Overview

4. The fiscal imbalance in the mid-1990s resulted from a deterioration that started with large wage increases in 1992. The six-year average of the deficit as a percentage of GDP prior to 1992 was only 1.0 percent, but between 1992 and 1995 the average rose to 4.0 percent of GDP.³ During 1986-91, the Netherlands Antilles experienced a significant decline in offshore profit tax receipts following a repeal in the United States in 1984 of the withholding tax on interest payments to nonresidents. Domestic tax revenues also diminished because of a deterioration in levying and collection of profit and income taxes. In response, expenditures in all categories were compressed, with emphasis on the containment of personnel costs. However, most of the adjustment of 1986–91 period was reversed during 1992–95. Wage costs during the 1992–95 period grew by an average of 11 percent annually at the general government level. A series of strikes in 1992 ended with a 14 percent rise in the average compensation of civil servants, and reinstatement of benefits. An increase in the number of civil servants reversed the effects of the earlier contraction. Furthermore, the shift in the financing of pension premiums from pay-as-you-go financing to capital funding led to a surge in pension premiums.

5. The Netherlands Antilles was in the midst of a fiscal crisis in 1995: the budget deficit of the general government reached 4.3 percent of GDP (Table 1). A large part of the deficit was financed by a buildup of arrears, which led to a considerable erosion of confidence in government. The general government debt at the end of 1995 amounted to 60 percent of GDP (of which two-thirds was domestic) and there was no room for further non-monetary financing of the deficit. Although the financing of the deficit through a buildup of arrears partly curtailed the expansionary impact of the large fiscal imbalance, a considerable depletion of official reserves could not be avoided; by the end of 1995 import coverage of official reserves had dropped to two months. Projections for 1996 pointed to a budget deficit of more than 9 percent of GDP. With the existing financing constraint, a larger budget could not be financed on a voluntary basis from domestic sources. In addition, in the absence of fiscal adjustment, confidence in the currency would likely erode, leading to a further decline in already low official reserves and, ultimately, jeopardizing the viability of the peg as well.

Table 1.

Netherlands Antilles: Budget Balances of the Central Government and the Island Government of Curaçao, 1994–99

(In percent of GDP)

Sources: Data provided by the authorities; and Fund staff estimates.

^1/General goverment revenue and expenditure are net of ERNA transfers between the central government and the island government. Therefore, revenue and expenditure of the general government are less than the sum for the central government and the island government.

Table 1.

Netherlands Antilles: Budget Balances of the Central Government and the Island Government of Curaçao, 1994–99

(In percent of GDP)

			1994	1995	1996		1997		1998		1999
					Progr	Act.	Prog.	Act.	Off.Proj.	Est.	Off.Proj.
Central government
Revenue			11.4	11.3	14.2	11.5	12.9	12.4	12.1	12.5	12.2
Expenditure			11.9	13.1	15.3	13.8	13.5	13.5	15.1	13.3	14.1
Balance			-0.5	-1.9	-1.1	-2.2	-0.6	-1.2	-3.0	-0.8	-1.9
Island government of Curaçao
Revenue			17.8	18.5	21.1	18.7	19.8	17.1	17.8	17.1	18.0
Expenditure			22.4	21.0	23.1	20.4	20.3	19.2	20.0	19.0	19.7
Balance			-4.6	-2.4	-2.0	-1.7	-0.5	-2.1	-2.2	-1.8	-1.8
General government
Revenue 1/			28.7	29.3	34.8	29.7	31.7	29.0	29.0	28.6	29.5
	Of which: tax revenue		23.8	23.9	28.9	25.1	27.1	25.5	24.7	25.0	25.9
Expenditure 1/			33.7	33.6	37.9	33.6	32.7	32.3	34.1	31.2	33.2
	Of which: current expenditure		32.5	32.3	36.2	31.9	30.9	31.0	32.2	31.0	31.6
		Of which: wages (excl. pension prem.)	11.6	12.2	14.2	12.8	11.1	11.8	11.2	11.4	11.3
		Of which: interest expenditure	2.8	2.8	3.4	2.9	3.5	3.4	3.9	3.6	4.0
Balance			-5.0	-4.3	-3.1	-3.9	-1.1	-3.3	-5.2	-2.6	-3.7
Sinking fund			0.0	0.0	0.0	0.0	0.9	0.0	0.0	0.0	0.0
Balance (incl. Sinking fund)			-5.0	-4.3	-3.1	-3.9	-2.0	-3.3	-5.2	-2.6	-3.7

Sources: Data provided by the authorities; and Fund staff estimates.

^1/General goverment revenue and expenditure are net of ERNA transfers between the central government and the island government. Therefore, revenue and expenditure of the general government are less than the sum for the central government and the island government.

View Table

Table 1.

Netherlands Antilles: Budget Balances of the Central Government and the Island Government of Curaçao, 1994–99

(In percent of GDP)

			1994	1995	1996		1997		1998		1999
					Progr	Act.	Prog.	Act.	Off.Proj.	Est.	Off.Proj.
Central government
Revenue			11.4	11.3	14.2	11.5	12.9	12.4	12.1	12.5	12.2
Expenditure			11.9	13.1	15.3	13.8	13.5	13.5	15.1	13.3	14.1
Balance			-0.5	-1.9	-1.1	-2.2	-0.6	-1.2	-3.0	-0.8	-1.9
Island government of Curaçao
Revenue			17.8	18.5	21.1	18.7	19.8	17.1	17.8	17.1	18.0
Expenditure			22.4	21.0	23.1	20.4	20.3	19.2	20.0	19.0	19.7
Balance			-4.6	-2.4	-2.0	-1.7	-0.5	-2.1	-2.2	-1.8	-1.8
General government
Revenue 1/			28.7	29.3	34.8	29.7	31.7	29.0	29.0	28.6	29.5
	Of which: tax revenue		23.8	23.9	28.9	25.1	27.1	25.5	24.7	25.0	25.9
Expenditure 1/			33.7	33.6	37.9	33.6	32.7	32.3	34.1	31.2	33.2
	Of which: current expenditure		32.5	32.3	36.2	31.9	30.9	31.0	32.2	31.0	31.6
		Of which: wages (excl. pension prem.)	11.6	12.2	14.2	12.8	11.1	11.8	11.2	11.4	11.3
		Of which: interest expenditure	2.8	2.8	3.4	2.9	3.5	3.4	3.9	3.6	4.0
Balance			-5.0	-4.3	-3.1	-3.9	-1.1	-3.3	-5.2	-2.6	-3.7
Sinking fund			0.0	0.0	0.0	0.0	0.9	0.0	0.0	0.0	0.0
Balance (incl. Sinking fund)			-5.0	-4.3	-3.1	-3.9	-2.0	-3.3	-5.2	-2.6	-3.7

Sources: Data provided by the authorities; and Fund staff estimates.

^1/General goverment revenue and expenditure are net of ERNA transfers between the central government and the island government. Therefore, revenue and expenditure of the general government are less than the sum for the central government and the island government.

Structural weaknesses in the budget

6. Developments until the end of 1995 brought several structural weaknesses in the fiscal sector to the forefront:

• The tax base was narrow. In the absence of a sales tax or value-added tax, the share of taxes on goods and services in total tax revenue was 15 percent for the general government in 1995. The majority of indirect taxes were specific excise taxes, which rendered the tax system rather inelastic. The implications of the ensuing excessive reliance on direct taxes became painfully clear when the offshore profit tax receipts declined from 18.3 percent of GDP in 1986 to 3.9 percent in 1995.

• Taxes on international trade and transactions constituted a significant part of total tax revenue collections. Prior to 1993, when the government increased the import tariff rate by 6 percentage points in an effort to boost revenues, the share of international trade taxes in total tax collections had averaged 12 percent over the previous seven years. This ratio rose to an average of 18 percent between 1993 and 1995.

• Tax collections also suffered from administrative problems. Starting from the late 1980s the efficiency of levying income and profit taxes deteriorated and long delays in tax assessment and collection became common. At the end of 1995 a mere 16 percent of profit tax assessments, originally due in 1994, had been issued, while 46 percent of profit taxes originally due in 1993 had not yet been collected by the end of 1995.

• On the expenditure side, the rise in government employment accompanied by a distorted wage structure generated an upward trend in wage and salary expenditures within the budget. The share of wage payments in total tax revenues expanded progressively from 45 percent in 1986 to 68 percent in 1995. Under the existing wage structure, civil servants at the lower and middle levels earned more than their peers in the private sector, whereas at the higher level they earned less, creating a distorted incentive structure and reducing the quality of management. Periodic wage increases were granted automatically, which led to a drift in nominal wages.

• The government’s obligations to the pension fund swelled, owing to higher wages and the progressive shift toward a fully funded pension system. Faced with growing difficulties in financing the budget, the government began accumulating arrears to the pension fund, which contributed to the emergence of a chain of arrears between different governmental agencies and the pension fund.

Implementation in 1996

18. Fiscal developments during 1996 were less than satisfactory. The general government deficit declined to 3.9 percent of GDP, exceeding the target by 0.8 percent of GDP. At the central government level, the budget deficit in 1996 was 2.2 percent of GDP, about 1.1 percent of GDP higher than programmed. The Curaçao government deficit, on the other hand, fell to 1.7 percent of GDP, 0.8 percent of GDP below the target. The main slippages in the central government budget occurred on the revenue side, whereas at the island government level, below target revenue was fully compensated for by lower spending. The government financed the deficit entirely from domestic nonbank sources. However, the liquidity shortage at the beginning of 1996 led to the accumulation of new arrears to APNA. By the end of the year, the island government had cleared this increase, but the central government had accumulated new arrears of NA f. 16 million.

19. At the central government level, the revenue shortfall was split evenly between tax and nontax revenue. The sales tax for the Leeward Islands went into effect with a maximum rate of 6 percent for nonprimary goods, 5 percentage points lower than originally proposed. Consequently, revenues from this tax fell short by NA f. 39 million (0.9 percent of GDP), 10 percent of the total tax revenue originally planned for the central government. The decline in nontax revenue was explained by unexpectedly low revenues from the commercialization of the international telephone company and low revenue collection of nursing fees charged by the Capriles Clinic.

20. At the island government level, profit tax collections were unexpectedly low. This was due to disappointing proceeds from clearing part of the backlog in profit tax collections. In addition, the introduction of a self-assessment scheme was postponed until January 1, 1997. A significant part of these taxes were now deemed uncollectible, owing to obsolete information used to prepare the assessments and the liquidation of firms to which assessments were sent.

21. In order to offset the effects of slippages during the first part of 1996, both levels of government took additional measures in the second half of the year. The surcharge on gasoline was retained and Parliament approved a further increase of excise tax on gasoline in the Windward Islands from January 1997. The property transfer tax in the Leeward Islands was increased from 2.75 percent to 4 percent. The island government stepped up its efforts to clear the backlog in profit tax collections and took steps to accelerate the payment of wage taxes. Further cuts in nonwage current expenditures and investments were also introduced. The impact of these measures in 1996 was about NA f. 40 million (0.9 percent of GDP).

22. Progress on implementing expenditure measures was mixed. Some progress was made on the core task analysis. By the end of 1996, the core task analysis of the central government was completed, while that of the island government was at an advanced stage. A preliminary review of the wage structure of the civil service had been carried out in a timely manner for its implementation in 1998. On the downside, the introduction of the health insurance scheme for chronically ill patients and some other smaller health care measures were postponed until January 1, 1997.

23. Expenditure monitoring and control was improved at both levels of government. In particular, the island government of Curaçao took significant steps. First, the budgeting of expenditure authorizations was moved to a monthly basis. Second, an automated system was developed in order to obtain accurate and timely information on the expenditure commitments of various agencies. The central government requested technical assistance from the Dutch authorities to strengthen expenditure monitoring and control procedures.

24. While the overall outturn for 1996, after adjusting for the one-time wage payments, marked an improvement over 1995, the results fell short of the target, and underlying developments were worrisome. The setback in one of the major elements of the fiscal reform, namely the rate and coverage of the sales tax, was bound to affect adversely the future performance of the tax system. The delays in other fiscal measures, such as the introduction of the self-assessment pay-as-you-file system and the insurance scheme for chronically ill patients, cost valuable time. Furthermore, the relative success of the outturn was based on discretionary measures such as cuts in expenditures on goods and services and capital expenditures, the sustainability of which was questionable.

Implementation in 1997

25. At the core of the policy program for 1997 were a continuation of fiscal consolidation and a correction for the structural policy slippages that had occurred in 1996, By early 1997, structural reforms that had faltered in 1996 were fully in place. Fiscal measures were reinforced by increases in the property transfer tax and the excise tax on gasoline, further cuts in nonwage current, expenditures and investment, and a host of nontax revenue measures. The program for 1997 envisaged a general government deficit of NA f. 87 million (2.0 percent of GDP), consistent with deficit targets of NA f. 40.4 million and NA f. 46.3 million for the central government and the island government, respectively.

26. The 1997 outturn did not meet expectations. Slippages had already become apparent at the beginning of the year. After the first quarter, the deficit of the central government had reached NA f. 17.6 million, more than 70 percent of the annual deficit target excluding the sinking fund contributions. The island government followed suit in the second quarter of the year, with a half-year deficit of NA f. 23.2 million, 9 percent over its annual deficit target, excluding the sinking fund. At the central government level these slippages early in the year were indicative of the failure to sustain cuts in expenditure on goods and services and investment. A significant drop in import duties and nontax revenues further aggravated the problem. For the island government, the early signs of slippage came on the revenue side; taxes on income and wages were below the midyear targets by a combined 11 percent, and only 17 percent of the midyear target in nontax revenues could be realized. Achieving the original objectives of the program was no longer possible. Both levels of the government accumulated new arrears to the pension fund, and when faced with significant financing constraints, postponed their contribution to the sinking fund.

27. Both levels of government increased their efforts toward fiscal consolidation, but no adequate policy measures were implemented in a timely manner. In the second half of 1997 the expansion of the deficit was contained, but the overall outturn for the year indicated a considerable reversal of the adjustment achieved in 1996. The deficit of the general government reached 4.2 percent of GDP (including the scheduled contribution to the sinking fund), exceeding the target by 2.2 percentage points. At the central government level, the budget deficit was 1.5 percent of GDP, more than twice the program target. The budget of the island government of Curaçao, with a deficit of 2.7 percent of GDP, was 1.6 percent of GDP above the target.

28. At the central government level, there were significant overruns on current expenditures and shortfalls on revenues. The most important revenue decline occurred in import duty collections. Lower import duty collections were mainly due to a 7 percent decline in imports, but slippages in collection contributed to the outcome as well. The lower-than-targeted collections on nontax revenue repeated the pattern of 1996, albeit on a smaller scale; the dividends from the central bank were significantly less than expected, and public agencies failed to pay laboratory and nursing fees.

29. Wage costs were responsible for the most important central government expenditure overrun. Wage payments were about 0.6 percent of GDP above the targeted level of 6.6 percent, defeating the purpose of the wage freeze. Also, proposed cuts in current nonwage expenditures and investment could not be realized, reflecting the failure of expenditure monitoring and control procedures. Expenditures on good and services remained flat at their 1996 levels, owing to a 35 percent budget reduction introduced in August. At the same time, a freeze on new investment projects was imposed. Still, investment spending was more than double the program target, representing a more than 66 percent increase over the previous year.

30. In 1997, more than half of the revenue shortfall of the island government was attributable to low collections of profit and income taxes. The shortfall amounted to NA f. 116.3 million in revenues (2.6 percent of GDP) when compared with program targets. This unsatisfactory performance arose mainly from the failure of the self-assessment scheme to deliver the expected efficiency in profit tax collections and from several exemptions in the income tax code that led to unexpectedly high refunds instead of collections. The shortfall in nontax revenues was NA f. 25.5 million (0.6 percent of GDP), as dividends expected from public companies did not materialize. On the expenditure side, a notable development was the containment of outlays on goods and services below the program target.

31. The core task analysis was successful in reducing the number of civil servants. The central government had envisaged a reduction of civil servants from 4,566 at end-1996 to 4,419 in 1997, all of which had been realized by the end of 1997. The island government had already started the implementation of a voluntary redundancy program and the core task analysis. As a result, the number of civil servants, excluding teachers, was reduced from about 3,800 at end-1996 to about 3,700 at end-1997.

Structure of the budget at the end of 1997

32. At end-1997, the main structural weaknesses of the budget identified at the start of the program period still existed and the deficit still exceeded the room for voluntary domestic financing. The latter problem primarily reflected significant revenue shortfalls, which were partly exogenous and partly the result of delays in improving tax collection. However, budgetary problems had been compounded by a lack of sufficiently strong remedial measures in response to emerging shortfalls. Nonetheless, a start had been made in redressing the excessive reliance on revenue from direct taxes, reducing the size of the government, and improving the effectiveness of tax collection and expenditure monitoring.

33. Tax revenue did not recover as targeted during the program period. The introduction of sales and turnover taxes partly remedied the dependence of the tax system on direct taxes; but revenues from this tax represented only 2.9 percent of GDP. Direct taxes still constituted more than half of total tax revenues. The introduction of the new indirect taxes masked the decline in the buoyancy rates of direct taxes. Failure in improving the collection efficiency of profit and income taxes was the major reason behind this outturn.

34. Lower-than-expected collections in nontax revenues had become a dominant theme on the revenue side of the budget since 1996. Nontax revenues suffered from two main problems. First, there was an apparent reliance on optimistic forecasts of nontax revenue collections in the budget, which was not warranted by the historically realized collections. Second, the collection of dividends, fees, and charges, which constituted the bulk of nontax revenues, had been at best erratic, with the outcome depending on negotiations of revenue sharing/transfer arrangements between various levels of governmental agencies and state-owned enterprises.

35. Wage costs remained high. Despite the emphasis of the program on divestiture and retrenchment, and the enactment of a wage freeze, the wage bill (excluding pension premiums) had not decreased since 1995 in nominal terms and only marginally in terms of GDP. The increase in the base wage while a wage freeze was in effect was particularly disquieting. This drift arose mainly from a job grading exercise, which involved regrading the job descriptions of government employees based on their most recently assumed responsibilities, even if they were of a temporary nature. A closer look at the composition of wages revealed that overtime payments, medical costs, and other allowances constituted the other main cause of the overruns.

The 1998 budget

36. Official projections showed an increase in the general government deficit to 5.2 percent of GDP in 1998. This comprised deficits of 3.0 percent of GDP for the central government and 2.2 percent of GDP for the island government (excluding contributions to the sinking fund). Total revenue was projected to remain at 29.0 percent of GDP, but tax revenue was to decline by 0.8 percent of GDP. Total expenditure was projected to increase from 31.0 percent of GDP in 1997 to 32.2 percent. Furthermore, policy coordination between the two government levels weakened in the absence of joint adjustment efforts.

37. Despite efforts to improve tax administration, the gradual decline in tax revenues was not projected to be reversed. However, a planned 2 percentage point decrease in import duties was not implemented. In addition, an increase in telephone tariffs was expected to boost nontax revenues by 0.4 percent of GDP.

38. In spite of several measures to limit wage costs, expenditure was scheduled to rise sharply in 1998. Most of the expenditure cuts that had been achieved during the 1996–97 period were not considered of a sustainable nature. Furthermore, the growth in nonwage current expenditures and capital expenditures over and above the 1997 outturn reflected a deliberate expansion. The main measures incorporated in the 1998 budget were, on the expenditure side, continuation of the wage and (partial) hiring freeze, a reduction by half in vacation allowances, and savings expected from a reduction in the number of civil servants through the core task analysis and voluntary redundancy schemes. Following a similar scheme adopted by the island government of Curaçao in 1997, the central government anticipated that about 250 requests for voluntary departure would be granted. The immediate saving from the continuation of the core task analysis and the accompanying voluntary redundancy schemes was projected at 0.7 percent of GDP, through a reduction in wage payments as compared with the 1997 outturn. However, this saving was to be more than offset by an escalation in nonwage current expenditures by 2 percent of GDP and a growth in capital expenditures by 0.7 percent of GDP.

39. The new wage structure was introduced at the start of 1998, as foreseen in the 1996–97 adjustment program. For 1998, the introduction of the new system would largely undo the savings resulting from the freeze on periodic wage increases. The law stipulated step increases of fixed nominal magnitudes to be awarded based on performance evaluations, a rule expected to limit wage costs in the medium term. However, the new performance evaluation system would not become operational until 2000.

40. Finally, some remaining changes of the pension system that were part of the 1996 revision were enacted in 1998. In particular, a deduction for the general old-age pension was introduced to the pension for new retirees, and the period required for building up a full pension was extended from 30 to 35 years. On that basis, the employers’ premium was reduced from 20 percent to 17 percent.⁷

Budget implementation in 1998

41. At the general government level, the 1998 deficit amounted to 2.6 percent of GDP, half of the amount included in the budget and 0.7 percent of GDP below the 1997 level. The deficit decreased for both levels of government, to 0.8 percent of GDP for the central government and 1.8 percent of GDP for the island government. Total revenue declined in terms of GDP by 0.4 percent, mainly reflecting lower-than-anticipated profit tax revenue. With a sales tax in place over two years and several efforts to boost collections of import duties and profits taxes, the decline in tax revenues below the 1997 outturn should be considered a further setback in efforts to boost the buoyancy of the tax system.

42. At both levels of government, spending was curtailed by a binding financing constraint that especially held down expenditure on goods and services and investment. Total expenditure decreased by 1.1 percent of GDP. The island government also urged public enterprises to invest in government securities to alleviate its financing problem. In addition, the island government accumulated further arrears to the pension fund.⁸

43. The lack of fiscal adjustment at the central government level was in part the result of the political paralysis associated with the lengthy government formation process during the first half 1998. Potential coalition partners had no incentive to agree on unpopular measures before actually joining a new government. The new government, installed in June 1998, prepared a Recovery Plan for 1999 and beyond, but no measures were adopted in 1998 to address the immediate financial difficulties.

44. Revenue performance at the central government level was largely in line with the 1997 outcome and the 1998 budget. Two noteworthy developments were the higher-than-expected proceeds from the turnover tax on Sint Maarten and from import duties on transshipment in the last quarter of the year. On the other hand, revenue from fees, charges, and sales did not grow as projected. The main reason was the transformation of the post offices into a public enterprise in 1998, as a result of which revenue from postal services was no longer recorded in the government budget. Moreover, revenue collection of laboratory fees continued to be constrained by a chain of inter-agency arrears.

45. On the expenditure side, the wage bill (excluding pension premiums) slightly exceeded the central government budget and the 1997 outcome.⁹ Expected savings through a reduction in the number of civil servants did not materialize, as there were new hirings for vital agencies as well as generous layoff benefits. As a result, while active employment decreased further, from 4,419 to 4,346 employees, the number of people paid through the budget rose by 201. In addition, the cost of the ongoing job-grading exercise had not been incorporated into the budget.

46. Central government transfers to other levels of government were exceptionally large in 1998. This mainly reflected a partial settlement of outstanding arrears to Sint Maarten and Curaçao. However, the remaining financial obligations between the central government and Curaçao were still in dispute.¹⁰ As part of the settlement with Sint Maarten, the island paid off a loan early, reflected in sizable negative net lending for the central government. In May 1998, the central government cleared its arrears to APNA, through a NA f. 36.5 million loan provided by the pension fund. On the other hand, expenditure was limited by the nonpayment of the scheduled contribution to the Coast Guard run by the Netherlands. Despite the financing difficulties, there appears to have been no overall increase in domestic arrears.

47. At the island government level, revenue fell short of the projected growth. The self-assessment scheme for profit taxes was successful in shifting tax revenue forward within the year, but not in halting the overall declining trend, as profit tax revenue fell by 0.5 percent of GDP. The effect on total revenue was offset by the—presumably one-time—increase in the transfer received from the central government. The transfer of the revenue from a levy on waste disposal (recorded under “licenses”), collected by Kodela, the stateowned utilities company, was interrupted in 1998 as a result of a dispute over their mutual financial obligations.

48. On the expenditure side, wages (excluding pension premiums) were reduced further in 1998, in line with the trend since 1995, but by less than anticipated in the budget. The overrun was the result of the ongoing job-regrading exercise, the introduction of the new wage system, and higher-than-expected layoff benefits. Expenditure on goods and services remained much lower than budgeted, reflecting the island government’s financing difficulties, which also resulted in the nonpayment of scheduled pension premiums. A large outstanding zero-coupon loan by APNA, of NA f. 437 million, was refinanced in September 1998, at a below-market interest rate of 6.5 percent (compared with 8.5 percent on the old five-year loan), for 30 years.

49. Little progress was made in 1998 with the implementation of the recommendations of the Core Task Analysis. Six central government departments or operations had been selected to be spun off during the year, including the postal service and the Central Bureau of Statistics. Only the postal service was indeed made independent. Concerning the state-owned companies, the scheduled privatization of Antelecom was deferred, awaiting consolidation with the telecommunications firms of the separate islands. Privatization of the national air carrier, ALM, which had been making substantial losses, was also postponed.

Outlook for 1999

50. While both levels of government face looming liquidity constraints in the course of 1999, no realistic budgets are available to guide budgetary management The formulation of the central government budget for 1999 was largely a pro forma exercise on the assumption of unchanged policies, as the new government’s policy initiatives were not yet ready to be incorporated. Adjusted to a cash basis, the resulting budget deficit can be estimated at about 2 percent of GDP.

51. Indirect tax reform worsened the budgetary outlook at the central government level for 1999 and beyond. The reform included the replacement of the sales tax on the Leeward Islands by a 2 percent turnover tax and the lowering of the turnover tax rate on the Windward Islands from 3 percent to 2 percent in the first quarter of 1999. At the beginning of the year, the obligation to apply the sales tax was lifted for firms on Curaçao and Bonaire, although the law had not yet been formally abolished. The new system was phased in during March. However, small firms and specific items are exempted. The revenue loss stemming from the delay in introducing the new tax is estimated at 0.6 percent of GDP. More generally, the new sales tax is estimated to yield revenue that is 0.5 percent of GDP less than that of the old system, unless a significant part of the informal sector could be captured—which is, indeed, one of the objectives of the new system.

52. Wage costs are set to edge slightly higher in 1999 as the authorities have decided to end the wage freeze. In addition, the job-regrading exercise, although nearing its completion, will still have a small upward effect on wage costs. The reduction in vacation allowance from 6 percent to 3 percent has also not been continued, with a budgetary impact in 2000.

53. The fiscal outlook is subject to large risks, given the many guarantees extended by the government for investment projects. In early 1999, the central government reached a settlement for a claim arising from the Parker project, with the government agreeing to pay NA f. 47 million (1.1 percent of GDP) up front, and about NA f. 5 million in each of the next five years. On the other hand, the Netherlands Antilles reached agreement with Aruba on the distribution of assets and liabilities pursuant to their 1986 partition; the Antillean central government is to receive NA f. 21 million in 1999, followed by NA f. 11 million in 2000.¹¹

54. The island government’s budget, adopted in December 1998, included a deficit of 1.8 percent of GDP. On the one hand, this budget was based on an optimistic assessment of wage and income tax revenue (slated to rise by 0.9 percent of GDP) and accelerated land tax collection (0.2 percent of GDP), and it excluded additional outlays on the Y2K project (0.4 percent of GDP).¹² On the other hand, pension premiums for 1999 have since been reduced (0.8 percent of GDP), and the budget included extra room for expenditure on goods and services (1.0 percent of GDP). On balance, these qualifications would indicate room for a slightly lower deficit. However, serious refinancing problems surfaced in January 1999, indicating that any deficit financing may be difficult given the rapid erosion of private investors’ confidence.