To His Honour the Speaker and Members of the Honourable House of Assembly: Mr.

Speaker, I am pleased to present to this Honourable House the United Bermuda Party reply to the 2001 2 Budget Statement.

In approximately six weeks time, at the end of fiscal year 2000 1, the Progressive Labour Party Government will have spent in excess of $ 1 billion since they were elected.

In their first budget, the PLP Government spent heavily, but they used Bermuda's booming economy and the hefty cash surplus inherited from the UBP Government to cover their spending increases without imposing new taxes.

Last year, the PLP Government spent heavily again. The second time around, however, they were forced to raise land and payroll taxes to make ends meet.

And this year, with record-setting expenditure at four times the growth rate of Bermuda's economy, the `people's' Government not only raised the `people's' taxes but also added $50 million to the `people's' debt.

In defense of such undisciplined spending, the Minister of Finance has claimed that the cooling US economy will negatively impact Bermuda's continued growth; under such circumstances, he said, the PLP Government must spend heavily to stimulate Bermuda's economy.

On the other hand, he said that Bermuda's `relatively buoyant' economy would continue to grow at a healthy 2.7 percent. Unfortunately, he can't spin it both ways. Why would a `relatively buoyant' economy need stimulation? His contradictory defence is little more than an excuse for out-of-control spending, an inability to prioritise, inflationary taxation and risky debt accumulation.

Unfortunately, after three budgets, we have learned that increased spending from the PLP Government has become par for the course. Their method of problem solving has become clear. If tourism numbers are dismal, spend more money on road shows and send the Regiment band and the Gombeys to Davos.

If Ministers don't get the respect they deserve, spend more money on bigger cars. If crime and drugs seem out of control, wait two years, and then spend more money. If Bermuda needs new fast ferries, new police stations, a new magistrate's court, a new school, a new adolescent residential care facility, new aquarium offices and new government offices, by all means, borrow the money and build them, build all of them, all at the same time.

Mr. Speaker, How much longer can Bermuda afford this throw-money-at-it PLP Government? Today, many Bermudians are hard pressed to say exactly what has been achieved by all this spending.

What has happened to the tax review and duty-free promises for retail? Where have all the tourists gone? What has happened to the money spent on developing Morgan's Point? What has happened to the $180,000 designated in last year's Budget for a senior centre? Why has it taken so long to get the drugs court up and running? What has happened to the `long-awaited' halfway house? What has happened to the quick fix on housing? What has happened to delivering on recommendations from the Oughton and Arthur Anderson reports that could have saved millions in healthcare costs? We suggest that the PLP Government's spending levels have exceeded their ability to deliver on their promises. Their inability to make the machinery of government work effectively was confirmed by their UK consultants in the leaked civil service review, which revealed problems with micromanagement and unwarranted interference with the civil service.

In many cases, PLP Government programs were not well planned, and they brought unexpected and unwanted results. When Government reduced the student-teacher ratio in primary classes, it promptly ran out of teachers, resulting in expensive, last-minute recruiting in the UK, which is experiencing its own teacher shortages.

Last year's senior-citizen exemption from the land-tax increase was insufficient to protect those on fixed incomes from a punishing financial burden. And setting the cap on payroll taxes for international businesses too high in last year's budget resulted in an irritated business community, an unpredicted surplus of revenue and an embarrassing resetting of the cap downward this year.

In addition, the PLP has put political business ahead of the people's business. Changing voter registration was first up. After considerable debate in the House, one funeral parlour now offers limousine service. Most recently, a poorly communicated and poorly thought-out push for Constitutional change has drained time and effort from other initiatives.

Last year the Minister of Finance concluded the second PLP Budget with a warning. He said, `This is the real world and someone has to pay.' The United Bermuda Party knew that the people would pay and pay dearly, and the people will continue to pay as long as the PLP Government holds the purse strings.

And will the people get their money's worth? For clues, let's highlight some spending initiatives that were buried in the Budget.

The PLP Government has allocated $495,000 for 24-hour Regiment guards to protect the people's Premier from the people.

$150,000 will pay the salary of a communications consultant in the Cabinet Office, whose function, we presume, is to put the sunshine back into public scrutiny. This position is in addition to the communications staff in Government Information Services.

The Government travel budget will rise 48 percent to $4.4 million. That's a lot of frequent flyer miles.

The civil service will add 98 people to its ranks in the coming fiscal year, bringing the total increase in civil servants to 211 since the PLP Government was elected.

The $50 million increase in debt will cost the taxpayer an additional $2 million in interest this year alone.

Mr. Speaker. Where, oh, where is a scissor man when you need him? External Economic Considerations Mr. Speaker. In any discussion of the Bermuda economy we must focus particularly on the US economy, to which our fortunes are so closely linked for tourism and international business.

The external economic background, against which this 2001 2 Budget must be considered, has changed dramatically in 12 months. Just one year ago, the US economy had broken the record for the longest expansionary period in US history.

In December 1999, the US Conference Board Consumer Confidence Index reached the highest level in its 32 years of existence, suggesting that American consumers were very optimistic about their economic prospects. GDP growth had exceeded four percent over the previous two years. The unemployment rate was at a 30-year low.

Twelve months later, the US economy is sliding downward, possibly into its first recession in ten years. At the end of January, the Conference Board Consumer Confidence Index plunged to its lowest level since December 1996. The 20 percent drop exceeded the 15.5 percent decline that preceded the last US recession in 1990-91.

Many US jobs were lost in the second half of 2000, as a collapse in technology stocks led to downsizing in many Internet startups. This stream of job-loss announcements has accelerated in 2001, with even traditional companies reacting to falling demand and restructuring pressures.

In January, US industrial production fell for the fourth straight month, leaving manufacturing output at its lowest level in nearly ten years.

The rate of US GDP growth slowed from a five-year-high of 5.6 percent in the 2nd quarter of 2000 to 1.4 percent in the fourth quarter. According to Federal Reserve Chairman Alan Greenspan, GDP is `probably very close to zero' in the first quarter of 2001.

Whether or not the rate of US economic growth turns negative over the next few months, it's clear the pattern has changed: The US has already entered a phase of significantly lower growth.

It remains to be seen whether consumer confidence continues to decline and whether aggressive intervention by the Federal Reserve and a promise of tax cuts by the new Republican administration will engineer a soft landing for the US economy.

During the long US expansion, companies and households accumulated debt backed by stocks and corporate paper. Recent corrections in the stock market could result in lower consumer and business spending due to losses and efforts to pay down debt. Obviously, this would have negative implications for Bermuda, given our dependence on US visitors and international companies.

Overview of the Bermuda Economy Mr. Speaker, Bermuda may be another world, but it's not immune to economic cycles. Given the openness of Bermuda's economy and sensitivity to economic change in the US, it is important for Government to heed the warning signs and trim its sails accordingly.

With the undisciplined spending in this budget, any appreciable slowdown in Government's revenue will mean additional borrowing and higher taxes to cover the shortfall.

Experience suggests that Bermuda's economy reflects changes in the US within six to nine months; consequently, we would not expect to see any impact from a US slowdown for some time. Nevertheless, there are already signs that our economy is beginning to cool, and these signs should not be ignored.

The value of `new construction projects started' in the first three quarters of 2000 declined $48 million from the same period in 1999.

Total spending by air visitors dropped by $21.3 million in the first three quarters of 2000 as compared with the same period in 1999. This was the first significant decline in air-visitor spending in three years.

The Retail Sales Index was generally depressed in 2000, particularly in the second half, suggesting a poor year for most stores.

Government revenues from customs duty, passenger tax, sale of land to non-Bermudians and stamp duty are all projected to fall short in fiscal 2000 1, according to the Budget Statement.

The Credit Association's bad-debt portfolio of individuals and companies almost doubled to $6 million in November 2000. It had remained relatively stable at $3.6 million in November 1998 and $3.7million in November 1999.

There has been a decline of 377 jobs in 2000 from 1999, according to preliminary results from the 2000 Employment Survey.

The balance of payments surplus on current account deteriorated by $31 million, or about 15 percent, over the first three quarters of 2000 compared with the same period in 1999.

Overview of Revenue and Expenditure for 2000 1 Mr. Speaker. You may recall that just prior to finalising last years' budget, there was a last-minute effort by the Ministry of Finance to impose a 5 percent across-the-board spending cut in all departments.

At the time we noted that while it was commendable to attempt to reduce current account expenditure, we wondered whether the last-minute reductions could be made to stick, given the experience with the PLP Government's 1999 0 Budget.

You will recall that the 1999 0 Budget was quickly followed by four supplementary expenditure requests.

To date, we have seen two supplementary requests for 2000 1, and it is now clear that some of the imposed reduction has snuck back in to the revised current account expenditure of $532.3 million, which represents an increase of 3.6 percent over the prior year.

Still, this increase demonstrates moderation over the first PLP budget, which posted an 8 percent increase.

Interestingly, in his justification of the 2000 1 expenditure, the Minister claims that the 37 percent of current account expenditure directed toward human service areas demonstrates the social focus of the PLP Government. He fails to mention, of course, that in 1998 9 the UBP Government also directed 37 percent of current account expenditure toward human service areas, without increasing taxation or debt.

On the capital side, the original budgeted figure of $90.5 million, an extraordinary 55 percent increase over the previous year, now looks to come in at a revised figure of $76.9 million.

Perhaps fortunately for the taxpayer, the PLP Government was unable to spend the money it budgeted due to slowness in moving capital projects ahead. A significant portion of the delayed spending was due to the new police and magistrates court building and the new Berkeley Institute lagging behind schedule.

Revised revenue projections for 2000 1 have exceeded original estimates by some $6.2 million, primarily due to the increased yield from payroll tax of some $11.2 million.

While good for Government coffers, the unexpected payroll tax differential came principally from physical presence exempted companies, which in some cases saw dramatic increases in their payroll tax burden.

In last year's Budget Statement, the Minister had indicated `the amount of tax actually paid by exempted companies under the tax proposals is estimated to change very little...' In fact, his miscalculation hit exempted companies hard.

Land tax, which has been hiked twice since the second PLP budget, now extracts an additional $9.5 million annually from taxpayers, an increase of some 36 percent since the last UBP Budget.

The UBP's response to the Budget will continue in Monday's Royal Gazette , Page 4