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What can we expect from the newly elected government?

Sunrise-ArubaAfter having casted our vote last September 27, the official part of forming the new government is taking place as we are writing this article. The results were clear, the Aruban people want the previous government of the AVP-party to continue for one more term, officially taking seat on November 1, 2013.

 

With a much weakened public finance and the economy leaning on only one industry, it is certain that these coming four years of government are not going to be an easy ride. The economy is doing fairly well, but there are inevitable choices to be made in order to bring government finance back under control. Let’s sum up the important points to be taken into consideration when forming a government.

Public debt
Aruba’s outstanding public debt stands at over 70% of its GDP. By the end of June 2013, Aruba’s debt burden amounted to 3,132.2 million florins, according to the Central Bank of Aruba, which is a 10,9% increase compared to June 2012. In four years (2009 – 2012), the public debt/GDP ratio increased with more than 20 percentage points. Without drastic turnaround in fiscal policy, both on revenue as well as expenditure side, budget deficits may further cause our public debt to GDP ratio to be well on its way to become 80%. Special attention goes out particularly to the burden of personnel expenses, which take a solid 75% bite out of total apparatus related expenses, and about half of total expenses.

Social security, pension funds and the General Health Insurance
Direct government debt in bonds and treasury bills are not the only financial commitments of the Aruban government. Our social security and health insurance systems are at risk and fixing them will be imperative, in order not to increase government’s financial commitments, as government is required by law to compensate for possible deficits, and their compensation will have to appear on the government budget. The public servants’ pension fund (APFA) is a next risk, as it is to receive nearly 700 million florins, to be paid over a 15 year period, on top of regular pension premium payments. Reaching a balanced budget under these circumstances becomes a more challenging task, as maintaining the current deficit levels seems like a major achievement.

The spending pressures in health care and pension schemes are not going away, as they are rooted in the aging process, which will appear full blast in the upcoming decade. By 2020, Aruba may have a full 10.000 persons more aged 60 and over than today, who will be eligible for general pension (AOV) according to current norms. By 2030, another 10.000 will be added, leading us ultimately to a community composed by seniors for about 25%.

Then, there are the mandatory premiums, which are the General Health Insurance (AZV) and the social security fund (AOV/AWW). These tariffs are already very high, the AZV is at 11,5% and the AOV/AWW 13,5% of the gross wage or income. The Chamber does not favor any increase of these premiums, as it will become unaffordable for employers and employees alike. It will have an immediate effect on the cost of doing business and the consumer’s purchasing power.

It is recommended to rise the retirement age from 60 to 65 years, as soon as possible. This is also the recommendation of the IMF in its recent report. The Chamber also recommends, in case of having a grace period, that this should not be extended for too long. Undoubtedly, these are not very popular measures, and some will propose a gradual increase of pension age. This will come however at the price of increasing premiums, which is not favorable to our economy as a whole. The Chamber considers we should have gradually introduced these measures a long time ago. Now we have run out of time and we cannot afford making up for deficits through premium increase. Drastic measures need to be taken in order to safeguard these funds, and with them, Aruba’s public finance.

PPP projects and financial commitments
Other public finance commitments include the Public-Private-Partnerships projects (PPP-projects), in which about 1 billion florins in private capital must be repaid in due time, with a reasonable return on investment. It is noteworthy to state that none of these PPP-projects are profit-based, with its direct consequences for government’s budget for the next decades. It is recommended to limit further PPP commitments, as these will add to the already high burden of long term financial commitments which will leave no space on the government budget for proper investments.

Solutions
So what does the Aruba Chamber propose? First, it seems logical that the government should check those expenses over which it has direct control. These are in the first place the expenses related to the apparatus, particularly personnel expenses, already commented upon above. This can be done rapidly, through salary cuts for everyone, or through improvement of the apparatus concentrating on core tasks, but which will take much more time, as these reforms can only be done according to the implementation capacity of government itself.

On the revenue side, government seems to have high hopes for economic growth taking care of a substantial revenue increase through taxes. However, this may not be the case as economic growth, based upon global growth perspectives, may be moderate at best in the coming years. With Aruba’s GDP close to the 5 billion florin line, a reasonable 3% GDP growth will yield about 150 million in economic wealth, of which government will generally gather about 20% through taxation. A 30 million increase in tax revenue may seem reasonable, but compared to a solid 400 million deficit each budget year it becomes clear that the possibility of crushing the current financial crisis by economic growth alone is a far cry.

Tax reform
The reforms should be sought in a bold move toward more indirect taxation, lowering personal income tax and profit tax rates in order to make Aruba more attractive for investors, giving it a competitive edge. Lowering the personal income tax will provide more expendable income for our citizens, which in turn will increase purchasing power. Finally, the Chamber also suggests the introduction of a Value Added Tax (VAT), to collect what government gave up lowering personal and corporate income taxes. The experience since 2007 with the collection of the BBO has created a much more favorable ambience for the introduction of a VAT. Also, government may consider increasing the turnover tax (BBO) back to its original tariff of 3%, while government starts developing a new fiscal regime including a VAT. After this, the BBO can be abolished.

A better perspective for San Nicolas
The Chamber maintains its point of view that it will not be feasible to reopen the refinery, and strongly believes in seeking new opportunities for this area. The Chamber already presented earlier this year an extensive plan for the development of the refinery area, including taking advantage of the excellent port facilities that may lead to a series of new business activities, broadening Aruba’s economic basis with business operations that will be earning hard currency, something we are in dire need of after the shutdown of the refinery.

Finally, we may count our blessings that our tourist sector is doing well. On the other hand, it is a matured market, and finding new ways and niche markets within the tourist sector will become imperative. The Chamber does not recommend building large scale hotels, because this will eventually have its toll on Aruba's already limited human resources, as we are soon hitting the hardest part of the aging process, severely limiting our local human resources at all levels. Cautiousness will be key, but so will be courage in certain cases.

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