Finance Minister Paula Cox will deliver what is without question the most important Budget of her tenure on Friday.

In doing so, it is vital that she levels with the people of Bermuda that the Island is facing the worst economic situation since the Great Depression. Bermuda's gross domestic product is now expected to drop by 2.5 percent in 2009, a much deeper fall than the one to 1.5 percent drop projected in the last Budget.

Government said that last summer 1,700 Bermudians were looking for work, which would put the unemployment rate at 4.5 percent. The likelihood is that the unemployment figure is much higher by now.

Retail sales were lower in 2009 than in 2008 – the first year over year decline since the early 1990s. Company incorporations are at historic lows. The balance of payments surplus is narrowing. Almost all economic indicators are pointing in the wrong direction.

Government recorded a current account Budget deficit for the first time in decades in the 2008-2009 financial year, and will almost certainly record a wider deficit for 2009-10. As for the projections for the upcoming financial year, it is hard to be optimistic, and would be wrong in any event. The question now is how to manage Bermuda through this crisis and to enable it to emerge from the recession in a stronger position.

Budgets have dual roles. They can set the direction for the Island's economy, using the tools that Government has at its disposal such as taxation, regulation, spending on capital projects and providing a safety net for those people caught out in the recession.

The narrow function is to manage the Government's own books by ensuring that enough money comes in to meet what needs to go out.

These two functions are intertwined. Spend too much in the good years, and Government risks overheating the economy. Taxing too much in bad years to make up for revenue shortfalls can make the recession worse than it already is. It is clear that increases in taxation now will damage the economy when individuals and businesses are already struggling to survive. Indeed, a case can be made for tax breaks, especially on Customs duty and payroll tax, to make the Island more competitive and to encourage employment and business activity. At the same time, as the construction industry moves from boom to bust, now would be the time for some public capital projects to be starting.

But such moves need to be made within the overall framework of the budget. If surpluses are not available to carry a Government through the bad times – and they are not as they were spent in the good times – then this can only be accomplished by borrowing which would lead to putting a burden on future generations and creates its own problems.

Government needs to tighten its own belt. As the recent Audit Report has shown, there is plenty of waste to be cut. And while government is reluctant to cut jobs in a recession, it must put in place and enforce a rigorous hiring freeze as a means of cutting costs. At the same time, Bermuda needs to be sure that those Bermudians who need help get it, and that money is spent on generating business for the Island. This includes aggressively marketing Bermuda as a business and tourism centre while doing everything possible in Bermuda to deliver the services offered to visitors and international companies in an efficient and friendly way.

Ms Cox faces an unenviable task, although some of the problems are of her Government's own making. She needs to deliver a Budget that is both realistic and lays the groundwork for recovery. She needs to show leadership.