Debt millstone that keeps getting heavier
In the third of a five-part series examining the impact of the ageing of Bermuda’s population, we look at government finances.
Bermuda’s burgeoning national debt is the millstone that impacts not just today’s generation of taxpayers, but will also affect future generations.
Total public debt is expected to rise to $2.465 billion at the end of the current fiscal year, according to Government’s Pre-Budget Report, released last week. Bermuda’s national debt has increased by $1.98 billion since 2009.
The annual interest cost of servicing that debt is $124 million, which means that 11.4 cents of every dollar that Government takes in goes to paying interest on the debt.
Government’s burdensome financial commitments must be met at a time when Bermuda’s population demographics are shifting, as outlined in the recently-released report, Bermuda’s Population Projections, 2016-2026.
The report reveals that, based on current projections, by 2026 the island’s population will decline by 111 people — and will have the highest rate of senior-aged residents in Bermuda’s history. By 2026 one in four of us will be 65 years of age or older. One in nine of us will be 75 or older; the median age will be 49.
Unless the mandatory retirement age is extended, that means fewer working people making payroll tax contributions, and more people receiving money from the pension pot, at a time when the island’s pension funds are already vastly underfunded. The ageing population is expected to result in greater demand for healthcare, leading to spiralling healthcare costs unless measures are taken to address the way that medical care is delivered in Bermuda.
In the context of assessing risks that could create a severe financial crisis, the island’s Financial Fiscal Responsibility panel was clear.
“Of greatest concern is the certainty of the island’s shrinking workforce and rapidly ageing population,” it wrote in a report released in November. “This will put ever-increasing pressure on both taxes and spending. On present trends, Bermuda is heading for a downward spiral of demographic and economic decline.
“The high level of government debt, unfunded pension liabilities and other contingent liabilities leave the island extremely vulnerable. Deficit and debt reduction must therefore remain a high priority.
“We regret the Government’s decision in the 2018 budget to delay achieving budget balance by a further year to 2020-21.
“This target must now be met, as well as the longer-term targets of reducing debt and debt service, respectively, to 80 per cent and 10 per cent of revenues.
“And this fiscal action needs to be complemented with policies to reinvigorate economic growth, including through a decisive change in immigration practices and policies.”
Bermuda, the panel wrote in its 2017 report and repeated in 2018, is also vulnerable to outside forces. “Any shock that has a significant negative impact on Bermuda’s economy could trigger a fiscal and financial crisis,” it wrote. “Improving fiscal resilience by pursuing fiscal balance and debt reduction therefore should remain an overriding priority.”
Thankfully, the news is not all bad.
The panel notes that GDP grew by 2.5 per cent in 2017, largely driven by activity related to the America’s Cup. The economy, the panel wrote, is broadly on track with tax revenues broadly tracking budget plans. Moreover, real growth has averaged about 1 per cent. The panel said that, while that appears plausible as an estimate of Bermuda’s growth prospects for the medium term, “over the longer term ... demographic pressures will dampen Bermuda’s sustainable rate of growth, absent substantial structural reforms. This in turn will have consequences for fiscal sustainability.”
Still, the panel wrote, “this reasonably stable short-term picture should make the ongoing task of restoring Bermuda’s public finances to sustainability easier, both economically and politically”.
Fiscal year 2017-18 saw continued progress, the panel wrote, with revenues substantially exceeding budget projections, a significant undershoot of planned spending and some savings on debt interest as interest rates remained low resulting in an overall deficit of some $67 million, or half the target.
“It seems likely that a significant proportion of this better than expected performance was due to one-off factors,” the panel wrote, including a one-off contribution holiday to the Bermuda Hospitals Board of $25 million.
“Nevertheless,” the panel wrote, “this is clearly very encouraging. Performance this year on spending and taxes appears to be running close to plans. The Auditor-General’s office has also noted that government departments have improved their performance in terms of staying within their expenditure limits.” The better than expected out-turn, the panel wrote, meant that the current balance (current revenues minus current spending and interest payments, but excluding capital spending) “was positive for the first time since the crisis”.
Even after taking account of capital expenditure, the deficit (before payments to the Sinking Fund) was “only about $5 million, so net debt was almost flat. Since nominal GDP rose, the debt/GDP ratio fell, again for the first time since the crisis, as did the debt/revenue ratio. These are major milestones.
“However, going forward, progress looks to be considerably slower than planned. In last year’s report, we noted that the government planned to achieve overall no addition to net debt in 2018-19. In fact, the published 2018 Budget foresees a deficit of $25 million ($90 million on the government’s preferred definition, after contributions to the Sinking Fund). There is a similar shortfall, relative to last year’s plans, in 2019-20 with the year for achieving balance on the Government’s definition postponed (again) by a further year.”
Still, the panel wrote: “Bermuda does not face a fiscal emergency — with debt/GDP and debt/revenue ratios now beginning to move in the right direction, there is no immediate prospect of a debt spiral. But ... there are significant risks, many wholly or largely outside its control, and it would not be sensible for government to proceed simply on the basis that they may not materialise.”
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