These lessons underscore the need for continuing sound economic stewardship in Bermuda, as the pressure for international co-operation in regulatory matters will only increase due to the forces of globalisation. The Ministry of Finance will place increasing emphasis on appropriate financial regulation and supervision. Enhancement of our supervisory abilities through the Bermuda Monetary Authority and the Registrar of Companies is currently underway and will keep Bermuda in step with international guidelines.

Bermuda's success will depend on striking an appropriate balance between embracing globalisation and minimising its negative potential. We will need to look at the careful dismantling of some of our own protections in the financial services area to improve competitiveness, avoid stagnation and to encourage economic diversification. We must also be sensitive to issues of international reciprocity, as highlighted in the recent World Trade Organisation agreements on services and telecommunications. Countries party to these agreements accept that the risk of breaking down barriers to trade is offset by enhanced opportunities.

The global reach of our international business sector means that Bermuda's fortunes will depend on our conduct of economic foreign affairs. Bermuda's visibility as an offshore financial services centre will attract the predatory attention of onshore governments concerned about the impact of globalisation on their tax revenues. The nature of our service economy will require commercial diplomacy with governments and international bodies as we negotiate economic and regulatory issues. The successful negotiation of the 1986 Tax Information Exchange Agreement with the United States, our more recent military base negotiations in Washington, our agreement with the Federal Aviation Authority to share air-traffic control and costs and our contributions to the Caribbean Financial Action Task Force illustrate how Bermuda's external affairs increasingly are being conducted to address economic issues.

Mr. Speaker, governments around the world are just beginning to understand the full consequences of globalisation, a process that continues to unfold. Yet recent experience shows that globalisation, which offers great opportunity, also has the potential to increase the divide between the haves and the have-nots, between emerging and developed countries and between economic classes within national boundaries. This Government understands that the best way to prepare for the challenges ahead is to invest in our people, to give them the skills needed to recognise and seize opportunity. At the same time, it must care for those least able to help themselves. The 1998-99 Budget therefore directly allocates over $270 million in people-oriented spending in such areas as education, training, health, youth, sports, social services and public safety. Other funds will be directed toward maintaining the impressive economic record of the past thirty years, by supporting tourism and international business, encouraging diversification and maintaining a first-class infrastructure. It is a Budget that is right for the times, a Budget that demonstrates sound economic stewardship.

Economic Performance in 1997 Mr. Speaker, Bermuda's economic growth, as measured by GDP has been robust over the last year. In fiscal year 1996-97 the economy grew at three percent after removing the effects of inflation and is on track to grow at this rate over the coming year. Since the 1992-93 recession, the economy has grown on average 4.2 percent per year.

The current account of the balance of payments showed a surplus of $135 million in 1996, and a further substantial surplus is expected for 1997.

Government borrowing remained very modest and the Government's outstanding debt is anticipated to be at 7.0 percent of GDP by the end of fiscal 1997-98.

On the strength of this performance, Moody's confirmed Bermuda's sovereign credit rating at Aa1 in December, 1997.

Bermuda continues to enjoy a low and stable rate of inflation with the consumer price index rising only 2.1 percent in 1997. We have maintained rates of inflation below that of the United States over the last five years. Low and stable inflation brings many benefits to our economy. It encourages businesses to invest, creating economic growth and jobs. Low inflation is also very beneficial to people on fixed incomes, such as pensioners, because it helps to prevent the erosion of their purchasing power.

The rate of job creation is another important measure of Bermuda's economic performance. The Employment Survey for 1996 showed an increase of 500 jobs in 1996 over 1995, and preliminary estimates show that the number of jobs further increased by over 650 in 1997. In percentage terms, job creation in Bermuda has exceeded the performance of the G7 countries. Payroll tax statistics indicate that employment has continued to grow rapidly in recent months. There has also been a steady decline in the number of people registered at the Government Employment Office seeking work. Although the number of registrants is cyclical, the overall trend indicates that greater numbers of Bermudians have been successful in finding employment.

Therefore, as measured by economic growth, inflation and job creation, Bermuda's economy is currently performing very well.

International business has taken full advantage of the strong economic environment. Professor Archer's encouraging Report on International Business for 1996 showed that foreign currency earnings from this sector grew nearly 20% in 1996 to $631 million. Of this total, $280 million was spent by international firms on salaries, $160 million in fees were directed to Bermudian firms and a further $54 million was paid in taxes.

The international companies directly employed 2,420 people in Bermuda, 1,412 of whom were Bermudians. Both the number of exempted companies with a physical presence on the Island and the number of people they employ have steadily increased since 1991. Upward mobility for Bermudians was pronounced in 1996, with the percentage of managerial and accounting positions held by Bermudians increasing from 28 percent in 1995 to 40 percent in 1996.

According to Dr. Archer, the impact of international business is more significant than simply the creation of jobs in international companies and local service companies. In fact, it positively affects over 13,000 jobs, or more than one third of the workforce.

I am pleased to be able to say that more recent statistics show that the international company sector continues to display very robust growth. The number of firms on the company register grew to 10,394 by the end of September, 1997, and the total number of persons employed by international companies, according to preliminary findings of the 1997 Employment Survey was 2,667, 1,528 or 57.3% of whom were Bermudians.

Bermuda's construction industry also turned in a very strong performance in 1997. The industry's measure of activity, the "value of work put in place,'' surged to $110 million for the first three quarters of 1997 compared to $59.4 million for the same period in 1996. This has resulted in steady increases in the amount of employment income generated by the industry. The construction sector is forecast to remain active for some time.

Evidence of Bermuda's vibrant economy can also be seen in the retail sector.

Retailers have experienced real increases in sales since May, 1997. This is an encouraging sign, because retail sales, after adjusting for inflation, have been relatively flat for over ten years. Another positive development for retailers was that the value of goods declared at the airport by returning residents did not increase in the last year. The strength in retail sales is a reflection of the growing economy, rising employment and consumer confidence, combined with efforts by retailers to increase their overall competitiveness.

Mr. Speaker, while it is encouraging to hear the positive news from the international companies, we are fully cognizant of the challenges facing the tourism industry. Despite positive developments and initiatives taken by the industry and the Ministry of Tourism, the number of tourist arrivals fell last year. Arrivals by air were down 2.7 percent for the full year, 1997, and this was associated with a decline in bednights of 3.5 percent. The reduction in bednights was not experienced equally by all accommodations. Small hotels, housekeeping cottages and guest houses all experienced a greater loss of business than the large hotels and cottage colonies.

Cruise passenger arrivals increased this year, reaching over 181,000 and surpassing the previous record set in 1996. The higher number of cruise passengers, however, was not enough to offset the decline in air passengers, and the overall number of visitor arrivals fell by 1.7 percent. Despite the decrease in visitors, records show that for the first three quarters of 1997 overall, total visitor spending fell by only one half of one percent compared to the same period in 1996, reflecting the fact that spending per capita by visitors has increased.

Mr. Speaker, despite the weakness in tourism, the record shows that Bermuda's economy performed well in 1997, with strong growth supported by excellent fundamentals and prudent Government policies.

Overview of Revenue and Expenditure for Fiscal 1997/98 Revenue Mr. Speaker, the projections of revenues to be received in the current fiscal year were made against the background of an economy showing signs of strong growth in both the international business and construction sectors. Last year's Budget was designed to provide significant support to both the tourism and retail sectors while they were going through re-positioning exercises, and it avoided the imposition of new taxes. It was a Budget designed to encourage the creation of an environment in which business could restructure and grow with the support of, but not dependence on, the Government.

The response from the business community has been positive, and the result has been growth in the economy. As a consequence, the revised revenue outlook for the 1997-98 fiscal year is projected to exceed the original estimate of $488.4 million by $16 million. Overall revenue growth has been supported by an increase in customs duties which are anticipated to show $2.9 million more than estimated, producing $147 million; new shipping registrations that will generate an additional $800,000 for a total of $1.6 million; and increased fees received for sales of land to non-Bermudians of $6.3 million, for an expected total of $13.3 million. Payroll tax is expected to be up by $3 million, to $136 million. On the basis of these and other growth estimates, the revenue forecast for 1997-98 has therefore been increased by $16 million to $504.4 million.

Expenditure Government's original forecast of current account expenditure for 1997-98 was $461.7 million. While there have been some necessary and significant items of unbudgeted expenditure, savings in some programmes (in particular $2.2 million in Social Assistance, $1 million in insurance premiums for Government buildings and $1 million in debt charges) will largely offset these expenditures. As a consequence, the original current account expenditure estimate for the year is expected to be exceeded by only 0.1 percent, or $500,000.

Of the unbudgeted items of current account expenditure for the year, $2.85 million or 70 percent was required for the Ministry of Education. $1.53 million was specifically required as an additional operating grant for CedarBridge Academy to provide overtime for teachers in preparation for the school's opening and an additional 16 teachers and counsellors to support increased student enrollment, as well as other operating expenses.

In response to security and discipline problems in some schools, Government spent $215,000 on a schools security programme, and by the end of this financial year will have spent $80,000 to staff an alternate school established at Warwick Camp.

The inclusion programme for special needs students required $800,000 to provide a further 32 staff, which brought the total annual cost of the special-needs programme to $8.9 million in 1997-98. In the past three years, 119 new staff have been added. Thirty-four are teachers and specialists and 85 are teaching assistants.

Other supplemental items included $200,000 for the Ministry of Health and Social Services, of which $121,000 was spent on additional staffing at the prisons. The Ministry of Transport was billed $100,000 for telecommunications services by the Federal Aviation Authority, and the Ministry of Works and Engineering spent $104,000 additional funds on temporary accommodation for Government departments while capital work was being performed on their premises.

The annualised cost of these items when carried on into the full year 1998-99 is more than $6.5 million.

Additional unbudgeted capital spending totalled $900,000. $500,000 was approved for urgent renovation of the National Sports Centre running track, and $400,000 was spent on the construction of a purpose-built, courier-package facility at the Airport to cope with the rapid growth in this business. This facility is being rented to the courier companies, and the cost will be recovered over time.

Capital Borrowing Cash in hand at the beginning of the 1997-98 financial year of $3.3 million, combined with a projected current account balance of $42.3 million, provided $45.6 million for capital expenditure, after provision for interest on debt and a contribution to the sinking fund, together totalling $12.0 million. In consequence, the total borrowing requirement for 1997-98 was restricted to $32.0 million, compared to the expected amount of $38.3 million.

The Government's foreign currency debt position changed during the year with the increase in capital borrowing and the refinancing of the $20 million bond issue which matured on the 30th of November, 1997. The Bonds were refinanced in US dollars in order to take advantage of more favourable rates and to avoid competing in the local market with potential Bermuda dollar issuers. The Government utilised Chase Securities Inc. as its agent for the private-placement, which was financed at a rate of 6.72 percent for a ten-year term.

Mr. Speaker, the Government's stated policy is to hold borrowing to a maximum of ten percent of GDP, with a current statutory limit on public debt of $185 million established in 1991. In last year's Budget Statement it was suggested that Government might undertake a review of the legislated debt ceiling sometime in 1997-98. However, as a result of continued strong revenue growth, together with controls exercised by Government over capital expenditure, it is appropriate to defer this review until 1998-99. Nevertheless, the Government prudently intends to maintain the ten percent of GDP policy restriction on borrowing.

The Government debt outstanding (excluding Sinking Fund balances) at the end of the 31st of March of this year is projected to be $162.5 million including guarantees. The debt consists of a ten-year US$75 million Senior Note issue due 2004, US$62 million drawn under a US$110 million bank facility ($24 million of which is on-lent to the Bermuda Housing Corporation) and a ten-year US$20 million Senior Note issue due 2007.

Under the provision of the Government Loans Act 1978, effective 31st March, 1993, the Government established a Sinking Fund to provide for the repayment of the principal element of Government debt over the long term. In each financial year a contribution equivalent to 2.5% of the outstanding debt at the end of the previous fiscal year is due to the Fund. At the end of 31st March, 1998, the balance in the Sinking Fund will be approximately $14.0 million. The effective, net amount of Government debt outstanding will therefore be lower by that amount.

Estimates of Revenue and Expenditure for 1998/99 Mr. Speaker, the priorities for expenditure in the 1998-99 Budget are clear.

First, this Budget will assist in preparing Bermudians to grasp opportunities and meet the challenges presented by globalisation. Second, it will provide an adequate social safety net to ensure security, to promote health and to care for those least able to help themselves.

Capital Expenditure Projections Capital expenditure by the Government in 1998-99 will once again significantly support educational reform, a process that is key to Bermuda's future success in the global economy. Cedarbridge Academy will be completed at a total cost of $72 million when work on the replacement for Ruth Seaton James Hall is finished at a cost of $6 million. It is necessary to complete work on the development of middle schools by converting and adding to existing school plant at a cost of $8.4 million. Plans are being finalised for the upgrading of Berkeley Institute to create the Island's second senior school; some $6 million is included in Government's capital plan to get this project under way.

$1.9 million will be spent on computers and other school equipment with a further $500,000 on Educational Planning Team-related engineering work.

The ongoing development and reintegration of former base properties by the Bermuda Land Development Corporation (BLDC) will significantly enhance Bermuda's competitive position. A $7.0 million grant will be directed to the BLDC for site preparation, road construction and the development of certain areas for business and residential use as detailed in the Southside plan.

These funds will also support existing maintenance contracts.

Expenditure of $1 million in 1998-99 will allow the completion of renovations to the running track at the National Sports Centre begun in 1996-97.

Government expects to enter into a lease-back agreement with the trustees of the Centre to support its completion, a project critical to youth development.

Bermuda's growing importance as a global centre for international business as well as its position as an upscale tourist destination demand nothing less than a world-class transportation system. Work on the arrivals section of the Bermuda International Airport will be completed through support in this Budget, as $3.3 million will be spent in the coming year on refurbishing and extending the baggage hall together with the installation of new belts to handle luggage. An energy management system will also be acquired for the terminal building at a price of $292,000 in order to achieve long-term savings in energy costs. An elevator system will be installed to assist the physically challenged as they leave the US Departures area at a cost of $114,000.

Work will continue on the upgrading of the Airport runway at a cost of $850,000 and is expected to continue for a further two years. $375,000 is also required for runway protection along the Castle Harbour foreshore.

Public transport will benefit by the acquisition of seven new buses at a cost of $2.4 million. Savings totalling $850,000, made as a result of favourable currency exchange rates at the time of the bus purchases, will be offset in part by expenditures on necessary renovations to the bus garage, replacement of equipment and the purchase of two of the seven buses. Funds allocated originally would have acquired only five buses.

The Ministry of Transport also plans to spend $880,000 on Town Cut in St.

George's to improve access for cruise ships.

The Ministry of Works and Engineering expects to spend $1 million on Phase III of the Park Development Plan for Pembroke Marsh and $600,000 on a reverse osmosis plant at Port Royal to service the Sandy's area. $3 million has been allocated for Government office relocations. A further $2 million will be spent on Government property upgrades deferred as a result of previous cut-backs.

$1 million will be spent by the Ministry of the Environment on the development of an education and general services building at the Aquarium. The Ministry also has been allocated $1 million for land purchases to preserve open spaces.

HOUSE OF ASSEMBLY HOA