Whichever party wins the general election next month, political victory will come with the heavy responsibility for huge public debt and the need for unpopular decisions on government spending and revenue.By the end of the fiscal year in March next year, Government has projected that the public net cumulative debt will stand at $1.41 billion — roughly $28,000 for every Bermudian.The debt has shot up by a staggering 700 percent since 2005 and this fiscal year interest payments alone are expected to total $85 million — that’s nearly $233,000 per day. Put another way, interest payments come to about $1,680 per year for each Bermudian man, woman and child.Debt is a fact of life for all governments. And with a debt-to-GDP ratio of 25.3 percent, Bermuda, on the face of it, appears to be better off than most.The debt-to-GDP ratio is about 85 percent for the UK, for example, more than 105 percent for the US and more than 200 percent for Japan. However, these economies are larger and more diversified than Bermuda, which is heavily reliant on its main pillar of international business.The Royal Gazette columnist Nathan Kowalski, chief financial officer of Anchor Investment Management Ltd, said: “It is incorrect to simply compare an island economy like Bermuda to large diversified economies like Canada and the US. Small inflexible economies like Bermuda are far more subject to a potential debt crisis because they have limited funding options and levers to avert escalating default chances.“For example, history has shown that countries can default even at low levels of debt-to-GDP ratios. Ecuador defaulted in 2008 with debt-to-GNP of 20 percent. Albania defaulted in 1990 with a debt-to-GNP of only 16.6 percent. Russia defaulted in 1991 with a debt-to-GNP of only 12.5 percent.”The key concerns for voters are the rate at which the debt has skyrocketed over the past seven years and whether the Island can reverse that trend through a mixture of spending cuts and higher revenues and get the debt back on a sustainable path.One of the experts on Bermuda’s debt is Nikola Swann, director of sovereign ratings for Standard & Poor’s, and part of the team which issues Bermuda’s sovereign ratings.“Thanks in large part to substantial, liquid, foreign assets in its pension funds, Bermuda is a net creditor on a general government basis, by our measure,” Mr Swann said.“As such, relative to the size of its economy, Bermuda enjoys one of the stronger public sector balance sheets of all 128 sovereigns rated by S&P. We expect Bermuda’s strong financial position, particularly compared to highly-rated peers, to survive the economic downturn, supporting our AA- credit rating, our fourth-highest rating.”However, he did flag up the relevance of the lack of diversification in the economy, as well as the impact of the Bermuda dollar being pegged to the US currency.“That said, given Bermuda’s narrowly-focused economy, with heavy reliance on specialised insurance and tourism, combined with the lack of monetary policy flexibility implied by its fixed exchange rate regime, we view Bermuda’s credit quality as more reliant on the fiscal flexibility implied by its strong financial position than would otherwise be the case.“Bermuda’s credit quality is thus more sensitive to its fiscal metrics than that of the average sovereign, in our view.”And the fiscal metrics are in the red right now. Government has projected a current account deficit of $172 million for the year ending March 31. It could be much worse if the projections prove to be as wrong as they were last year, when revenue fell short by $70 million and expenditure was $70 million higher than planned.For Peter Everson, co-chair of the Bermuda Chamber of Commerce’s Economic Division, it’s not just the size of the debt that’s a concern, but also the fact that borrowing is now paying for everyday functions of government.“An individual who borrows to buy a house can rightfully say that is an investment, usual parameters applying — the right price, can afford the repayments, etc,” Mr Everson said.“An individual who borrows to pay the interest on a credit card debt is throwing their money away. An individual who borrows to pay their daily living expenses knows that there is no hope bar a lottery win.”Through his own analysis of the Consolidated Fund statements and National Budget books, he noted a significant shift in how Government borrowings were spent. He characterised the categories as the good (capital projects, at the right price); the bad (interest payments on previous borrowings); and the ugly (borrowing to pay for everyday expenses, such as salaries).The accompanying graph illustrates the results. “Note how the components of borrowings have moved in recent years,” Mr Everson said. “The good has been squeezed, the bad has grown and the ugly has appeared from nowhere.“These trends will not reverse when the overseas economies recover because they are the direct result of policy choices in earlier years. These trends will only reverse after there have been substantive policy changes.”Those needed policy changes will be among the toughest decisions for the election victors. Mr Kowalski, a chartered financial analyst, estimated that, in order to stop the debt-to-GDP ratio soaring out of control, Bermuda would need to start running a primary budget surplus of approximately 0.6 percent — something that has not happened for ten years. This would require an adjustment of around $200 million to the current budget.Mr Kowalski put the scale of that adjustment into perspective. “A pure revenue boost assumes revenues soaring by over 20 percent,” he said. “In other words, Government would need to produce record revenues when GDP is about nine percent below its peak.“The amount of spending that needs to be cut is equivalent to the size of the entire Department of Health — estimated Health Department spending for 2012 is $191 million.“If the Government were to reverse the current payroll concession afforded to the hospitality, retail and restaurant sectors, approximately $49 million in revenue could be raised. It would still, however, need to reduce capital projects and/or general expenditures by some $151 million.“To put this figure in perspective, this is double the current budgeted capital projects or the entire budgeted expenditure for the Department of Education.”Read more on Nathan Kowalski’s views in Business, Page 28