Which Orientation for Economic Policy?
The Bank of Mauritius decided last week to hold down the interest rate structure in the economy. It predicated its decision on a generally not-so-brilliant economic prospect for the near term. Mauritius is a largely export dependent economy. Good external market conditions boost our rate of growth and employment, and the converse is true if that is not so. A lot of uncertainty surrounds the immediate outlook of the world economy. Forecasts of global growth rates have been trimmed down or kept steady, in the hope of some silver lining. The IMF has put the growth rate of the global economy at 4.8% for 2010 and 4.2% for 2011. It is not foreseeing a sharp downturn after 2011 so that we can keep our fingers crossed. There are presently more than 210 million people who are unemployed in the world; of these 30 million have been added as from the start of the financial and economic crisis which began late 2007.
The overall fragile economic condition is characterised by a global banking and financial system which is not yet fully out of the woods despite the trillions of dollars governments have injected in it. It is coupled with a very slow and at times slackening pace of demand from consumers who are quite heavily steeped in debt. People who are overwhelmed by debt hardly want to spend whatever they are able to eke out or, at best, they will buy up essentials only. That is why demand is not fit and fine. A risk-averse credit system, especially the one in the West, is hardly functioning well enough to shake up this slack. Growth is continuing to be sustained in the Asia region however, albeit less firmly than it was the case before the global crisis. The West is faced with huge budget cost overruns. It has been contemplating to put some order before things get out of hand by having recourse to fiscal consolidation. This means spending by governments is being cut and, where possible, taxes are being increased. The situation carries the risk that any economic recovery that might be on the way could get stifled and send the global economy into another downward spiral. There is not much monetary policy can do to perk up the economy in the present circumstances; it has eased beyond measure and no longer finds space to do better.
It is against this kind of rather unpromising international background that the budget of the government will be proposed in November next. No ‘state of the economy’ exercise has been carried out in our case but we know that economic performance is proceeding by fits and starts in different sectors. This year’s growth rate has been revised down and is expected to revolve around 4%. Although better than the rate of 3.1% of 2009, it remains below the trend growth rate of 5% or more. In 2005 and after, a lot of insurance was bought by the previous Minister of Finance who had least anticipated the continuing positive impact on our growth rate of the global boom of 2006 and 2007. It will be recalled that he went about claiming that he had to battle against what he called the “triple shocks”. The situation is no better today except that the current Minister of Finance cannot, like his predecessor count on resurgent demand, as it happened in 2006 and 2007, with a positive drag of the same in 2008, to keep the economy recording high growth rates. Bunching up of public sector capital spending on infrastructure, budget spending associated with the Additional Stimulus Package, etc., towards the end of the previous government’s mandate has raised the level of the public debt and the budget deficit. This leaves very little room for manoeuvre in terms of taking more liberties with the budget deficit.
It is also difficult to see substantial new taxes being raised, given the threat under which certain key contributors to GDP are operating mainly because of tough external economic conditions. On the expenditure reduction side, one could think of rationalising some give-aways such as uncontrolled free transport to certain categories at the cost of the Exchequer. Saving on regularly wasted expenditures, as reported by the Director of Audit, will go in the same direction but we are yet to see some tough sanction being taken against wasters to confirm that the government intends to use this avenue as a significant cost-saving device. To the extent such measures will not go as far as one would wish for, that may not make much difference to rectify the broader budget deficit.
The government, having been voted to power, on its promise to sustain welfare spending, cannot afford to take away some of its generosity from beneficiaries in a bid to better balance the bottom line. The government was also voted to power on the understanding that it would abolish certain unfair taxes, such as the NRPT and tax on interest earned from saving deposits, and thus remove the inequity to which certain less well-off classes of the population had previously been subjected. That will mean losing revenues from these sources, which will need to be compensated for if only not to aggravate the budget deficit. If now, the aim is to make of Mauritius a duty-free island, the giving up of revenues coming from Customs and Excise duties in this context will tend to widen the budget resource gap.
The difficulty to get to a sound budget outcome in the circumstances calls for concerted action on the part of all members of the government. In other words, some cannot be observing the scene from a distance only to distance themselves further off if things did not fully work out for the best at least in the next two years when the going is expected to be tough or, at best, subdued, at the global economic level. Had work been done in earnest in the past on rational public transport planning, we would not have been wasting millions of dollars worth on imported oil burnt in unnecessary traffic jams from year to year. But oil is only one resource that we are using wastefully. Spending not directed to get value-for-money in all other domains, in the public and private sectors, is a tremendous waste as well. One could use the budget therefore to purge the system of a broad range of inefficiencies arising from unfortunately too widespread a system of poor managerial practices. Program-based-budgeting has not gone far enough in this direction, which explains the laisser-faire and waste highlighted by the Director of Audit in his several reports.
In the columns of this paper, we have brought up time and oft several proposals that would re-define and broaden the economic outlook of Mauritius. For, one way to improve the buoyancy of tax collections is by increasing our economic scope. We need to transcend the usual range of our production if we do not want to be constrained by limited resources to undertake development. Government policies have, in past years, been at the base of several new fields of activity undertaken from Mauritius. There is nothing wrong to keep opening up the new “chantiers de l’avenir” adapted to the changing global conditions. Although we could have gone some of the way forward by playing with our exchange rate, we cannot hope to win economic space by engaging in the “currency wars” that the US, Japan, Europe, China, etc., are likely to get involved in very soon, if that is not the case already. We have to develop our own strategies to succeed in the constraining external economic circumstances, like Sir Walter Raleigh did to win the naval victory for England with his smaller fleet-footed ships against the impressively big but slow-moving Armada of Spain.
Our different columnists and interviewees have recommended actions ranging from more privatisation to better pricing of scarce resources to get to outcomes that will be economically sustainable. They have suggested that a better take of government’s share from certain high-profit activities will enable the government to spend more sustainably on directed welfare benefits. They have asked for broadening of the population’s skill base towards buttressing our export efforts. Suggestions have been made to encourage the setting up of “sunrise” industries instead of wasting resources on foregone conclusions. Now that the new government is to present its first budget, it would be a good signal if it proved more ambitious than making the budget a sheer exercise to match revenues against expenses. Mauritius badly needs a structural re-definition of its next policy priorities to position itself on global markets as it did when we kicked off with textiles. The time has come to demonstrate that we can ambition towards a more high-tech production base without losing our pristine comeliness as a prized destination for productive investments.