Our Gross Domestic Product for fiscal year 1995/96 grew by nearly 4 1 percent in real terms and looks set to have enjoyed further growth of 2 1 percent to 3 percent during 1996/97. This means that over the last three years, on average, our economy has grown over two percent in real terms per year. The current account of the balance of payments showed a record surplus of $147 million during 1995 and appears to have enjoyed a further substantial surplus in 1996.

Employment levels rose by 1 1 percent to 34,633. Government borrowing fell below expectations and is expected to remain very modest at 6 1 percent of GDP at the end of this fiscal year. Consumer price inflation remained low and stable at around 2 1 percent throughout the year.

Mr. Speaker, these are excellent fundamentals, matched by few other countries in the world. They underline the prudence and skill with which the Government has managed its economic responsibilities, a fact confirmed by Bermuda's Aa1 sovereign debt rating assigned by Moody's Investors Service.

The most positive economic news emerged from the international business sector. Honourable Members will recall that the Archer Report for the year 1995 shows that foreign currency earnings from international companies reached record levels. Those companies spent $527 million in Bermuda in 1995, 22 percent more than in 1994. 84 percent of the total was spent by those with a physical presence in Bermuda, only 3.1 percent of all companies on the register.

Total employment in international companies exceeded 2,200, and nearly 13,000 jobs -- just under 40 percent of the total number of jobs in Bermuda -- were dependent on international companies expenditure. I am pleased to announce that the latest indicators for 1996 show that the international company sector continued to display very robust growth: 1,080 new companies were formed during 1996, making it the second best year on record. New company incorporations in the fourth quarter of 1996 reached record levels of 308, over 40 percent more than in 1995. Employment data also indicate that companies with a physical presence continued to grow strongly, with employment levels reaching 2,420.

In the face of increasing international competition, this is a clear vote of confidence in the underlying strength of Bermuda and her economy. It helps to explain why government revenue generated by international companies, including revenue generated by re-spending of income by households and businesses, amounted to $192.5 million in 1995, compared with $153 million generated by tourism.

Evidence of vibrant economic activity also emerged from the construction industry. Total wages and salaries paid within the industry have risen by over 50 percent since the beginning of 1994, and the value of expenditure on major projects increased by over 90 percent in the first nine months of 1996. The Alliance of the Construction Industry forecasts that construction investment expenditure will continue to remain buoyant for the next two to three years.

Mr. Speaker, while the overall economic picture is strong, the Government is well aware that competitiveness problems continue to hold back some of our traditional industries. This is particularly true of tourism. Total visitor arrivals rose by 2 1 percent in 1996. However, arrivals by air grew by just under 1 percent, and many hotel properties experienced a decline in the average length of stay of their guests. Cruise ship arrivals reached record levels at around 180,226. This compares with 154,000 in 1993, 173,000 in 1994 and 170,000 in 1995.

There were some encouraging signs for the retail industry, as first quarter retail sales values grew by 6.9 percent in nominal terms compared to the corresponding quarter of 1995. While sales growth moderated during the remainder of the year, there are signs that businesses in the retail sector are beginning to respond to some of their underlying problems and adjust their business strategies and structures.

Overview of Revenue and Expenditure for Fiscal 1996/97 Revenue Mr. Speaker, the projections of revenues to be received in the current fiscal year were made against the background of challenging economic conditions in Bermuda as well as continued difficulties facing some of our major tourist markets in the United States. Last year's Budget was carefully designed to provide Government with the revenue necessary to finance its activities, while giving businesses the opportunity to adapt to these challenging conditions. I am therefore very pleased to see that many businesses have seized those opportunities.

As a result of these actions, and underlying economic growth in the international business and construction sectors, the revised revenue outturn for the 1996/97 financial year is likely to be in excess of the budgeted figure of $452.6 million. Revenues have been strengthened by an improvement in payroll tax, which is projected to generate some $128 million, or $13 million more than forecast, reflecting a strong employment situation and the Government's efforts to enhance compliance. Revenues from stamp duties, vehicle licenses and golf courses have also been strong. Customs duties are expected to generate about $141 million, $2.7 million more than forecast. The revenue estimate for 1996/97 has been revised upwards, therefore, by some $20.5 million to $473.1 million.

Expenditure Current account expenditure has been kept under firm control during the year as Government adopted the position that unbudgeted items could be introduced by departments for the most part only where corresponding dollar savings could be identified in their budgets. This has required departments to scrutinise and carefully prioritise their proposed expenditures.

There have been, nevertheless, some significant unbudgeted items that the Government has been required to support. The principal items are $1.4 million for the mainstreaming of special needs children; $500,000 to strengthen the Ministry of Tourism's marketing initiative; $435,000 on continued capital infrastructure improvements at the Airport; $250,000 for further support for legal aid; and $250,000 as a further grant aid to the Lady Cubitt Compassionate Association. Additionally, $225,000 in capital expenditure was spent on improvements to the Somerset Police Station.

Savings in other areas of Government, especially debt charges and social assistance, have offset much of this expenditure, however. The result is that the revised estimate of current expenditure for 1996/97 is expected to total some $435 million, or $1.3 million below the total original estimate of $436.3 million.

Cash in hand at the beginning of the financial year of $12.6 million, combined with a projected current account balance of $38.1 million, provided $50.7 million for capital expenditure after provision for debt service of $8.5 million and a contribution to the sinking fund of $2.5 million. In consequence, the total borrowing requirement for 1996/97 was kept to around $25 million, compared to the anticipated amount of $56.6 million.

Capital Borrowing The Government's foreign currency debt position remained unchanged over the year. In addition to the US$75 million Senior Note issue due 2004, US$35 million has been drawn against the US$110 million syndicated loan facility.

$29 million has been on-lent to the Bermuda Housing Corporation. The balance of US$75 million on the syndicated loan facility will be drawn down as needed over the next several years to finance the Government's capital expenditure programme.

At 31st December, 1996, the total Government debt outstanding was $135 million excluding sinking fund balances. The amount includes the BD$20 million bond issue, the US$75 million Senior Note issue, $35 million on the syndicated loan facility and $5 million in local overdrafts.

It should also be noted that in 1996 Government raised from $2 million to $4 million the amount of the National Education Guarantee scheme to provide further loans through Bermuda's banks to Bermudian students. This Guarantee, however, counts against the total Government borrowing liability. With guarantees included, the total amount set against the statutory borrowing limit will approximate to $140 million at the end of this financial year, net of the sinking fund balance.

Given the relatively strong economic growth of the last two years, it would appear prudent to undertake a review of the legislated debt ceiling sometime in 1997/98. The present ceiling was established in 1991, and there is also the policy restraint that limits overall government debt to 10 percent of GDP. As the $20 million bond is due to mature in November, 1997, the Government may use the opportunity to review the statutory debt ceiling which remains set at $185 million.

Estimates of Revenue and Expenditure for 1997/98 Mr. Speaker, the result of the policy implemented by Government in 1996, which requires Ministries and departments to seek to fund unbudgeted new initiatives begun during the course of a fiscal year from savings in existing programmes, is to place the emphasis on funding new programmes in the annual Budget. This emphasis assists Government to focus more readily on its commitments and priorities. Expenditure in 1997/98 will support those valid, ongoing programmes to which Government is already committed. New funding will emphasise the importance that Government places on preparing Bermudians to meet the challenges of the Twenty-first Century through education and training, and will provide the environment in which Bermudians can live safe, happy and productive lives. These new expenditures will be investments in the future that will undoubtedly result in new opportunities for employment and skills enhancement.

Nevertheless, the Government recognises the need to control the growth in public spending, which in recent years has exceeded that of the economy. This year's Budget will therefore limit the growth in total government spending to 21 percent, which is in line with the expected rate of inflation. This Budget will, therefore, set the stage for a steady decline in the size of Government relative to the overall economy.

Capital Expenditure The presence and growing importance of international companies emphasises ongoing structural change in our economy, and the need for education and training to enable Bermudians to take advantage of new opportunities.

Government recognises this and is continuing to emphasise expenditure in these areas. The most significant items of capital expenditure in the 1997/98 Budget relate to the physical plant needed to support educational reform. Having completed the Bermuda College at a total cost of $30 million, Government proposes to spend some $65 million in total on capital account in 1997/98, $20.7 million of which will be spent on the completion of the new Cedarbridge Academy and the modification of other schools, including the upgrading of The Berkeley Institute.

In addition to this emphasis on education, $2.7 million in capital will be spent on the development of an adolescent residential care facility; $3.5 million will be spent on new computer equipment and software to service Government; and $4.7 million will be spent on Airport renovations, $3.1 million of which will be spent on the retail and arrivals area. Government property upgrades that were deferred as a result of recent Government cut-backs will be carried out by the Ministry of Works, Engineering, Parks and Housing at a cost of $2 million. In addition, a further $5 million is being earmarked for Government office relocations and alterations. The Bermuda Land Development Company will receive $4.3 million to support the development of infrastructure on the Kindley baselands.

All of these capital expenditure items position Bermuda and its people to better meet the competitive challenges and take advantage of the opportunities of the Twenty-first Century.

Details of Current Expenditure Projections The ten Heads of expenditure with the largest current account budgets, in the coming year, ranked in descending order are: 1. Hospitals $56.2 million 2. Department of Education $54.9 million 3. Works and Engineering $53.8 million 4. Tourism $31.7 million 5. Police $30.4 million 6. Accountant General $24.3 million 7. Airport Operations $15.1 million 8. Financial Assistance $14.8 million 9. Prisons $12.4 million 10. Health $12.0 million Mr. Speaker, in addition to the capital expenditure on educational facilities already referred to, the Government is committing a further $1.66 million on current account to restructuring of educational programmes operated by the Department of Education. $796,000 is allocated for the operation of Cedarbridge Academy, and $500,000 is committed to the training of teachers to support restructuring. A further $200,000 is allocated for senior school curriculum development. $165,000 is added in respect of consultancy to support education restructuring. Also in Education, $1,243,000 is required to provide the teachers and teaching assistants needed to staff the special needs children's programme, and $144,000 is included to provide long service awards negotiated by the Bermuda Union of Teachers.

$393,000 is allocated to the Bermuda College to support the innovative programme called "Best Steps''. This programme provides tutorial and financial assistance for those who wish to upgrade their qualifications to gain admission to the College and continue on to further education.

In furtherance of its commitment to Bermudianisation, the Government is allocating a further $97,000 to the Department of Personnel Services to support the supernumerary programme in the Civil Service. This brings expenditure on the programme to the level of $1.9 million annually.

The Government's commitment to the Island's youth is not limited to education, and this Budget sees a further $276,000 in new funding committed to a wide range of programmes in the Ministry of Youth Development, Sport and Recreation. The after school programme at Victor Scott School will receive $84,000, and new sports areas at the former Kindley baselands will be managed at a total cost of $107,000. Grants to sporting organisations have been increased by $100,000 to fund drug screening and to strengthen the administration of the national sports of soccer and cricket.

Mr. Speaker, Government recognises that in this changing world, education and training become a life-long process. As Bermuda adjusts to structural economic changes brought about by the digital revolution, Government must facilitate the training and retraining of adults whose skills must be updated to compete effectively for employment.

In 1996/97, provision was made for the creation of the new Department of Labour and Training. In 1997/98, $682,000 is provided in new funding to support the activities of the Department, and some $350,000 is being provided for various new employment and training initiatives. $144,000 will directly fund the new National Training Board, and $138,000 will be used to support its first training initiative developed in partnership with international companies. Government welcomes the partnership of international business in the development and training of Bermudians and acknowledges the $5.7 million in scholarships generously provided in 1995.

This Budget draws considerable attention to the significant and growing role international business plays in Bermuda's economy. As a consequence, in 1996/97, Government will both respond to the increasing needs of international business and develop the strengths of the Ministry of Finance by providing for thr e new posts in the Ministry headquarters at a cost of $206,000. The duties of these posts will support directly the needs of international business. In addition, the grant allocated to the Bermuda International Business Association through the Registrar of Companies will be increased by $350,000 to support international marketing efforts. Proposed changes in companies legislation and improved systems designed to meet current and future client requirements in the Registrar of Companies' office are currently under active review, and it is anticipated that Government will support those changes that lead to improved service.

In 1995, Government commissioned a review of its insurance options. The recommendations approved by Cabinet in 1996 included the appointment of a risk manager. Tenders have been let for the appointment of a consultant manager and $100,000 is provided in 1997/98 for these services, in anticipation of the realisation of significant cost savings.

Mr. Speaker, the Auditor recently reported to you on his plans to complete outstanding annual Audit Reports on the accounts of the Government of Bermuda.

$200,000 in additional funding is provided to support secondments to the Auditor's Office in order that the target dates may be achieved.

Government is now the sole shareholder in the newly-formed Bermuda Land Development Company Limited, the company responsible for ensuring development of the former baselands. Current account funding to the amount of $5.5 million is to be provided in 1997/98 to support the company's activities. $2.4 million is provided to maintain existing Serco contracts; $1.2 million is needed for salaries and benefits and $900,000 is needed to support security contracts for Kindley and Daniel's Head as the company takes over that responsibility from the Police.

Mr. Speaker, reference has already been made to the structural change occurring in tourism and the need to develop a community-based plan to improve Bermuda's competitiveness. The Minister of Tourism will discuss his comprehensive plans for a broad re-examination of tourism in Bermuda.

Resources already allocated to the Ministry of Tourism will be redirected internally by the Ministry, but a further $500,000 is allocated for work to be coordinated by the Monitor company, a Cambridge, Massachusetts consulting firm, whose engagement was initially sponsored by the private sector. The Government welcomes this partnership role with the private sector in managing change in what has been our primary industry for so long.

Mr. Speaker, Government recognises that significant progress has been made to modernise the Police Service and make our Island community a safer place to live, work and visit. Crime figures are down significantly in important areas, and inroads have been made in the war against drugs. The 1997/98 Budget continues to support the efforts of the Service to maintain Bermuda's reputation as a safe destination and to give better protection to its citizens. Of a total of $1.2 million gross in additional funding for Police operations in 1997/98, $615,300 is allocated to salaries, uniforms and benefits as a further sixteen police posts are civilianised and their current occupants move out to policing duties. This brings to 43 the number of officers returned to regular policing duties over the last two years.

`Big government' era ends The Ministry of Finance will see three new posts dedicated to supporting international business, while the work of the Bermuda International Business Association will get a $350,000 boost for its marketing effort.

And the Police Service will also get a cash injection of an extra $1.2 million to improve efficiency and help step up the war against crime.

Children will benefit from extra social work support to combat child abuse and strengthen the family. The elderly will be helped by extra cash to fund in-patient hospital care and the first phase of the National Pension Scheme will be implemented.

And while bus and ferry fares for the general population will go up by five percent, the elderly and disabled will get special cards entitling them to free travel on public transport. The cost of a car licence, however, will also go up by five percent.

And the King Edward Hospital and St. Brendan's will see an extra $5.4 million, while education initiatives will get a further $2.6 million.

Duty on printing paper has been abolished, while duty on printing machinery has been reduced.

But Dr. Gibbons pledged to keep the growth in total Government spending -- which has exceeded economic growth in recent years -- to 2.5 percent, which is in line with the expected inflation rate.

He said: "The Budget will, therefore, set the stage for a steady decline in the size of Government relative to the overall economy.'' But Government is also to review the legislated debt ceiling set in 1991. A policy restraint also pegs debt at 10 percent of the Gross Domestic Product -- which remains set at $185 million.

Dr. Gibbons also unveiled Budget figures which he said were "overall....very encouraging''.

The projected results for 1996-97 show revenue rose more than $20 million above that Budget's estimates to more than $473 million, while expenditure is expected to be $1.3 million lower than expected at $435 million.

Spending on debt charges is likely to be $2 million less than predicted, while Social Assistance is set to come in $2 million under the Budget figure.

Government is expected to spend a total of $526.7 million -- up 2.5 per cent -- in 1997-8 while revenue is predicted to hit $488.4 million, up by 3.2 per cent.

Current expenditure is expected to reach $461.7 million and expenditure on major building projects will hit $65 million.

Progressive Labour Party Shadow Finance Minister Eugene Cox slammed the financial blueprint for 1997/98 as a failed attempt to capitalise on the feelgood factor in the run-up to a general election.

And he said: "The reason for an attempt at a feelgood Budget is because we have a pending election.'' Mr. Cox said that tax breaks in retailing benefited tourists, not the man in the street.

He added: "We have to assist our tourists but we have to be realistic. Our consumers must benefit when an attempt is made at a Budget.

And Mr. Cox pointed out that ferry and bus fare increases would hit not only residents but visitors as well.

He claimed the Budget Statement sounded good -- but lacked substance.

Mr. Cox said: "It's a lot of verbiage in the Budget but I want to see some programmes and a demonstrated attempt to make things happen for Bermuda -- the restructuring of Government.'' And he accused the UBP of a "half-hearted'' adoption of a PLP vision of a Ministry devoted to international business without giving the Opposition credit for the idea.

Mr. Cox said: "It's these kinds of things which say to me it doesn't come across as a feelgood Budget.'' But Dr. Gibbons said that an election date was a matter for Premier David Saul -- who last month ruled out a snap poll in the interests of stability.

He added: "There are some people who will say it's an election Budget but this is a Budget appropriate to the challenges of 1997.

"It's a good, balanced Budget -- it will stimulate certain types of spending in the economy and that's very positive.'' HOUSE OF ASSEMBLY HOA