It is difficult to assess the state of the economy in 2007 without gross domestic product (GDP), balance of payments and employment data. There are, however, data in the public domain that allow a glimpse of some of the major trends in spending. For heuristic reasons, we will take the expenditure approach to national income accounting. Consumer spending is by far the largest spending category.

Three-quarters of all spending is by consumers. The best proxy for consumer spending is the retail sales index (RSI), which is published by the Department of Statistics on a two-month delay. The data in the RSI represent 70 percent of all retail activity, but it does not include the largest part of consumer spending, spending on services. The latest RSI figures put retail sales for 2007 at $1.11 billion, which is about the same as 2006. Unless there was a significant increase in spending on services, it is unlikely that consumer spending increased. It follows that if the economy grew in 2007, it probably wasn't consumer driven as was the case in 1996 to 1999. Investment spending on new homes and buildings as well as business equipment, typically accounts for 14 percent to 18 percent of GDP.

Spending in this sector is relatively volatile. John Keynes, an influential British economist from 1920-1946, described investment spending as driven by 'animal spirits'. By that he meant, profit maximising behaviour could not explain the ebb and flow of business spending. Much of the supply response by developers to the demand for housing and buildings was fuelled by animal spirits. The sheer pace of development could not help but lead to an over-supply of condominiums in a market where ironically there is an acute shortage of affordable housing.

During a virtuous investment spending cycle, commercial and residential real estate demand are strong, prices are expected to rise, credit is plentiful, and risk is under-priced. When this scenario begins to unwind, demand slows and as a result price expectations set by developers and realtors are not met. A concomitant of a weaker market is inventory accumulation of existing homes and buildings.

It would not be an exaggeration to say that we are at the end of a virtuous real estate cycle. We know from the Budget Statement that employment is down in construction. GDP growth, if it existed in 2007, did not likely come from investment spending. Domestic demand increased in 2007 because government spending was six percent higher than in 2006. Ordinarily such an increase would raise the ire of fiscal conservatives, but when taken into perspective, one notes that over the last 10 years government spending has increased from 17 percent to 18 percent of GDP — hardly a cause for concern.

There is confusion over the meaning of the terms deficit and debt. The deficit or budget balance is the difference between current government spending and tax revenues in any given year. The deficit does not include capital spending. It is a Bermudian fiscal tradition that the deficit is positive, that is, current government spending should be less than tax revenues. The resulting surplus is put toward capital spending. The national debt is a result of borrowing to cover the shortfall between the budget surplus and planned capital spending. Debt then is an accumulation of deficits and borrowing over time.

It is also a fiscal tradition for capital spending to be on hard assets, such as schools, buses and ferries, office buildings, bridges, etc. In theory, these hard assets can be sold to pay off any debt, which is what Margaret Thatcher's government did in 1980. When Thatcher became Prime Minister, British debt was more than 100 percent of GDP. After selling/privatising state-owned industries, British debt was eliminated.

The ratio of debt to GDP, now at 6.4 percent, is at a record high. It would be an exaggeration to infer that government borrowing or spending is out of control, just as it would be an act of denial to discount the impact of rising debt. Fiscal conservatives will argue that the present generation should be mindful of saddling future generations with too much debt. They may also suggest that just as benevolent parents bequeath assets to heirs, a government should create a reserve of foreign currency and assets for posterity as both a buffer against the vagaries of globalisation and as a source of government revenue that is not a tax.

It is fair to say that the people of Bermuda have high expectations of the government to deliver goods and services that cannot profitably be provided by the private sector. The political-economic climate, however, is such that government debt can continue at its present level. The Bermudian economy is finally showing signs of maturation. GDP figures aside, the economy is more like that of a developing country than a developed one. We rely totally on exports and that reliance is further underscored by dependence on one sector — international business. This is a disturbing trend, which is why the events of the last three years are welcomed. The economy has grown a third pillar from investment income on foreign assets held by Bermudians.

Investment income earns more foreign currency than tourism, although those earnings go to relatively few hands. Since the end of the last recession in 1992, Bermudians have earned more foreign currency than they have spent.

The resulting surpluses have been converted into income generating assets. Bermuda's new economic pillar is unique in that ownership of the underlying asset that is generating the foreign currency is in Bermudian hands. The new pillar also achieves a social objective of broadening the economy's narrow base. It maybe the case, that diversification requires a change of economic objective from maximising GDP to maximising the current account surplus.

Craig Simmons is a lecturer in economics at Bermuda College.