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Finance minister suspends sinking-fund payments

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The Bermuda Government is to suspend payments into the sinking fund, a home for money set aside to pay down long-term debt.

In his maiden Budget Statement yesterday, Curtis Dickinson, the Minister of Finance, said it did not make financial sense to borrow money in order to set it aside for future debt payments.

Not paying the contribution allows the Government to project a surplus of $7.38 million, rather than a deficit of about $57 million if the payment had been made.

Mr Dickinson said yesterday that the sinking fund has a balance of $214 million. In the coming fiscal year, $180 million of it will be used to repay maturing debt.

“The Government will suspend making mandatory contributions to the sinking fund,” Mr Dickinson said.

“This decision has been made in light of the following factors: (i) apart from the private placement notes referenced above, the next maturity of government debt will occur in 2022; (ii) the interest expense associated with borrowing to fund the mandatory sinking fund contributions will be greater than the investment return generated on those funds; and (iii) the Government is forecasting continued operating surpluses which it intends to contribute to the sinking fund or use to make open market purchases of its existing indebtedness.”

The medium-term projection accompanying the Budget Statement shows no plans to make a contribution to the sinking fund in any of the next three fiscal years.

The Government Loans Act 1978 requires that an amount equal to 2.5 per cent of public debt outstanding is paid into the sinking fund each year. The law gives the finance minister discretion to suspend payments for 12 months or to draw on the fund to make interest payments.

As the debt has burgeoned over the years, from $277 million in 2008 to about $2.46 billion today, mandatory sinking-fund contributions have grown with it to a high point of $64.2 million in 2018-19.

The last time the Government made no contribution to the fund was in 2009-2010, when Paula Cox, the finance minister of the time also drew on the fund to pay interest on long-term debt.

Since then, contributions to the fund have totalled more than $345 million.

The repaying of the $180 million in maturing debt in 2019-20 will reduce annual interest costs to the Government by $12.1 million, Mr Dickinson said.

The net debt will rise close to the $2.5 billion debt ceiling, but will not break through it, Mr Dickinson said. By the end of March 2020, net debt is forecast to be $2.457 billion.

Future surpluses will be committed to paying down debt, the finance minister added.

Interest payments on the debt will amount to $116.5 million in 2019-20, down from $124 million in the previous year, but still costing the public purse the equivalent of $319,000 per day.

Interest will also eat up 10.4 cents of every dollar the Government takes in the next fiscal year.

Revised estimates for the current fiscal year, which ends on March 30, show that the Government took in $1.08 billion, which was $10.6 million, or 1.1 per cent less than it projected in last year's Budget.

Current account expenditure, which excludes debt servicing costs, was nearly $932 million, which was $2.85 million, or 0.3 per cent more than projected.

The result was a deficit of $102.58 million for 2018-19, revised upwards from the last year's projection for a deficit of $89.7 million.

For 2019-20, revenue is forecast to rise by $39 million from the revised estimate for this year to $1.12 billion, while expenditure will be down by $2.1 million from this year's revised total to $929.86 million.

The biggest contributor to government coffers will be payroll tax, which is projected to bring in $466.1 million next year, up $5.5 million from this year's revised estimate, followed by customs duty, expected to generate $235 million, compared to $224.5 million this year.

Mr Dickinson announced a freeze in expenditure at 2018-19 levels and added that spending cuts would be difficult to achieve.

“While there has been some success in reducing costs, it has become increasingly difficult to implement further reductions under the current government structure and the across-the-board expenditure cuts in previous budgets,” Mr Dickinson said.

“With 51.5 per cent of the current account expenditure, excluding debt service, representing employee costs and 34.1 per cent relating to grants and contributions, there are very few other expenditure types that can be reduced and have a material impact on the level of spending.”

However, the Government has set up an Efficiency Committee, to seek further opportunities for savings, “either by way of increased efficiencies or by making structural reforms in the way in which services are delivered and institutions are structured”, Mr Dickinson added.

The finance minister said: “The EC has highlighted how savings and greater effectiveness can be obtained by the Government in the areas of financial assistance, purchasing of materials, inventory management, and handling of staff vacancies.

“The EC has also emphasised the critical importance of developing a detailed overall strategic plan to guide the spending priorities of the Government over the medium to long term.”

The most expensive ministry by far is health, whose projected expenditure for next year is $241.55 million, more than $100 million ahead of the next most costly ministry, education, which will cost nearly $137 million, just ahead of national security, with $135 million.

New heights: Bermuda's net debt is expected to peak at $2.465 billion at the end of the current fiscal year on March 30 and then start to fall
Setting money aside: the Government has paid an aggregate $345 million into the sinking fund since the last time it opted not to make a contribution in 2009-10

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Published February 23, 2019 at 8:00 am (Updated February 22, 2019 at 9:55 pm)

Finance minister suspends sinking-fund payments

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