Fiscal Policy or Folly?
By Mrinal Roy
The government cannot continuously increase expenditure and grant tax rebates against a backdrop of low tax rates without being strapped for funds in respect of government capital expenditure or to comply with our debt management obligations
If there was one thing that the Prime Minister and the government did not want ahead of the general elections is for the 2019-20 budget proposals to be mired in controversy. The implications of the proposal to ‘make early repayment of public sector debt by using part of the accumulated undistributed surplus held at the Bank of Mauritius’ has raised a furore. Economists have had a field day exposing the patent pitfalls of such a contested proposal. At a time when there is a need for an honest and serious debate on a disputed measure undermining the pivotal monetary and stabilizing role of the Central Bank in the national economy, politicians of every ilk seemed only bent on adopting a partisan take on the proposal despite being for the most unable to fathom the fallout of such a measure on the economy. This is too important a matter to be fluffed or swept under the carpet. It is above all not the time for sycophancy or vacuous pontifications.
The open letter of Ramesh Basant Roi, the previous governor of the Bank of Mauritius to the Prime Minister (PM) explaining his ‘reasoned arguments’ for ‘earnestly requesting the PM to reconsider the proposal as it is certainly not in the best medium- and long-term interest of the country as a whole’ is explicit enough. He further cautioned that going ahead with the proposal despite the ‘clarifications provided’ would ‘also sow the seed of lasting macro-economic instability’ and may bring it under the scrutiny of the IMF. When a citizen of the country and previous governor of the Bank of Mauritius, seasoned in the technicalities of central banking, acting in good faith warns the country against the pitfalls of a contested budget proposal in a debate which is followed by the whole nation, the people expect the PM and the government to pay heed and reconsider.
Confusion and desperation
Instead, in his summing up speech, this week, the PM disconcertingly argued that as Finance Ministers in 2011 and in the 2000 MSM-MMM government both Xavier-Luc Duval and Paul Berenger had made use of the Bank of Mauritius special reserves to repay debts to justify his flawed proposal. Are the confusion, mix-up and desperation of government so patent that apples are now being compared to oranges? So often in the past, the people have been dished out such lame arguments by those in power to justify the unjustifiable. Two wrongs don’t make a right. In any case, it is blatantly obvious to all and sundry that these cases are not similar to the present contested government proposal which would, by the government’s own admission, first necessarily require an amendment of the Bank of Mauritius Act.
Such desperate measures to have recourse to the Special Reserve Fund of the Bank of Mauritius to pay back Rs 18 billion of the outstanding public sector external debt in order to comply with the statutory requirements of the 2008 Public Debt Management Act aimed at bringing public sector debt to 60% of GDP by end of June 2021 obviously stems from the flawed government fiscal policy. The government cannot continuously increase expenditure and grant tax rebates against a backdrop of low tax rates without being strapped for funds in respect of government capital expenditure or to comply with our debt management obligations. It is a matter of simple arithmetic.
We should recall that strapped for funds, the government in last year’s budget proposals had similarly sought recourse to the decried scheme of selling Mauritian passports to foreigners. A potent wave of protests had forced the government to surreptitiously scuttle the ill-advised proposal.
The government cannot continue to grant since 2015 very generous fiscal incentives amounting to billions of Rupees of forfeited tax revenue to promoters of smart city projects in a desperate bid to boost growth through property development without taking parallel measures to raise revenue. After selling state assets, government is promoting the sale of villas and residential properties to foreigners, rendering land more and more unaffordable to large swathes of Mauritians. The upshot is that the fiscal burden of the country is borne by mainstream Mauritians through the payment of VAT, excise and taxes on goods and services which, as per the revenue estimate for 2018-19, represented some 64% or the lion’s share of tax revenue. In contrast, corporate tax represented some 14% of tax revenue. Such an iniquitous fiscal policy is widening inequality.
The cornerstone of government fiscal policy is to increase tax revenue through consumption. The handout galore dispensed to all and sundry aims at boosting consumption. Bridging inequality and ensuring a fair sharing of the fruits of prosperity in the country cannot mean government handouts dished out from public funds. The flip side is that such a policy also boosts imports, the hawkers’ trade and further deteriorates the balance of trade. The country cannot continue to live beyond its means or seek and be dependent on generous grants from friendly countries to bolster its financial resources because of the government’s inaptitude to adopt policies to increase its revenue, judiciously arbitrate its expenditure and better manage the country’s finances. We must remember that there are no free lunches.
Such short-termism is taking a heavy toll on the prospects of the country. Any responsible government is expected to critically appraise its policies and the state of the economy as well as the general wellbeing of the people and take the corrective actions necessary to set things right instead of tediously rehashing its litany of achievements. A quick reality check exposes a wide range of enduring core problems which have not been efficiently addressed. Despite a below par growth rate ranging between 3.6% and 3.8% during the 2015-18 period against forecasts of 4.1% in 2017-18 and 2018-19, the government has again glibly forecast a growth rate of 3.9% in 2019 and 4.1% in 2020 without taking cogent steps to realize these objectives in a context where WTO has warned this week that trade wars and new trade barriers imposed by G20 countries are forecast to affect goods worth $335.9 billion. Government’s forecasted growth rates have chronically not been matched by the performance of the economy.
There is also short-termism regarding government’s growth strategy which is heavily weighted towards property development schemes. Fuelled by generous tax incentives granted by government, private sector investment is cherry picking the highly lucrative property development and smart city projects. According to 2018 estimates, some 52% of Foreign Direct Investment (FDI) have thus gone into real estate activities with the lion’s share of 46.4% of FDI being invested in Integrated Resort Scheme/Real Estate Scheme/Invest Hotel Scheme/Property Development Scheme/Smart City Scheme (IRS/RES/IHS/PDS/SCS).
The other major focus of private sector investment is the very lucrative energy production in the country fuelled by leonine contractual terms and generous prices granted for sugar cane trash and bagasse used by Independent Power Producers when in contrast sugar producers receive a paltry payment for their bagasse. Is sugar cane trash whose volume and caloric value is limited now the new fig leaf used to mask the continued massive use of highly polluting coal?
The present flawed economic model and fiscal policy is untenable
Mauritius is at a crossroads. The present flawed economic model and fiscal policy is untenable. No real strategic thought is being given for an innovative vision of the way forward. There is therefore an urgent need for cogent new strategies to re-engineer the economy in a holistic manner bearing in mind the challenges and opportunities of the marketplace. The cardinal object is to ensure that every sector and the diverse pillars of the economy is recast to cut its dead wood and reboot it with new potent pathways of viable growth having maximum positive fallouts on the economy in terms of productive employment for the young, rising standards of living and the reduction of inequalities. It is only then that growth performance can be significantly improved.
There are also so many other constraints of our lives which must be efficiently addressed. For example, commuters driving or going to work every day face daunting challenges wasting hours on the road (which could have been more gainfully utilized) thereby significantly enhancing their carbon footprint. Rain, bad weather or road accidents make matters worse. The Metro Express will not be the all encompassing panacea which would resolve the problems of congestion and pollution on the road. It is not rocket science to see that there are too many cars and vehicles on the road and that urgent steps must be taken to contain the increase in the number of vehicles in the country instead of taking various measures as in the 2019-20 budget to increase it further. It is high time to address this problem frontally in a comprehensive manner with concrete measures.
Similarly, the wanton pollution of the environment is a major problem facing the country. It is a principal source of blocked drains, waterways or rivers causing flooding. It is above all an eyesore as well as a health hazard blemishing our roads and beaches and polluting the sea, thus affecting the important tourist industry. This cannot go on. It cannot be resolved by a ‘Mega National Cleaning and Embellishment Campaign’ proposed by government over two days in July this year. We need to go far beyond this.
There is first and foremost an urgent necessity to inculcate among the people and the young a new mindset as is the case in countries like Japan or Singapore to keep the country clean and vow an unstinted commitment towards the protection of the environment for the benefit of all. This must be accompanied by the sorting and recycling of waste as well as sanctions against polluters. The police of the environment must also be more alert to put an end to the unchecked dumping of waste across the country.
As the country moves into election gear, it is more and more evident that the hegemonic control exercised by the government and its inept spin doctors over the national TV and their deplorable conversion of prime time news into a partisan propaganda machine at public expense is the government’s most important handicap ahead of the general elections. The selective and one-sided treatment of news is decried by people and building into a scathing backlash. To put it simply, people from across the country do not want to be again afflicted and to endure such an abject and partisan misuse of the national TV for another five years.
What’s sauce for the goose is sauce for the gander
Was the recent press report announcing the cancellation of the international tender to replace the country’s suppliers of fuel due to the Supreme Court ruling in the Betamax case that such tenders should necessarily go through the established procedures of the Public Procurement Act (PPA)? Does it mean that the State Trading Corporation and government were blithely bypassing the PPA, despite arguing in the Supreme Court that such imports should have automatically gone through the PPA? Were they basically doing exactly what they were denouncing? This disconcerting situation yet again epitomizes the appalling state of governance in the country and is an indictment of government rhetoric repeatedly belied by actions.
* Published in print edition on 28 June 2019
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