Does the 2011 Budget strike the right balance?
The new Minister of Finance, Pravind Jugnauth, delivered his Budget Speech on Friday last. Part of the local media and the Opposition had raised a hue and cry before the presentation. It was made out as if the Budget would show that effectively Pravind Jugnauth had no real fiscal message to deliver which is distinct from that of Rama Sithanen. In other words, all the protests he had been raising against certain of his predecessor’s anti-social policies when he was in the Opposition were mere wind without substance. In their view, he would have passed the test if he had made a sharp departure from past budget practices. It may be noted that none of the governments during the past 40 years or so, including the so-called leftist MMM government of 1982, has accomplished the feat of departing sharply from the established platform of fiscal policies. The taunt from the media and the MMM against Pravind Jugnauth was probably a pre-emptive strike to preserve all that had been gained by private sector interests during the past 5 years.
Pravind Jugnauth had, together with Labour, promised during the last electoral campaign, that certain inequitable taxes like the NRPT and tax on interest earned on financial savings would be removed. He removed them, leaving the concerned media and the opposition speechless in this regard. He even dispelled their worst fear that relinquishing on those taxes would have necessitated a shift of the tax pressure against the private sector in order to manage a sound budget balance. He had already given the tone in this regard much earlier by establishing the Economic Restructuring and Competitiveness Program (ERCP) which aims to assist enterprises restructure themselves to face up to prevailing difficult international market conditions. A day or so before the Budget presentation, the National Tripartite Forum had also given a clear indication that it would not contradict the ERCP philosophy by blowing up wage compensations out of proportion at a time we need to explore competitive alternative export opportunities. As a politician, Pravind Jugnauth could not even have afforded to suggest that a better deal for workers will have to await our overcoming external market constraints.
Budget 2011 did touch up a few additional contributions specific to highly profitable sections of the private sector and certain high income earners while not destabilising the existing corporate or personal tax structure as a whole. The private sector has had no strong reproach to make and the MMM opposition’s peripheral remarks, as given in Parliament on Wednesday last by Paul Berenger, against the Budget, tend to show that they may not have been able to make any deep improvements on the model given out last Friday.
Apart from achieving an equitable distribution of the good and the less good, revenues and taxes, a budget also sets the tone for the future. The future is cast against prevailing unpredictable external market conditions. These conditions are tougher than what obtained in 2005-06, the so-called “triple shocks”. Manufacturing as a sector of activity is hard hit both by increasing difficulties of access to generally depressed export markets and by the fact that other cheaper producers like China have already occupied the space that used to be reserved for us on export markets when the Multi-Fibre Agreement was in place. On the side of sugar, the EU has nearly downed our sugar export price by 36% and has been compensating us (we received a second tranche of about Rs. 6 billion as part of the pre-agreed deal under the Multi-Annual Adjustment Scheme with the EU only this week) for the consequent loss of historical preference on the EU market in this regard. Planting of sugar cane on the small planter scale has already gone uneconomic for want of implementation of a comprehensive well defined plan to recuperate the sector into an alternative economic viability. While the rate of room occupancy in hotels remains reasonably high, we are still tapping the very markets which are hardest hit by the international crisis. These are clear signs of emerging economic difficulty.
Funds have been earmarked in the budget to give support to the ailing sectors and they will hopefully be deployed intelligently, minus the characteristic waste of resources, to get to positive outcomes. Thus, there will be restructuring of certain public bodies; money will be spent to raise skills; directed development of some sectors like the SMEs will be promoted; rationalisation of certain public functions by regrouping will be undertaken. All this is good. A lot of work along this direction ought however to have been done years ago because it takes time before concrete results show up. Economic restructuring with a view to achieve gains in productivity of resources is a long haul exercise. One risk is therefore that we might be left standing on the platform while other countries which have prepared themselves better would have already embarked on a train with limited seats.
On the other hand, a structural flaw in our external account has manifested itself since a number of years and it is not looking like it wants to go away so soon. It concerns the country’s balance of payments. For 2010, the external trade deficit (Imports minus Exports) of Mauritius is estimated at 20% of GDP; its current account deficit (shortfall of exports of goods, services and incomes against imports of same items) will be around 8.6% of GDP. This means that we are becoming indebted to the rest of the world from year to year. The recurring external indebtedness due to the current account deficits is being offset luckily by inflows of foreign direct investment (FDI) going into things like local real estate, hotels, manufacturing, hospitals, local share portfolios, etc. For 2010, it is estimated that some Rs. 11 billion will materialize from FDI. FDI is well known to be erratic and therefore too much of dependence on it can be highly risky.
We can minimize this risk by increasing our exports of goods, services and enhancing our incomes from foreign investments. We can increase exports by beating down competitors. We can beat down competitors if we can produce goods and services for exports more competitively than they. This means we have to lower our costs of production drastically. We can do this by adopting more efficient production methods, not only for goods and services we are producing today. We should be able to do so in respect also of newer goods and services that we would wish to produce for external markets in future as we lose out traditional exports. The problem is that other countries have not only been seeing this perspective but they have also been acting on it for quite some time now to penetrate increasingly difficult markets against almost unbeatable rival countries.
Straightening the local bureaucracy and getting a better coordination of public action to give our external trade a push, as the new Budget does, will go some of the way. It will require a dogged fight however to keep costs of production as low as possible for sending an improved and more varied range of our products to external markets. External market conditions are not easy to penetrate but that is how we can deal with our current account problem effectively. You do not do things like this in one budget, we concede. It’s a long haul action. Nor does the government alone act to re-stabilise the external trade factor; you need a committed concerted effort from all stakeholders. If we get the SMEs to produce trinkets for local consumption that are not even substitutes for imports, we will not get to the real goal. The SMEs partaking of the re-balancing referred to in the budget will have to be raised to the status of suppliers to external markets. Their skill levels will have to be much higher in such a context. The entire platform of production will need to be re-invented, getting rid of local inefficiencies caused by expensive utilities as well as creaking cost-inducing infrastructure, amongst others.
For all practical purposes, the Budget is now a thing of the past that will need to be applied. Beyond it, there is an urgent and deeper quest for continuously repairing all the fault lines that have got embedded in terms of unsustainable costs of production. The Ministry should let the Budget work its way out. Its real priority should however be to keep re-addressing and dealing effectively with inefficiencies that risk pricing us out of growingly competitive international markets. This is a call beyond redistribution; it has to do with building a new presence for us on those markets before others occupy the economic (not fiscal) space.