Below the summary in English of the purchasing power study that was conducted recently. Shortly a study about poverty in the Dutch Caribbean also will be published. The entire study in Dutch can be read here: http://www.scribd.com/jansenannemieke/d/96868237-Kabinetsstandpunt-Koopkrachtonderzoek-Caribisch-Nederland
Background and goal of the study
Since October 10, 2010, Bonaire, Saba and Sint Eustatius have become integral parts (as public bodies) of the Netherlands. Together the islands form the Caribbean Netherlands (CN). Since the transition, much has changed on the islands. A new tax system is in place, a new health insurance system has been introduced and the US dollar is the official currency. 2011 saw a surge in prices.
Purchasing power is felt to have gone down as a result of these changes. Ecorys (NL) and Curconsult (CUR) have been commissioned by the ministries of Finance and the Interior and Kingdom Relations to study purchasing power on the Caribbean Netherlands.
The goal of the study is to find which factors have caused increases in prices and the (perceived) decrease in purchasing power. The analysis offers options for potential redress. The study looks at the following elements:
Part I: the development of purchasing power on the Dutch Caribbean
1.The development and explanation of prices
2.The development of gross incomes
3. The development of net incomes – effects of the new tax system
4. The development of disposable incomes
5. The development of purchasing power
Part II: Other topics
6. Credits and Loans
7. Functioning of markets in the hotel and catering industry
8. Trade with the Dutch Caribbean
Various sources of information have been used in this study. Reports and studies have been analysed and the islands have been visited. Discussions were held with entrepreneurs, politicians and civil servants and other stakeholders. In addition, a survey has been held among 83 households on all three islands. Questions addressed (perceived) effects of the transition and (perceived) developments in prices, incomes and purchasing power.
Part I: the development of purchasing power on the Dutch Caribbean
1. The development of prices – high inflation can be explained
Bonaire is dependent on Curacao for the supply of most goods and services. In 2011, prices on Bonaire increased by 6.5%. On Curaçao prices rose by around 3% (Aruba: 7.2%).
The main explanations for the strong increase in prices are the increase in the prices of fuels (additional costs for transport) and the increase in world prices of food and raw materials. These factors are also co-determinants of inflation on Curaçao. Factors that are specific to Bonaire are: higher excise duties (on tobacco products and alcoholic beverages), changes in the tax system (notably the ABB) that are not always correctly applied, and higher compliance. The many factors that relate to the transition have not played an important role. For some categories of products, changes in prices cannot be fully explained.
Saba and Sint Eustatius are almost fully dependent on Sint Maarten for the supply and import of goods. 2011 saw price increases on Saba and Sint Eustatius of 7.4% and 10.9%. Sint Maarten saw an increase in prices of around 5.8%. The main explanations for the strong increase in prices are the increase in the prices of fuels (this increases the costs of electricity and also increases costs for transport to and from the islands), the increase in world prices of food and raw materials, an increase in costs of transportation (a higher excise on petrol and price increases of Winair) and a ‘double’ levy by the combination of the BBO on Sint Maarten and the ABB on Saba and Sint Eustatius. The introduction of the dollar has only played a minor role. The differences between the inflation on Saba and Sint Eustatius can be explained by (i) differential price increases of Winair (ii) different weights of price categories and (iii) differences in trade flows.
2. The development of gross incomes – strong increase in benefit payment and minimum wage, modest increases in other incomes
Most gross incomes on the Caribbean Netherlands have increased in 2011. Incomes paid in the (semi) public sector and by large(r) enterprise are typically adjusted for last year’s inflation. Indexation has been limited or absent in important economic sectors such as construction, the hotel and catering industry and retail trade. Social benefits (AOV, AWW, onderstand) minimum wage have strongly increased in 2011. Indexation of supplementary pensions has been limited or absent. The increase in gross income of retirees with supplementary pensions was less pronounced than that of retirees receiving only AOV. On Saba and Sint Eustatius, the increase in the minimum wage has had limited effects as often lower (wage) incomes are higher than the minimum wage. On Bonaire, the increase in the minimum wage was less sharp than on the other two islands.
3. The development of net incomes – the new tax system increases net incomes
The changes in the tax system have resulted, for a given gross income, in an increase in net income for almost all. Obviously, this does not apply to those not previously) paying (wage or income) tax, among which are many part time employees. For these people, the development of gross and net incomes is identical. Apart from this, since the transition, pensioners sometimes pay more tax as soon as their income increases beyond the personal allowance. Whether and how much more is paid depends on the amount of pension income.
2011 saw an increase in the macroeconomic tax ratio relative to 2010. This is primarly the result of higher premium receipts for health insurance. The total additional revenue generated is not entirely clear, as past revenues (based on the Dutch Antilles tax and benefit system) are not fully known. Another reason for this higher ratio is better compliance (e.g. the direct collection of ABB at the harbour). In October 2011 a number of changes were made to tax legislation to compensate for the higher burden. In 2011 tax arrears were also collected. Total payments for taxes and social and employee insurance in 2011 were substantially higher than in 2010. This was, however, a temporary phenomenon. Moreover, part of the October 2011 compensation will only become effective in 2012, resulting in a lower burden.
4. The development of disposable incomes – increases for most groups
Employees and entrepreneurs In 2011 employees have often been fully or partially compensated for price changes in 2010. Gross incomes have therefore increased. Larger employers and (semi) public sector employers more commonly grant this compensation than smaller-scale employers. On top of that, the net effect of the new tax system is positive. A large number of part time employees often earn an income that is lower than the minimum wage. They therefore did and do not pay any taxes. Smaller-scale entrepreneurs faced pressure on their gross and net income in 2011. On the one hand their incomes were relatively low already and on the other hand they faced a drop in demand as a result of higher prices. Large-scale entrepreneurs (within the income tax system) are less susceptible to this. There are not many large-scale entrepreneurs on Saba and Sint Eustatius.
Minimum wage and social benefits
The gross and net incomes of minimum wage earners have increased. However, not many people earn the minimum wage. Retirees with only AOV also have seen an increase in gross and net income. The percentage increase in net incomes is lower when the supplementary (pension) of retirees is higher. Beneficiaries of AWW and onderstand face a similar situation. Often they have supplementary income that in gross terms did not or only marginally increased. Due to the low levels of income, no taxes are paid.
5. The development of purchasing power – some groups face pressure; other groups see increased purchasing power
For many groups the increase in disposable income is more than sufficient to compensate for increased prices. For some groups this effect is stronger than for others. Purchasing power is under pressure for groups that did not pay taxes or paid only a small amount (both in 2011 and before) and have only seen at best a modest increase in gross income. The increase in prices is similar to the increase in disposable income. Particular groups that face a real risk of a decrease in purchasing power are those with an income around the minimum wage (particularly on Bonaire) and part time workers, retirees with a modest pension, employees of small-scale enterprises – not in the (semi) public sector, and small-scale entrepreneurs (which includes any entrepreneurs on Saba and Sint Eustatius). The risk of a decrease in purchasing power is particularly high for those entrepreneurs and for part time workers. In 2012 many of these groups will be compensated for higher prices in 2011 as social benefits and the minimum wage are adjusted annually for inflation (by island). Various employers also provide wage indexation. In addition, better compliance by the tax administration and customs, including the one-time collections of tax arrears over a number of earlier years, effected the (partially perceived) development of purchasing power in 2011.
Part II: Other topics
6. Credits and loans – present rules are not uniformly applied
Credit policy by banks does not differ substantially between banks. There are similar credit limits applied by all banks; typically a maximum monthly burden of one third of net income (or 40% of fixed expenses) is applied. Banks typically check with other banks whether credit has already been granted. Banks indicate that relative to earlier years there is no increase in defaults or arrears. There is a difference between theory and practice. We have seen examples of people paying over one third of their income to one or several banks. In July 2012, new legislation will be active. This legislation seeks to introduce ‘conduct’ supervision by AFM and DNB. This new legislation will prevent excess credit being offered in the future.
7. Functioning of markets in the hotel and catering industry – market functioning is not hampered
Bonaire and (in particular) Saba and Sint Eustatius have seen a sharp increase in prices in the hotel and catering industry. No problems have been observed that hamper the functioning of markets. On all three islands, markets function properly. Important factors that can explain the increase in prices are increases in the cost of food, (alcoholic) beverages, transport, the minimum wage and electricity. On top of that decreasing demand, fluctuations in purchase prices of grocery stores and uncertainty on the structure of the tax system have played an important role.
8. Trade with the Dutch Caribbean – almost all goods are sourced from outside the Dutch Antilles
Most products destined for Bonaire are shipped from Curacao (or Aruba) Trade flows to Curaçao originate from North America (48%), the EU (27%), Middle and South America (12%) and the rest of the world (12%). Of all trade between Curaçao and Bonaire, around 70-75% (per 2010) flows through the Curaçao freezone.
Nearly all trade destined for Saba and St. Eustatius arrives via Sint Maarten. Trade flows to the Windward Islands originate in the US (92%), followed by the EU (3.4%) and the rest of the world (4.6%). By importing more directly from the countries of origin, costs of imports can be reduced.