Pre-Budget

Report

201213

In advance of Fiscal Year

GOVERNMENT OF BERMUDA Ministry of Finance

Ministry of Finance
__________________________________________________

Pre-Budget Report
In 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

Chapter 3 Fiscal Space: the Trade-off Between Competing Objectives ....................... 18 Fiscal Space ................................................................................................................... 19 The Government's Fiscal Space Enhancing Strategy .................................................... 20 The Governments 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

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 Governments 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 multiyear 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 crisis undermines future growth in Bermuda's public revenues.

HarikaMasud 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.

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 tradeoff 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 maintaining prudent 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 Bermudas 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.

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 various external 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 external events 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 the international 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 5

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, Bermudas 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 multiyear 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 and contain 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.

Chapter 2 Economic Policy and the 2012-13 Budget

2010 GDP Contraction Constrained by Tourism Gains
In 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 financial intermediation 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 partnerships were 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 7

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, Bermudas Balance of Payments current account remains solid. This is largely attributed to strong year over year growth in the first 8

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 first two 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 Bermudas foreign currency Issuer Default 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 Bermudas sovereign ratings reflect the islands stable macroeconomic and political environment, which, combined with friendly policies towards its international business sector, has made its economy one of the wealthiest 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 Bermudas GDP in real terms will decline slightly in 2011, with only a modest recovery likely by late 2012.

Chart 1: Bermuda's Debt

Bermuda General Gov. Debt in US$ Billions versus General Gov. Debt to GDP Ratio
25 21 18.7 15 1.4 21.8 1.2 1 0.8 1.28 10 5.9 4.4 0.16 4.1 0.16 3.8 0.16 3.9 0.18 4.6 0.22 4.7 0.26 0.34 0.56 9.3 0.82 1.05 1.19 0.6 0.4 0.2 0

20

14.4

General Gov. Debt(US$ Bil.)

Gen. Gov. Debt to GDP Ratio

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. 10

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.

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

11

Chart 2: General Government Debt/GDP(%)

Source: Moody's Statistical Handbook; November, 2011

140 Bahamas 120 Barbados Bermuda

100
Cayman Islands 80 France Germany 60 Jamaica Maastricht Guidelines Trinidad & Tobago 20 United Kingdom United States 0

40

12

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 201112. 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 programmed over 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.

13

Chart 3: Annual Change in Debt to GDP Ratio %

16

11

Bermuda Bahamas 6 Cayman Islands Jamaica Trinidad & Tobago

United Kingdom United States

1 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 (Projected) (Projected)

Germany France Barbados

-4

14
-9

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 the biennial 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-cash retirement 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 Governments 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-professionals 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 was 17% 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
3

Professional 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.

15

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 million to $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 the payroll 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 September 2011 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 years spend.

16

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 years 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 paraprofessionals salaries; increased demand on Governments health subsidy programme for 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 Governments 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 Governments 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.

17

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

Many countries, along with Bermuda, are now facing similar, externally imposed, budget challenges. 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 now recognised 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 the options 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.

18

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.

Chart 4: The Fiscal Space Diamond

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

19

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 the size 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 Governments 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.

20

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 countercyclical 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 period of 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 favourable effects on longer term business confidence).

21

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 2015-16 budget 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.

22

$million

REVENUE ASSUMPTION

CURRENT EXPENDITURE

RESULTING NET DEBT

Green 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 917.3 977.4 926.6 949.9 991.3 1034.3

Yellow 917.3 977.4 926.6 940.6 958.0 980.4

Red

Green

Yellow

Red

Green 772.4

Yellow 772.4

Red 772.4

917.3 1000.9 1000.9 1000.9

977.4 1038.3 1038.3 1038.3 1006.8 926.6 922.1 906.8 908.4 924.7 950.3 923.5 922.1 924.1 923.7 950.3 922.3 922.5 923.8 923.9 950.3 1157.0 922.7 1240.0 922.7 1250.0 907.4 1245.0 876.9 1210.0

1006.8 1006.8 1157.0 1157.0 1250.0 1270.0 1300.0 1393.0 1320.0 1455.0 1335.0 1480.0

1083.2 1013.4

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 (Revenue contraction 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 years 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.

23

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 the vehicles 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 tax expenditures 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. Pensioners Land Tax Exemption: In 2005 the Government exempted all pensioners from Land Tax. Prior to this change, homes owned by pensioners with 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.

24

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. The Government 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.

25

Chapter 4 Increasing our Expenditure Flexibility

The Case for Efficiency Savings
Efficiency 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.

26

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 services arrangements 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 funding per 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.

27

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 for core 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. 28

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 crowding out high priority measures not yet in place, such as pro-growth investments, tax reductions or reductions in debt.

29

Chapter 5 Conclusion
Commitment to Budget Transparency
This 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 Governments 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 citizens 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.

Ramkumar, V., & Shapiro, I. Guide to Transparency in Government Budget Reports. Washington, DC: International Budget Partnership.

30

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: openbudget@gov.bm

31

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 by 201415 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 to drive 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.
7

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

32

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 and champions 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 budget focus, 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.

33