Central Bank president Richard Doornbosch (in front at right).
WILLEMSTAD/PHILIPSBURG–When Curaçao and St. Maarten agreed on implementing a reform package, the so-called “Landspakket”, with the Netherlands as a condition for liquidity support amid the COVID-19 pandemic, part of it included achieving a balanced budget by 2023. Given the poor state of the public finances in the countries, fiscal consolidation is indispensable, the Central Bank of Curaçao and St. Maarten (CBCS) acknowledged in its June 2022 Economic Bulletin.
“However, amid the heightened uncertainties, the question arises whether the current fiscal consolidation path is realistic. With increased inflation pressures moderating the pace of economic recovery and higher government spending required to provide targeted support to the most vulnerable in society, a balanced budget should not come at the expense of a continued recovery,” cautioned CBCS president Richard Doornbosch.
“Instead, the countries should work on a medium-term fiscal consolidation path that balances the effects of fiscal retrenchment on growth,” the CBCS president advised. “First, healthcare and pension system reforms are needed to reduce the pressures on the national budget. Second, public financial management should be strengthened to achieve a more efficient and effective allocation of government resources,” Doornbosch continued. “On the revenue side, tax compliance should be further improved to widen the tax base and to distribute the tax burden more fairly across the economy. Given the capacity constraints of the two countries, however, all these reforms cannot be implemented within one year.”
In its latest Economic Bulletin, the CBCS recommends that both countries develop a medium-term fiscal adjustment programme with a four-year focus. “This programme should be based on prudent assumptions regarding economic growth and fiscal targets and include clear medium-term priorities. In addition, the pace of fiscal adjustment should in the recovery phase be linked to a debt anchor instead of a balanced budget rule,” Doornbosch explained. “The experience so far with the balanced budget rule in Curaçao and St. Maarten demonstrates that it has not served soundness in public financial management and decision-making while it mostly results in procyclical fiscal policy,” he further pointed out.
“The countries should implement measures that accelerate the pace of economic recovery and support a higher and sustained growth path. Structural reforms as agreed in the Landspakketten are necessary in both Curaçao and St. Maarten to address the weaknesses on the supply side of the economy,” Doornbosch continued. “An important area of reform is reducing administrative procedures and red tape.”
The June 2022 Economic Bulletin also includes a feature article with the preliminary results of an extensive survey the CBCS conducted on the effects of red tape on business performance and economic growth in Curaçao and St. Maarten. A first assessment of the results indicate that the cost of red tape has been rising on both islands, adversely affecting business performance and economic efficiency. Therefore, both governments should take steps to address red tape, according to the Central Bank.
“Besides structural reforms, the countries would also benefit from higher public investments, which have been low over the past decade. In this regard, a medium-term public investment programme is recommended that sets clear priorities on investment projects that provide a high economic and social return and includes norms that guarantee project quality and efficiency of resource allocation,” CBCS President Doornbosch said.
Source: The Daily Herald https://www.thedailyherald.sx/islands/cbcs-balanced-budget-should-not-be-at-the-expense-of-recovery