From Page 4 As important as it is to upgrade the physical facilities of Bermuda's educational system, funding must also be found for a number of additional capital projects in order to ensure that other equally pressing community needs are met and the country's infrastructure is maintained.A This Budget recognises these needs and provides an extra $22 million for capital development not tied to education. Included in this amount is $6.4 million to complete the mass burn incinerator.

Mr. Speaker, there is little doubt that Government's long-term capital programme will have to undergo a detailed review in light of the scheduled return of the US bases in late 1995. Acquisition by the Government of such a large inventory of buildings and other facilities will unquestionably put a strain on the Government's capital funds. Inevitably, priorities will need to be re-assessed in the next year or two in the light of these changing circumstances.

I have already pointed out that the Government has had to borrow to fund major capital projects such as the incinerator and the new prison, and that additional money will certainly have to be borrowed to fund the school development programme. The balance on current account, which in 1994 5 is expected to be $17.5 million after sinking fund contribution and debt serving costs, will again only be adequate to fund routine capital development and minor capital acquisitions, leaving major, one-off projects to be funded from borrowing.

As has been said on many occasions in the past, there is absolutely nothing wrong with a country engaging in prudent borrowing provided such borrowing is used for capital construction only. The operative word here is "prudent''. It must be stressed that borrowed money attracts interest and must be repaid: reckless borrowing can, and has, crippled many a country. The Government is determined to avoid the mistakes which have plagued so many other small countries.

Mr. Speaker, the single most important feature of Bermuda's economy which has enabled us to weather the recession as well as we did was the absence of any large scale national debt. Neither the legislated limit on Government borrowing, set at $185 million, nor the guideline which the Government has set for itself with respect to borrowing, namely that such borrowing, including guarantees, shall not exceed ten percent of GDP, will be breached by current or future planned borrowing.

The Ministry of Finance is currently holding discussions with a number of banks in an effort to determine how best to fund Government's major projects over the next seven to ten years. The success of the $20 million bond issue offered to the public by the Government in December, 1992, together with the current high level of Bermuda dollar liquidity, has led the Government to the conclusion that a further local bond issue of some BD$20 million should be offered to the public at an attractive rate in the coming financial year, as part of an overall borrowing strategy.

Details of Current Account Expenditure Projections Mr. Speaker, I now want to comment in more detail on the current account expenditure for the financial year 1994 5, which is projected to be $358.1 million.

The ten heads of expenditure with the largest current account budgets, in the coming year, ranked in descending order are: Department $m %* Department of Education 46.3 12.9 Hospitals 44.3 12.4 Ministry of Works and Engineering 41.1 11.5 Department of Tourism 29.2 8.2 Police Department 25.7 7.2 Accountant General 20.2 5.6 Department of Financial Assistance 15.0 4.2 Prisons and Senior Training Schools 11.2 3.1 Health Department 10.2 2.8 Department of Agriculture & Fisheries 9.1 2.5 *Percentage of total current account expenditure.

As already indicated, the current account expenditure estimates for the coming year are being heavily influenced by preparations which must be made for the return of the US bases. Reflecting this, a sum of $2 million has been provided within the Ministry of Finance to meet the initial exploratory investigations associated with this return.

In 1994, Bermuda will be moving away from a somewhat primitive method of garbage disposal, namely dumping, which although relatively inexpensive is no longer acceptable from an environmental and social standpoint. In its place, the Government will be operating a highly sophisticated, state-of-the-art mass burn incinerator. The costs of running the plant, and of safely disposing of the incinerator ash, will be much higher than the costs we are now paying for pulverising garbage and dumping it in Pembroke Marsh. These additional costs are expected to total some $4.3 million in the coming year. As anticipated, during the transition period a large portion of the $2.7 million now spent on the Pembroke Marsh operation will also have to be provided. Finally, substantial new expenses will be incurred in providing the environmental studies and associated monitoring which are integral parts of the whole incinerator project.

Offsetting the costs associated with operating the incinerator will be revenues from the sale to Belco of electricity which will be generated by the plant. However, it is not expected that sales will actually commence until well into the coming financial year.

Approximately $600,000 in additional funding is being made available to operate the new prison. This increase is an unavoidable additional expense in that there was simply no way the country could continue to operate the antiquated Casemates as a maximum security prison for much longer.

Addressing the Island's overall infrastructure, Government is instituting a five-year programme in order to upgrade our road system: $1.8 million will be spent on re-surfacing public roads in the coming year, $1 million more than in 1993 4.

Mr. Speaker, from the additional costs associated with maintenance of the infrastructure and operating new facilities, let me turn to the Government's social commitments.

Funding for the Social Assistance programme within the Ministry of Health, Social Services and Housing is being increased by $2.6 million over the original 1993 4 estimate, bringing the total funding available for social assistance in 1994 5 to $8.8 million.

As expected, the strengthening of the economy has led to a gradual decline in the number of people drawing on this programme and in the number of new applicants, following the sharp increases experienced during the worst of the recession. However, the programme is still costing, on average, some $700,000 per month.

The cost of the Housing Allowance programme, by contrast, has been fairly stable for the past three years. Currently, about 800 households are receiving rent assistance and it is expected that this figure will remain constant through 1994 and 1995 at an estimated cost of $3.5 million.

Health care costs the world over are increasing at a rate substantially in excess of inflation. Bermuda is no exception, although it must be said that our experiences are not as bad as most other jurisdictions. Nevertheless, the total grant to the Bermuda Hospitals Board will be increased in 1994 5 by approximately $3.0 million or 7.4 percent over the 1993 4 figure.

The King Edward VII Memorial Hospital is to receive $1.8 million of this additional grant. The Government meets all hospital costs for children under the age of 16, and young people up to the age of 21 if they are full-time students, and in addition the Government provides for 80 percent of hospital costs for persons over 65 and 90 percent of such costs for persons over 75.

Furthermore, in the case of any patient categorised by the hospital as indigent, 100 percent of costs are met by the Government. The shift in demographics towards an older population, identified in the 1991 Census, is being reflected in the rising cost of subsidising hospital care for the elderly and the inability of many families to supply support at home for those who need health care.

In the case of St. Brendan's, Government provides an outright operational grant that covers most of the operating expenses of that hospital. This grant, which has been frozen for the past three years, will be increased by $1.25 million in 1994 5. The move towards greater use of community-based group homes for patients of St. Brendan's will be continued in the coming year.

The social benefits from this programme are enormous.

Funding for the Ministry of Tourism has been increased by $0.9 million to $29.2 million, which will enable the Ministry to continue its aggressive and highly successful marketing of Bermuda.

The promotion of the services which Bermuda has to offer to international business has historically been carried out by the private sector. However, as more and more offshore jurisdictions have decided to compete in this arena, the Government has become increasingly involved on a cooperative basis with the private sector in the generic promotion of Bermuda. In the current year, approximately $400,000 has been spent on such promotion, largely in concert with the Marketing Committee of the insurance industry and with BIBA. In the coming financial year, Government will increase its spending on the promotion of Bermuda as the premier offshore business centre to $900,000, most of which will continue to be channelled through the Insurance Marketing Committee and BIBA to ensure that the successful partnership in marketing which has been developed between the Government and the private sector over the years is maintained.

The National Drug Commission, now the responsibility of the newly created Ministry of Human Affairs and Information, will continue to receive strong support from the Government. Over $1.0 million will be provided for the Commission in the coming year.

Honourable Members will recall that the Public Service Superannuation Act 1981 was amended last June to authorise the Government to leave its five percent share of the pension contribution in the Superannuation Fund when employees leave the pension scheme before the vesting of their benefits. As a result of that action the Fund has benefitted by an additional $900,000 in the current year. This will be augmented by a direct cash contribution of $500,000 from the Consolidated Fund. These two steps, which are to be continued in 1994 5 and each year thereafter, are designed to reduce progressively the actuarially-projected pension liability of the Superannuation Fund.

Mr. Speaker, Members of Parliament last received an increase in salary in 1988. The Government did not consider it appropriate to raise parliamentary salaries during a period of recession. Now that the economy is improving, the Government will recommend that a Joint Select Committee be appointed to review parliamentary salaries and make recommendations to the House for any increases considered appropriate. It will also be recommended that the Committee address the question of the increasing unfunded liability in the Ministers and Members Pension Fund, identified by the actuary, which was brought to the attention of Parliament last June in a report on the Fund.

Details of Revenue Projections Mr. Speaker, I now turn to the detailed revenue projections for 1994 5 which anticipate total Government revenue of $385.2 million. In framing these projections, the following assumptions have been made: (1) The improvement in the hospitality sector will be sustained in 1994 5 and visitor expenditure will increase by about ten percent at current market prices; (2) The foreign currency generated by the international business sector will increase by two percent in real terms; (3) The improvement in gross domestic fixed capital formation will continue, reflecting a modest recovery in the construction sector and a general improvement in the level of confidence in the community as the impact of the recession recedes and the economy becomes more buoyant; (4) The rate of inflation will stabilise between 2.0 and 2.5 percent and the level of wage alary settlements is expected to remain modest; (5) There will be a slight increase in household disposable incomes, in real terms, as employment prospects improve and the number of hours worked increases; (6) There will be a modest increase in the volume of imports.

On the basis of these assumptions, Bermuda's external balance of payments on current account, which is expected to remain in surplus in 1993, may strengthen slightly in the coming financial year. Reflecting the continuing recovery, Bermuda's Gross Domestic Product is forecast to grow by 2.5 to 3.0 percent in real terms in 1994 5.

While the Government fully appreciates the need to make every effort to hold down costs in the coming financial year in order that it does not undermine the current economic recovery, it is a fact, demonstrated by earlier comments, that more and more demands are being placed on the public purse. The closure of the bases alone will bring additional financial costs. As a consequence, it is essential that carefully thought out steps be taken now to secure the Government's revenue position in order that the challenges facing the community at large can be met without unduly upsetting the delicate balance of the economy as a whole.

In last year's Budget Statement the House was advised that the Ministry of Finance would be examining the Customs Tariff with a view to simplifying it and making it more user friendly. This has proved a useful and worthwhile exercise.

The amendments to the Customs Tariff Act, which will be tabled today, establish a simplified version of the classification structure of the Harmonised Tariff used by the majority of trading nations. These changes will significantly reduce the administrative costs of clearing goods through Customs as the local importer will henceforth only need to refer to the coding on incoming customs documentation avoiding the need to reference a complex tariff code. The revised system also paves the way, in due course, for the electronic clearance of goods through customs.

Welcome news will be the fact that the number of items listed in the tariff has been reduced by 60 percent -- from 522 to 215. This reduction has been achieved through the amalgamation of many item descriptions. For instance, the 12 entries for meat have been replaced by two; the ten items for vegetables have been replaced by one; the antiquated distinction between refrigerators of different sizes has been removed.

"End-use'' distinctions and other protectionist measures in the present tariff, by and large, will be removed. Under the proposed amendments, the manufacturing industry will receive a concession on the importation of raw materials, rather than relying on tariffs for protection against overseas competition. The new arrangement should improve the competitiveness of local manufacturers as well as, in certain cases, improve their opportunity to export goods made in Bermuda. Those manufacturers who do export, but do not currently enjoy a zero rate of duty on their raw materials, will be able to apply under the Fourth Schedule for a rebate of 100 percent on such duty paid, rather than the present 90 percent.

Having achieved a reduction in the number of descriptions for imported goods, it was logical to consolidate the number of rates of duty also. Although this exercise was constrained to some extent by the need to limit any major negative impact on Government revenue, a dramatic reduction in the number of different tariff rates was in fact achieved.

As a result of the review, the existing 16 rates of duty - 0, 3.5 percent, 5.5 percent, 8.5 percent, 11.25 percent, 16.75 percent, 19.5 percent, 22.25 percent, 27.75 percent, 32.25 percent, 33.5 percent, 40 percent, 55 percent, 75 percent, 111 percent and 150 percent -- have been reduced to nine -- 0 percent, 5 percent, 8.5 percent, 10 percent, 22.25 percent, 33.5 percent, 55 percent, 75 percent, and 150 percent.

This reduction has been achieved by adopting one rate of duty for a product rather than a range of duties for the same or similar products. For example, the four rates of duty for vegetables, i.e. 0 percent, 5.5 percent, 11.25 percent and 22.25 percent have been reduced to one rate -- five per cent, which becomes the standard rate of duty on most foodstuffs. The exceptions are cereals, products of the milling industry, sugar and imported foodstuffs for the local manufacturing industry, which remain at 0 percent and shellfish where the rate of duty falls from 22.25 percent to 10 percent. The duty on carbonated beverages is reduced from 40 percent to 33.5 percent which will be the flat rate for soft drinks, other than pure fruit juices which will be five percent.

Careful studies of the expenditure patterns from the 1982 Household Expenditure Survey indicate that the above proposed changes to the tariff on foodstuffs and non-alcoholic beverages will result in a slight reduction in the food bill for the average household.

The already low duty, 8.5 percent, on items of particular importance to the tourist retail market, will remain unchanged. However, the rate of duty on perfumes and toilet waters will be reduced from the present 22.25 percent to ten percent, and the duty on watches will be reduced from 11.25 percent to ten percent. Undoubtedly, this extension of existing concessions for the tourist market will stimulate retail sales, especially among visitors. The duty on children's clothes and footwear is to be reduced to ten percent from the current 11.25 percent. In addition, the rate of duty on computers and office machinery will be reduced from the present 27.75 percent to 22.25 percent in order to encourage businesses to become more efficient through the increased use of computer technology. Furthermore, the duty on computer software will be reduced to 0 percent. It is estimated that any loss of revenue will be offset, over time, by increased sales of computers and other business machines.

Mr. Speaker, it has been two years since the last increase in specific duties on wine, alcohol and tobacco, and the Government proposes the following increases in 1994 5.

Item PresentProposed Increase DutiesDuties Wines $2.25 per litre $2.50 per litre 11% Cooler drinks $1.10 per litre $1.22 per litre 11% Beer, cider $0.78 per litre $0.86 per litre 10.3% Spirits $21.00 per litre $23.00 per litre of alcohol of alcohol 9.5% Cigarettes $55.00 per kg. $62.00 per kg. 12.7% It is estimated that these measures will raise $1.7 million in a full year.

While the increases themselves are above the rate of inflation they need to be put into perspective. The increases add no more than 18.5 cents on a .75 litre bottle of wine; 80 cents on a 40 proof litre bottle of spirits; 2.4 cents on a .330 litre can or bottle of beer, and 15 cents on a packet of twenty cigarettes.

Accordingly, there is no reason for the wholesale or retail prices of alcohol and tobacco products to be increased by any more than the actual impact of the change in duty, and perhaps the normal seller's margin on that change, on the unit of sale, i.e. the bottle of beer, the bottle of wine and the pack of cigarettes. These duty increases should therefore have little inflationary impact.

This Budget does not propose any increase in the duty on gasoline and diesel in the coming year. This decision has been made despite the fact that the cost of petroleum products has dropped sharply in recent months as global crude oil prices have plummeted, and that the duty on these products has stayed the same for two years. The Government does not consider that this is the time to add any further burden on the public or on the tourists in this specific area, and wishes to see the country derive the maximum benefit from these lower petroleum costs.

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