S&P fires a warning shot
Standard & Poor’s Rating Services fired a shot across Bermuda’s bow by revising the outlook for the Island’s credit rating from ‘stable’ to ‘negative’. Although the seriousness of Government’s mounting debt was already apparent, the rating agency’s decision makes clear the urgency of improving the fiscal situation.
The negative outlook means S&P believes there is at least a one-in-three chance that the Island’s credit rating will be downgraded at some point in the next two years. A downgrade would mean Government having to pay a higher rate of interest to borrow money. That is something Bermuda can ill afford.
In the fiscal year that ended last month, Bermuda paid more than $8 out of every $100 it took in revenue as interest on debt. According to S&P’s projections, it will be $15 out of every $100 by 2016.
As Finance Minister Bob Richards has made clear, the debt will get bigger before it starts to shrink and only tough decisions made now will get Bermuda off the road to fiscal disaster.
There are two ways to improve the Government’s fiscal situation: raise more revenue and cut spending. Moves made to stimulate the economy, such as payroll tax holidays for new Bermudian hires, reduction in the licence fee for foreign property buyers and the abolition of term limits may all help over time, but, as S&P’s analysts pointed out, it will likely be several years before healthy growth returns and that will depend heavily on the strength of the US recovery.
Therefore spending cuts will be the principal means of improving Bermuda’s fiscal health in the near-term. Given the ageing population and the ten percent official unemployment rate among Bermudians, cuts in areas like health and financial assistance will be all but impossible.
The most feasible area in which to make cuts is surely employment costs, which make up half of Government’s current expenditure. The urgency of the situation makes the ongoing negotiations between Government and public-sector unions critical to the future of the Island and all who call it home.
Meaningful cost reductions, whether achieved through pay cuts and/or cuts in working hours, are necessary to get Bermuda back on an even keel. Hopefully the talks will be pragmatic and co-operative, and political confrontation will be set to one side. It will be difficult for the unions to make the case that there should not be pay cuts, given that Government has already given them a guarantee of no layoffs something that private-sector employees can only dream of.
In the spirit of shared sacrifice, let us hope civil servants and their union leaders will accept the stark reality that a dose of pain is necessary. Bermuda’s economic stability is on the line.
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