WILLEMSTAD - The economy of Curaçao has been hit hard by the worldwide outbreak of the COVID-19 coronavirus and the preventive measures taken by the government to stop a local spread of the virus. The sharp contraction of the economy will result in a further increase in unemployment, an increase in poverty and deterioration in public finances. Before the outbreak of this pandemic, Curaçao already faced major socio-economic challenges and now the situation will deteriorate further.

The government of Curaçao has meanwhile requested financial support from the Netherlands. However, the first tranche of liquidity support for the next six weeks already received is considerably less than the government has requested to finance the support measures. As a result, other alternatives should also be explored.

Curaçao will also have to make sacrifices to absorb the negative socio-economic effects of the worldwide outbreak of the COVID-19 coronavirus and the local preventive measures. At the request of the Minister of Finance, the CBCS has calculated the economic effect of a solidarity tax in this context.

It follows from this analysis that the solidarity tax, while maintaining part of the income of vulnerable and most affected groups in society, will have a pro-cyclical effect on the economy. After all, as a result of the tax, the projected real contraction for 2020 will be even greater.

An important explanation for this is that part of the resources generated by the solidarity tax will be used to replenish the Social Insurance Bank's reserves and to compensate for the government's loss of income. This part will not lead to extra expenditure, but rather to loss of wealth (i.c. deadweight loss). It is not realistic to expect that in an economy that had been in recession for a number of years before the pandemic broke out, a solidarity tax could generate over NAf.588 million (or 15% of GDP) to finance measures.

In addition, it should be noted that the flat rate solidarity tax of 10.0% may mean that the net income of groups on or just above the wage threshold may, due to the solidarity tax, be lower than the net income of the groups that are just below the wage limit (and therefore do not have to pay a solidarity tax).

Instead of introducing an additional tax, which will have a strong pro-cyclical effect on the economy, the government is recommended to explore opportunities to reduce government spending. This includes the measures in the area of personnel costs that are already mentioned in the Growth Agreement. The released funds could then be supplemented with additional financing from the Netherlands and limited loans on the local capital market.