Government’s Budget deficit is expected to be an “unsustainable” $295 million for the current financial year after the Covid-19 pandemic slashed revenues and sent spending soaring.

As a result, Government is considering removing funding for “lower priority” vacant public sector posts and offering early retirement to Government employees aged 55 or older in the next Budget, according to the pre-Budget report released yesterday.

Curtis Dickinson, the Minister of Finance, also revealed that Government will have to write down the value of the debt it bought when it put the Caroline Bay project into liquidation from $180 million to $1,000.

However, he said this accounting adjustment did not mean some of the debt could not be recovered.

The Pre-Budget Report said revenues for the the 2019-20 financial year could shrink by $208 million while unbudgeted Covid-19 spending may total $125 million.

The resulting $295 million deficit, $100 million higher than projections made at the beginning of the pandemic, means Bermuda’s outstanding debt will be $3.35 billion.

The report projected that gross domestic product will shrink by seven to nine percent in the current year and will be flat in the next financial year.

Government expects revenues to increase by some $80 million in the next financial year as a result of post-Covid recovery, fees for the Covid-19 Bermuda Travel Authorisation and some biennial increases in Government fees.

The Ministry of Finance aims to hold capital spending to $60-70 million and to cut current account spending by $20 million to $25 million.

With these measures, it projects a deficit of between $126 million and $155 million, which would bring overall Government debt to around $3.5 billion.

Mr Dickinson reiterated yesterday that he expected to present the 2021-22 Budget on February 26 and he also announced the release of the Fiscal Responsibility Panel’s report.

Mr Dickinson highlighted the “unprecedented level of economic hardship” dealt to the island by the global pandemic of the past year, including a significant decline in government revenues.

He said the report would reflect the impact of the virus on Bermuda’s economy and “provide everyone with an opportunity to understand the focus of the next Budget – but also allow the people of Bermuda to provide feedback”.

He reiterated there would be no new taxes and the report proposes extending debt relief measures.

He said that the Government had gone to the markets in August to buy back up to $500 million of its bonds from investors and selling new debt.

“The objective there was to raise sufficient capital to ensure that we could fund the Government for two to three years of deficits.

“No one at that point and no one today still has any sense of how long this pandemic is going to last.”

He called for the public to e-mail their recommendations on the Budget to openbudget@gov.bm.

Mr Dickinson said he would hold virtual meetings “in the coming weeks” with members of the international business community, the Chamber of Commerce, local businesses and trade unions, with consultation to end around February 1.

Mr Dickinson said there had been an “accounting adjustment” in relation to the failed Caroline Bay development at Morgan’s Point in Southampton.

In 2019, the Government was “forced to respond” to demands on the project’s guarantees.

The resort and condo development was backed by a Government guarantee to the tune of $165 million.

Mr Dickinson said the Government had opted to purchase the loans on the project, as opposed to a direct repayment of the guarantee.

Government also purchased the claims of subcontractors who had gone unpaid by the developer, Georges Bay Limited.

Government successfully petitioned the Supreme Court for the winding up of George’s Bay Ltd, and Mr Dickinson said the company’s assets remained in the hands of joint provisional liquidators.

Mr Dickinson added: “While we expect control to be transferred to the Government during this year, the Government currently only has a claim on those assets.

“This has an impact on valuing the claims according to public sector accounting standards.

“Our accountants and advisers have concluded that according to PSAS, and considering the current status of the liquidation process, they do not have enough information for the joint provisional liquidators to provide a valuation range for accounting purposes at this time.”

The claims assets have been written down by $183.3 million to a nominal value of $1,000.

Mr Dickinson added: “This does not mean the asset is worthless.

“Once the Government obtains control, we expect to restructure the assets as a going concern.

“The Government has engaged professional advisers to assist in the development of a realisation strategy that seeks to maximise the value of the Government’s claim.

“With the successful execution of any realisation strategy, we expect to see value put back into the financial statements.”

Mr Dickinson said there were “still a lot of challenges” before any return could be achieved on Caroline Bay.

He added it was a “stark reminder there can be a real cost to a government guarantee”.

Mr Dickinson also addressed the $11 million government payout to former staff of the Fairmont Southampton Hotel to cover their severance cheques.

The Government agreed to the payout last November after the hotel closed and laid off hundreds of people without meeting redundancy obligations.

Gencom Limited, the hotel’s owner, has pledged to repay the Government, but the former staff are prepared for a class action law suit to recover the money and repay the Government.

Mr Dickinson said “regular dialogue” continued with Gencom.

Mr Dickinson also paid tribute to Anthony Manders, the Financial Secretary, who died this month.

Mr Manders played a key role in Budget preparation.

Mr Dickinson also said he was confident in Bermuda’s long history of working with successive United States administrations, whether Republican or Democrat, with regard to its tax status.

He added: “We’re looking forward to the new administration coming in – we will do as we’ve always done.”