No one said Finance Minister Paula Cox was going to have an easy time of this year's Budget.

A weakening economy that was sure to lead to a drop in estimated tax revenues combined with increased demand for social services is a murderous combination for any Finance Minister.

What's worrying, though, is that the bad times have barely begun for Bermuda.

In fact, Government's financial position is worse than many people may have thought, and it would seem that Ms Cox has chosen to break two of the "golden rules" of Bermuda Government budgeting to avoid making drastic cuts in spending or raising taxes.

She has also decided to literally raid Government's piggy bank to make the numbers work.

Golden rule number one for Government is "Thou shall not run a deficit on your current account". But Government did just that in this financial year – as a projected $23 million surplus turned into a $6.3 million deficit. In effect, that meant that Government had to borrow money to pay the bulk of the $20.3 million interest it owed.

Golden Rule number two is "Thy borrowing shall not exceed 10 percent of gross domestic product (now around $6 billion)". But Ms Cox plans to do just that in the coming financial year as borrowing balloons to $682 million. And she also wants to increase the statutory borrowing limit to $1 billion, way above 10 percent of GDP, although she says this a temporary measure required only to satisfy foreign countries concerned about a possible systemic failure in an economic sector, as has occurred in other countries.

However, Bermuda's strong current account position and 10 percent rule are two of the reasons that the Island's debt rating has been so stellar until now. It might not be after this Budget, and that could result in higher interest costs.

Ms Cox is projecting a current account surplus for next year, but the margin is razor thin at $2.7 million. And it is only a surplus because Ms Cox is raiding the "piggy bank", or in this case "Sinking Fund".

Instead of paying interest on Government's debt, estimated at a record $29.7 million, out of current revenue, it is being paid out of the Sinking Fund, set up by then Finance Minister Dr. David Saul in 1993 as a long term fund to be used only to pay off the principal – not the interest – on Bermuda's debt. In addition, payments into the Sinking Fund have been deferred this year. That sum, at 2.5 percent of debt outstanding, should have been around $15 million, which along with $29.7 million in interest, would have resulted in a $42 million current account deficit in the coming year.

Using the Sinking Fund in this way is a bit like taking money out of your child's college fund to pay the mortgage and leaving an IOU. Ms Cox is gambling that the economy will recover in 2010, enabling her to repay those sums and still run a current account surplus. That's a hefty bet.

However, the alternative was to either raise taxes or to dramatically cut spending.

Neither are easy choices. Ms Cox was rightly concerned that raising taxes now would hamper any economic recovery and there is even an argument for using tax cuts to stimulate the economy and to reduce the Island's costs.

Having said that, raising "sin taxes" on tobacco and alcohol (where demand is relatively inelastic) would have gained Government at least some additional revenue, and it could certainly use it.

Cutting spending is also unappetising. Ms Cox had asked Ministers – with the exception of "helping departments" – to look for 10.5 percent in cuts. Some obliged, but overall, Government current account spending is expected to rise by some $10 million, and the public service will see a net gain of 90 jobs. While some Government spending will indeed stimulate the economy, it is hard to believe that more savings could not be found, although Government's decision not to sacrifice jobs will have hampered cost cutting efforts.

What is most worrying of all is Government's projections on revenue for next year.

It is a little dangerous to compare gross domestic product figures for a calendar year with revenue estimates for a financial year which runs from April to March, but it is suitable for a rough comparison.

Government estimates that the economy grew at between two and 2.5 percent in 2008, but tax revenue fell $20 million short of estimates in the 2008-9 financial year. Now, with the economy expected to contract by one to 1.5 percent in 2009, Government expects tax revenue to be flat in 2009-10; barring a strong recovery in late 2009 and early 2010, that just doesn't add up.