WILLEMSTAD, PHILIPSBURG – “Without a doubt, fiscal consolidation is necessary to put the public finances of Curaçao and Sint Maarten on a sustainable path and to create fiscal space to deal with any future adverse economic shocks. However, fiscal consolidation must be carried out in a gradual and structural way so as not to inhibit economic growth,” says Richard Doornbosch, President of the Centrale Bank van Curaçao en Sint Maarten (CBCS) in his latest economic bulletin of March 2022. In this regard, a path of fiscal consolidation should ensure space for public investment.

Doornbosch stresses that the fiscal consolidation plan should be based on a four-year timetable, include operational targets to cover both budget spending and revenue, use prudent assumptions about economic growth and public finances, and set clear priorities. Furthermore, on the expenditure side, governments should strengthen public financial management, while on the revenue side, the implementation of tax reforms is crucial.

“To be growth-friendly, the fiscal consolidation plan must also ensure room for maneuver for public investment. Curaçao and Sint Maarten could benefit from the positive impact of public investment on economic growth, especially in difficult economic times,” argues Doornbosch. Between 2011 and 2021, the share of public investment in GDP was on average only 2.5% in Curaçao and even barely 1.6% if the construction of the hospital is excluded. Meanwhile, in Sint Maarten, public investment has averaged just 0.8% of GDP between 2011 and 2021.

The extent to which public investment will translate into higher economic growth depends on the size of the so-called fiscal multipliers. Fiscal multipliers measure the short-term impact of discretionary fiscal policy on output. In other words, fiscal multipliers indicate the gains of an expansionary fiscal policy or the costs of a restrictive fiscal policy on the economy in a given year. Given the high degree of openness and smallness, fiscal multipliers are relatively low in Curacao and Sint Maarten, as government spending has higher import leakage. Nevertheless, research has shown that in “abnormal” times, fiscal multipliers tend to be higher than under normal economic circumstances. Moreover, in the longer term, public investment contributes more to output growth than public consumption.

“Unlike other developing countries, Curaçao and Sint Maarten have the ability to borrow at relatively low interest rates due to the permanent underwriting rule. However, an important prerequisite for increasing public investment is that governments choose and manage their investment projects in such a way as to maximize economic returns. In this regard, a well-designed public sector investment program is recommended in which investment projects are prioritized and assessed on the basis of their costs and benefits and their contribution to long-term sustainable growth. In addition, the program should include standards guaranteeing the quality of investment projects and the efficiency of resource allocation,” concludes Richard Doornbosch.