yesterday by Finance Minister the Hon. David Saul.

To His Honour the Speaker and Members of the Honourable House of Assembly, Mr.

Speaker, Five years ago the Budget of 1990 1 alerted the Country to the need to prepare for the on-coming recession and that Budget was followed by a series of three carefully crafted Budgets designed to overcome the problems which the downturn in the economy brought.

In introducing last year's Budget, I drew the picture of an economy moving slowly but steadily out of recession and anticipated that this movement would continue through 1994. That picture was drawn against the uncertain but highly challenging background of the impending Base closures.

During the years of recession the Government responded to the needs of the community by emphasising capital expenditures, controlling the size of the Civil Service, and reassessing current expenditure priorities while, at the same time, providing essential social programmes. Government Departments were required to reassess their priorities and make their own cuts in expenditure designed to effect the levels of savings set by Cabinet.

In 1994 it was necessary to begin to prepare for the heavy costs which the Base closures would impose on Bermuda, and plan for consequential funding requirements. Hence, last year's Budget was designed to encourage economic recovery in anticipation of the burdens which would need to be shouldered in the short and medium term, leading up to that time in the future when the Island is able to realise the full benefits of the absorption of lands equal to some ten percent of the area of Bermuda.

In 1995, now that we have a much clearer picture of the costs involved in the Bases takeover it has become apparent where the priorities lay. From the outset it was obvious that the country's financial and economic affairs had to be carefully adjusted to meet the new and immediate operational requirements of what will soon be recognised as The Bermuda International Airport. The Government is today being called upon to face complexities that, by comparison, will make the running of the Civil Air Terminal seem insignificant.

Over the past six years, sensible economic planning and sound budgetary preparation has placed the finances of this country in a position which now allows us to take advantage of the global economic recovery. This stewardship has earned an 'AA1' rating by an international rating agency for our recent $75 million note issue. Notwithstanding, Bermudians must appreciate the fact that the decisions taken by the Governments of Canada, the United States and the United Kingdom to close their military Bases in Bermuda will have far-reaching and dramatic effects on the future economic affairs in these Islands. The decisions taken by those three foreign Governments reflect the new realities of a post-Cold War world. Bermuda will now have to react and respond to these new political consequences with the same degree of fiscal creativity that it has demonstrated in the world of international business. We must seek out new economic opportunities by displaying a high degree of vision and foresight. Only in this way will the decisions taken now and over the next few years result in positive long-term outcomes.

Mr. Speaker, it should come as no surprise that the Bases issue has dominated the preparation of this Budget, one that would, in the normal state of affairs, have been a routine Budget, following what has been a year of recovery and growth in most areas of the economy. In short, the Bases closures have not come at what could be called the ideal time. However, the challenge is unavoidable, and hence this 1995 Budget is designed to guide the country successfully through this Bases transition period. The stage has been set, we must all now play our part.

Economic Performance 1994 Three factors have led to significant growth in GDP in 1994: a continuation of the revival in the tourism sector, a sharp acceleration in the level of international business activity, and a recovery in the level of fixed capital formation.

Led by a record number of 172,865 cruise ship passengers, tourism's recovery has continued. The 416,990 air passengers were only 0.9 percent more than the corresponding total for 1993 but the 1994 total visitor count of 589,855 made it the best year in overall arrivals since the record breaking year of 1987 and the fourth best ever. However, the number of visitors is only one indicator to consider. The Bermuda Hotel Association reports that the average length of stay in their properties increased to 4.8 days for the ten month period ending October 1994, compared with 4.5 days for the same period in 1993. This has been matched by a 6.7 percent increase in total visitor expenditure in the nine months to the end of September 1994 when compared with the same period for 1993. In the whole of 1993, tourists spent $509 million in Bermuda.

The other pillar of our economy, international business, has continued to expand, and is contributing substantially to the Island's foreign exchange earnings and economic growth, earning the Island some $485 million in 1993. In the calendar year 1993, international companies spent $392 million in Bermuda, an increase of 9.2 percent over the $359 million in 1992. In 1994, a record number of 1,091 international companies and 61 exempted partnerships were added to the Register, showing that confidence in Bermuda as a domicile of choice remains strong. The total number of international companies stood at 8,224 at the end of 1994. The number of insurance companies, a key component of our international business, rose by a net 42 over the previous year. Total assets in the Bermuda insurance market in 1993 totalled $69.9 billion, and total capital and surplus increased by 33 percent over the figure for 1992 to $29 billion.

There has also been an improvement in the level of fixed capital formation during the last 12 months. Much of the increased expenditure has been in the form of new plant and equipment, or investment in information technology systems by the business community. In addition, there are also signs that the construction industry itself is beginning to turn around. The value of new construction projects started during the first nine months of 1994, at $25.4 million, was more than two and one half times the level for the same period in 1993.

However, the slower than anticipated growth in consumer expenditure has resulted in the volume of retail sales increasing by only 2.2 percent for the year ending October 1994 as compared to the corresponding period in 1993.

Nonetheless, this generally positive overall economic performance is further underscored by an increase in the number of filled jobs in the economy.

Following five successive years of decline from 1988 through 1993, there was a reversal of the trend in 1994. The results of the 1994 Manpower Survey show that the number of jobs had increased by 716 or 2.1 percent to 34,143.

This statistic needs to be read together with the numbers recorded as "unemployed'' by the Government Employment Office and the data maintained by the Financial Assistance Department. The figures show that unemployment was down from a peak of 1,089 in April 1993 to 370 in July 1994 before seasonal layoffs commenced for the winter. At the end of November there were 529 persons on the unemployment register. The number of persons applying for financial assistance has declined, and the number of recipients has stabilised, albeit with seasonal variations. Further evidence of an improvement in the economy is the fact that work permits of a one to five year duration issued for the year to the end of November 1994 were 1.4 percent up over 1993, to a total of 5,531.

The competitive position of Bermuda has been further helped by the maintenance of a low level of inflation. The average rate of inflation for the twelve months ending December 1994 was 2.3 percent, compared with 2.5 percent to the end of December 1993 and this figure is below that of the US and it has been so for the last two and one-half years. If we are to remain competitive, we must continue to make every effort to keep inflation within bounds.

On the international scene, economic prospects for the major industrialised nations are better than they have been for many years. Unemployment has begun to decline in many countries while inflation has been low and is likely to remain so in the near term. Generally these international developments should be favourable for Bermuda.

Conversely, the expansion in the United States economy is maturing rapidly and there is a general consensus that little, if any, spare capacity remains. This fact implies that the Federal Reserve Board will probably take further steps during the course of 1995 to raise short-term interest rates in order to dampen inflationary pressures that are beginning to show signs of emerging.

Notwithstanding the prospect of further US interest rate changes during the course of 1995, Bermuda is well placed to take advantage of a higher level of world economic activity.

Overview of Revenue and Expenditure for the Financial Year 1994 5 Revenue Total Government revenue for the 1994 5 financial year is on target and is projected to total $390.2 million, some $2 million more than was originally forecast in last year's Budget. Lower than expected consumer expenditure has produced some variances from the original estimates with the result that Customs Duty receipts are anticipated to be down by some 5.4 percent. For a variety of reasons, despite a slight increase in visitor numbers, hotel occupancy tax receipts are anticipated to be down by $500,000 or 4.2 percent.

These reductions have been compensated for by additional receipts from Hospital Levy and Employment Tax, reflecting the improving economy and the increased level of employment. Revenue from Hospital Levy is now projected to increase by $4.5 million or 7.3 percent over the original estimate and Employment Tax by $2.5 million or 9.4 percent. There has also been a marked increase in the sale of property to non-Bermudians with revenue now projected at $7 million, compared with $3.5 million in the original estimates.

The projected modest increase over the original revenue estimate for the current year underscores the fact that the gradual strengthening of the economy during 1994 has not been generally translated into a corresponding increase in Government revenues. As a result, projected revenue as a percentage of Gross Domestic Product is expected to decline to 19.9 percent this year compared with 20.2 percent in fiscal 1993 4.

Expenditure Mr. Speaker, the current account expenditure outturn for 1994 5 is expected to be $365.5 million, some $4.3 million or 1.2 percent more than the original estimate. This slight increase is accounted for almost entirely by the necessary preparations for the assumption of responsibility for the Base lands, and more importantly, the overriding obligation to assume total operational responsibility for the Airport on 1st June, 1995, three months ahead of the actual withdrawal date of the United States Navy.

Government provided $2 million in the current estimates for initial exploratory investigations associated with the return of the Bases. However, significant additional sums have had to be committed to fund surveys of the current state of the buildings and equipment being handed over to Bermuda, and to conduct extensive examinations of the damage to the physical environment following decades of military use. These complex tasks have been vital to prepare for both the future operational and infrastructure needs of the Airport and the various other Base lands. There was absolutely no option but to incur the additional expenses associated with these studies.

On a more positive note, Government's forecast current account balance for the year of $24.7 million was strengthened by cash in hand at the beginning of the year of $23.7 million. After provision for debt service of $7.2 million and the contribution to the Sinking Fund of $1.9 million, a sum of $39.3 million was available for capital expenditure against the planned commitments of $40.9 million for the year. As a consequence, the borrowing requirement for 1994 5 was kept to a minimum of $1.6 million putting the country in a more favourable position to deal with the Base expenses.

Mr. Speaker, Government's long-term capital programme has been subjected to close scrutiny and review during the past year in anticipation of the vital capital equipment requirements arising from the handover from the United States Navy of full Airport responsibilities and functions. As a result of these reviews, some capital priorities have had to be adjusted. This step became obvious in light of the projected scope of the capital programme for the Bases which unquestionably will necessitate some major funding over the next ten years.

In June, 1994, the Government completed the first phase of its medium-term borrowing strategy when it secured US$75 million through a ten year 7.59 percent Senior Notes issue in US private capital markets. Proceeds of the loan were used to repay a maturing $40 million loan to NM Rothschild & Sons Ltd.

and a $15 million loan to the Bermuda Housing Corporation. The balance of $20 million is now available to help fund Government's major capital works projects.

Mr. Speaker, the Government has now entered the second phase of its borrowing strategy and will soon seek to finalise arrangements for a syndicated bank loan of $75 million. Depending on circumstances the Government also retains the option of a smaller local bond issue.

The AA1 rating which Moody's Investors Services assigned to the Senior Notes issue coupled with Government's prudent fiscal policies have stood the country in good stead and should strengthen our position as we move into the second phase of borrowing.

The Government believes that the policy guideline of limiting borrowing to 10 percent of GDP is a sound one and the country can be assured that this guideline will be maintained when the statutory borrowing ceiling is reviewed.

As Bermuda's economy continues to strengthen and expand, it will be possible to review the statutory limit of $185 million in the next two or three years.

It should be noted that Bermuda's GDP reached $1.86 billion at the end of June 1994.

Contributions to the Sinking Fund, which was established in March, 1993 to provide for the amortisation of Government debt over the long term, now stand at $3.4 million. The establishment of this Fund was a wise move, evidenced by the fact that it is seen by overseas and local financial institutions as a very prudent step designed specifically to instil confidence in potential lenders.

Estimates of Revenue and Expenditure for 1995 6 On June 1, 1995, the Government of Bermuda will be responsible for providing all of the air operations at the Airport, namely: air traffic control, ground electronic maintenance, meteorology eronautical information services and crash ire escue services. This will be the first step in a two part plan to take over the entire control of the International Airport.

On September 1, three months later, the final step will be taken when the Government assumes responsibility for all of the Airport infrastructure, which includes all the runways, taxiway and apron maintenance, airfield lighting, jet fuelling system, water and sewage services. It must be stressed that each of these responsibilities is in addition to the air operations services. Both sets of obligations -- air operations and infrastructure -- have now to be shouldered by Bermuda for the first time.

These major undertakings have been or will be contracted out initially, with the air operations contract alone extending over five years, $5.5 million of which will be due in 1995 6, decreasing gradually each year to a low of $3.5 million in the fifth and final year of that contract.

The contract to maintain the infrastructure of the Airport as outlined above is estimated in its first full year to be in the order of $6.1 million. The total estimated cost of the new Department of Airport Operations in 1995-96 is $18.4 million of which some $13.9 million represents new money. The main components of this sum are the two major contracts referred to earlier together with funding for a significant strengthening of the Airport management team, increased property insurance, and security costs in respect of the terminal areas and airfield perimeter.

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