to the Budget Statement, which he delivered in the House of Assembly yesterday.

To His Honour the Speaker and Members of the Honourable House of Assembly: Mr. Speaker, I am pleased to present to this Honourable House the United Bermuda Party reply to the 2000/2001 Budget Statement.

One year ago, just three months after the 1998 General Election, the Progressive Labour Party Government delivered its first Budget to the people of Bermuda. Generally reassuring, their first Budget was notable for what it did not do. Many observers were relieved. Aside from a dramatic increase in spending, the first PLP Budget signaled "business as usual'' and provided financial support for many programmes initiated by the United Bermuda Party Government. The Island continued to enjoy the benefits of a robust economy, which reflected decades of prudent financial management by UBP Governments.

Mr. Speaker, What a difference a year makes. The first PLP Budget -- with its unequivocal promise of no tax increases -- wasn't cold before land taxes were raised, and what a whopper that hike was: a 25 percent jump in the total land tax bill.

Having spent lavishly on first-class travel, entertainment, cars, road shows and self-congratulatory magazine inserts, the PLP Government gave itself $15 million-supplementary to the $36 million increase already included in the Budget. That's not small change, that's not prudent management and who's to say there won't be more? Mr. Speaker, The community is no longer relieved. The mood is uneasy. Self-indulgent Government spending at taxpayers' expense irritates the people of Bermuda. Our seniors, small businesses and hotels in particular felt betrayed by last year's unexpected land-tax increases. Recently announced restrictive immigration policies and bureaucratic de facto affirmative action programmes are perceived as threats to the economic well being of companies and employees alike.

Recent economic indicators offer cold comfort to the concerned. Inflation increased from 1.9 percent in February 1999 to 2.8 percent in December 1999.

The balance of payments surplus on current account for the first three quarters of 1999 declined by $22 million over the same period in 1998, the first decline seen since 1995/96. Every key tourism measurement but one was down in 1999. International business expenditure has leveled off for the first time in several years, and GDP figures demonstrate that the rapid economic expansion of the nineties has slowed considerably.

Mr. Speaker, These indicators are not signs of an economy in free fall. They are, however, signals that Bermuda's economy, steered by a new PLP crew, is drifting off course toward troubling economic waters.

In last year's Budget the PLP pledged "financial discipline in all matters''.

They indicated that spending would be financed "from the healthy growth in the economy that will generate revenues from the existing tax base''. They declared that the Government would support "policies leading to low inflation''. They stated that "the watchwords of the PLP Government are accountability, transparency and fairness''.

These are impressive words that clearly contradict the record established by the PLP Government during the past year. Either the PLP Government doesn't know what financial discipline is, or they have abandoned their stated goal.

They either don't understand the relationship between Government spending and inflation, or they choose to ignore it. We can only guess at the answers, because we know answers won't be forthcoming: The transparent and accountable government-in-waiting has become the inaccessible and silent Government-in-hiding.

Overview of Revenue and Expenditure for 1999/00 Mr. Speaker, In our Reply to the first PLP Budget, we drew attention to the fact that the budgeted increase in current account expenditure over the prior 1998/99 year was $35.9 million. Effectively, this was a 7.4 percent increase in spending, about four times the rate of inflation and almost four times the projected rate of GDP growth for our economy. At the time, we were pleased to note moderation in the capital spending budget of $58.3 million, an expenditure that was slightly less than the revised estimate of $61.7 million in the prior year's Budget.

Unfortunately, during the course of 1999 the spending increased, and Parliament was asked to approve three supplementary items totaling in excess of $15 million. The revised outtake for the 1999/2000 Budget year now projects a current account expenditure that is some $40.3 million, or 8.5 percent, higher than the prior year's original budgeted expenditure. The revised capital expenditure has jumped by some $9 million to $67 million.

These results are in sharp contrast to the moderation demonstrated in the last United Bermuda Party Budget in 1998/99. This Budget showed a final current account expenditure that exceeded the prior year by only $8.4 million, a 1.8-percent increase, well within the rate of inflation and GDP growth. The final capital expenditure of $56.2 million was $16 million, or 22 percent, less than the 1997/98 year.

On the revenue side, it is interesting to note that the actual revenue for the 1998/99 year exceeded the original estimate by over $35 million and provided an actual surplus on current account of $71.5 million. After subtracting the capital expenditure of $56.2 million, the country-thanks to the United Bermuda Party Government-was left with an overall Budget surplus, after both current and capital expenditure, of over $15 million.

Contrast this performance to the PLP record in the current 1999/00 financial year. The revised revenue looks to exceed the original estimate of $551.6 million by some $18 million. After this is applied to the revised current account expenditure of $502.3 million and the revised capital expenditure of $67 million, there is a residual deficit of $12.3 million.

Bermuda's bottom line has changed from black to red. We have gone from a budget surplus to a budget deficit in just one year. For now, there is a UBP-generated safety net, because this PLP deficit has been covered by the UBP surplus from the prior year, eliminating the need to resort to even further borrowing.

Even though the economy was still relatively buoyant in 1999, the revised Budget numbers suggest a trend toward deficits and a widening gap between expenditure and revenue. This trend is ominous given an economy whose growth began to moderate in 1998, and it suggests complacency and lack of discipline in the budgeting process.

Mr. Speaker, One week ago, the Government delivered its second Budget, but it is the first to be entirely shaped by PLP economic policy, and it will be the first to be judged accordingly.

Estimates of Revenue and Expenditure for 2000/01 The widening gap between budgeted expenditure and revenue continues in the PLP Government's second Budget. While the increase of $17.7 million, or 3.5 percent, in current account expenditure for 2000/01 over the original estimate for 1999/00 is a significant improvement over the budgeted increase from the previous year, it is still well in excess of the rate of inflation and the anticipated growth in our economy. It is also interesting to note that this $17.7 million increase was only reached following a last-minute, across-the-board effort to cut five percent from the current account expenditure in the 2000/01 Budget. While this effort is commendable in principle, we wonder whether such a last-minute effort can be made to stick, particularly given the pattern established in this year's Budget, where a flurry of supplementary items, totaling $15 million, followed shortly after the original budget document.

On the capital side, however, not even modest restraint has been shown. The budgeted capital expenditure for 2000/01 of $90.5 million is an extraordinary 50-percent increase on the original 1999/00 Budget of $58.3 million. When this capital budget is combined with the current account expenditure budget of $528.7 million, there is an increase of almost $50 million, or 8.8 percent, over total expenditure in the 1999/00 Budget.

Apart from its potential to exacerbate our increasing level of inflation, this expansionary expenditure package is expected to add another $28 million to Bermuda's national debt. It has also required hefty increases in payroll tax and land tax on residential properties.

Mr. Speaker, In our response to last year's Budget, we noted that the large increase in spending, without a corresponding increase in tax, was only possible due to the legacy of strong revenue growth and disciplined spending inherited from the United Bermuda Party Government. Unfortunately for the people of Bermuda, the "spend'' has now been joined by "tax'' and indeed "borrowing'' in the PLP's second Budget.

In order to feed the 50-percent jump in projected capital spending in 2000/01, the Minister of Finance has hiked the payroll tax on most businesses by three quarters of one percent, of which one quarter can, and probably will, be passed on to employees. Although small businesses will only get a one-quarter percent hike, their employees will most likely absorb all of it.

While taking away with the right hand, the left hand has offered a concession to large businesses: A payroll credit of $2,400 for each worker employed can be deducted from the business's total payroll that is subject to payroll tax.

It is not clear, however, why such a complicated artifice should be created.

Is it the PLP Government's intention to remove this payroll tax credit eventually in the same way the so-called "discount'' on land tax has now been decreased? Why not simply increase payroll tax by one quarter or one half of one percent? Whether these concessions are real or illusory must be determined by each business on the basis of its own payroll. What is clear, however, is that the cost of doing business in Bermuda is now higher than it was before the PLP Government came to power.

Mr. Speaker, Land tax has been hiked again in less than nine months. However, unlike the extraordinary May 1999 increase, of which $5.3 million was allocated to businesses and $1.6 million to residential properties, this new $3.7-million land tax will be directed entirely against residential properties. In the Parliamentary debate on the original increase, the Opposition pointed out the impact this would have on Bermuda's senior citizens on fixed incomes. Now the Minister of Finance has belatedly acknowledged that hardship by increasing the senior citizen tax exemption by a further third, or $10,000. Unfortunately, this Budget more than doubles the 1999 increase. We can only wait and see whether the promise of "broadening of the tax bands'' will "significantly temper'' this huge increase in residential land tax.

As for businesses, particularly those with large premises such as retail shops and hotels, the rethinking of the May land tax increase and the concessionary drop from six percent to 5.5 percent may be too little too late. These businesses still face a $4.3 million tax. This tactic gives new meaning to the old saying "I'm from the government and I'm here to help''. It is particularly ironic in light of the PLP election promise to work with the private sector to reduce the cost of doing business in Bermuda.

Mr. Speaker, Following the PLP election promise to retailers to introduce duty free shopping, the changes in the customs tariff in this Budget are insulting. The decrease in the tariff on artificial fibre clothing to 10 percent may provide some assistance to struggling retailers, but when the duty on natural fibre clothing goes from 2.5 to 10 percent at the same time, the result may be, effectively, a wash. For some smaller retailers who depend on natural fibre clothing for their trade, the increase may further undermine their margins and livelihoods.

Mr. Speaker, We support the increase in duty on cigarettes. The further increases in company fees and user fees for Government services are perhaps to be expected from a Government looking for revenue, but they do add to Bermuda's reputation as an expensive place to live and do business.

Mr. Speaker, The Report on the Bermuda Tax System should be released as promised in last year's Budget Statement, and serious consideration should be given to the "Duty Free Shopping'' programme for tourist-oriented retail outlined in the report. In addition, the PLP Government should announce its tax policy, if one exists. A clear and consistent tax policy is a hallmark of well-managed economies, as it allows individuals and businesses to plan their economic futures with greater certainty.

External Economic Considerations Mr. Speaker, Since last year's Budget, the world economic outlook has brightened considerably. The Southeast Asian crisis and the associated instability that affected currency and capital markets in other developing nations has receded, and the impact of volatile capital flows has become less of a pressing issue.

Urgent discussions by the G7 finance ministers aimed at fixing the global financial architecture and restructuring the role of the IMF are no longer front-page news. Overall projections for global economic growth are considerably more positive.

The US economy to which Bermuda's fortunes are intimately tied has recently broken the record for the longest expansionary period in US history, while US unemployment has dipped to a 30-year low. Inflation has been held in check by gains in productivity. Federal Reserve Chairman Alan Greenspan recently declared in his half-yearly report to Congress that the current state of the economy was "unprecedented in my half century of observing the American economy''.

In the US, the Conference Board Consumer Confidence Index in December 1999 reached the highest level in its 32 years of existence, suggesting that American consumers are still very optimistic about their economic prospects.

Perhaps this is no surprise, given the booming stock market, high asset prices and the intoxicating pace of IT and Internet-driven change. In the last six months of 1999, the US economy expanded at the blistering pace of 5.5 percent, and the Congressional Budget Office is projecting GDP growth of 3.5 percent this year.

Indeed, there is some irony for Bermuda -- as we face a mounting debt -- that the current US budget debate has been focused on the most appropriate allocation of their healthy budget surplus. Economic indicators in the UK suggest that the Chancellor of the Exchequer will face a similarly pleasant quandary when he contemplates the disposition of the UK surplus in his upcoming budget. An overall budget surplus is a high-class problem that Bermuda, unfortunately, no longer enjoys.

There are, however, some concerning indicators coming from the US Employment costs rose by 3.4 percent in the 4th quarter, mirrored by an inflation level that edged up to 2.1 percent in the same quarter. The price of oil recently exceeded $30 per barrel for the first time in nine years. In addition, both corporate and personal debt levels continue to rise dramatically.

In order to contain this torrid growth and rising inflationary pressures, the US Federal Reserve moved again at its February meeting to increase the Fed funds target rate to 5.75 percent, which has now taken US. short-term interest rates to their highest level since December, 1995.

Against this backdrop of strong growth and rampant consumer spending, there are some, including Robert Rubin, the former US Treasury Secretary, who see a paradox of prosperity in these generally optimistic US economic conditions.

This strong economic performance seems to have diminished the willingness among investors, businesses and the public to exercise discipline and take the actions necessary to prolong the prosperity. Mr. Greenspan recently stated that "we cannot be lulled into letting down our guard on budgetary matters''.

In Bermuda, the cost of economic complacency is high.

While the US economy is broadly diversified and continues to grow strongly, the Bermuda economy-narrowly dependent on tourism and international businessshows unmistakable signs of cooling. In 1998/99, GDP growth fell to an estimated 1.5 percent from the 4.3 percent experienced in the prior year. The contribution from tourism to GDP fell below 20 percent in 1998/99, the lowest recorded level in Bermuda's history. It has plunged further during the current fiscal year. More dramatic is the change in expenditure by international business; averaging 16 percent in recent years, growth in spending by international business dropped to less than one percent in 1998/99.

Mr. Speaker, Many Bermudians will ask, "How can you say times are bad when they're so good?'' Opposition Members are not the only ones to note the proliferation of new $60,000 luxury cars on Bermuda's roads, the staggering amount of overseas purchases by Bermudians, the renovations and additions to homes and the trips abroad.

Yet it is this rampant consumer spending -- along with a hotter-than-hot construction industry -- that is currently fueling what residual GDP growth Bermuda currently enjoys. Unlike tourism and international business, however, neither consumer spending nor construction is capable of supporting Bermuda's economy over the long run.

HOUSE OF ASSEMBLY HOA