Budget 2019-20: The Orientation

Economic Outlook

We should espouse a model that secures a more inclusive and resource-efficient economy and where the rising tide of economic growth lifts all boats, not just the super yachts

By Rattan Khushiram

The consolidated budget deficit for 2017-18 is -3.7% of GDP and exclusive of grants it comes to -5.2%. Our own estimates of the consolidated budget deficit for 2018-19 turns out to be around -3.5% of GDP as compared to earlier estimates of -3.8%. As in previous years, the budget deficit has been contained by sacrificing capital expenditures (Net Acquisition of Nonfinancial Assets -NANA) to a dismal 1.6% of GDP. This trend is likely to continue in the next budget with the populist policies — plenty of giveaways and goodies — at the cost of NANA.

Some of the worrying trends are that there has not been any fiscal adjustment or restructuring to raise the revenue (without grants) to GDP ratio while containing the rise in recurrent expenditure. Recurrent expenditure (Expense) registered an all-time high of 23.7% of GDP in 2017-18 and our estimates for 2018-19 are still higher than in 2015-16. The measures announced in the 2018-19 fiscal strategy to do more with less, to reduce wastages and address weaknesses identified by the Director of Audit do not seem to have produced the expected results. Recurrent expenditure continues to surge driven by social spending and employee compensation. This reorientation of the budget, where a very large portion of it is actually going towards recurrent expenditure at the cost of public investment, is impacting negatively on the growth rate, in the reduction of youth unemployment and in alleviating poverty.

The Ministry of Finance has listed ten priorities for the 2019/2020 Budget. Let us examine each of these:

  1. Expanding and modernising our infrastructure: In the face of dipping private sector investment, the strategy was to power growth and get the economy going again through the public investment splurges – the so-called ‘chantiers’ — with billions being spent on the Metro Express, the Road Decongestion Programme, the Safe City project, but these did not produce the multiplier effect that was expected on the economy and failed in pulling up the growth rate that has plateaued at less than 4%.
  1. Dealing with the challenges facing the sugar and manufacturing sectors, including textiles: The sugar sector has become a burden to the economy. For years we have merely been patching up without a long-term view of the sector. Similarly, in the manufacturing sector, giveaways like the 40% reduction in air freight costs to Europe and the Exchange Rate Support Scheme to support the export-oriented sector, besides being distortionary, have proved to be poor substitutes for structural reforms meant to address the emerging cost competitiveness challenges.
  1. Investing in new pillars of growth, in particular, AI technologies: Mauritius is underperforming in many Scientific and Technology (S&T) and innovation indicators, including Research &Development. Our children completing primary education lag behind their peers in comparator countries with regard to basic literacy, maths, and science skills. With 48% of the unemployed aged below 25 years, we should be aligning the country’s resources towards addressing such priorities, thus putting in place the building blocks for sustainable development instead of the far-fetched elitist policies for the development of AI and nano-satellites. The Sugar, Manufacturing, ICT, Financial Services and Energy sectors are facing all kinds of difficulties and will need additional resources to keep their heads above murky waters. These are the priorities for now!
  2. Encouraging a new culture of entrepreneurship: How to unleash the creative energies of private entrepreneurship? Is government driving the reforms necessary to create an adaptable labour force as well as developing a national appreciation for discovery, entrepreneurship and the creative process? That will require an overhauling of the education system. Is it prepared for such an overhaul or will it remain content with mere tinkering at the edges?
  3. Further opening up and integrating our economy with the rest of the world: First of all, do we have a properly tuned and consistent new trade, regional and global strategy which is part and parcel of our responses to global and regional challenges and new developments? Are our institutions prepared to take advantage of these new opportunities with respect to global knowledge acquisition, that is in relation to acquiring crucial market knowledge, finding the right people, firms and institutions and building the contacts for insightful information and leads which will influence the ways our business sells and markets our brands, builds relationships, secures resources and negotiates the best deals and partnerships for our industrial and SME sectors? Can the Economic Development Board rise to these challenges?
  4. Investing in the education, training and other skills needed by our youth, so that they are better prepared for the future: Vocational and trade schools should also be main component of the education reform plan and the investment in vocational education should be linked upstream to higher education and industry training.These are the priority areas where we should be re-allocating our resources.
  5. Addressing the impact of demographic change: With the priority shifting to voter-pleasing packages and a generous distribution of handouts, we could not expect this government to be serious about a bold reform of the pensions system that would have ensured less drastic future changes and fairer outcomes. But with the projected decline in the workforce and an increase in dependency ratio, the increase in pensions spending will pose fiscal risks as well as crowd out other priority expenditures. Sooner or later, we will have to confront the hard choices that we have not prepared ourselves for.
  6. Promoting gender equality: Based on the recommendations of the IMF, Government had implemented the Negative Income Tax (NIT). Let us hope this time it will bold enough to implement the following measures proposed by the IMF to close the gender gap: (i) promote part-time work and flexible work arrangements; (ii) increase the number of childcare centres compliant with minimum quality standards; (iii) increase financial inclusion for women by expanding financial literacy training targeted at micro-enterprises; and (iv) consider the introduction of paternity leave to level the playing field in hiring decisions and pay of women and men.
  7. Promoting a more inclusive and equitable society and further addressing the problem of poverty: We should not limit ourselves to the trickle-down effect of our growth such that it percolates to more people down the line. But that’s a minor piece of the big pie, mere crumbs at the table or leftovers like the Minimum Wage or the Negative Income Tax to buy the workers in without empowering them. 

Why do we have to continue with the smart cities and real estate schemes with the result that a large part of the population is being crammed into smaller and smaller and relatively poorer areas? Why do we continue to graft on our economy imported concepts of economic development like the tax-centric Global Business Sector and unproductive FDI inflows that have not delivered in terms of competitiveness, technology, management know-how and jobs?

We must go beyond these to question the very basis of our development model that is neither desirable nor workable. We should be working towards a model that is far more resilient, sustainable and inclusive, far more oriented towards achieving quality growth than the race to the bottom and far more targeted towards improving happiness and welfare indices rather than the Doing Business indicators.

We should rather espouse a model with such programmes and strategies that secure a more inclusive and resource-efficient economy and where the rising tide of economic growth lifts all boats, not just the super yachts…

  1. Building greater resilience to the impact of climate change: Who has been encroaching on our wetlands and public beaches and sending hooligans to tame down protestors? What has been government’s role in all these? A mere spectator!!! And the Economic Development Board wants to bypass all environmental laws and legal procedures for all national priority projects!

All the issues pertaining to the encroachment on our beaches, our coasts, our environment, our islands like Ile-aux-Benitiers and the plundering of our natural resources and our Exclusive Economic Zone are testimonies of a failing economic system.

* Published in print edition on 7 June 2019

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