Becoming Rich and Paying Taxes: The Glorious Way to a High Income Economy

Budget 2018-19

Budget 2018-19 could be the last budget of this government if they decide to have snap elections sometimes between now and June next year. As we listen to the Minister on Thursday afternoon, the astute analyst will surely be able to figure out whether this is the case or not. As matters stand we do not believe that this would be the case. The principal reason militating against such a decision is that this is a government which needs time.

After three years characterized by more than a few what one can charitably call false starts, the last year has been relatively better. Indeed, over the past nine months or so there has been some serious progress marked by the launch of several large public infrastructure projects not least of which is the light railway system dubbed the Metro Express. This kind of public spending is bound to have multiplier effects which will impact positively on economic growth although this will take its own time. The time lag between actual investments and its transmission into improved household spending can be long and complex.

Over that same stretch of time, local private sector investments as well as Foreign Direct Investments (FDI) have continued to be mainly directed to Real Estate development — construction and sales of luxury villas to foreigners. These two factors taken together are estimated to contribute to a growth of nearly 10% in the construction industry year on year. Tourism and the financial sectors also promise to contribute considerably to further job creation and to economic growth. In fact, a cursory glance at newspapers provides a clear indication that availability of the appropriately inclined or qualified labour may soon be, if it is not already, a serious bottleneck on future economic growth.

For most economic commentators and the Opposition parties, the acid test of the budget which will be presented on Thursday will for all intents and purposes turn around the solutions which it will propose for what constitutes three of the most serious economic issues facing the country today. First among those is how to stop the gnawing gap between exports and import of goods resulting into a rapidly deteriorating balance of trade deficit and a frightful “de-industrialization” scenario. Second but not less acute is the whole issue of “survival” of the sugar/cane industry in Mauritius. Last but not the least is the widening wealth and income inequality which is already causing considerable harm to social harmony and the law and order situation.

Despite all the hype that has come to surround “budget day”, it is perhaps appropriate to keep in mind that the primary function of the annual national budget is neither to provide a wish list of projects to be realized over the coming year nor to propose turnkey solutions to all sectoral problems. No one expects any Minister of Finance to resolve these issues, and the latter should probably be the first ones to have the good sense if not the modesty to admit to as much. When the causes of the problems are mostly structural, as in the present context of deep transition that the economy is going through, throwing money at problems is most of the time tantamount to irresponsible wastage of public funds. Recent history of government spending certainly provides ample proof to sustain this observation.

The real dilemma facing the Minister of Finance in this budget is that of maintaining a dynamic equilibrium among three principal objectives: maintaining the Welfare State, increasing the competitiveness of our productive sectors and start reducing social and economic inequality. Fiscal policy or the use of taxation as a tool for achieving these objectives should therefore be the central determinant of the budget orientation.

The experiment with a Flat Tax policy which was sold as a breakthrough measure which would have taken us to the “nirvana” of a high-income economy has failed to deliver on its promises. Although this seems to be the consensus view today, we do not expect the Minister to introduce a new tax regime which will be more progressive in nature by increasing marginal taxation rates – although this might be a desirable and, in our view, even necessary step in the emergence of the new economic model which is a precondition for getting out of the present rut.

One of the reasons which motivated the introduction of the Flat Tax apart from its promise of higher investments and rapid economic growth was the “simplification” of the tax collection process. Looking back, we believe that there is a good case to argue that in fact quite the opposite has occurred over the years. Successive governments have been looking at creative ways of increasing government revenue while maintaining the semblance of a “low tax” jurisdiction. The ferocious opposition to the recent hike in the price of gasoil despite a huge increase in the price of oil on the international markets is probably the best illustration of how such efforts to get around this obsession with a purportedly low tax regime can finally be counterproductive and economically dysfunctional.

The Minister will certainly not be insensitive to this argument and we expect that he will announce some sort of restructuring of the present composition of price of gasoil at service stations. Increasing only the oil component of the final price to reflect the increase price of petroleum, for example, would constitute a sensible solution.

Having said that though, the Minister of Finance would still have to have recourse to similar creative “taxation” if he wants to achieve his objective of a reduction in the budget deficit while attempting to achieve the above-mentioned objectives. In the absence of an abolition of the “flat tax” this remains the only means left to him to ensure “that every person shall contribute to public expenditure in accordance with their capability.”

 


* Published in print edition on 14 June 2018

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