Storing up trouble
Government is breaking a number of rules that have stood the Island in good stead for decades in this year's Budget.
Government MPs must know that what they are doing is risky, but it seems they simply don't have any better ideas or they don't have the stomach to cut unnecessary spending or to increase some taxes.
Instead, the rule book is being thrown out, mostly in the hope that the economy will improve sufficiently by next year that no one will notice.
First, Government raised the borrowing ceiling to $1 billion, well above the ten percent of gross domestic product ceiling that the Island has had in place for several decades.
Second, long term borrowing is projected to exceed that same ten percent cap this year, assuming that borrowing is increased to the full $637 million level anticipated.
Third, Government plans to change the law requiring it to place a percentage of the debt outstanding into the Sinking Fund, which was set up as a long term means of paying off the national debt and will not pay any money into the fund this year.
Fourth, Government is going to take money from the same Sinking Fund – which should only be used to pay off the principal of the debt under the current law – to pay the $29 million in interest.
All of that is already known. Now, two more rules are being changed.
On Monday night, Progressive Labour Party MPs passed an increase in the short term debt that Bermuda can carry from $15 million to around $111 million.
This kind of facility, which is like an overdraft, is reasonable. Taxes do not come in in an orderly stream in time to pay salaries, suppliers and the like. So some form of short term financing makes sense. And the cap on this borrowing has not been changed since 1985, so an increase is reasonable, although it is interesting that Government does not seem to have needed to change it until this year and $111 million seems high.
Still, it stands to reason that taxes will be paid more slowly this year, and a welcome deferment in payments on Customs duty will exacerbate that.
So while $111 million seems high, that's not the real problem. The real problem is the legislation contains a provision that would enable Government to turn this short term borrowing into long term debt if it is not paid off in 15 months.
This breaks Bermuda's fifth golden rule of Budgets – that long term borrowing should only be used to finance capital projects like buildings and bridges. Instead, Government is now doing the equivalent of paying for the groceries by credit card, carrying the balance for more than a year and then going to the bank for a loan.
Like the promise to catch up with payments to the Sinking Fund next year, this move is predicated on the economy improving in a year's time. But what happens if it doesn't? More debt, more interest payments, more slippery slope for the Bermuda economy.
The sixth rule that got thrown out the window on Monday concerns pensions. It is a fact that the Contributory Pension Fund's benefits are not sufficient for anyone to live on and Finance Minister Paula Cox has worked hard to improve them in the last few years.
It can also be argued that pensioners, more than anyone else, need to continue to get income increases as other parts of the economy weaken.
So on Monday night, MPs from both sides of the House approved a five percent increase for pensions, which was roughly in line with inflation.
But in past years, contributions have also been increased, and by a higher rate, sometimes as much as three quarters of a percentage point more.
Not this year. In line with Government's promise not to raise any taxes in order to keep money in the economy, there is no increase, although it is intended that this will be made up in 2010.
At the risk of being accused of being a grinch, this is fundamentally wrong.
First, it might well have made sense this year to reduce the increase to pensioners to around three percent on the understanding that everyone needs to sacrifice in this environment.
More importantly, there are two reasons to increase the contribution. One is to ensure that contributions exceed payments, and therefore the fund remains viable. The second is to build up funds to account for the surge in pensioners that will occur over the next five to ten years as baby boomers retire. That necessity is exacerbated because the CPF lost more than a quarter of its value in 2008 as investment markets collapsed and the outlook for 2009 is poor.
So, and in spite of the desire to keep money in the economy and to take some pressure off individuals and employers, this is one area where prudence dictates that these payments should continue.
If not, we are simply storing up problems for future.