Cft chairman Prof. Age Bakker about St. Maarten: “Tax revenue remains flat in spite of economic growth”

POSTED: 12/2/13 2:38 PM

GREAT BAY – St. Maarten has experienced the highest economic growth of all countries in the Kingdom since the year 2000. Prof. Dr. Age Bakker, chairman of the Board for financial supervision Cft highlighted this feat in an address at the congress Doing Business in a Sustainable Way between the Caribbean and the Netherlands in The Hague yesterday. The congress is part of the celebration of 200 years Kingdom.

“St. Maarten is an interesting casus within the Kingdom,” Bakker said. “Economically it has performed well during the past decade. Its budgetary problems are of a lesser nature than those of Curacao, the Netherlands and Aruba. This is due to the fact that St. Maarten has a younger population, well-capitalized social funds and healthy government-owned companies.”

At the same time, the Cft-chairman noted, St. Maarten has to deal with larger administrative challenges than the other countries in the Kingdom. “In a short time it had to build up new institutions like the high Councils of State and the national services from its own budget. There are still great challenges in this respect.”

St. Maarten is not out of the danger zone, Bakker warned. “Without policy the surpluses in the social funds will turn into deficits by 2017 and around 2027 there will be deficits in the pension fund. St. Maarten ought to anticipate this situation by increasing the retirement age now.”

The stronger economic growth has not resulted in more space in the budget and Bakker has an explanation for it: “In spite of the growth tax revenue nominally remains flat.”

“St. Maarten is a proponent of small government and is thereby probably the most Anglo-Saxon country in the Kingdom. There is a can-do-mentality that other countries can learn from. But I think that the country has reached its limits and that an increase in tax revenue is necessary to put a stop to the extensive black economy, the increasing inequality in income and the unsafety. Within the Kingdom we are allowed to call each other on these issues.”

Prof. Bakker compared the budget-rules in the Netherlands with those in the other three countries in the Kingdom. “The Netherlands has to deal with European rules that everybody knows by heart by now. The total deficit of the government, including all government investments, must be below 3 percent of gross domestic product (GDP) and the total national debt cannot be more than 60 percent of GDP.

Curacao and St. Maarten must balance their current expenditures with their current revenue. “At first, this seems stricter than the European rules, but that is not the case because deficits for government-investments are allowed as long as the interest burden is below 5 percent of government revenue (over the past three years – ed.) and on the condition that the budget is balanced.”

In public finances this approach is called “the gulden financing rule,” Prof. Bakker said. “That name is due to the underlying thought that government-investments strengthen the economy and that future generations will benefit from it. That is why loans for this purpose are permitted: they earn themselves back.”

The budget deficits of the Netherlands and Curacao are not far apart and from 2014, St. Maarten will fall within the same range – between 2 and 3 percent. “St. Maarten will be able to borrow for investments in the coming years on the condition that its budget complies with the Kingdom law on financial supervision,” Bakker said.

The Cft-chairman noted that the debt quote of the Netherlands will stabilize around 77 percent by 2017, while Aruba’s debt quote will be higher. The debt quotes of Curacao and St. Maarten have been restructured to a level between 30 and 35 percent, but this percentage will slowly increase due to investments.

The consequences of the national debt levels for the interest burden on the budget vary greatly. The Netherlands has the highest debt, but the interest burden is just 3.5 percent of government revenue, because the country is able to borow money cheaply. Due to the debt relief, the interest burden for St. Maarten and Curacao is at 2.5 percent even lower. By comparison, Aruba’s very high interest burden of 10 percent of government revenue makes clear that restructuring is urgent, Bakker said.

Prof. Bakker told his audience that since he assumed his position at the Cft two years ago, he had encountered on many occasions that people have the wrong impression about St. Maarten and Curacao.

“An often heard misunderstanding in the Netherlands is that St. Maarten and Curacao have used all the money from the debt relief program and that there is still money going to these countries. On the other side we hear that Curacao and St. Maarten did not get the healthy financial starting position that was promised to them and that the requirements for their budgets are so strict that this destroy their vulnerable economies. Both impressions are wrong.”

As a matter of fact, the Cft-chairman said, ‘We know very little about each other and we have trouble letting go of the patterns we are thinking in.”

To illustrate the information gap, Bakker posed eight questions to his audience, to which he provided the answers at the end of his address. He mentioned the highest point in the Kingdom (Mount Scenery in Saba), the number of languages (4: English, Frisian, Dutch and Papiamento), the fastest economic growth since 2000 (St. Maarten), the fastest economic growth since 10-10-10 (Aruba), the most expensive healthcare system (Curacao), the highest national debt (currently the Netherlands but soon Curacao), the best credit rating (Curacao) and entities with a budget surplus (Bonaire, Saba and Statia).

The islands’ budget woes are not unique, Bakker pointed out. “The United States had great trouble to find a majority in Congress for the increase of the debt ceiling. In Europe the debt crisis has rocked the eurozone to the core. Now attempts are made to enforce budget discipline on the European level. Apparently it is difficult to maintain healthy government finances on our own.”

The challenges within the Kingdom are even more pregnant “because they go hand in hand with a too low economic growth,” Bakker said, “At times it seems that we are in a vicious circle of low growth, increasing deficits, budget cuts, that in turn lead to even lower growth.”

The budget problems stem first and foremost from the aftermath of the economic crisis, Bakker said. “Next to that life expectancy increases and the population is ageing. That has not been taken sufficiently into account when we organized our pension systems. Healthcare costs are going up as well, due to the ageing population and to the expensive technological progress.”

For doing business openness is of the utmost importance, Bakker said. “You must be able to trust each other. I dare to say that leaving entrepreneurs in the dark about the state of government finances is worse for the business climate in a country than the absolute level of deficit and debt figures. When entrepreneurs have no confidence in the government, doing business becomes very risky. For investors it is good to know that the Kingdom stands for budget discipline with effective financial supervision.”

Transparency is politically sensitive in the Caribean part of the Kingdom, Bakker noted. “Extensive statistics, but also web pages and libraries where it is easy to find legislation and reports from meetings, are lacking in all three countries.”

While effective supervision requires a plausible threat with sanctions, supervision and economic recovery depend first and foremost on political stability according to Bakker. “In the almost two years that I am the chairman of the Cft I have had to deal with four cabinets in Curacao, three in St. Maarten, and with three ministers of Home Affairs and Kingdom Relations in the Netherlands. In Bonaire and Statia I have had to deal with three different commissioners. Only in Saba I am still speaking with the same people. Political peace and stability are a prime requirement.”

 

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