Cft Chairman Bakker’s lecture in seriesPOSTED: 01/24/14 3:11 PM
Cft Chairman Professor Age Bakker delivered an interesting and informative lecture Monday night at the University of St. Martin. There is something in his lecture that we can all learn from, and gain a better insight into how the Kingdom functions, as well as putting each of the constituent countries in a comparative context economically and politically. Today will run his lecture in a 4 part series. Here is part 3 of the chairman’s lecture unabridged and unedited:
Let’s take a closer look at government revenues. Over the three-year period 2011-2013 cumulative growth of nominal GDP, that is the sum of real economic growth and price inflation, has been close to 13 %. On the other hand, over the same period, tax revenues declined by 1 %. If tax revenue collection would have kept pace with nominal GDP growth there would have been additional fiscal space of ANG 60 million.
The budgetary processes in Sint Maarten have been cumbersome. Since Sint Maarten became a country if its own, it has not been able to sign off a budget before the beginning of the new year. 2013 was a particular bad year since the budget was finally approved as late as September. If the government can make progess to finalize the budget 2014 in the coming week than 2014 will mark a significant turn for the better.
Therefore, the policy agenda for Sint Maarten it seems to me is quite clear.
For the government to be able to provide the basic services to the population it is imperative to increase the tax base and improve tax compliance. In doing so, it is important that the strongest shoulders bear the heaviest burden. Than it is also imperative to strengthen financial management and adhere to the timelines for an orderly budgetary process.
The good news here is that upon positive advice on the budget 2014 Sint Maarten can borrow for capital expenditures and this will help improve liquidity position. I am optimistic that we can reach agreement this week in our talks with the government on an investment program, to be financed at relatively cheap interest rates, using the triple A status of the Netherlands.
In the longer run, structural measures are needed as well. There is a need to strengthen health care and raise the retirement age, just as all other countries in the Kingdom have done. Sint marten is lagging here. Without due policy, as of 2017, the surplus of the social security funds will turn into deficits and these deficits will have eaten up the reserves by 2027. Sint Maarten should anticipate for this to happen as we speak, by gradually increasing the retirement age.
So, to sum up here, higher economic growth in St. Maarten has not been translated into greater fiscal space. Despite the growth, total revenue from tax remains nominally equal, which is worrisome.
Sint Maarten is in favor of a so-called small government and therefore perhaps is the most Anglo-Saxon country within the Kingdom. There is a can-do mentality which other countries can learn from. But I think the limit is reached, and that an increase of the tax revenue is necessary to stem the major informal economy, rising income inequality and insecurity.
Aruba, finally shows the highest deficits within the Kingdom. Also on Aruba social security and health care funds are in a precarious situation which calls for short term intervention. The new government has expressed the intention to freeze spending nominally, increase the retirement age and other major measures, to cut back on government deficits and balance the budget in the years to come.
I hope I can replace it with a dotted line in this graph in the short-term forecast for Aruba and can say, ‘this is how it would have looked like on Aruba, if no decisive action would have been taken’.
What does this all mean in terms of debt? Chart 2 shows how the debt will evolve from 2007 to 2017. The Netherlands expects a stabilization of the debt ratio around 77%. Aruba, according to the latest IMF estimates, will even go beyond this ratio. As known, the countries of Curaçao and Sint Maarten have benefitted from the debt relief program, which brought them to a level of around 30 to 35%, but due to capital investment, debt will gradually increase.
Graph 2: Debt ratios within the Kingdom
Source: IMF Article 4 consultation Curaçao and Sint Maarten (2011), IMF article 4 consultation Aruba (2013), Miljoenennota 2014, calculations and estimates Cft for Curaçao en Sint Maarten.
The implications this has for the interest expenses vary enormously between the countries. Even though the Netherlands currently has the highest debt, interest costs do not exceed 3.5% of government revenue, because it can borrow cheap. Because of the debt relief program, the interest expenses for Sint Maarten and Curaçao are even lower at 2.5 %. The comparison shows very high interest expenses in Aruba of 10% of government revenues, which makes clear that sizable measures are urgently needed.
Much has been accomplished in the area of sound public finances. This is an important prerequisite to even higher economic growth in the future. The Kingdom law facilitates this through the possibility of public investments at a low interest rate, as long as the current account of the budget is balanced. Sint Maarten and Curaçao have worked hard in recent years to balance their budgets. Therefore, the benefits of that hard work and, as a result, the financial basis, are ready for them to be achieved.
Higher economic growth is a must. Chart 3 shows that the growth in Curaçao and Aruba has lagged behind that of the Caribbean. The countries in 2013 more or less back to the prosperity of the early century. Netherlands also showed little growth over this period. Sint Maarten, with growth of 20% over the past 10 years, is the only country in the Kingdom that is substantially better off in 2013 than at the beginning of the century.
Source: Centrale Bank of Curaçao and Sint Maarten, Centrale Bank of Aruba, IMF World Economic Outlook 2013, IMF article 4 consultation Aruba, Draft budget 2014 Curaçao, IMF article 4 consultation Curaçao and Sint Maarten (2011)
The latest estimates suggest that St. Maarten and Aruba are recovering again. The economy of Curaçao has suffered this year from the sizeable measures to balance out the budget, but the effects are less severe than expected. This has everything to do with the measures led to reduce imports, but did not affect domestic spending. In economic terminology, the multiplier of fiscal policy in a small open economy is very low.
So there is a sound financial basis for accelerated growth. The view of the Kingdom as a hub to the rest of the world, with the Netherlands as a hub to Europe and the Caribbean countries as a hub to North and South America, can certainly help.