Fiscal panel warns of danger of Government guarantees
Financial guarantees given by the Government to private firms pose a “significant risk” and should virtually never be issued, an independent group of international economic experts has warned.
The annual study by the Fiscal Responsibility Panel, whose members visited the island for five days in November, raised the alarm as the report pointed to the example of the Morgan’s Point project.
The comments come in the aftermath of a major government bust-up on the issue when Curtis Dickinson quit as finance minister because he was concerned at the level of guarantees being offered to developers of the planned $376 million Fairmont Southampton revamp.
The report said: “Guarantees for commercial businesses pose a substantial risk – as has been seen in the recent call of the Morgan’s Point guarantee – and should be significantly curtailed.
“Guarantees virtually never should be issued to back commercial projects – including those included in the Economic Recovery Plan.”
The Premier has committed to give a guarantee of $75 million, representing 21 per cent of the revised costs of the Fairmont Southampton project.
As well as giving a $75 million loan guarantee to Gencom, the Fairmont Southampton developers, the Government has also pledged a $30 million one to the BLDC to help pay for improvements to the water and sewage system in the East End.
A guarantee of $50 million was given to the Bermuda Commercial Bank in support of scheme to help first time buyers get on the property ladder.
And the Bermudiana Beach Resort received a $10 million guarantee.
While the National Sports Centre was given a guarantee for a $3.235 million loan on behalf of the centre for the purchase and installation of its renewable energy system.
The study also warned that the level of Bermuda’s national debt was a “serious concern”.
It called for renewed efforts to achieve a Budget surplus of $50 million a year from 2026-27 as the “absolute minimum needed to make appreciable inroads into Bermuda’s large external debt burden”.
The panel also stressed reform of the tax system was vital for economic growth.
The report states: “The long-term increase in debt – now well over $3 billion, nearly three times annual revenues – remains a serious concern.
“We expect the Government to remain within its fiscal guardrails for the ratios of gross and net debt to GDP for the forecast period.
“The 2022-23 plans announced in the 2022 Budget in February provide for revenues and spending higher than previously planned.
“Beyond 2022-23, the higher revenue forecast assumed some increase resulting from both tax reform and continued revenue buoyancy; the increase in the spending plan reflected a more realistic vision than that in the 2021 Budget – the extremely tight restrictions of which in our view were unlikely to be realised.
“And the overall fiscal strategy set out in 2022 was more coherent and credible than that of previous Budgets, in particular the adoption, in line with our recommendation, of a target for a budget surplus of $50 million in 2026-27.”
However, the report added that the Budget projections were not “realistic”.
It stated: “Yet, the 2022 Budget projections themselves are no longer realistic as spending plans and revenue estimates for this year are both now significantly higher than projected at the time of the Budget.
“Furthermore, the Budget assumed that spending would grow by only 1.5 per cent per annum in future years, but in the panel’s view this was, and remains, extremely unlikely. Rather, based on spending pressures and recent experience, the panel’s own ‘likely scenario’ is for spending to grow 1 per cent more slowly than revenues.
“This would result in the budget not being balanced until 2025-26 and a budget surplus of about $25 million in 2026-27, well short of the $50 million target.
“Even this assumes that tax reform, long delayed, does finally deliver some structural increase in revenue.
“And even under this relatively optimistic scenario, the debt to revenue ratio would remain close to 300 per cent, in sharp contrast to the Government’s long-term objective of 80 per cent.”
The study said a bigger effort on immigration was needed.
“The single most critical problem facing Bermuda in the medium to longer term is that of the size and composition of its population,” said the report.
“Addressing this problem is a question of increasing immigration and the labour force -there is no other solution.”
The panel called for more action on pension liabilities, including raising the retirement age.
The report said that in the field of healthcare the Government must move “from plans to implementation” of proposed reforms.
The panel praised the Government for responding to economic challenges with “an ambitious and challenging agenda: the Economic Recovery Plan, the Bermuda Health Plan, the Climate Task Force”.
The study also raised environmental issues, stating: “Bermuda is at high risk from climate change. The current serious and welcome focus on improving the resilience of the island to rising sea levels and extreme weather events must be sustained.”