After every New Year, comes the resolution to review finances, getting them under control by working on the dreaded budget: comparing actual cash flow in (income) and cash paid out (expenses) from prior years to projected income / spending plans for the current year; assessing size of debt and ability to manage the cost; estimating probability of reaching financial and personal goals.

Reality sets in (and resolutions weaken) when one's financial calculations reveal whether a bonus party or a radical paring of lifestyle is in the cards.

In recessionary times, any financial planner worth his/her salt understands that a budget is only the first step in cautious overall planning. In order for a budget to be the least bit effective, it has to be into actioned in four phases.

Cash comfort comes from assessing the options available to increase income.

Savings are increased if new income sources can be generated.

The spending plan has to be centred on balance, reducing debt while maintaining necessities of life.

Investing is the last consideration, but only if a solid workable plan is in place. Then and only then, if there is any cash left some of it can be invested, but always with a slant toward conservative easily-redeemed securities. Tough economic times mean that every investment item must be part of a contingency plan.

Budgets are necessary for individuals, corporations, non-profits and countries. Yes, the numbers may be larger but the purpose is the same, having control of one's finances. The budget has to balance; otherwise there is no budget, there is a problem.

The Country Budget

Referencing the charts and graphs and financial information released regarding the country's financial health, the first step assesses realistic revenue projections. Next, are there any contingency savings to supply needed cash to cover revenue shortfalls. If not enough available cash, what other income sources are available?

What is our country's total debt load, both actual and projected?

Is the total debt close (or over) the defined borrowing limit of $1 billion?

What is the interest on this debt annually and where will this expense be included within the budget?

Interest expense becomes a priority even to the detriment of social programmes and capital infrastructure projects.

Conservative savers know that debt is insidious and must be paid. It cannot be ignored, or economically reduced the way we might cut back on our grocery list by spending less, thus owing less. Debt will own you until the last principal reduction is taken off your books.

Flat Tax Structures

Last week, a simple progressive tax plan was discussed. Flat tax plans, such as a tax on interest and dividends have implemented in various tax regimes, as well.

Those programmes are predicated on the savings and investment habits of the population where those closer to retirement, or the fiscally conservative savers will pay more.

Generally, flat tax programmes are less costly to implement and manage, less paperwork required from the individual, less legislation required to institute the programme.

On a quick calculation of the deposits in domestic banks and savings companies (BMA report Q4 2009 estimated $17 billion) with an average 2.5 percent interest rate taxed at five percent will remit approximately $25 million.

Tack on the tax from dividends (local) could possibly generate a total of $50 million a year.

An income tax regime appears to raise more revenue, but will be more cumbersome and costly from inception: new tax legislation, an entire addition to a tax department to assess, monitor, record and collect individual and corporate income taxes, far more intrusive and costly to implement and manage from the taxpayer's perspective.

We consider that there are approximately 35,000 employed and self-employed persons in Bermuda. Using an average income tax of $10,000 per individual (some will pay more and some much less), the tax revenue raised in a year is substantial, estimated at $350 million.

Our public debt load is already in excess of $850 million dollars (per the Auditor General's 2008/2009 Audited Financial Statements of the Bermuda Government's Consolidated Fund.)

The interest due on this debt per year at a seven percent rate is estimated at $60 million dollars. Add to that anticipated capital projects: the hospital at $375 million, the Causeway at $150 million, Future Care of many more seniors of an additional $70 million, the public debt increases to $1.5 billion.

Without repaying any loan principal whatsoever, the debt service interest will almost double to $120 million. That interest amount alone could pay for every single child (estimated 6,000 enrolled students) to attend a year of college — free!

The Ultimate Unwilling Bankers, Us (you and me). We won't know what the actual deficit for this year will be until the budget is delivered.

We don't know how and in what form additional taxes will be implemented. But, we probably all know the answer to the country's budget problem. We, the people as bankers, are going to be asked (told) to give (in taxes) more than ever. Start revising your own budget picture now.

Martha Harris Myron, CPA, CFP (US) TEP (UK) JP — Bermuda is an international Certified Financial Planner practitioner at Patterson Partners Ltd. She specialises in independent fee-only cross-border tax, estate, investment, and strategic retirement planning services for Bermuda residents with cross-border, multi-national connections, internationally mobile people and US citizens living abroad. For more information, contact martha.myron@gmail.com or call 296-3528.