of how fast this burden can snowball, in the fiscal year 2005-06 the Bermuda Government spent just $10.5 million on interest payments — just eight years later when the OBA announced its first Budget, the figure was ten times more than that.
Further exacerbating the problem is that the government is obliged to pay 2.5 per cent of net debt into the Sinking Fund each year to help pay down debt. And the greater the debt is, the higher that amount will be too.
The late Larry Burchall, in his repeated warnings on the island’s fiscal deterioration, called it Nanci the Spider — the voracious creature gobbling its way through public money as a direct consequence of government spending beyond its means for a prolonged period, leading to a spiralling debt problem getting out of control.
And in order to fairly compare the different administrations’ fiscal performance, the debt-service headwind — or Nanci’s ever-growing appetite — should be factored in.
In the 2008-09 Budget, the PLP had a fiscal headwind of $27.6 million — $18.2 million in interest, plus a $9.4 million payment into the Sinking Fund. From then until the last PLP Budget in 2012-13, the average impact of debt servicing on the deficit was $54.2 million per year, as the government forked out a total of $271 million over five years. This does not tell the full story however, as in 2009-10 and 2012-13, the PLP Government made interest payments out of the Sinking Fund, effectively deferring Nanci’s impact on the deficit.
The OBA inherited net debt of about $1.47 billion and in its first Budget, debt-servicing costs were close to $147 million. In their five years, if projections for the current fiscal year are included, the OBA’s average yearly debt-service headwind has been $168 million, with the government paying out a staggering five-year total of $842 million in interest and Sinking Fund payments over five years.
The statistics make clear that the OBA inherited an extremely challenging fiscal situation complete with ministry-sized debt-servicing costs. But the rate of increase of the debt has slowed significantly during their tenure.
Whoever wins the election will have to wear the same debt-servicing straitjacket, as only when the Bermuda Government can stop posting budget deficits will Nanci’s appetite stop growing. And further discipline will be necessary for years to come to actually start paying off the huge debt.
Both parties say they want to balance the budget within short order, with a mixture of spending cuts, revenue increases and economic growth.
History has shown that taming Nanci will be easier said than done.
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