A Resurgent Role for the State in Economic Development

Budget 2018-19

This budget has the merit of having done away with the flat tax, raised the purchasing power of the less privileged sections of society and introduced an industrial policy

In our last article before the budget presentation we had written that, depending on the content of the budget, the astute observer would be able to figure out whether this was going to be the last budget presented by this government before the next general elections. The Leader of the Opposition has been quick to react after the budget communication exercise and announced that the general elections are clearly on the agenda.

Make no mistake when a Leader of the Opposition reaches this conclusion: it is a recognition that the measures announced will be well received by the electorate. It is far from clear whether the Leader of the Opposition has got it right or not. In our view it is more likely that this exercise by Pravind Jugnauth constitutes the first chapter of a twofold exercise leading to general elections in late 2019 or early 2020.

It must be said that Budget 2018-19 is a far cry from a Big Bang exercise. There are no bold and far reaching proposals to resolve what some commentators have described as the “structural” problems hampering some of the major sectors of the national economy – namely the sugar industry or the exports of manufactured products. Yet we find that it does introduce a potentially game changing new approach about several issues which have been the subject of animated debate for some time now.

To start with and as a general remark, one can safely state that this budget marks a definite departure from the practice of a recent past when neo-liberal thinking was the dominant driver of economic decision-making by government officials and Ministers. To illustrate this, it may be appropriate to consider three such departures that can be considered as the defining markers of this change in philosophy.

“Budget 2018-19 is a far cry from a Big Bang exercise. There are no bold and far reaching proposals to resolve what some commentators have described as the “structural” problems hampering some of the major sectors of the national economy – namely the sugar industry or the exports of manufactured products. Yet we find that it does introduce a potentially game changing new approach about several issues which have been the subject of animated debate for some time now…”


Demise of the Flat Tax

By introducing a new tax of 10% for those earning an annual income between Rs 305,000 to Rs 650,000, the Minister has effectively put an end to the Flat Tax regime which was introduced in 2006. This regressive taxation regime can be considered as the iconic measure of the neo-liberal thinking which dominated economic policy for nearly 15 years.

A reduction in marginal taxation for the higher income group including corporates was meant to create a jolt in investments and economic growth rates. The experimentation has proved to be a dismal failure.

None of the promises have materialized and it was high time for a Minister to have the nerve to do away with it. The most interesting part is that the door is now open for the implementation of a more progressive tax regime which (and we will come to this another time) does not necessarily have to mean a return to excessively high marginal taxes as some would have us believe.

Rebirth of Industrial Policy

There is undeniable evidence that the success story of the socio-economic development of Mauritius up to around the end the last century was largely due to government-engineered economic transformation. One common thread which runs through the successful development of various economic pillars (tourism, industrialization, financial services industry) has definitely been government driven initiatives. These usually took the form of the setting up of an appropriate legal framework and the provision of fiscal and other incentives.

This is what led the famous American academician E. Romer, talking about the Mauritian experience, to conclude that “the only obvious candidate for explaining the success of Mauritius is the policy of supporting the EPZ, which made investment attractive to foreigners.” The sum of all the measures and dispositions promoted by government to direct investments towards distinct economic activities is what constitutes industrial policy.

With the advent of liberalization and deregulation ideology at the Ministry of Finance, industrial policy was abandoned in favour of what was defined as a pro-market economic paradigm. Furthermore, the introduction of the flat tax meant that government all but gave up on the use of fiscal policy as an instrument of economic development. The objective of fiscal policy was henceforth limited to ensuring macro-economic equilibrium.

To cut a long story short, the promise of rapid economic growth which was to follow the adoption of such market driven measures has proven to be a mirage. Instead the country is now facing the challenge of a socially and economically damaging de-industrialization.

Government has clearly stated its intention to resume with the adoption of industrial policy by re-introducing the appropriate tools for its implementation — fiscal incentives and measures to favour local production. The term industrial policy is here taken in its widest sense to include measures which aim at increasing food production in the country by small and medium enterprises.

Tackling Growing Income and Wealth Inequality

Enough has been said about the “popular” measures which have been announced in the last budget in favour of the more vulnerable sections of society. True to form, the opposition has described these measures as “populist” and vote catching.

Suffice it to say here that whatever be the motivation of the Minister, the result is undeniably that the purchasing power of the targeted segment of the population will objectively improve with the implementation of these decisions. At least one well-known economist has had the courage to state openly that he opposes these measures because of their propensity to increase consumption expenditure.

We are here at the heart of an ongoing debate which has been exacerbated ever since the Great Financial Crisis of 2008. On the one side are the Conservatives and rightist politicians who support austerity budgets (serre ceinture in local parlance) as the shortcut out of economic stagnation while the other side – the progressives and left leaning politicians – propose a relaxation of budgetary fundamentalism to kickstart economic growth. No one will deny that at least on this count the recent budget leaves no doubts about which option the government has chosen.

In conclusion this budget is commendable to the extent that it has at least started a break from the dominant neo-liberal approach of recent years. It has the merit of having done away with the flat tax, raised the purchasing power of the less privileged sections of society and introduced an industrial policy which aims at promoting innovation and value addition.

 


* Published in print edition on 22 June 2018

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