The Bermuda Government's mounting debt problem can be traced back a few years to when the economy was booming, according to the Bermuda Chamber of Commerce.

In a statement on Finance Minister Paula Cox's recent comments on the debt situation, the Chamber's Economics Committee said that the deficit was "structural", as opposed to being linked to the fortunes of the economy.

Peter Everson, chairman of the Chamber's Economics Committee, warned that a revival in the Island's economy would not alone stop the debt problem from growing — a fundamental change in fiscal policy would also be necessary.

"Over the opening years of the last decade (1999/00 to 2002/03) Government's total current expenditures amounted to about 85 percent of its revenues," the Chamber's commentary stated.

"The surplus of 15 percent was available to pay interest on the debt, contribute to the Sinking Fund to repay debt and to meet capital expenditures. This surplus turned negative in 2004-2005.

"The deficit we have is a 'structural' deficit, as opposed to a deficit related to a period of low or no economic growth. The first year of this deficit — 2004-2005 — was a period of robust economic growth. Since then, the current account deficit has grown, whether the economy has expanded or contracted."

Ms Cox has attributed much of the increased borrowing to the Government's need to spend more on public programmes during the economic downturn, at a time when revenues have also slowed as a resulting of decreasing economic activity.

Mr. Everson said his viewing of historical statistics indicated that a change in policy was the fundamental cause of increased borrowings that have led to a total debt outstanding that reached $826 million as of the end of June this year.

The consistent pattern of Bermuda governments budgeting current account expenditure at about 85 percent of revenue changed in 2004/05, he added.

As a result, current account expenditure in 2005/06 rose to 88.3 percent of the revenues and, after debt-related and capital spending was taken into account, the budget went into deficit.

For the current fiscal year, budgeted current account expenditure is projected to reach 101.4 percent of revenues, even before the $38 million cost of servicing the debt and the $28 million contribution to the Sinking Fund are paid for.

"The problem is that current account expenditure alone is bigger than the revenues, meaning that everything spent on debt servicing, debt repayment costs and capital expenditure has to be borrowed," Mr. Everson said.

"It is not a question of if we wait a couple of years for the US economy to recover, then it will all be sweetness and light. That's not going to be good enough. That won't affect the fact that expenditure on the programmes for the people is far larger than the revenues coming in. If they continue to do that, then the debt will continue to increase."

The option of increasing revenues was limited, Mr. Everson said, as several sectors of the economy had proved unable to shoulder the payroll tax increases already imposed.

Hotels and taxi drivers had already been granted payroll tax breaks, while restaurateurs were negotiating for a deferment, he said.

The Chamber's commentary also noted Minister Cox's comparison of Bermuda's debt situation with that of countries like the US, the UK and Switzerland.

These were larger countries with diverse economies unlike that of Bermuda, which was reliant on two main "prongs" of tourism and financial services, the Chamber said.

The commentary also mentioned the Cayman Islands — like Bermuda a British Overseas Territory and an offshore financial centre — where public debt reached a crisis point last year, when the Caymans' Governor refused to allow the Government to borrow more until it had come up with a plan to cut its debt.

"The Cayman Islands, which has a similar economy to Bermuda's, and has a 24 percent debt-GDP ratio [compared to Bermuda's 13 percent debt-GDP ratio], has recently undergone a detailed outside evaluation of its finances and is taking steps to reduce its debt levels by rigorously cutting government expenditures, and encouraging the growth of work permits, which are seen as contributing to employment and business expansion," the Chamber stated.

Whoever succeeds Ewart Brown as Premier will have some tough decisions to make to halt the trend of rising Government debt, Mr. Everson said.