Having taken a cursory glance at the budget it appears to be an improvement over previous years in that there are some attempts to cut spending, though it is concerning that it seems to rely heavily on a recovery to resolve our problems. Premier and Finance Minister Cox should be applauded for managing cuts of $90 million, it certainly couldn’t have been easy. Unfortunately though, it is not going far enough to balance the budget, let alone begin resolving our debt woes. We can only hope their prediction for a recovery will be correct, though we can be forgiven for being concerned given the government’s track record for predicting the economy.
The first tidbit is the title of the budget “RESETTING THE DIAL!”. It is an interesting choice as it seems to suggest that the theme of this budget is to buy time. It does not appear to be an unfair assumption as there is much mention of aiming to reduce spending and aim for a recovery to perhaps balance the books. The only question is, are we on track for one?
“You will see that the fiscal contractionary path we have chosen will not only help Bermuda to meet the immediate challenges it faces but will also pave the way for what I predict will be the beginning of a gradual recovery in 2012.”
Recovery predictions are worrying primarily because so few managed to see that our economy was overheating and predict the potential for a recession in the first place. One statement suggests hope that the US recovery will likely contribute to our own, though there are concerns with this.
Compared to the bleak outlook in Europe, the United States has shown no desire to halt its stimulus spending. According to some forecasters, this will provide substantial support to the American economy for the next two years. As a result, the US is likely to transition from a sluggish recovery into a modest expansion. This long-awaited development is anticipated to become evident by the end of the first quarter of 2011. In all likelihood, the Bermuda economy will benefit from this trend but probably not until next year at the earliest.
The issue with the stimulus driven US recovery is that eventually it will drive up inflation. We mentioned only last week concerns about how much food commodities have risen and their potential impact. A concern is that eventually this will trickle through to the rest of the economy and start creating widespread signs of inflation. Further it will likely impact global growth as food prices globally are much more sensitive to commodity rises.
Why does inflation matter? When inflation rises, the US will likely have little alternative but to move to raise interest rates and put a stop to quantitative easing or “money printing”. If the US economy hasn’t gotten to standing on its own by that time then we’re likely to see another recession. If inflation becomes a concern, they may have no choice. Worse, if we see the combination of high unemployment and inflation we could end up in a period of stagflation, the only proven solution to which was a rapid rise in interest rates to extreme levels.
Why are we covering all this? Bermuda’s cost to write new debt this summer was quite high despite record low interest rates. Imagine what our debt costs could rise to when those underlying rates rise? It is wholly concerning that rather than aiming for a budget surplus to work on paying off our debt, we’re incurring more.
So, those are our initial thoughts. There is likely more of the budget to review, especially based upon what the revised numbers for 2010/2011 tell us, though that will have to wait for another time.