Dear Sir,

It was good to read that the budget deficit for the 2021-22 financial year is expected to be less than forecast: government deficit predicted to be $44 million less than original forecast (The Royal Gazette).

The following Q&A explains why we are still operating on borrowed time:

Why did the 2021-22 deficit decrease?

Looking below the headline, it is important to note that both government revenue and expenditure are increasing. The reason the deficit is reduced is because tax receipts are increasing by more than expected spending. Specifically, greater customs duty is the main driver of the revenue increase. Higher customs duty is largely because of the increased inflation trend that we are living through at present. This underscores how tax receipts are driven up by inflation.

So, inflation is the driving tax receipts up?

Yes. While inflation is supporting tax receipts today, which in turn reduces the deficit, we also need to take into account the trend going forward. What we are seeing is a recognition lag between inflation’s impact on receipts and expenditures. Clearly, wage and labour costs will increase in an inflationary environment. These increases are on their way. Higher expenditures will increase future deficits unless offsetting changes are made.

Aside from inflation, what else is going on?

Another key issue that will affect everyone in Bermuda is that in response to increased global inflation, the leading central banks are increasing interest rates at the fastest rate in 30 years. Higher interest rates help to reduce inflation by increasing the cost of borrowing, encouraging people and businesses to borrow less and spend less, thus slowing the economy. Five-year US treasuries now stand at 4 per cent, up from less than 1 per cent a year ago. This is a dramatic change that we have yet to account for.

We know interest rates are going up, how much would this cost Bermuda?

So long as we continue to run deficits, Bermuda’s debt must be refinanced. It is very likely it will be refinanced at higher interest rates given the present direction here and abroad. With $3.35 billion of total public debt outstanding, each 1 per cent increase in rates will cost the Bermuda taxpayer $33.5 million annually, which equates to a little more than $1,000 for each job holder each year. To put that amount in perspective, even if we doubled TCD fees from the level they are today, it would not cover a 1 per cent increase.

So putting this all together, what are we saying?

The fiscal situation is not improving as much as the recent headline sounds. We are in an inflationary environment, which will in turn lead to higher interest rates. This means we need to be even more careful when it comes to managing our public finances. Unlike large economies, we do not control our interest rates. We need to be much more prudent, otherwise the risk increases that the cost of servicing it will sink us. The risk will rise gradually, then all at once. We already spend 12 per cent of our tax revenue on interest and guarantee management, and with increased rates it will be on its way to 15 per cent. The higher the annual interest bill, the less we will have to allocate to domestic priorities. Such an outcome would hurt those most in need. Let us not be too quick to spend this inflation-driven difference.

What is described above is on the horizon; please do not dismiss it. We should use this inflation trend to help reduce our debt burden rather than increase it.

WILLIAM SOARES

Smith’s