Wednesday, February 9, 2011

The Debt Deception Debate

Next week Friday, Premier Cox will deliver her first budget as leader. Immediately following this there will be a predictable outpouring of practiced outrage about the level of government debt. We will be reminded of how debt levels have increased significantly under successive PLP administrations, how it is not sustainable and what specific cost each of us must bear and then, necessarily, pass on to future generations. These denizens of doom want you to think there is something foul, something untoward, something irresponsible afoot. Don’t buy into it.

Governments borrow money to enable them to pay for things that cannot be financed out of its short-term tax revenue. This would finance, for example, a new cruise ship port, hospital, incinerator plant. It is akin to a family borrowing money to purchase a home. Rather than being sinister, it is entirely sensible and a prudent way to manage public funds while delivering social needs to the people.  One key issue here is the ability to service that debt. On this front, Bermuda has an excellent track record, making all its payments in a timely manner with no hint of trouble in this respect on the horizon. The bankers, then, are pleased and our credit ratings remain high, in sharp contrast to most European countries.

For the sake of clarity, and a momentary digression, we are not talking about cost over-runs on government contracts. The PLP government’s performance has been no better than the UBP’s record on this front and this calls into question whether governments are best suited to management large contracts.

Bermuda’s debt level is consistently below 20% of GDP, one of the lowest in the world. Many rich countries in the North have debt levels well in excess of 50%, with some approaching 100%. Britain, which has taken it upon itself to advise Bermuda on financial matters, has a 60% debt to GDP ratio. Comparatively speaking, we are at the very low end of the debt spectrum and we have no problem meeting our debt obligations.
Every major ratings agency gives Bermuda high marks for its fiscal policy. Bermuda’s fragile economy, though weakened, has navigated the treacherous channels of the global recession and steered clear of the groundings and implosions that have so deeply afflicted other countries.

The naysayers will tell you that this not an appropriate comparison because Bermuda is “different” than other countries. Of course it is. And so too is every other country different from every other country.  But the world collects data to make global comparisons. We compare population density levels, per capita incomes, infant mortality, and we compare debt levels. We do this to monitor trends and help shape policy.
Making the case for Bermuda being “different”, that we are ‘another world’ is only meaningful in a cultural sense, when accompanied by the melodic tunes of Hubert Smith. In the real world we forgo fantasy for careful analysis. 

One of the emotional arguments made is how we are saddling young people with this debt burden they will have to carry in a manner similar to Sisyphus rolling that massive boulder up the hill—a burden carried for an eternity. While the Bermuda government , like most governments, is likely to always use debt as one means of accomplishing its goals, it is entirely reasonable to expect that young people, who will share in the benefits of the infrastructure created—greater cruise ship revenue from a new port or better services from a world class hospital—should pay toward putting these in place.

When it comes to debating the debt we should do so soberly. We should do so with the demonstrated knowledge and understanding of what is going on globally and not simply dismiss that reality because it runs contrary some intended political invective composed as part of the budget debate. The people expect better, they deserve better and they will be listening..

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