A budget deficit is likely next year as revenues continue to shrink, but opinions differ over Government's role in the looming recession and what should be done.

Economist Craig Simmons recommends "extraordinary policy responses" and advised Government to continue spending in order to stimulate the economy. He maintains that because Government has spent the previous budget surpluses meeting the public's expectations for goods and services, they were unable to amass a larger war chest which could be used now.

But former Chamber of Commerce president Peter Everson offered a conflicting view – more money should have been saved and Government should look at reducing consultant contracts. The businessman further declared Government would have to borrow from banks to fund its social programmes.

Earlier this week Premier Ewart Brown said Bermuda's two economic pillars — insurance and tourism — were not immune to the current economic crisis but added Government was committed to continuing free Bermuda College tuition for students and free public transport for school students.

On the heels of his announcement Finance Minister Paula Cox said Ministries had been advised to cut their budgets by 10.5 percent but civil servant jobs were safe and taxes were not set to rise in the coming fiscal year.

Yesterday Mr. Simmons said: "It is naive to suggest that this Government has put us in a precarious situation. They were responding to the expectations of the people. We the people expect the Government to provide us with a raft of public services – fast ferries, state-of-the-art schools, safety and security in both the privacy of our homes and in public spaces."

He recommended Government eschew traditional economic thinking, that spending should not exceed revenues.

He said: "Traditions are all fine and good, but they can stifle progress. This may be the year that we will need to break that fiscal tradition.

"We must weigh the cost of allowing the economy to sink into a recession against the benefits of minimising disruptions to peoples' lives by way of job loss — the most distressing economic event in a person's life – foreclosures on homes — the largest investment of many households – and bankruptcy.

"We should be prepared to run a deficit given this environment; the adherence to rules is not appropriate at this time. Our leaders must be given the discretion to increase spending, even as tax revenue falls. What made the Great Depression of the 1930s was governments' unwillingness to spend as the private sector was contracting. Let us not repeat the mistakes of the past."

And Mr. Simmons said Bermuda's low debt level was the envy of the world – at around six percent of gross domestic product compared to approximately 60 percent in the US and 40 percent in the UK – and that once the economy stabilised Government would have to cut spending and pay back its debts.

But Mr. Everson believes more should have been set aside and predicts Bermuda could be in for a bumpy ride.

"Government revenues have increased enormously during the last ten years rising from $546 million to $985 million, an increase of 80 percent," he said. "In large part this growth has been driven by payroll tax.

"Unfortunately for Bermuda, just like the US house buyers who deluded themselves into thinking that house prices only went up, the Government has been spending all of this increased revenue.

"Now the music has stopped, the economy will shrink and the Government revenues will decline. Hence the problem."

Mr. Everson said one scenario could see the economy shrinking to the level it was at in 2005/2006 — this would mean a loss of 1,000 jobs resulting in approximately $60 million less in payroll tax revenues.

He said: "Add in the (estimated) $14 million extra cost for the Police pay in 2009/10 and you already have a $74 million problem without any declines in other revenues — we already know that tourist revenues will decline — and you have to add in the cost of other public sector pay awards that have already been signed for multi-year periods.

"So under that scenario you can see why the Ministry of Finance is looking to reduce expenditure by $100 million."

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