What should we look forward to from the next budget?

It is customary for people across the board – employers, employees, investors, receivers of social aid, young and old – to expect that the budget will confer additional benefits on them. The annual budget is often seen as a harbinger of “miracles”, lasting additional freebies and such.

While this may be expecting too much from an exercise in public finance management in the course of a single year, there are occasionally budgets which become pace setters; they prepare the ground for the shape of things to come over years. We are standing at such a threshold of opportunity at the moment.

India and Mauritius: some parallels

Last year, a new government came to power in India. Contrary to what most people expected, it did not make those overhauling changes in fiscal policy that people had come to expect. It’s the reason why people – and not only in India – are waiting with bated breath for the make-it-or-break-it budget announcements to be made by the Indian Finance Minister on February 28th this year; they are expected to make good all the great expectations that did not materialize from the first budget of the new government last year. The Indian government has a tough task ahead having to strike a balance between constraints (e.g., public debt) holding down the public sector and introducing liberating measures (e.g., tax rationalization)  to give a new spurt to the economy.

There are parallels, though. The Indian budget of 1991 unleashed a first wave of unprecedented reforms opening up India to foreign trade and foreign capital as well as the doors of domestic competition. India has benefited and keeps benefiting from the wave unrolled by Dr Manmohan Singh at the time. Likewise, in 1983, the Mauritian budget slashed down taxes and consolidated the roots of manufacturing for exports in the case of the Mauritian economy. The effect was to launch a higher growth phase of the economy, opening up new avenues of production including the provision of international financial services, all of which have kept the local economy on an even keel to date. As high are the expectations from the oncoming Indian budget of 28th February, equally high are the expectations from the Mauritian budget of March 23rd.

Time to take a harder look at economic realities

What then should we expect from the coming first budget of the new Mauritian government?

First, a sombre mood of suspicion and doubts about past misdoings in the public sector has taken hold of popular imagination. This is certainly not a propitious environment to undertake improvements towards working up the economy. The budget, if bold enough, could relegate all this high-pitched emotion about milk that has apparently already been spilt by coming up with a set of proposals that will take people’s minds off the negative preoccupations that have come to occupy the front stage of our public life.

One would expect that the next budget to be a defining budget, by the depth of its proposals, setting our sight on larger issues, on grander things to do and on moving forward away from the misdeeds, ruins and debacles of the past. Hopefully, the national day celebrations on 12 March will prove to be an effective buffer between the bad things which have sprung up of late and the prospects of positive budget announcements.

We could remove existing constraints and become part of new clusters of economic growth

That said, what should our expectations from the budget be?

At the broader level, we expect it to take up those policies and measures which will generate better economic growth and hence more employment. This is what all countries want. Few realize however that national economies are in competition with each other the world over in this respect, which tends to limit the degrees of freedom and real effectiveness of individual governments. There’s a battle for survival.

In such a case, Mauritius would need to cut the edge, taking advantage of its perceived specific comparative advantages. We don’t have enough wide-scale expertise or the primary inputs other countries are endowed with. We need therefore to target those areas of production where long-term possibilities exist for us despite such limitations. We can partner with other countries, for instance, which have complementary resources – skilled manpower, technology, markets and materials. It’s uphill, but visionary budget policies will embark us on this bigger adventure.

The object is not to grow the economy for the sake of becoming bigger and bigger (the so-called high-income economy); it is to put it on a path of higher development in keeping with resources we can mobilize internally and externally. To achieve this, we need to tackle the constraints which have contributed to a stagnating level of economic growth in past years. We need to identify them and work on factors which will keep those constraints at bay.  As we keep adapting ourselves to changing global economic conditions along the way, constant re-engineering will keep us on track in terms of development.

For instance, we have noticed that our private investment – the source of additional economic expansion – has either been stagnating or falling behind in terms of its rate of growth in past years. We’ve got to get over this situation. Uplift is urgent. Innovativeness is necessary.

Our domestic investment might pick up if we managed to become part effectively of a group of performing economies, whether regional or other types of blocs. Such a collective arrangement would support the scope of our international trade and improve our economic clout. We have to grow not in isolation as an island but along with compatible partners. Our companies could tie up with multinationals – old and new ones – we could persuade to set up and do business from here. The same type of scope would be created if we induced more international company headquarters into Mauritius. It would pay off handsomely if we joined hands with the best international companies of the planet. We should do so.

We have to establish an irreproachably advantageous international tax structure here to get to this objective. For this, we need to  overcome misperceptions being created by various lobbies to the effect that we would be a mere tax haven. This label should not be allowed to stick to us. We should be seen as what we are effectively: a serious and credible business centre with the rule of law at the heart of a much bigger regional system.

Incentives for an outward-oriented strategy

Local investments will increase the more there are new avenues of growth being established. The same is true if profitable opportunities for expanding into external markets are increased. Local investment for external market penetration will be incentivised if investors are given tax reliefs whenever they export a bit more (incremental tax rebates), whenever they employ additional local workers and expertise to drive their business overseas and whenever they bring back a larger share of their earnings from abroad into the country. The time has come to make all our policies converge to a central developmental theme of which each pillar supports the other as part of an integrated statement of our long-term economic objective, e,g.,  to make Mauritius a regional economic launching pad.

Our principal goal could be a growing outbound economic framework founded on the highest levels of skills in multiple domains. In economics, you have to grapple with both the demand and supply sides in order to rise to the higher rungs of the ladder. Take the example of the 1980s. Why did we make an economic breakthrough at the time? We had enough tax space in the domestic economy to give the breaks for increased supply of goods by local investors – they saw that they would be better off operating from Mauritius at the given tax rates – and we identified the most favourable markets outside – mostly the European Community – where there was demand for our so-priced manufacturing exports.

The context has changed today but the principle – an integrative model to sustain local economic production of goods and services matched by supportive demand — remains the same. How do we price our goods and services to keep up their demand? What is the extent of diversification of products and markets we should aim for? How do we incentivise new areas of production to settle down over here? What are they? In this quest, who can the potential investment partners with us be and why? Who will we target for generating adequate market demand? How will we sustain our share of such demand in global competition? What are the tax and other policies that should be adopted to bring about in our place the resurgence of self-sustaining productivity and business facilitation to make Mauritius a centre of business in such a context? If the budget is ambitious enough, it will provide a roadmap answering questions like these ones.

Mauritius has sustained itself in past years by raising its production of both goods and services simultaneously. However, while our services sector has remained more or less unaffected by the morose international economic conditions of past years, our goods sector (also called the real sector) has not progressed terribly well. This is where policies need to be driven to increase domestic real sector production through domestic value-adding transformation, preferably for external markets. A good tax environment should help us produce more for external markets.

Let’s set our sights higher

Constructing additional roads and infrastructures is no doubt good for preserving fluidity of the market, but excessive engagement in this direction — without sufficient quid pro quo by way of matching economic returns – landed Greece into huge public debt which has become life-threatening for the country today. On the other hand, cost effectiveness of public capital expenditures with the long term in view is often a good recipe for delivering balanced development and growth, especially when benefits are not appropriated by a few only due to growing inequitableness of income and wealth distribution.

Nations in distress look up to saving resources by minimizing waste, which is no doubt a laudable prudential objective. Nations which want to blaze a trail of future success by way of sturdier economic growth and equitable social development, deal with this problem but concentrate pointedly on charting up additional and coordinated avenues for growth in an integrated framework. We’ve done the latter in the past. The current situation is more complex. But there is no reason why the next budget should not focus on this kind of target at this critical moment of our possible economic uptake.

 

* Published in print edition on 27 February  2015

Tags:Anil Gujadhur, Dr Manmohan Singh, European Community, India and Mauritius, Local investment