Government debt has been rising by an average of 28 percent every year since 2004 from $195 million to $700 million and could be set to exceed $1 billion within the next three years.

That was the stark message delivered by Craig Simmons, senior lecturer in economics at Bermuda College, at the latest Hamilton Rotary Club meeting at the Royal Amateur Dinghy Club in Paget yesterday

He warned that, for the first time, a Progressive Labour Party government would not have the luxury of windfall tax revenues to support its "less than stellar" capital spending record.

Mr. Simmons also called on Government and financial regulator Bermuda Monetary Authority (BMA) to limit the financial services sector's ability to produce credit in order to avoid another property bubble and tackle the issue of the country's private debt, which stands at more than $6 billion.

And with the Budget only days away, Mr. Simmons proposed tax cuts for working class Bermudians in a bid to boost public spending and provide an incentive and reward for employers who create jobs.

He said that such reductions in tax had the advantage of being easier and quicker to implement than capital projects, would extend beyond the construction industry into more representative areas of the labour force and restrict the physical size of Government.

"There is research to suggest that a $100 million payroll tax holiday on Bermudian jobs would do more to fight the recession than the same spent on capital projects," he said.

"When targeted at jobs that pay fewer than $50,000, working class women and men will spend more.

"Employers will have an incentive to create jobs for working class Bermudians and those who do will be rewarded."

Such a stimulus package, said Mr. Simmons, would be required until the end of 2011, with debt set to climb to more than $1 billion by that time, followed by a decrease in spending in 2012 and tax increases in 2013.

He added that if the economy could begin to grow within two years, the current account could return to surplus and debt repayment could start in earnest by 2017.

Mr. Simmons set the scene by explaining that the PLP was in "unchartered waters", having enjoyed a boom time after coming to power in 1998, but 10 years later economic growth stood at two-thirds of one percent as the economy began to contract in 2009 and into 2010 and debt mounted.

He said that for most of the 1990s through to the mid-2000s, the debt-to-gross domestic product (GDP) ratio declined to under four percent and since 2004 average growth in inflation-adjusted GDP was less than four percent, with Government debt increasing at an unsustainable rate.

"Our public finances are arguably in as bad a state as they have ever been," he said.

"First, there was no need to accelerate Government spending in 2004. The private sector was already overheated. An appropriate policy response would have been for the Government to cut its spending rather than increase it. This was an opportunity to amass a surplus that could have been used to fight the recession.

"Second, the debt build-up has been well beyond the economy's growth potential, which is roughly equal to trend or productivity growth. Incomes cannot rise without the backing of productivity increases. Productivity is determined by physical capital, human capital, labour force and technological progress.

"Third, and what is more important, the Government has not said how it plans on bringing debt levels down. Taxpayers and investors need to know what the exit strategy looks like. Individual consumers, business people, investors, philanthropists, etc., base part of their spending decisions on expectations of disposable income and therefore taxes.

ndividuals know that debt can be paid off in a couple of ways: reduce spending; increase tax revenue; or sell off assets.

"In fact it is not clear that the Government perceives present debt levels to be problematic, even though it is likely that debt will surpass $1 billion or 15 percent of GDP by 2013 and remain there until at least 2017."

Mr. Simmons said that Government's ability to fight the recession with deficit financing was diminished due to its ability to borrow being compromised by a fast rising debt-to-GDP ratio and it would take time to reduce spending with a number of capital projects in progress and tens of millions of dollars worth of other developments in the pipeline.

He pointed out that it was difficult to see how growth in Government spending could remain below four percent or how tax revenue would not decline by a similar amount, while the public would have to expect fewer services while paying more for those that are left.

Looking at the Budget, Mr. Simmons said it was highly probable that this and last year's Budgets would have current account deficits as tax revenues drop and spending rises, with next year expected to be the same and the use of deficit financing unavoidable.

Turning to the subject of private debt, Mr. Simmons said that the figure, which totalled $5.2 billion in Bermuda dollars and $1.1 billion in foreign currency, according to the BMA's December 2009 Regulatory Update, related to local banks' over exposure to interest and exchange rate risks on their foreign currency loans and highly leveraged loan book following the levelling off of real estate prices.

"These exposures are potentially destabilising to the macro economy and more specifically to credit markets and the construction industry," he said. "BMA regulation should seek to reduce fragility in the financial system caused by asset price bubbles, leverage, current account imbalances and under pricing risk.

"There are a number of policy instruments at the disposal of BMA policymakers. Banks' capital loan ratios can be raised if leverage appears excessive. Loan-to-value ratios can be decreased to restrain housing prices."

Mr. Simmons highlighted the fact that foreign currency borrowing increased an an annual average of 17 percent between 1998 and 2000 - partly responsible for the housing bubble - but added that capital controls could be employed to slow foreign currency borrowing by reducing incentives on short positions, while banks could also be required to back their foreign currency loans with reserves deposited at the BMA or a tax could be levied on short-term debt or minimum-stay requirement placed on loans.

"Private and public debt reduction will suppress consumer and investment spending and therefore growth," he said. "But this is to be expected after nearly two decades of excess. The Island is in unchartered waters. A storm is upon us. The Bermudian thing to do is to hunker down, placing our confidence in time-tested building practices. The analogy extends to the economy. Our economic infrastructure is beyond sound. There is no doubt that when the global recession's grip weakens, growth will resume. One lesson to be learned is that taking on debt, whether public or private, at an unsustainable rate is bad."