To His Honour the Speaker and Members of the Honourable House of Assembly, Mr.

Speaker.

In the twelve months that have passed since the last Budget Statement was presented to this Honourable House, Bermuda has moved slowly out of the worst recession experienced locally since the 1930s.

The recession has unquestionably affected the lives of everyone on this Island, and yet, in relative terms, and when compared with other countries, Bermuda has weathered the experience remarkably well. This accomplishment has not simply been a matter of luck, but rather the result of the Government's foresight in first recognising and then, with the full co-operation and support of the community, dealing with the reality of the recession.

In anticipation of a prolonged period of economic uncertainty, the Government used the 1990/91 Budget to strengthen its revenue base and built on that base in each of the following three carefully crafted Budgets. Those Budgets, among other measures, tightly controlled the Government's current account expenditure while at the same time provided for substantial increases in spending on essential social programmes and capital projects.

In my last Budget Statement, in 1993, Honourable Members were advised that the year ahead did not promise quick relief from the economic difficulties facing Bermuda. It was stated that 1993 would see both a gradual improvement in tourism and a continued modest growth in international business.

As things transpired, both the tourism and the international business sectors did indeed perform well, largely as a result of the strengthening of the economy in the United States, our dominant trading partner, the efforts of the Department of Tourism and the hotel industry itself as well as those involved in international business, particularly the members of the Bermuda International Business Association (BIBA) and the International Companies Division of the Chamber of Commerce.

Tourist arrivals by air in 1993 numbered 412,473 up by 37,976 or 10.1 percent over 1992, representing the best year since 1990. The number of cruise ship passengers rose to 153,944, an increase of 22,938 or 17.4 percent over 1992.

This very substantial increase in the number of cruise passengers reflects the expanded capacity and very high occupancy levels of the four cruise ships which regularly served the Island and reinforces our reputation as a cruise destination of choice.

In all, a total of 567,109 tourists visited Bermuda in 1993. This represents an increase of 60,872 or 12 percent over 1992 and made the year the best for tourism since 1988. There was also some improvement in visitor expenditure but, because of the seasonal pattern of our tourist economy, the impact of this improvement was not felt until the second and third quarters of 1993.

Thus, in the nine months to the end of September, cumulative visitor spending was up by 14.3 percent compared with the same period in 1992.

International business, the other major sector of our economy, which I must emphasise fully compliments rather than competes with tourism, continues to record encouraging growth. In the calendar year 1992, international companies spent $359 million in Bermuda, an increase of 5.5 percent over 1991. Of this amount, some $30.8 million was a direct contribution to Government revenues in the form of taxes and fees. In calendar 1993, 887 new exempted and permit companies were registered, bringing the total on the register as of December 31, 1993 to 7,580, a net increase of 309 or 4.2 percent over 1992.

Mr. Speaker, the Economic Review prepared by the Ministry of Finance and tabled in the House today provides, in far more detail than time permits here, a wealth of information on the world and local economies and is designed to supplement this Speech. Through the use of a number of economic indices, the Review also traces Bermuda's emergence from the recession and identifies the economic challenges which lie ahead for the Island.

While the strengthening US economy is undoubtedly helping to stimulate the recovery of our economy, Bermuda can also take a good deal of credit for much of the local improvement. The local inflation rate, which was recorded at 2.1 percent year on year in November, 1993, was the lowest it has been since 1977 and is now very much in line with inflation rates prevailing in the US and Canada.

This fact has unquestionably made Bermuda more competitive, both as a tourist destination and an international business centre. Most wage and salary settlements agreed in both the public and private sector over the last year or two have been quite reasonable and this moderation has played a major part in containing inflation. In this regard, both employers and employees are to be applauded.

Mr. Speaker, two specific factors have had a particularly strong influence on the preparation of this Budget.

The first factor is that Bermuda's economy, not surprisingly, has contracted over the past four recessionary years. Gross Domestic Product (GDP), the total value of goods and services produced by Bermuda, declined by six percent during the period of the recession. The most glaring manifestation of the negative aspects of the recession, which is probably going to have a marked effect on the economy for some years, is the fact that the number of work permits held by guest workers dropped by almost 50 percent, from 10,100 to 5,400, during the four-year period December 1989 to December 1993. While this dramatic decline in the number of work permits unquestionably cushioned the effects of the recession on unemployment among Bermudians, it also very substantially reduced the local demand for goods and services and this consequentially had a serious negative effect on the economy. This reduction, represented by everything from loss of rents to landlords to lower sales of cars, has been conservatively estimated to have cost the local economy $300 million over those past four years. Some $60 million or 20 percent is estimated to have been lost from Government revenue alone. It is on this greatly reduced economic base that Bermuda is now building its recovery.

The second major factor which has had an important bearing on the preparation and planning of this Budget is the forecast withdrawal of all United States military personnel from Bermuda by September, 1995 and, on a much smaller scale, the closure of the British base HMS Malabar as well as the departure of the Canadian Forces. Careful economic planning will be absolutely essential if Bermuda is to achieve the maximum benefit from this turn of events.

The US bases alone contributed about $35 million in direct revenue to Bermuda in 1992 in the form of rents paid to local landlords, wages paid to Bermudians and the purchase of goods and services locally.

The departure of the US military will mean that the community will not only lose this direct income but will also have to assume costs which, especially in the short or medium term, will unquestionably place very heavy demands on the local economy. By September, 1995, the cost of providing the air traffic control, weather and fire services, security and air field maintenance essential to the operation of the airport, all of which have been borne in the past by the United States Government, will fall entirely on the taxpayers of Bermuda. The bill for these services alone is estimated to be in excess of $10 million annually.

In the long term, however, the benefits to Bermuda from the return of the bases will be immense, as we first evaluate and then, over time, realise the huge potential for economic and social benefit to the Island which rests in the Naval Air Station, the Naval Annex, and to a lesser extent at Daniel's Head and Malabar, which together comprise about ten percent of the Island's land area.

It is against this uncertain, but highly challenging, background that the 1994/95 Budget is set.

As in 1990, the Government must prepare to meet these challenges, both from the economic as well as the social point of view. Some bold steps will surely have to be taken. However, the Government is well aware of the trauma Bermuda has just come through and is mindful of the need to avoid undue financial strains as we move out of the recession.

Mr. Speaker, based upon the performance of tourism and international business in Bermuda in 1993, and the positive outlook for the US economy, the financial year ahead should see our economy steadily improve. Nevertheless, this is no time for any extravagance -- certainly not in the public sector -- because the tax base remains fragile and the future demands not exactly quantifiable in every instance. Accordingly, the Government will continue to steer the steady, sensible course which so effectively guided the Island through the recession and which is now helping to sustain the economic recovery.

In saying this, the Government recognises that it will incur some substantial, but predictable, new expenses in 1994/95. In particular, I refer to those expenses associated with the operation of the new incinerator and prison. In addition, we must plan for the expenses relating to the return of the military bases.

Despite these "new'' expenses and a number of other specific calls on Government revenue, I hasten to stress that there will be no lessening of the resolve of the Government to control its own costs while continuing to provide financial assistance to those who experience genuine financial hardship.

Mr. Speaker, before presenting the revenue and expenditure projections for 1994/95, let me set the stage by outlining the present financial position of the Government as we approach the end of the current financial year.

Overview of Revenue and Expenditure for Financial Year 1993/94 Revenue Total Government revenue for the financial year 1993/94 is predicted to be $360.8 million, some $8.3 million or 2.4 percent more than the original estimate for the year of $352.5 million.

This modest increase on the original revenue estimate for the current year confirms the fact that the strong tourist arrival numbers in 1993 have not yet translated directly into comparable increases in Government revenues.

Receipts from passenger and departure taxes are expected to be up by $1.6 million or approximately 10.5 percent over the original estimate for 1993/94 of $15.2 million and hotel occupancy tax receipts are projected to be up by about $1.0 million, or a little less than 10 percent over the original estimate of $10.1 million. In both of these instances the revenue has a high correlation to the increase in tourist arrivals. However, other revenue centres have not been as buoyant. Customs duty, which represents about 36 percent of total Government revenue, is expected to be up by $5.0 million or four percent over the original estimate for the current year of $126.2 million. Hospital levy and employment tax revenues are expected to be little changed from the original estimates of $49.4 million and $25.9 million respectively.

Expenditure Mr. Speaker, the current account expenditure estimate for the year 1993/94 is $334.8 million, which is some $3.0 million or 0.9 percent over budget. This very modest over-expenditure is primarily the result of additional expenditures of approximately $3 million for social assistance and a further $500,000 for temporary work projects within the Ministry of Works and Engineering. Both of these programmes have been an important part of the Government's initiative to cushion the impact of the recession for those who have found themselves in financial difficulties.

Mr. Speaker, I think it is worth noting that Government has operated within its original current account expenditure budget for the past three financial years and will be only marginally over budget in financial year 1993/94.

During that three-year period the Government's expenditure rose by only 6.4 percent while the rise in the general price level over that same period was ten percent. This cost control performance is commendable, particularly in light of the very substantial additional demands for services placed upon many Government departments as a result of the recession. This accomplishment was absolutely vital to the maintenance of our credit standing as we go out to borrow for future capital projects and to refinance current loans.

The balance on current account for 1993/94 is expected to be $26 million. As we conclude this financial year, $3.6 million must be subtracted from this amount for the servicing of debt and a further $1.5 million must be set aside for the Sinking Fund established by law last March as a prudent step towards amortising Government debt over the long term. Allowing for these deductions, the current account balance will be approximately $21 million at year-end 1993/94.

Each year the Government is at great pains to emphasise why a strong current account balance is absolutely essential. Every penny of this balance is automatically applied to the Capital Expenditure Plan. There was a time when the current account balance could be expected to fund all capital development and capital acquisitions. However, in these days of major capital outlays, this balance can do no more than fund routine capital development projects and capital acquisitions such as furnishings, equipment, computers and the like.

Funding for the major capital projects which the Government has undertaken, such as the prison and the incinerator, and those large scale schemes which will be undertaken in the future, in particular the school building programme, must come from borrowing.

In the current financial year, the capital programme is expected to cost $47.2 million. When the anticipated current account balance of $21 million and the $9.9 million cash in hand at the start of 1993/94 are applied to this, $16.4 million will remain to be obtained from borrowing, thus raising Government's direct borrowing at the end of this current financial year to about $80 million.

Estimates of Revenue and Expenditure for 1994/95 Mr. Speaker, I shall now move to the estimates for the coming year, 1994/95, where I will, inter alia, make further comments about capital expenditure and borrowing.

The estimates for 1994/95 indicate Government revenue, exclusive of some $3.8 million earned from airport operations which is to be applied directly to the new Airport Authority, of $385.2 million. This is $24.4 million or 6.8 percent more than the revised revenue estimate for 1993/94. The projected increase in revenue in the coming year follows a five-year period in which Government revenue simply kept pace with inflation.

Current account expenditure for 1994/95 is estimated at $358.1 million, which is $23.3 million or seven percent more than the revised expenditure figure for the financial year 1993/94.

Approximately $10 million of this increase in expenditure can be attributed to inflationary effects and minor expansions of existing programmes, many of which had been curtailed over the past three years with some deterioration in services to the public. The remaining $13.3 million increase is largely attributable to major new expenses which will be incurred with the return of the bases; the operation of the new incinerator and prison; the start of a five-year road surfacing initiative; increased support for the Bermuda Hospitals Board; and the promotion of international business and tourism.

Mr. Speaker, to the current account expenditure figure of $358.1 million must be added $42.7 million of capital expenditure, giving a total estimated expenditure, excluding interest and Sinking Fund charges, of $400.8 million.

This total expenditure figure for 1994/95 is up by $21.3 million or 5.6 percent over the original estimate for total expenditure in 1993/94.

Now that the new prison has been completed and the incinerator is close to completion -- these being the two largest capital projects ever undertaken by the Government -- capital funds in the coming years will be directed increasingly towards the school development programme.

Some $8 million is expected to be spent in 1994/95 in preparing the site at Prospect for a new secondary school as well as to begin work on several middle schools.

The full cost of the entire school development programme, scheduled to be completed in the next five to six years, is estimated at $114 million. This is a very substantial financial undertaking for any community of our size and brings home forcefully the commitment which the Government and the people of Bermuda are making to improve the entire public education system.

The fact that an additional $5 million has been provided to enable a start to be made on the final phase of the Bermuda College at Stonington reinforces this commitment. Furthermore, it is expected that this final phase will cost about $15 million over the next three years.