Debt the ‘biggest threat to prosperity’
Bob Richards issued a stark warning on the importance of tackling the island's debt and added that a casual attitude towards extra borrowing would be “irresponsible and dangerous”.
The finance minister made the comments in his annual Budget statement, as he projected that Government would spend around $135 million more than it will take in over the coming 12 months.
Debt servicing costs of $186 million are now “the largest line item in the Government's budget” and amount to more than $500,000 per day, he said.
Allowing the debt to grow would limit Government's ability to provide public services, trigger credit ratings downgrades that would in turn impact local banks' ratings, potentially leading to a real-estate slump and mortgages being called.
He said while no one wanted to see such a scenario, “Government must protect against such risks by taking action now so that it never happens”.
The net public debt will reach nearly $2.4 billion by the end of next month, rising to $2.47 billion by March 31, 2018.
Debt servicing costs now outstrip expenditure on the largest ministry, Health and Seniors, by more than $23 million.
Increases in payroll tax rates for high earners and employers, a hike in customs tariffs and a new financial services tax that will hit banks and local insurers, will enable the Government to raise revenues and remain on target to eliminate the deficit by 2019. Government plans to increase revenues by 4.6 per cent to $1.04 billion, while reducing spending by 1.6 per cent.
For the year ending March 31, 2017, the Government took in less than expected and spent more, resulting in a revised deficit expected to be $212.2 million — nearly $13 million more than had been planned.
In the House of Assembly, Mr Richards went to great lengths to explain why more painful measures were necessary, describing the national debt as “the single biggest threat to the future prosperity, standard of living and social stability of the people of Bermuda”.
“For every dollar of revenue that the Government takes in during this upcoming year, 17.7 cents will come off the top to service the debt,” Mr Richards said. “In 1998, it was 2.8 cents.
“The greater the debt, the larger the debt service costs; the larger the debt service costs the less money Government has available for crucial social and safety services. The danger point here is simple: increasing the national debt will increase debt service and crowd out Government's ability to perform its core services to the community.”
He said there were still “some who remain sceptical about the seriousness of this threat” and who wanted Government to borrow more “to build something, like a new airport terminal”. “The real consequences of such action is debt service costs crowding out Government's ability to fulfil its obligations to the people of Bermuda for education, healthcare, social services and security. Such casual attitudes to the national debt are both irresponsible and dangerous.”
The Ministry of Finance projections show the deficit being eliminated by 2019-20. But to achieve that, it plans to generate a further 6.5 per cent increase in revenue in 2018-19, as well as a 2 per cent cut in spending.
Mr Richards said Government had managed to reduce annual debt servicing costs by $4 million through a $665 million bond issue last October with a yield of 3.717 per cent — a record low coupon for Bermuda Government bonds. While $188.9 million was new borrowing, the rest made of higher-yielding debt that was retired.
Mr Richards said that with interest rates on a rising path, financing future deficits would become more expensive.
“The opportunity the Government recently took to refinance bonds at ultra-low rates may not likely present itself again in the near future,” he said.
A $180 million debt repayment is due in 2019-20.