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Analysts have wake up call for government on GDP and debt

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The Government needs to stimulate economic growth with a focus on international business and tourism to avoid a debt crisis, analysts have warned.

But investment managers Anchor Investment Management say in their most recent message to clients that the debt situation is not at a crisis level at the current time.

The view of the analysts is that the cost of debt and the level of deficits have improved the potential trajectory of the island’s fiscal situation.

Writing in their Bermuda Economic Update for January, analysts also state: “It is the potential growth rate that gives us great concern. Without a decent level of nominal growth, we fear it will be increasingly difficult to tackle the escalating government debt.

“Thus, our largest concern continues to be growth and the prospects for growth in Bermuda.”

The report says that assuming unchanged interest rates on debt financing, and Bermuda continues to run primary budget deficits of about one per cent of GDP and does not grow the economy, debt levels will escalate to about 75 per cent of GDP in ten years.

“If, however, budget discipline is adopted with a balanced primary deficit, growth is achieved at a 2 per cent level and debt costs do not escalate from current levels, the debt level will not become an excessive threat. In fact, it appears to be manageable.”

The report says that the interest rates on government borrowing will be shoved higher if the market feels the future stream of revenues and surpluses is insufficient to service the growing liabilities.

“To prevent this from happening, Bermuda still needs a credible plan to bring government spending into balance and a strategy for dealing with ballooning entitlements that are compounding in the face of challenging demographic trends.

“Ultimately, all these problems are much easier to resolve if the government can implement policies that stimulate economic growth.

“Therefore, the optimal solution is determining the balance between controlling spending and fostering an environment for growth. If you had to worry about only one, however, it would be economic growth.

“Very difficult decisions are necessary to deal with the debt problem and tackling it will create a headwind to growth.

“The focus should be on policies to promote international business and tourism.

“Harsh austerity at this stage would only perpetuate the recession but government spending does need to be brought in line with revenues.

“Tackling the deficit is important, but if it is done hastily and abruptly, Bermuda is at risk of entering a debt deflationary spiral of falling GDP and escalating debt levels.

“Policies to stimulate growth could offset the negative impact of higher taxes and reduction in government jobs.

“Too much national debt impairs the government’s ability to deliver those essential services to its citizens. A credible plan must be made to tackle escalating levels of debt.“

Anchor Investment Management: the optimal solution is determining the balance between controlling spending and fostering an environment for growth (File photograph)
Government debt: it is the potential growth rate that gives us great concern (File photograph)

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Published January 12, 2022 at 7:37 am (Updated January 12, 2022 at 7:46 am)

Analysts have wake up call for government on GDP and debt

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