Budgets always have three functions.
One is the most basic – the fiscal question of whether the budget is balanced, how much is being spent, whether the Government is living within its means, what taxes are being increased, how much money has to be borrowed and so on.
The second area is the broader economic view –the effect will the budget have on the economy and what changes in the economic direction of the country are intended.
Finally, there is the purely political – what political goals does the Budget accomplish? How will the political opposition react?
Although the OBA did not draft all of the 2013-14 Budget, it was in power for the whole financial year, which began on April 1. Overall, the record is OK. Mr Richards forecast an overall deficit of $331 million, largely because of a hike in debt service payments and a projected increase in capital spending. In the end, the Budget is expected to have a deficit just $1 million higher.
However, on current account, Government’s deficit was $123 million, $10.9 million higher than projected as expenditures were $32 million higher and revenue were $21 million higher than projected.
The increases in expenditure are telling – $9 million extra to financial assistance and $12 million for the hospital are worrying, but understandable. Most Ministries hit their targets pretty well, which is a massive change from past years. The exception? Shawn Crockwell’s Tourism and Transport Ministry, which overshot its budget by $12 million with virtually every department overspending its budget.
Still, anyone hoping for a rapid reversal in budget deficits, or debt, will be disappointed. Debt will have reached $2.3 billion this year, a mind-boggling figure, with that debt expected to continue to increase in the medium term.
For this year’s Budget, the current account will continue to show a deficit, although it is expected to be cut to $44 million from this year’s revised $123 million and is projected to go into surplus in 2015-16.
Revenue projections are very conservative, with an increase of $9 million projected. Spending is projected to be cut by some $70 million through broad-based cuts about which there is little detail yet.
Clearly Richards is attempting to negotiate a difficult path – get the Island’s fiscal position “under control” in his words because the previous path was unsustainable.
He rightly states that the approach has to be twofold. There will be no long term improvement without growth, but runaway spending has to be curbed as well.
This budget suggests he is off to a good start, but the road will be a hard one.
Through the course of the year, Richards is going to pursue his big idea for controlling spending, namely by hiving off as many as 12 Government departments. Some like the Aircraft Registry are obvious because they already make money for Government. The idea is that once these services are in the private sector where there are greater rewards and accountability – features which Richards pointed out at the Budget Breakfast today are absent in the public sector – they will generate more revenue for Government.
At the same time, because these departments will be owned by their employees, they will create more investors in Bermuda, help the economy to grow and should help to preserve jobs.
The other big idea has two goals. Government still needs to embark on some infrastructure improvements and capital projects also keep people working and stimulate the economy. But Government is “tapped out” and cannot borrow any more money for these kinds of projects. So Richards has apparently bought into the idea of PPPs, orP3s – Public Private Partnerships, in which private investors provide the funds for public projects like the Causeway, the Airport and Tynes Bay Incinerator.
The idea is that Government does not have to start paying for the project until it is completed and presumably generating some income. Even then, the timeline for repayment can be long.
It’s a little surprising that Richards has bought into this. PPPs look great on the surface, but as the hospital is discovering, they still have to be paid for. The Bermuda Hospitals Board is scrambling to find the money for the first balloon payment on the building and with its own fall from profitability, is expected to struggle to keep up. All PPPs do is kick the can down the road and make payment someone else responsibility.
The third and probably most controversial aspect of the Budget lies in the abolition of the 60:40 ownership rule. Twenty years ago, this was a sacred cow and even discussing relaxing it was taboo. Times have changed. First the banks got waivers and now most have been bought outright. Many BSX companies have already received permission to waive the rule. Now the need for foreign investment is great and local capital and credit so limited that foreign investment is vital if Bermuda’s economy is to grow, says Richards.
Of course, many Bermudians already work for non-Bermudian owned firms in the banks, international companies and hotels.
Still, it’s not that simple. As Peter Everson pointed out, a building owner might be thrilled to rent space to a non-Bermudian business, but the Bermudian owner of a competing company will be less excited. And sometimes, this could be the same person.
Politically, 60:40 is still a hot potato and likely to be a major battleground in the House of Assembly and outside. Richards quite cleverly pointed out that 60:40 was put in place by the white oligarchy to maintain their control of the economy. But these days, opposition is more likely to come from what passes for the Left in Bermuda.
A stronger argument is that it was the PLP that got the ball rolling, both by giving HSBC permission to buy the Bank of Bermuda outright and later by relaxing the rules for BSX-listed companies. It’s hard for the PLP to make the argument it would have stopped there.
But there are contradictions in Richards position. He strongly criticizes the banks in his statement, but part of the reason that the banks are not acting in Bermuda’s interests is because they are not Bermudian-owned and their foreign owners have different priorities.
So this is going to be a long and difficult debate, or it should be.
More broadly, the political thrust of the speech is quite strong. Richards has made a strong point of the need for change and that Bermuda is staring at the abyss. Privatisation, relaxation of 60:40 and other steps are aimed at making Bermuda a less cosseted and protected place. That will create great possibilities for some and pose risks for others.
Certainly the PLP cannot claim this is purely an austerity budget because Richards is very clear Bermuda needs to both cut its spending and grow its income. In that sense, it is no different than a home where the main breadwinner has seen a reduction in income. Some economies are necessary at home, but Mom or Dad also has to find a way to increase their income through a new or second job. But the status quo cannot continue.