Although Government finances are more complex than household finances, the basic principles are the same:l If you find yourself running out of money before the next pay cheque, or can't afford to pay the rent or the groceries, you have to cut your spending or increase your income. These days, many people are all too familiar with this quandary.l Spending more than you earn over a long period of time means you are building up debts you can't pay for. Eventually, you will default.l There is nothing wrong, within reason, with borrowing money for major purchases or investments which would be unaffordable if paid for all at once. If you need to borrow to buy a house or a car, and the long term cost of paying for that item, plus the interest on the debt, falls within your day to day ability to pay, then it makes sense. If you can't cover the cost of the debt, you will eventually lose the house or car.Government finances are not much different. It makes sense to borrow for capital investments like airports, schools, hospitals, docks and so on. Provided these projects are built over time, completed efficiently and can be paid for over a reasonable period of time, it's a prudent approach.Day to day spending — on salaries, fuel purchases, garbage collection, vehicle repairs, debt service and so on — should be less than income from taxes and the like. If not, the deficit has to be paid for with borrowing. If you run deficits on day to day spending over the long term, you end up borrowing more, in part to pay the interest on the debt you already have. That is unsustainable. And that is where Bermuda is right now.This week, Bermuda raised $475 million in a new bond at an interest rate of 4.13 percent. $120 million of what was raised is supposed to pay off Government's overdraft with local banks, which charge a higher rate of interest. If that results in savings, that's good. But it also suggests Government can't meet its day to day obligations, and that's not good. Some of the bond will also be used to retire debt currently on a higher rate of interest and that is welcome too.Government says $180 million represents new borrowing, which is about $8 million more than was anticipated in the Budget.About $35 million of that will be used to pay interest, leaving the rest to pay for this year's current account deficit (borrowing money to pay for groceries) and the rest for around $75 million in capital spending, the biggest part of which is $15 million on improvements to the Tynes Bay Incinerator.As a result of the bond, Bermuda now owes $1.42 billion, four times more than the $345 million owed five years ago. The cost of serving that debt has risen from about $17 million a year to around $80 million. The interest alone on this amount cannot be paid from Bermuda's day to day revenues since these are running at a deficit. So around half of the new borrowing from the bond is being used to fund interest payments — taking on more debt to service existing debt.Government also intends to use the sinking fund, to pay $210 million in debt by 2016. But Government is using around $50 million of this fund to pay this year's interest. Premier Paula Cox says an economic recovery, boosting tax revenues, will bring the financial situation under control in due course. But this week's ratings downgrade by Fitch and the ratings agency's pointed comments show there is little confidence in Government's ability to do that.If Fitch is right, that means Bermuda faces a continuing growth in debt which can only be paid for by taking on more debt. Sir John Swan points out one of the other risks in his column on this page. Money used to pay interest on debt cannot be used on services to the public or improving infrastructure.Over time, the cost of paying for that debt will rise, and in the worst case, if Bermuda cannot meet its obligations — and that remains unlikely — it would default on the debt.Bermuda's physical assets would not be seized, but Bermuda would either be unable to borrow money, or could only do so at a prohibitively high rate. Bermuda is not there yet, and may not be for ever. But that's what will happen if the current trend does not stop, and it's a prospect no one should be happy about.