Pre Budget Report (2012 2013)

8/3/2019 Pre Budget Report (2012 2013)

http://slidepdf.com/reader/full/pre-budget-report-2012-2013 1/34

GOVERNMENT OF BERMUDA

Ministry of Finance

In advance of Fiscal Year

Pre-Budget

Report



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Ministry of Finance __________________________________________________

Pre-Budget ReportIn Advance of Fiscal Year 2012-13

Contents

Chapter 1 Purpose of the 2012-13 Pre-Budget Report ................................................. 3

What is a Pre-Budget Report? ........................................................................................ 3

The Purpose of the Pre-Budget Report .......................................................................... 3

The Principles of Good Fiscal Policy ................................................................................ 4

Budgeting for Uncertainty in the Economy ................................................................ 4

Setting Fiscal Policy Priorities with Revenue Uncertainty .......................................... 5

International Best Practice ......................................................................................... 5

Medium Term Expenditure Framework (MTEF) and a Multi-Year Fiscal Consolidation

Strategy ........................................................................................................................... 6

What is a Medium Term Expenditure Framework? ................................................... 6

Chapter 2 Economic Policy and the 2012-13 Budget ..................................................... 7

2010 GDP Contraction Constrained by Tourism Gains ................................................... 7

The Bermuda Economy in 2011 .................................................................................. 7

Near Term Outlook ..................................................................................................... 9

Bermuda and the Global Financial Crisis ...................................................................... 10

Cause for Concern ..................................................................................................... 13

2010/11 Budget Review and Other Financial Information for Fiscal 2010-11 ............. 15

2011-12 Mid-Year Review ............................................................................................. 16



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Chapter 3 Fiscal Space: the Trade-off Between Competing Objectives ....................... 18

Fiscal Space ................................................................................................................... 19

The Government's Fiscal Space Enhancing Strategy .................................................... 20

The Government’s Approach to Medium Term Fiscal Policy ....................................... 20

Our Policy Trade-Offs ................................................................................................ 21

The Medium Term Expenditure Framework ................................................................ 22

Which Scenario Should Underlie the 2012-13 Budget? ........................................... 22

Policy Options Under Consideration for 2012-13 Budget ............................................ 23

Harmonising Duty for Personal Imports ................................................................... 23

Possible Changes to the Betting Tax ......................................................................... 24

Increases in Sin Taxes ................................................................................................ 24

Biennial Fee Increase ................................................................................................ 24

Rollback of Tax Expenditures .................................................................................... 24

Land Taxes ................................................................................................................. 25

Creating a Local Debt Market ................................................................................... 25

Chapter 4 Increasing our Expenditure Flexibility ....................................................... 26

The Case for Efficiency Savings ..................................................................................... 26

What Are Efficiency Savings? ........................................................................................ 26

Realising Efficiency Savings ........................................................................................... 28

Adoption of a Multi-Year Approach .............................................................................. 28 Externally Driven Efficiency Review Process................................................................. 29

Chapter 5 Conclusion ................................................................................................ 30

Commitment to Budget Transparency ......................................................................... 30

Feedback Encouraged ................................................................................................... 31

ANNEX. Efficiency Reviews in Other Countries .......................................................... 32

The Canadian External Review Process ........................................................................ 32

The British External Review Process ............................................................................. 32



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Chapter 1

Purpose of the 2012-13 Pre-Budget Report

What is a Pre-Budget Report?

It is important that citizens and stakeholders are aware of the factors driving the

Government's budget policy choices. The Government is accountable for developing

budget strategies to cope with international turbulence, and the strategies adopted

should be transparent and open to comment.

To ensure this, the Government is introducing a Pre-Budget Report as part of the

preparation process for the 2012-13 budget. This reflects this Government’s decision to

participate in the Open Budget Initiative.

"Greater transparency and public participation in the budget process is more likely

to yield spending priorities that serve the best interests of society as a whole... The

regular release of information can provoke public debate and encourage

accountability. And budget information is important not just for accountability to

the public but also for internal management purposes.

Holding the government fiscally accountable requires the production and

dissemination of budget information from the formulation stage, through

approval, execution, and evaluation (or oversight). Yet around the world today,

citizens and legislatures frequently lack at least some basic information about

government decisions and actions at every stage of the budget process."1

The Purpose of the Pre-Budget Report

The introduction of a Pre-Budget Report is another important step towards transparent

government in Bermuda. It includes several innovations when compared to Bermuda's

previous annual budget processes:

It places the 2012-13 budget preparation in the context of a consistent multi-

year consolidation strategy, and is part of the Government's process for

introducing a medium term expenditure framework (MTEF) for preparing annual

budgets. It includes 'stress testing' of budget policies for alternative revenue outcomes in

the medium term, including a scenario in which a renewed world economic crisisundermines future growth in Bermuda's public revenues.

1HarikaMasud and Jason M. Lakin, 'What the Open Budget Survey 2010 Tells Us about the Global State of Transparency’, Yale Journal of International Economics, winter 2011, p. 65.



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It discusses, and quantifies, the trade-offs between the Government adopting

stimulus budgets that compensate for softening demand in the private sector,

and contractionary budgets that bring earlier debt reduction.

It describes possible budget polices (particularly for current spending) through to

2016, and indicates their debt implications.

It outlines measures proposed by the Government to improve the budget trade-

off between boosting jobs and cutting debt. This entails cutting spending in areas

with limited impact on government objectives, thus enhancing options in later

budgets for allocating the resulting increase in fiscal space between pro-growth

spending and debt reduction.

In short, the Pre-budget Statement outlines the Government's multi-year

strategy for weathering the storm. It spells out what this means for the 2012-13

budget and where we are likely to be in four years time. It reviews the

implications of international volatility for Bermuda (as it impacts future budget

revenues) and the decisions facing the Government about how to manage the

tensions between the need for expansionary budget policies and maintainingprudent fiscal balances.

The Principles of Good Fiscal Policy

Budgeting for Uncertainty in the Economy

In uncertain times fiscal rules must accommodate volatility in the funds available for

future budgets. Sluggish international growth may continue to limit Bermuda’s ability to

increase gross domestic product, generate or sustain employment opportunities, and

increase Government revenues to support expansionary budgets. There is a financing

gap between the stimulus policies that we would like to continue in order to protect

jobs and the policies we are able to finance due to diminished revenues.

The Governments must either continue to borrow funds to bridge this financing gap, or

must cut spending to accommodate actual revenues. The latter strategy could

ultimately result in public sector down-sizing, which leads to increased weakness in the

private sector.

Many governments are struggling with this dilemma. Some countries have decided to

give lower priority to strict observance of fiscal rules (such as debt ceilings) while

external disturbances persist; and to give higher priority to [budget policy making] with

a view to assisting the economy to regain strength.



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They have emphasised that fiscal rules should be met over the course of an economic

cycle rather than in every year, and that such rules exist to prevent unsustainable

domestic policy making, but should not narrow the options for responding to externally

imposed crises. The rules should be re-applied when stability is re-achieved, in order to

ensure that future domestic policies continue to be responsible and sustainable.

The Government takes the position that while risks exist, it is time to plan for bringing

our budget into surplus with a view to reducing long term debt.

Setting Fiscal Policy Priorities with Revenue Uncertainty

Fiscal policy during the current climate is a challenge. It can be difficult, if not

impossible, to predict revenue in an uncertain economic climate, and fiscal strategy

needs to allow for wide variations.

In these circumstances, effective governments are not necessarily those that are rule

driven, but those that ensure that they have a range of potential solutions to the variousexternal scenarios that could emerge. Option enhancing strategies, rather than

commitment to a single option which may become outdated by events, provide the

flexibility required to cope with the variety of circumstances that could unfold.

A good fiscal management system means that a government is not locked into place as

to what it must do if a certain situation arises, but rather, can choose what it would like

to do according to its policy objectives.

Rigid policies, on the other hand, can potentially paralyze a government during an

economic crisis. For example, a commitment to achieve a budget surplus in a particular

future year is hazardous, since the budget deficit or surplus is the difference between

two very large numbers. Given that it is difficult to predict the impact that externalevents may have on these numbers, it is impossible to predict the timing of a return to

surplus with any accuracy. While strict absolute targets are good tools during stable

times, their utility in the current economic climate is reduced especially if they produce

a premature reduction in spending.

International Best Practice

International best practice, therefore, suggests that it is important to stress test

government fiscal strategies. By stress testing budget outcomes, particularly for

alternative time profiles of future revenues, and designing a tool box of alternative

strategies ahead of time, the Government can make the best of whatever theinternational economy throws its way. A centrepiece of such a master strategy should

be increasing the potential flexibility in budget expenditures to broaden the range of

responses to unforeseen changes in future revenues.

Also important are strategies that encompass multiple years instead of just planning for

the next budget. For this reason the Government is introducing the Medium Term

Expenditure Framework (MTEF). MTEFs enable adjustments to be programmed over a



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longer time span, smoothing their social impact, and broadening the range of responses

beyond those that can be accommodated in a single annual budget.

Contingency planning and stress testing approaches are necessary for future budgets to

respond flexibly to international turbulence, as well as to provide policy options with

multi-year implementation profiles. This will allow us to manage our future in the new,

more turbulent environment.

Medium Term Expenditure Framework (MTEF) and a Multi-Year Fiscal

Consolidation Strategy

Bermuda has recently seen a sharp increase in its absolute level of debt (see Chart 1).

This reflects volatility on the revenue side of the budget, which has not been matched

by flexibility on the expenditure side.

Equally, however, Bermuda’s current debt-to-GDP ratio is extremely low compared to

its key trading partners and comparable nations (see Chart 2).Despite our favourable standing in international league tables of debt to GDP, the

government regards this growth in absolute debt as a serious challenge. In response to

this, the 2012-13 budget will be prepared as part of a carefully designed medium term

fiscal consolidation strategy to address volatility over an extended period of time, rather

than implementing a drastic set of measures in a single year. This strategy will provide

Bermuda with the ability to address any possible declines in fiscal revenues.

What is a Medium Term Expenditure Framework?

MTEF based budget preparation is used to achieve medium term policy targets which

are impossible to achieve in a single budget. An MTEF programme allows flexibility in

the allocation of resources across a series of annual budgets to meet objectives related

to debt service and other government commitments that cannot be achieved in a single

budget.

In order to successfully implement such a framework, the Ministry of Finance will

develop forward estimates of the cost of core government policies, in the form of multi-

year cash limits. Over time, this will allow the Government to pro-actively reduce the

part of budget spending that is locked in, increasing fiscal space and allowing resources

to be re-directed to pro-growth areas of spending (or to tax reductions or debt

reductions) as economic conditions dictate.

By implementing such a framework we will not only achieve fiscal consolidation andcontain expenditures, we will also increase our ability to make the changes we regard as

important; e.g. build and maintain an inclusive, strong economy and provide jobs for

Bermudans, while transforming governance and the public sector.



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Chapter 2

Economic Policy and the 2012-13 Budget

2010 GDP Contraction Constrained by Tourism GainsIn 2010 the Bermuda economy contracted by 0.7% based in current market prices

(Nominal GDP). When adjusted for inflation, the level of economic activity or real GDP

decreased by 1.9%.

The smaller than anticipated contraction in GDP of 1.9% in real terms for 2010 (2010

Economic Review predicted 4-5% contraction in real GDP) was largely driven by declines

in output in the construction, business activities and wholesale and retail sectors. These

declines were partially offset by growth in the hotel and restaurant sector and some

stabilisation in the financial intermediation sector.

It is encouraging that accompanied by the steadying performance of the financialintermediation sector, the tourism sector exhibited growth in 2010. This bodes well for

the economy given the tourism indicators for 2011 are also positive.

The Bermuda Economy in 2011

When the 2010 Economic Review was presented in February 2011, it reported that the

recovery in 2011 would be sluggish. It noted that while the soft US recovery would

boost service exports, there was a downside risk to growth from fragile private sector

investment and consumption. It also predicted that local households would continue to

remain constrained in 2011 by a tight employment market.

During the first nine months of 2011, there was a 6.3% increase in the number of

visitors to the island. Over the first three quarters of 2011, visitor air arrivals increased

by 3.3% while the number of cruise visitors grew by 8.7%. The growth in air visitors over

the first nine months of 2011 was the first increase over the corresponding period of a

calendar year since 2007.

The increase in air visitors recorded over the first half of 2011 translated into higher

visitor expenditure which was up by 13.6% over the first half of 2010 settling at $201.6

million. Hotel occupancy rates were also up for each month of 2011 through August

with the exception of May.

Over the first nine months of 2011, 624 new international companies and partnershipswere registered in Bermuda representing a 15.3% increase over the 541 companies that

were registered in the corresponding period for 2010. However, the accumulated

number of international businesses on the register has declined by 5.5% year over year.

Although new company registrations have grown in the first three quarters of the year,

the number of companies in the process of being liquidated or struck off the register has

more than doubled when compared to 2010. In 2010 there were 919 companies



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liquidated or struck off the register while in 2011 there were 1,875. Overall the

International Business and Financial Services sectors have experienced a marginal

decline in numbers but as an industry they remain strong. Employment income in the

International Business sector has grown by approximately $124 million or 25.8% during

the first half of 2011. The increase was the result of larger basic salaries, bonuses, stock

options and accommodation allowances.

The latest employment figures are for 2010 and measure the number of filled jobs in the

economy. The 2010 figures illustrate that the number of jobs declined from 39,520 in

2009 to 38,095 in 2010 a reduction of 1,425 jobs or 3.6%. With the continued economic

slowdown, the number of posts has undoubtedly been reduced further, but the level of

employment income has grown by 7.4% over the first half of 2011. Much of this growth

can be attributed to the increased employment income in the International Business

sector. The official unemployment rate for Bermuda is 6% which was calculated using

information recorded during the Census as at May 20, 2010.

In the first half of 2011 the value of new projects started in the construction industry

jumped to $520 million from $11.5 million in 2010. The reason for the large year over

year increase was due to the commencement of the redevelopment of the King Edward

Memorial Hospital project which represents $500 million of the $520 million value of

new projects started. The $500 million figure represents the largest sum ever for any

single project in Bermuda. The estimated value of work put in place over the first two

quarters of 2011 was $77.1 million compared to $138.1 million in the corresponding

quarters of 2010, a decline of 44.2%. Of the estimated value of work put in place, 33.6%

represents schools, hospitals and community centres. 87.5% of the estimated value of

work put in place was performed by the private sector while 12.5% was performed by

the public sector.

The uncertainty in the local economy and a soft labour market has caused consumers to

be cautious in their spending. Consequently, retail sales activity has declined every

month since March 2009 with the exception of August 2011 which was flat. The volume

of retail sales when compared to the same month in the previous year (when adjusted

to eliminate the effect of inflation) has not been positive since April 2008. Total

consumer spending in retail outlets between January and September 2011 decreased by

3.6% or $28.1 million to register at $793.5 million. Of that amount, approximately

$744.6 million was spent locally while $48.9 million was spent overseas.

The headline rate of inflation in September 2011 stood at 2.6% year-over-year. The year

to date average inflation rate and the 12 month average rate of inflation were also 2.6%.

The headline rate in September is well below Canada (3.2%) the US (3.9%) and the UK

(5.6%). During the course of the year, the greatest contributions to the level of inflation

were generated by the increased costs of medical supplies, prescription drugs and

health insurance premiums in the Health & Personal Care sector, higher rent charges

and greater food costs.

Despite the economic slowdown, Bermuda’s Balance of Payments current account

remains solid. This is largely attributed to strong year over year growth in the first



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quarter of 2011. The Bermuda current account recorded a surplus of $511 million in the

first half of 2011, compared to a surplus of $288 million during the same period in 2010.

This represents a 77.4% increase year over year. The increase in the Current Account

Balance is due in large part to a 19.8% increase in employee compensation receipts

which represents 59.8% of the overall increase in receipts of $209 million. Travel

receipts increased by $14 million. Total receipts grew from $1,566 million in the firsttwo quarters of 2010 to $1,775 million in the corresponding quarters of 2011,

representing a 13.3% increase over last year.

The Bermuda Government continued to receive positive reports from external credit

rating agencies on its management of the economy. The most recent of these reports

was from Fitch Ratings in November 2011, who affirmed Bermuda’s foreign currency

Issuer Def ault Rating (IDR) at ‘AA+’ and its local currency IDR at ‘AAA’. The outlooks on

both ratings are stable. Fitch also affirmed the short-term rating at ‘F1+’ and the country

ceiling at ‘AAA’. The rating agency stated that Bermuda’s sovereign ratings reflect the

island’s stable macroeconomic and political environment, which, combined with friendly

policies towards its international business sector, has made its economy one of thewealthiest in the world. The ratings are supported by extremely high per capita income,

sustained large current account surpluses, strong institutions and a moderate public

debt burden.

Near Term Outlook

Economic data for the first half of 2011 are consistent with the expectation in the 2010

Economic Review, that the road to full economic recovery will be long and not without

continuing challenges. After taking all of the above information into account, the

Ministry of Finance still anticipates that the economic slowdown will persist through the

majority of 2011 and estimates that Bermuda’s GDP in real terms will decline slightly in2011, with only a modest recovery likely by late 2012.



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Chart 1: Bermuda's Debt

Bermuda and the Global Financial Crisis

There is no doubt that the global recession is having a negative impact on government

finances worldwide and Bermuda is not unique in facing these economic challenges.

Around the world, fiscal deficits and government debt have been rising sharply to levels

not seen since the Second World War.

However, unlike many other countries, Bermuda does not face a debt crisis. Chart 2

plots debt to GDP ratios since 2001 for a range of countries, including other small island

economies. Bermuda has consistently shown the lowest ratio of all the countries,

including in the most recent years. This can be attributed to sound financial

management from 1998 – 2007 which witnessed Bermuda maintaining a low level of

debt. This prudent financial management gave the government room to increase

borrowing to cushion the blow of the Global Economic Crisis.

0.16 0.16 0.16 0.18 0.220.26

0.340.56

0.82

1.051.19

1.28

4.4 4.1 3.8 3.94.6 4.7

5.9

9.3

14.4

18.7

2121.8

0

0.2

0.4

0.6

0.8

1

1.2

1.4

0

5

10

15

20

25

Bermuda General Gov. Debt in US$ Billions versus

General Gov. Debt to GDP Ratio

General Gov. Debt(US$ Bil.) Gen. Gov. Debt to GDP Ratio



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According to the Maastricht convergence criteria relating to the soundness of budgetary

positions, the deficit in general government finances should not exceed 3% of GDP in

any year, and the public debt-to-GDP ratio should not exceed 60%.2

Judged by these

standards, Bermuda is well positioned and maintains a much lower debt-to-GDP ratio

than international debt standards require.

While the absolute level of debt in Bermuda increased rapidly from 2007-08, this was

from a very low base, and has not yet created a position in which debt would remotely

be regarded as high in relation to GDP.

2http://www.europarl.europa.eu/parliament/expert/displayFtu.do?id=73&ftuId=FTU_5.5.html&language=en



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0

20

40

60

80

100

120

140

Bahamas

Barbados

Bermuda

Cayman Islands

France

Germany

Jamaica

Maastricht

Guidelines

Trinidad &

Tobago

United Kingdom

United States

Chart 2: General Government Debt/GDP(%)

Source: Moody's Statistical Handbook; November, 2011



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Cause for Concern

Although Bermuda does not face a debt crisis, there are some worrying factors. The first

is that we suffer from unusually high volatility in our revenues due to reliance on

international business services and tourism, and commitment to being a low-tax

domicile to maintain Bermuda as an attractive business venue.Second, we suffer from structural rigidity in our budget spending. The proportion of

public spending that is locked for our annual budget is high. Spending related to public

sector payroll is extremely difficult to curb in the short term, without making painful

cuts.

The combination of revenue volatility and expenditure rigidity generates spikes in

borrowing, which flow forward into future increases in interest payments. Demand for

social and stimulus spending, combined with alarmingly volatile revenues, has resulted

in current account expenditures exceeding total budget revenues in 2010-11 and 2011-

12.

It is this revenue volatility/spending rigidity predicament, rather than our current level

of debt, which is the greatest cause for concern. The Government must continue to take

strong action to reverse the trend. However, this creates the trade off of budget support

for jobs and job creation against budget cuts for debt reduction. The Government is

therefore committed to a programme of efficiency savings, which when re-directed to

pro-growth expenditures, will improve the jobs/debt trade-off, increase future fiscal

space and enable job-enhancing spending without incurring more significant additional

debt.

The platform for reducing expenditure rigidity is the MTEF. This will enable structural

savings in ministries, which are unattainable in a single budget year, to be programmedover a longer period through the issue of binding forward cash limits for ministry core

packages.

This does not necessarily mean that each ministry must reduce its spending over the

next four years. A ministry can propose new initiatives over and above its core package

to compete for a share of the fiscal space generated by the MTEF. However, it does

mean increased flexibility in our spending. More productive spending will replace less

productive spending. The Government's fiscal strategy for coping with a volatile

environment is predicated on use of the MTEF to reduce budget rigidity, broadening the

options the Government will have in managing a volatile future fiscal environment.



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-9

-4

1

6

11

16

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011(Projected)

2012(Projected)

Chart 3: Annual Change in Debt to GDP Ratio %

Bermuda

Bahamas

Cayman Islands

Jamaica

Trinidad & Tobago

United Kingdom

United States

Germany

France

Barbados



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2010/11 Budget Review and Other Financial Information for Fiscal 2010-11

The total revenue raised by the Consolidated Fund for fiscal 2010-11 was approximately

$991 million, representing an increase of $74 million (8.1%) from the previous fiscal

year. The primary reason for this increase in revenue was the increases in payroll tax,

foreign currency purchase tax, stamp duty on estates, vehicle licensing fees and thebiennial review of government fees.

The most significant generators of revenues for fiscal 2010-11 were Payroll Taxes

accounting for $423.0 million or 42.4% of revenue; and Customs Duty accounting for

$219.0 million or 23.9% of revenue. Revenues were below budget in 2010-2011 mainly

due to shortfalls in Customs Duty, Stamp Duty, Immigration Receipts, and International

Companies Fees.

Current expenses for fiscal 2010-11 were $1.260 billion (2009 - $1.177 billion). The three

largest components of current expenses were: employee costs; grants and

contributions; and professional services. Total employee costs were $597.3 million or

47.4% of total expenses. Included in this amount is $150.7 million of non-cashretirement benefit expenses. Grants and contributions were $267.7 million or 21.2%

and professional services3

were $119.1 million.

The Ministry of Finance prepares the annual Budget Estimates on the modified cash

basis. The Financial Statements are prepared on an accrual basis. Due to the difference

in accounting methods, the actual expenses included in the Financial Statements are

restated to the modified cash basis for comparative and analytical purposes.

After these restatements, total current expenditure on a modified cash basis was $1.12

billion, which was $64.0 million (5.7%) higher than original budget estimates.

Expenditures were above budget in 2010-11 primarily due to the following items:increased expenditure on Government’s health subsidy programme for the youth, aged

and indigent - $28 million; interest on long-term debt - $18 million; increased

expenditure for Financial Assistance and Child Day Care Allowance - $9 million;

additional monies for the Police Service - $6 million; above budget expenditure on

substitute and para-professional’s salaries - $5 million; and additional expenditure on

the War Veterans Programme - $5 million.

Total capital account cash expenditure was $120.5 million, which was $23 million lower

than the original budget estimates.

The total net receivable balance for fiscal 2010-11 increased by 17% to $166.6 million as

compared to $142.6 million in fiscal 2009-10.The net accounts receivable balance was17% of revenue. A significant portion of the gross receivable at fiscal 2010-11 (64.6%),

represents Payroll Tax which was due and payable on 15 April, 2011. During the month

3Professional services covers all government contracts for cleaning, security, legal aid, Works and Engineering

maintenance, contracted services for the Department of Airport Operations, health insurance portability claims, war

pensioner medical claims and other locally and overseas contracted services.



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of April 2011, the Government collected approximately $107.6 million in Payroll taxes.

The allowance for bad debts for fiscal 2010-11 was $47 million, representing an

approximate $16 million increase from fiscal 2009-10. The significant change in the

allowance for bad debts was due to a combination of the following: a change in the

method in which bad debts are calculated; and the impact of the recession on

businesses meeting their financial obligations.

The closing Net Book Value of Tangible Capital Assets for the year was $727.7 million, an

increase of $127 million over the 2010 value of $600.4 million. In total, Government

assets as at March 31, 2011 are valued at $1.027 billion, an increase of $111 million over

the 2010 level.

Net Public Debt, which excludes guarantees and is net of the Sinking Fund, increased by

$242.8 million during fiscal 2010-11, standing at $1.0 billion at the end of the year. The

actual net debt to GDP ratio at March 31, 2011 was 17.4 %.

During 2010-11, $25.7 million was contributed to the Sinking Fund. During the tenure of

successive administrations, the balance on the Sinking Fund has grown from $17 millionto $82.8 million as at March 31, 2011. Following the 2011-12 contribution, the Sinking

Fund balance will be $113 million.

2011-12 Mid-Year Review

The headline numbers for the 2011-12 National Budget were: a revenue target of $940

million; current expenditure of $997 million; capital expenditure of $84 million; and a

borrowing requirement of $147 million.

Revenues for the six months ending September 2011 are $421 Million; this is $45 million

lower than in September 2010. The primary reason for this decrease is due to thepayroll tax reduction; this reduction resulted in reduced revenue of $30 million.

Customs Duties to date are approximately $3.6 million below 2010 collections while

stamp duty collections are $5 million lower than 2010. When compared to Budget

estimates, revenues are tracking slightly below budget estimates. The primary reason

for this slippage relates to weakness in the collection of Customs Duty, Foreign Currency

Purchase Tax and Stamp Duty collections. The recently announced Payroll Tax

Concession for the retail sector will reduce collections by approximately $9 million.

Considering the above, the Ministry of Finance estimates that revenue for the current

fiscal year will be between $920 and $930 million.

Current expenditures, excluding debt service, for the first six months ending September2011 are $480 million; this is $29 million lower than was spent during the same period

last fiscal year. Capital expenditures for the first six months ending September 2011 are

$28 Million; this is $25.7 million lower than what was spent during the same period last

fiscal year. Total current and capital spending to date, excluding debt service, is $54.7

million lower than last year’s spend.



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Debt service costs for the first six months ending September 2011 are $60.8 million. This

represents $35 million in interest payments and a $25.8 million transfer to the

Government Borrowing Sinking Fund. Debt service to date is $7.7 million more than last

year’s period.

Government spending to date is lower during this fiscal year when compared to the

similar period last year due to reductions in the following areas: Professional services

spend ($20 million); Material & Supplies ($3 million); Advertising ($2.5 million); Training

($1.5 million); Travel & Transport & Communications ($1.5 million); Insurance, Energy

and Uniforms ($1.35 million); and Repairs ($1.3 million).

However even with the above reductions achieved, compared to budget estimates,

current account spending is still tracking approximately $26 million or 3% above budget

estimates. Due to the ongoing weak economic conditions, spending pressures have

continued in the social areas. Expenditures were above budget in the first six months of

2011 primarily due to the following items: expenditure on substitute and para-

professional’s salaries; increased demand on Government’s health subsidy programmefor the youth, aged and indigent; increased demand for financial assistance and child

Day care allowance; significant increases in police salaries from arbitrated awards and

overtime.

Mr. Speaker, in order to remain as close as possible to Government’s 2011-12 budget

targets, Government has instituted several measures in order to realise further cost

savings. In particular the Government has instituted a hiring freeze on non-essential

posts and targeted the following areas for even further spending reductions in 2011-12:

consultants, training & travel, materials & supplies and capital expenditures.

The Government’s revised current account expenditure, excluding debt service, is

expected to be $950 Million, which is $43 Million above the estimates provided in the

budget.

The Government has financed the estimated deficit for fiscal year 2011-12 through a

4.95% BD$200 million 3 year term loan facility agreement with Butterfield Bank Limited.

On September 30th

, 2011, Net Public Debt, which excludes guarantees and is net of the

Sinking Fund, stood at $1.12 billion. The net debt to GDP ratio was 19.2% and still

remains among the lowest in the non-oil countries in the Fitch ‘AA’ rating category.



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Chapter 3

Fiscal Space: the Trade-off Between Competing Objectives

Many countries, along with Bermuda, are now facing similar, externally imposed, budgetchallenges. These include how to boost budget spending to protect jobs and help groups

impacted by international instability while at the same time reining in the growth of

public debt which boosts business confidence and reduces the cost of debt service.

Governments, including Bermuda's, therefore face a difficult budget trade-off. Budget

policy should slow job declines through stimulatory budget spending but at the same

time curb the growth of debt through constraint in budget spending. Internationally

transmitted weakness in revenues makes achieving this goal difficult.

The old prescriptions for managing fiscal weakness and risk of insolvency were based on

cutting budget spending, even if this produced a pro-cyclical rather than counter-cyclical

effect, and increased unemployment in an already weak economy. But it is nowrecognised that this traditional approach has resulted in social hardship and unrest,

which made such measures difficult to implement effectively. Moreover, budget cuts

have often reduced productive investment spending rather than cutting into

inefficiencies in service delivery, which undermines future fiscal capacity to service debt.

This has led to re-thinking the appropriate responses to externally imposed fiscal stress.

Some countries have decided to give lower priority to fiscal rules, such as debt ceilings,

for the duration of the external disturbances, and a higher priority to policy settings that

assist the economy to regain strength. They have emphasised that fiscal rules should be

met over the course of an economic cycle rather than in each year of the cycle. Fiscal

rules exist to prevent unsustainable domestic policy settings, and should not narrow theoptions for responding to externally imposed crises. In this view, the rules should only

be re-applied when stability is re-achieved in order to ensure that future domestic policy

settings continue to be responsible.

There is also a question as to whether the fiscal rules are correctly specified. Should a

fiscal rule for capping public debt be expressed as a ratio of debt-to-GDP, as most

countries do, or an absolute amount, as is currently the case for Bermuda? From a debt

sustainability perspective it is the debt to GDP relationship that counts. A fiscal rule that

is expressed in terms of the absolute level of debt will (as illustrated in the 'fiscal space

diamond' in Chart 4 below) bring a greater reduction in the fiscal space available to

successive budgets, reducing the options available to the government for handling the jobs-debt trade-off in successive budgets.



19

Fiscal Space

Recently there has been a widening of the focus of public expenditure analysis to

embrace the concept of fiscal space, rather than the narrower and traditional focus on

aggregate spending. This is linked to movement of some countries to introduce a

medium term expenditure framework.4

The IMF has recently emphasised the importance of budgets maximising 'fiscal space' -

the funds which are not locked in during each budget preparation cycle but are available

for discretionary use in responding to external instability. Greater fiscal space in each

budget gives the Government more options when choosing a policy combination of job

growth and debt reduction.

The fiscal space perspective is a useful tool for analysing fiscal strategy for the 2012-13

budget. It introduces the role of efficiency savings and cash limits as routinely used fiscal

policy instruments, along with taxation and debt management and 'other' instruments

such as asset rationalisation. Chart 4 illustrates the fiscal space 'diamond' underlying

this approach.

4 See for example, IMF, Understanding Fiscal Space, Policy Discussion Paper 05/4. The paper states that "... anyconsideration of fiscal space must be made in the context of at least a medium-term expenditure framework that has acomprehensive perspective on the government’s expenditure priorities." p. 4.

Chart 4: The Fiscal Space Diamond



20

To illustrate, options for using the 'fiscal space' in Bermuda's budgets include increasing

Bermuda's future fiscal capacity to reduce debt (for example by promoting tourism and

future jobs and as a result a broader tax base) or short term reduction in the budget

deficit and debt. These alternative courses for reducing Bermuda's debt have different

implications for the time profile of debt reduction, and for budget stimulation of jobs

growth. The medium term fiscal scenarios included in this Pre-Budget Report reflect thesize of fiscal space in the Bermudian budgeting process. The greater the fiscal space, the

greater the range of job stimulation and debt reduction options available to the

Government.

However, Bermuda's current budget preparation processes do not create a large

amount of fiscal space. International credit rating agencies such as Fitch cite Bermuda's

small and open economy as well as limited financing flexibility as barriers to addressing

economic shocks. With the introduction of the MTEF, some of these constraints will be

alleviated.

The Government's Fiscal Space Enhancing Strategy

At the heart of the Government's strategy for handling international instability is a

commitment to reduce the locked-in element of future budgets. This will increase future

fiscal space to enable the Government to manage its response to international

turbulence more flexibly, rather than being swept along by events because of limited

options, and applying temporary fixes to reduce the damage.

Our Zero Based Budgeting (ZBB) system supports this approach to increasing fiscal

space, and steps for increasing budget flexibility are outlined in Chapter 4 of this

statement. These options include:

An efficiency savings review, aimed at cutting spending which has little impact

on the outcomes the Government seeks;

A review of the way in which existing fiscal rules are formulated, to ensure that

they do not unduly constrain our fiscal space in the face of international

turbulence; and

The introduction of multi-year cash limits for ministry core packages, as part of

the medium term expenditure framework, which reduce core packages over

time. This does not necessarily reduce ministry spending since the resulting

increase in fiscal space can, in part, be allocated to ministry initiatives which

improve future growth and fiscal space.

The Government’s Approach to Medium Term Fiscal Policy

The Government's medium term strategy for dealing with international volatility is to

increase expenditure flexibility and fiscal space. This requires adoption of a multi-year

approach to budget preparation rather than treating each annual budget in isolation.



21

Current international volatility translates into unpredictability for Bermuda's budget

revenues. The regular and strong revenue growth experienced through to 2007-08

encouraged similarly strong growth in current spending (except for 2005-06) as the

benefits of prosperity were translated into improved public services.

However, since 2008-09 revenues have weakened. Translating this into reduced

expenditure is a challenging process. Ministries cannot easily reverse earlier staffing or

programme commitments. Also, the damage caused by reducing public spending and

cutting jobs in an economy simultaneously experiencing reductions in private spending

and private sector layoffs must be minimised.

Our Policy Trade-Offs

Faced with these conflicting objectives of reducing borrowing and augmenting domestic

demand, the core of a medium term budget strategy is to proactively manage the

impact of weaker revenues by carefully distributing this impact across current spending

and the level of net debt. This is to achieve the best balance of protecting jobs and

reversing net debt, better known as the ‘jobs/debt trade-off’.There is no 'correct' allocation of revenue between reduction of current spending and

increased borrowing. Some countries emphasise the need to maintain support for

domestic demand by continued budget spending, on the assumption that a counter-

cyclical fiscal policy will improve future options for debt reduction. This is a ‘create jobs

now/reduce debt later' approach.

Bermuda has the lowest debt to GDP ratio of all the countries depicted in Chart 2,

despite the recent spike in absolute debt. A counter-cyclical approach based on

stimulatory budget policies paid for by borrowing is certainly available to us. However,

the combination of revenue volatility and spending rigidity exposes us to future debt

risk, and the Government cannot continue to solely borrow its way through this periodof volatility, even though, when compared to other countries, this could be a technical

policy option. Any temporary increase in debt could be justified only by a marked

improvement in flexibility on the expenditure side of the budget, so that the debt can be

reversed when domestic demand recovers. Realistically, such increased flexibility will

take a while to achieve (see Chapter 4).

It is important to repeat that increased spending flexibility is not code for less public

spending per se. It means that less cost effective areas of spending are reduced, with

the resulting savings (increment in fiscal space) being allocated either to new budget

spending which is pro growth and pro jobs (facilitating future reductions in debt) or to

immediate debt reduction (which is less 'pro jobs' in the short term but has favourableeffects on longer term business confidence).



22

The Medium Term Expenditure Framework

The Government's approach to a medium term budget strategy in the current

environment is based on identification of the range of possible revenue scenarios, and

identifying the best settings for current expenditure and net debt for each scenario. This

can then be translated into multi-year cash limits for the ministries to implement over a

series of budgets, which reflect the balance of reduced spending and reduced debt

adopted in the Government's fiscal strategy.

Which Scenario Should Underlie the 2012-13 Budget?

Under our stress testing approach, the best (multi-year) budget settings for recurrent

spending and change in net debt are separately identified for each of three scenarios for

the growth in public revenues to 2015-16. The three scenarios are a return to historical

growth rates of revenue, continued structural weakness in revenues and a middle

course. Under our intended MTEF strategy, the 2012-13 budget is then configured for a

relatively pessimistic revenue scenario. This requires further compression of recurrent

spending by locking in expenditure levels at the 2012-13 levels throughout the 2015-16budget period. This will be accomplished through efficiency savings, introduction of

multi-year cash limits for core packages, and policies that earn income from government

fixed assets. Introduction of multi-year cash limits on ministry core packages will ensure

the savings take place over the budgets to 2015-16, and will avoid quick and formulaic

cuts, which experience shows are hard for ministries to implement.

This conservative approach to the 2012-13 budget will maximise the fiscal space

available in the 2013-14 and later budgets. As international developments become

clearer and future public revenue profiles less uncertain, the Government can shift

flexibly between the best strategies for the use of the fiscal space, either for stimulatory

current spending to support jobs or reduction in net debt to reduce debt.The columns in the following table describe the three illustrative scenarios. It should be

emphasised that this is not a projection. It represents three possible outcomes on the

revenue side, and the resulting spending/debt policies to 2015-16, which we believe

would bring the best outcome for Bermuda should each scenario become reality.



23

$million REVENUE ASSUMPTION CURRENT EXPENDITURE RESULTING NET DEBT

Green Yellow Red Green Yellow Red Green Yellow Red

2009-10 917.3 917.3 917.3 1000.9 1000.9 1000.9 772.4 772.4 772.4

2010-11 977.4 977.4 977.4 1038.3 1038.3 1038.3 1006.8 1006.8 1006.8

2011-12 926.6 926.6 926.6 950.3 950.3 950.3 1157.0 1157.0 1157.0

2012-13 949.9 940.6 922.1 923.5 922.3 922.7 1240.0 1250.0 1270.0

2013-14 991.3 958.0 906.8 922.1 922.5 922.7 1250.0 1300.0 1393.0

2014-15 1034.3 980.4 908.4 924.1 923.8 907.4 1245.0 1320.0 1455.0

2015-16 1083.2 1013.4 924.7 923.7 923.9 876.9 1210.0 1335.0 1480.0

Note: The optimistic scenario is detailed in the green columns (average revenue growth

of 4.5% through 2015-16), the pessimistic scenario in the red columns (Revenuecontraction and slow recovery averaging no growth through 2015-16) and the middle

scenario in the yellow columns (average revenue growth of 2.75% through 2015-16).

Figures for 2009-10 and 2010-11 are historical figures. 2011-12 are revised budget

estimates. Figures for 2012-13 onwards are scenarios based on alternative revenue

projections and (for each scenario) the preferred combination of current expenditure and

net debt.

Policy Options Under Consideration for 2012-13 Budget

The following are considerations for inclusion in next year’s budget. One of the main

objectives of a Pre-Budget Report is to provide a document that elicits discussion from

stakeholders. Prior to finalising the budget, the Government will hold public forums and

meetings with stakeholders and discuss the ideas outlined below.

Harmonising Duty for Personal Imports

There are different rates of duty that are assessed to individuals who import

items for personal use. At the airport the rate is 35% however via other methods

of import, the rates vary from 5% to 33.5%. Because of the inconsistent duty

rates across methods of import, Government efforts to support local business

are not as effective as intended. Therefore the Government will examine

changes to duty rates for personal imports.Changes that harmonise rates must be done in a way to ensure that those who

import goods for business use or for resale do not face additional requirements

and additional “red tape”. The Government continues to remain committed to

supporting local retail and is looking at a way to ensure that the correct balance

is struck.



24

Possible Changes to the Betting Tax

The current betting tax rate of 18% is very high compared to other countries.

Government is considering a reduction of this tax as it may stimulate more

betting transactions being based in Bermuda.

Increases in Sin Taxes

When finances are tight, there is a regular clamour by the public for increased

taxes on “sin” items such as alcohol and tobacco. The Government is considering

raising these taxes but is mindful of the effect that increased alcohol prices may

have on our tourism industry and nightlife.

Biennial Fee Increase

The biennial fee increase is scheduled to take effect this year.

Additionally the Government is looking at changing its fee structures to reduce

the annual cost of ownership for fuel efficient vehicles. It is thought that

changing the basis of the annual vehicle licence from the dimensions of thevehicles to the fuel efficiency of the vehicle will promote purchases of energy

efficient vehicles. This change is planned to be revenue neutral. However, to

prevent vehicle owners from seeing a sudden rise in licensing cost, this change is

to be phased in over a period of years.

Rollback of Tax Expenditures

Tax expenditures assess the costs, in terms of forgone revenue, of various tax provisions

that provide tax breaks for certain taxpayers and activities. Over the last few years, the

Government has put into place a number of tax expenditures. Some have been as a

result of Government looking to assist business during the recession. Others were put in

place to meet certain social policy objectives. The following are a number of taxexpenditures which will be reviewed for the 2012-2013 budget.

Hotels & Restaurants: In 2009, the Government put in place a Memorandum of

Understanding for the hotel sector for payroll tax relief. In 2010, payroll tax relief

was extended to the restaurant sector. This MOU has provided a reduced rate of

payroll tax for these industries. Over the duration of this concession, the

Government has in effect spent $20.4 million dollars on these tax expenditures.

These concessions were never meant to be permanent and the Government will

look to reduce them over the near term.

Pensioner’s Land Tax Exemption: In 2005 the Government exempted all

pensioners from Land Tax. Prior to this change, homes owned by pensionerswith an ARV of less than $40,000 were exempt from land tax. It is not envisioned

that the Government would look to remove this exemption in its entirety;

however, the Government will examine ways to continue to provide this relief to

a vast majority of pensioners while reducing this annual tax expenditure of $6

million.



25

Senior Vehicle Licence: In 2007, the Government put into place a policy whereby

seniors who owned a vehicle did not have to pay to licence their vehicle. This

blanket tax expenditure, while popular, has been very open to abuse. Since this

exemption came into force there has been a 26% increase in vehicles licensed to

seniors and a 358% increase in class H vehicles owned by those 65 and above.

This tax expenditure has cost the Government $17 million since its inception. TheGovernment will examine this tax expenditure with a view to putting into place a

provision that assists seniors in need and is less open to abuse.

Land Taxes

The Government is considering implementing a recommendation from the 1999

Report of the Bermuda Tax System to tax vacant land. There are pros and cons to

this recommendation. Such a tax, if implemented, would provide more revenue

to the Consolidated Fund, which can be used to fund national priorities.

However, taxing vacant land could also spur owners to develop vacant land

which while increasing economic activity would reduce undeveloped land. There

is also the question as to whether all vacant land, or only vacant land zoned

residential should be taxable.

Creating a Local Debt Market

Although the Government continually enjoys excellent access to international

markets, the Government is considering financing most of its future borrowing

requirements locally, in Bermuda dollars. It is anticipated that this choice would

lead to more economic activity on the island, and may spur local capital markets.

When these financial instruments are issued, they will provide the ability for

savers to diversify their Bermuda dollar holdings and will offer another option for

savers which may provide attractive saving rates.

The Government emphasises that the policy options listed above are for discussion

purposes and that no decisions on any of the above for the 2012-13 budget have been

made. During the month of January, the Government will hold public meetings on the

above policy options to encourage public debate and discussion on the priorities for the

2012-2013 budget. The Government welcomes feedback on this report as we look to

involve as many as possible in the Open Budget Process.



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Chapter 4

Increasing our Expenditure Flexibility

The Case for Efficiency SavingsEfficiency savings enable the Government to achieve a better outcome for both jobs and

debt, improving the terms of the budgetary trade-off.

An efficiency saving in the 2012-13 budget, which is re-spent on another Government

programme or growth promoting infrastructure initiative, will not reduce aggregate

spending in the 2012-13 budget. There is no adverse effect through the 'jobs versus

debt' trade-off in the 2012-13 budget.

However, transferring spending from ineffective to effective uses can improve the

trade-off in later budgets by boosting future growth and future revenue collections thus

increasing future fiscal space. This has led the International Monetary Fund to broaden

its focus from fiscal adjustment based on cutting aggregate spending and, unavoidably,

jobs, to a broader focus on re-prioritising spending so as to enhance future fiscal space

and future options for cutting debt.

Similarly, efficiency savings in the 2012-13 budget which are used to finance further tax

reductions will not reduce the financing deficit in the 2012-13 budget.5

However they

may encourage greater employment and revenue growth in future years, increasing

future fiscal space, and future options for managing debt.

What Are Efficiency Savings?

Efficiency savings are reductions in budget allocations to ministries which do not reduce

service level outcomes. They can either be:

1. 'Technical' efficiency savings: These are efficiency savings which are found

when more efficient ways of delivering the service are identified. For

example, the introduction of customer service centres reduces the need for

multiple offices, cutting spending on rent and salaries without significantly

cutting service levels. Technical efficiency savings enable a reduction in

inputs with little reduction in outputs.

2. 'Allocative' efficiency savings: These are efficiency savings that involve

reductions in service delivery which do not appreciably affect the outcomes

sought by the government. For example, introduction of means testing for

social programmes which reduces the number of recipients without affecting

the government's goal for social assistance for families in need. Allocative

efficiency savings enable a reduction in outputs with little damage to

outcomes.

5 The financing deficit is equal to revenue less current and capital spending.



27

In reality, most efficiency savings appear to involve some combination of improved

technical and locative efficiency.

Efficiency savings are often embedded in the detailed architecture of departmental

work plans. They occur where the work plans funded by the budget are inefficient or out

of date, have failed to respond to changes in the demand for, or nature of, government

priorities, may not reflect 'learning curve' benefits as experience with programme

delivery grows, or the reality that the activity has largely achieved its intended benefits.

Three of the main targets in seeking efficiency savings are as follows:

1. Reduction in the ratio of administrative overheads to direct programme

costs: A common source of efficiency savings is 'right sizing' of the ratio of

departmental administrative costs to programme costs. In good years, in

which revenues are buoyant, there is a tendency for administrative

overheads to grow relative to direct programme spending. Some of these

activities may have achieved their purpose, but have never been wound

back. In other cases efficiencies can be gained through shared servicesarrangements and transfer of functions.

2. Poor targeting of programmes, resulting in diffusion of benefits beyond the

target group: Loose design of social benefit programmes allows those

outside the target categories to receive benefits from the budget,

contributing little to the social outcomes which the Government seeks. This

can reflect shortcomings in the original design of the initiative which have

never been corrected as experience with take-up of the benefit accumulates,

due to strong revenue growth over time.

3. Technical inefficiencies: These occur where government spending on inputs

is pushed beyond the point where it has a cost effective result on outcomes.

Common examples are over-expensive government accommodation,

marginally necessary government travel and over-specification of equipment.

Beyond this there are no shortcuts to identifying efficiency savings. Most efficiency

savings are embedded in the detailed architecture of departmental work plans and are

'a la carte'.

The most fundamental approach to implementing an external review requires a cost

analysis of existing ministry outputs, for example, an activity based costing review. A full

costing review involves building up the activities and inputs required to efficiently

produce each ministry output. This will indicate the minimum level of budget fundingper unit of output required to finance the basic input of materials and other goods and

services. Where this differs from the current level of budget funding an efficiency saving

is available.



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Realising Efficiency Savings

Savings rounds in the past, including for the 2011-12 budget, have met with mixed

success. The Government adopted a formulaic approach to expenditure cuts in the

2011-12 budget. Reductions were allocated between agencies, and Ministries were

charged with reducing their budgets.

However, some departments have experienced difficulties in actually implementing the

cuts, resulting in projected cost overruns. This is partly because of a mismatch between

the length of the annual budget cycle and the time needed by agencies to identify and

implement potential savings, and also the Government policy of not eliminating

established posts which would be counter-productive during this period of economic

challenge.

In order to implement future efficiency savings more effectively the government will

take a revised approach:

1. Adopt a multi-year (MTEF linked) approach to efficiency savings: Efficiency

savings will be programmed over several years (using forward cash limits forcore packages) as part of a multi-year, MTEF based, programme to

implement our fiscal strategy. This will provide the lead time needed by

agencies to identify, design and implement further efficiency savings which

were difficult to achieve when budgets were prepared in a single year

perspective.

2. Adopt an external review approach: An externally driven process will be

implemented for challenging and guiding ministries currently suffering from

'savings fatigue' to identify extra savings and to bring them in on time. This

will involve a task force under the oversight of the Cabinet Office which will

implement an external review of all ministry core packages.

These two changes are discussed below.

Adoption of a Multi-Year Approach

We will introduce a multi-year programme of efficiency savings in ministry core

packages as follows:

The existing cash limits will have an enhanced role in the preparation of ministry

core packages, by being made binding on the cost of core packages. The cash

limits will be strict rather than indicative;

We will freeze forward cash limits to 2015-16 at 2012-2013 levels, based on our

medium term strategy for trading off budget spending and debt reduction over

the MTEF period. Thus binding multi-year (forward) cash limits will require

ministries to gradually compress their core packages; and

Ministries will be assisted in achieving their forward cash limits by an externally

driven efficiency review process and multi-year business plans.



29

Adoption of efficiency savings in a Ministry's core package does not necessarily mean

that the total Ministry appropriation is also reduced. The Ministry may compete for a

share of the fiscal space available in each budget round, partly as a result of service wide

efficiency savings, through its proposal of new initiatives in level 2 and 3 packages.

If it is successful, the result is an increase over time in the flexibility of the Ministry's

budget, reflected in internal re-prioritisation of its spending. If it is not successful the

Ministry will contribute to increased spending in other areas.

Transition to an MTEF should help to institutionalise a focus on potential efficiency

savings within a Ministry. The MTEF will enable efficiency savings to be an additional

instrument of budget policy, along with tax policy and borrowing. Bermuda's Zero Based

Budgeting (ZBB) approach to budget preparation is well suited to the external efficiency

review approach to cutting spending.

Externally Driven Efficiency Review Process

The Government will establish an Efficiency Team comprising staff from the Cabinet

Office, Ministry of Finance and the private sector, under the direction of the Premier &

Minister of Finance. The team's task, working with individual Ministries and the Ministry

of Finance, will be to identify the outputs of Ministries' existing core packages and to

zero base their costings. This will be done in order to validate the current composition of

the core packages and the funding levels they contain. These costings will be analysed

by private sector contributors to provide an external challenge process. This step is vital

to ensure that bureaucratic waste is reduced.

The composition of the outputs funded by each core package will need to be validated,

to ensure that lower priority outputs currently receiving core funding are not crowdingout high priority measures not yet in place, such as pro-growth investments, tax

reductions or reductions in debt.



30

Chapter 5

Conclusion

Commitment to Budget TransparencyThis Pre-Budget Report represents a major step forward in the preparation of budgets

and the formulation of budget policy in Bermuda. This Government is proud of the

numerous improvements in governance that it has brought to Bermuda. Joining the

Open Budget Initiative and giving a commitment to budget transparency is yet another

step towards better governance in Bermuda.

To meet international best practice for budget transparency, the International Budget

Partnership recommends that governments publish eight budget reports during the

budget cycle. The documents and the Governments commitments are below:

1. Pre-Budget Report: This document is the Government’s initial Pre-Budget

Report. It is recommended that this document be issued at least one month

prior the Budget statement to allow adequate time for public feedback to assist

in budget policy formulation.

2. Budget Statement: The Government issues budget statements annually. This

practice is a matter of custom and will continue.

3. Citizens Budget: A Citizens Budget is a nontechnical presentation that “can take

many forms but its distinguishing feature is that it is designed to reach and be

understood by as large a segment of the population as possible”. A citizen’s

budget is a simplified summary of the budget designed to facilitate discussion.6

In 2005 and 2006 the Government issued a guide to the budget. The

Government will re-introduce this document with the 2012-13 budget

statement.

4. Enacted Budget: The enacted budget is the appropriations bill which is passed by

the legislature annually as required by the Bermuda Constitution.

5. In-Year Reports: The Government, through the Department of Statistics,

currently releases various quarterly statistics including Government revenue and

expenditure. The Government commits to releasing more comprehensive

quarterly reports of revenue and expenditure.

6. Mid-Year Review: The Government does not currently issue a Mid-Year Review.

The Government commits to releasing a Mid-Year Review in the next fiscal year.

6Ramkumar, V., & Shapiro, I. Guide to Transparency in Government Budget Reports.

Washington, DC: International Budget Partnership.



31

7. Year-End Report: The Government does not currently issue a separate Year-End

Report. The Government does issue financial statements once they have been

audited as per the Bermuda Constitution. The Government commits to issuing a

Financial Statement Discussion and Analysis document at the same time as its

annual financial statements. This will serve as the Year-End Report.

8. Audit Report: The Auditor General currently issues an Audit Report annually.

It is the aim of the Government to provide all of these reports during the coming budget

cycle and 2012-13 fiscal year. In publishing this document and conforming to

international standards of budget transparency, this Government reaffirms its

unwavering commitment to good governance.

Feedback Encouraged

The Government invites and welcomes feedback on this document. In addition to

electronic communication, the Government will hold public meetings in January 2012 to

discuss the principles laid out in this document and to solicit public feedback.

Comments can be emailed to: [email protected]

mailto:[email protected]

mailto:[email protected]



32

ANNEX. Efficiency Reviews in Other Countries

Governments such as those of the UK and Canada believe that an external challenge

process is needed to strengthen efficiency review processes, which are internal to the

bureaucracy.

This approach has been adopted in a number of countries, i.e. the Canadian Strategic

and Operating Review and the UK Gershon Review and its annual spending review

process.

The Canadian External Review Process

An example of external savings review is the Canadian Strategic and Operating Review.

Budget documents state that this "will examine direct program spending, as

appropriated by Parliament. About $80 billion of direct program spending will be

reviewed with the objective of achieving at least $4 billion in ongoing annual savings by2014 –15 or 5 per cent of the review base. The review will place particular emphasis on

generating savings from operating expenses and improving productivity, while also

examining the relevance and effectiveness of programs.

"The review will be led by the President of the Treasury Board, who will chair a specially

constituted committee of Treasury Board that will assess proposals put forward by

ministers and their departments and agencies to achieve the targeted level of savings.

This committee will be guided by experts from outside government who will help design

a framework for the review based on private and public sector best practices."7

The Canadian review covers both operational and strategy issues. Operational issues

relate to reduction in inputs needed to achieve core outputs. Strategy issues relate to

the relevance of activities and the link between their outputs and the outcomes sought

by the government. Strategy reviews ensure that programmes are achieving their

intended results, are effectively managed, and are appropriately aligned with the

government priorities and responsibilities.

The British External Review Process

The Gershon Efficiency Review in 2003 led to the 2004 budget announcing a 'stretching'

target for the whole public sector to deliver efficiencies of 2.5% per annum over the

three years of the 2004 Spending Review. A central Efficiency Team was established todrive and coordinate review implementation. This was independent of the Treasury (but

working closely with it), reporting directly to the Prime Minister and Chancellor. The

Team included outside sector experts, while departments worked with the team to

produce implementation plans setting out how they would meet their efficiency targets.

7Government of Canada, The Budget Plan (June 6, 2011), Chapter 5: Plan for Returning to Balanced Budgets.



The Efficiency Team assured the quality of departments’ implementation plans

(including the adequacy of contingencies to guard against slippage and risk), and their

capacity to implement them, and proposed monitoring arrangements.

The use of outside experts ('change agents') reduced the risk of departmental

implementation strategies being over-reliant on advice from civil servants who may lose

status and resourcing as a result of the efficiency process. It introduced a degree of

contestability in identifying options, which gave the Government greater command over

the review by formalising a 'departmental challenge' process.

The most recent round of UK expenditure cuts has been driven by Treasury's annual

Spending Review process which, in 2010

fixed multi-year budgets for each spending department to 2014-15

looked at possible spending cuts in this multi-year frame

supplemented bureaucratic proposals for spending cuts with an external review

process through a Spending Review Challenge Group of experts – both from

within Government and outside – to act as independent challengers andchampions for departments throughout the process. Their remit was to think

innovatively about the options for reducing public expenditure while balancing

priorities.

The Spending Review 2010 also introduced the interesting and apparently successful

website called 'Spending Challenge'. This received over 100,000 suggestions from public

servants, stakeholders and citizens on opportunities for efficiency and programme

savings. The Bermudian government recently implemented a similar approach.

The 'Spending Challenge' approach is very consistent with the Bermudian open budgetfocus, and is also a means of identifying savings options, which might not otherwise see

the light of day. It could be considered for inclusion in the 2013-14 budget preparation

cycle.

Documents

Pre Budget Report (2012 2013)