“People may easily forget the short-term goodies if the economy does not perform well, good and smart jobs are not created, if insecurity rises”

Interview: Rama Sithanen, Former Finance Minister

Elections 2019/20: ‘The voice of reason and reality, if not survival, will dictate the choice of political parties’

Rama Sithanen, economist and twice former Minister of Finance, dissects the Budget in this week’s interview. His incisive technical analysis backed by hard facts and figures would be difficult to contest. He nevertheless concedes that there are some positive social measures, though he remains skeptical about the income tax measures proposed. He is also worried about FDI and achieving a sustainable growth rate. Read on:

Mauritius Times: It’s said that good politics and good economics do not usually make easy bedfellows, but the PM and Minister of Finance seems to have accommodated both with his main measure for those ‘60000 employees who earn less Rs 50,000 per month and who will pay up to Rs 18,000 less in income taxation annually’. What’s your take on that?

Rama Sithanen: Some social measures have been well received. The Prime Minister and Minister of Finance and his advisers have done a good communication exercise on the fiscal policy for a tranche of the middle income group with the reduction in the income tax rate from 15% to 10% for those earning between Rs 305,000 and Rs 650,000 per annum. Even if the reality is significantly different from what he has stated in terms of the number of taxpayers who will benefit and the amount they will save.

This spin doctoring often happens when measures are announced in the Budget Speech and most people do not have access to official figures to understand their consequences. The Minister of Finance gets the credit on Budget day while it takes some time for economists, accountants and astute analysts to delve into the real impact of the changes. This measure is a perfect illustration of the gap between what is thought to be the case and what will actually happen. It is plain that there will be far fewer than 60,000 employees who will benefit from the reduction from 15% to 10% income tax and the savings will be miles away from Rs 18000 per annum, except in very few circumstances.

* Are we missing something?

Just consider the facts and figures. There are 984,000 people who are aged 16 and over in our country. 397,100 are outside the labour force while 41,800 are unemployed. This leaves 438,900 persons who are not even working. The number of people in employment is 545,100. Around 80% of those in employment earn less than Rs 25,000 per month and are very close to the threshold of Rs 305,000 per annum (Rs 23,500 per month) who are not to pay any income tax as from next year. There are around 15% of employees who draw a salary of between Rs 25,000 and Rs 50,000 per month. Those people would be the likely beneficiaries of the income tax measure. However we have to make the key distinction between employees and taxpayers because of various deductions and personal allowances granted. Thus, many employees do not pay any income tax because of the various allowances and deductions even if they earn much more than Rs 305,000 per year.

* But how will it work out for the 60,000 employees referred to by the Prime Minister in the budget?

The very few employees who will save Rs 18,000 (in fact Rs 17,500) per year would be single individuals without any dependent and who draw exactly Rs 50,000 per month or Rs 650,000 per annum. Their personal allowance was Rs 300,000 last year and their chargeable income would have been Rs 350,000 (Rs 650,000 minus Rs 300,000). At a rate of income tax of 10% instead of 15%, they would save Rs 17,500 per year. The problem is that there are very few such taxpayers in our country. It should be stated that 94% of employees earn less than Rs 50,000 per month.

A typical employee with a monthly salary of Rs 50,000 is likely to be middle-aged and to have at least two if not three dependents (spouse plus one child or spouse plus two children). The allowances would be Rs 480,000 (2 dependents) or Rs 525000 (3 dependents). If one adds a combination of interest deduction (say around Rs 100,000 on a loan of Rs 1.2 m), Rs 175,000 for a child in post-secondary education and some credit for medical scheme (up to Rs 50,000 for a family of four), that person will not pay a single cent of income tax even with an annual income of Rs 805,000 (two dependents) or Rs 850,000 (three dependents) — which is considerably higher than the threshold of Rs 650,000 stated by the PM. Many taxpayers are in that situation. The additional sums of Rs 155,000 and Rs 200,000 respectively over the threshold of Rs 650,000 are such that even without all the deductions mentioned above, he would still not pay any tax. So it is absolutely misleading to give the impression that 60,000 employees will gain from that measure. It is simply untrue.

* At the end of the day, how many employees will benefit from the income tax reduction and why they won’t save Rs 18,000 per year?

Each taxpayer will do his own computation to find out whether he will benefit from the policy and by what amount. Two things are however absolutely certain. There will be far fewer than 60,000 employees who will benefit as the personal allowances and deductions are such that they will not pay any tax even with an income of Rs 805,000 or Rs 850,000 per annum.

I would be surprised if the number of beneficiaries exceeded 25% of the 60,000 employees stated by the Prime Minister. Equally those who will benefit will save far less than Rs 18,000 per annum. On average I would not put it at more than 20% of Rs 18,000, if not lower.

Let us take the example of a person who earns a mid-income of between Rs 305,000 and Rs 650,000 per year, which is the range stated by the PM.

The salary would be Rs 477,500 per year (or Rs 36,730 per month). If he has a spouse and a dependent child, has no loan for his house and no child at university and no medical scheme, the allowances are Rs 480,000 which is higher than his income. So he would not pay any tax and would therefore receive no benefit at all from the tax proposal of the PM.

If he has no child, his allowance would be Rs 415,000 per annum. We have to make the very bold assumptions that he has no loan for his house and has no medical scheme to reach a chargeable income of Rs 62,500. A 5% reduction would save him Rs 3125 per year. However if we add interest, post-secondary education and medical scheme deductions, the likelihood of paying tax diminishes considerably. And then there would be no benefit from the new income tax policy.

The combination of much fewer than 60,000 employees benefiting from the policy and the fact that the gains are very far from Rs 18,000 per annum would suggest that the economic and financial impact is low even if psychologically it gave the impression of a big bang on Budget Day.

* If that is not the big bang, what is it then?

Pravind Jugnauth has made a mountain out of a molehill as the actual economic impacts are low. Worse, the Minister has done something that is quite unique. The reduction from 15% to 10% applies only to those who earn less than Rs 650,000. It is not a graduated scale as is usually the case where the first tranche of chargeable income between Rs 305,000 and Rs 650,000 is taxed at 10% and then rises to 15% after Rs 650,000.

The system penalises another section of the middle income group who earn between Rs 650,000 and Rs 975,000 per annum (between Rs 50,000 and Rs 75,000 per month). They will have to pay around Rs 17,250 more per year because of being pushed in a different tax band. There is also an anomaly as a person earning a higher salary could end up with a lower post-tax income than one with a lower salary. An employee who earns Rs 670,000 per year will have a lower after tax income than someone with Rs 650,000 per year if he has no dependent and has no other deductions. As he is charged 15% on the totality of his chargeable income instead of 10% for the first Rs 345,000 and 15% on the remaining amount.

The Minister has on purpose not made this concession as it is an expensive one in terms of revenue foregone. The very large majority of taxpayers who actually contribute significantly to tax collection would have each benefited Rs 17250 per annum. It has simply not happened.
* What about the decrease of Rs 2.35 per litre of mogas, Rs 1.90 per litre of diesel and Rs 30 per cylinder of LPG of 12 kgs? Do you find anything objectionable there as well?

The treatment of the prices of petroleum products is very cynical on the part of Government. In May 2018, the price of mogas was raised by Rs 4.70 per litre (10% increase) while that of diesel escalated by Rs 3.80 per litre (10% rise). The PM and Minister of Finance could have done what he did in the budget at that time and the prices would have gone up to Rs 49.65 for mogas and Rs 40 for diesel (which are the prices currently). That is a 5% increase instead of sending poor Minister Gungah to explain why the prices had to go up by 10%.

What is the purpose of an increase of 10% in May followed by a decrease of 4.5% one month later? Is it all about effective communication and management of public opinion? What is the message except that Gungah is the bad guy while Jugnauth is the good one?

Motorists also feel that they have been short-changed by Rs 2.35 per litre of mogas and Rs 1.90 per litre of diesel as the decrease announced in the budget represents only 50% of the increase of May 2018. The rises were at 10% while the reductions stand at only 4.5%. And instead of lowering the excise duty to reach the new prices, the PM has kept them unchanged. The adjustment has come mainly from the Price Stabilisation Fund to lower the prices. It means that at the next rise in world market prices, the STC will have no choice than to pass them on to consumers.
The drop of Rs 30 per cylinder of LPG of 12 kg is also part of a communication strategy. Since November 2015, Government had raised the contribution made for the subsidy on rice, flour and LPG from Rs 1.50 to Rs 2.70 per each litre of mogas and diesel instead of passing on the then huge decreases in oil prices to consumers. However only 40% of the amount collected has been used as stated in the annual report of the STC. That contribution has now been brought back to its pre-November 2015 level (Rs 1.75 per litre of mogas and Rs 1.20 for diesel) and part of the massive savings made by the STC between November 2015 and 14th June 2018 has been used to lower the price of LPG by Rs 30.

* What’s your reading of the macroeconomic indicators presently? Are they really not that bright as some would suggest?

Besides the usual measures announced to facilitate the integration of unemployed people in the labour market and the oft-repeated facilities for the SMEs that have not yet yielded much positive results, there is a distinct impression that the economy has been sacrificed on the altar of policy paralysis and insufficient support. The economic fundamentals are weak while many key sectors of our economy such as manufacturing, export, agriculture, fisheries and SMEs show signs of decline or stagnation. There are also many measures that have been mentioned in many budgets and have not been implemented. Probably the two biggest weaknesses of the three preceding budgets are the huge gap between promises and delivery, and the poor implementation and execution of major projects as evidenced by the massive underspending of the capital budget every year.

Most macroeconomic indicators are not performing, some doing very poorly. Let us consider the six or seven key macroeconomic indicators that determine the health and vitality of an economy, especially one that ambitions to graduate from an upper middle to a high income country.

– Economic growth at 3.8% is far below what was promised at 5.5% and even slightly lower than in 2014.
– Government promised to create 15,000 to 20,000 jobs per year between 2015 and 2019. The average number of employment created between 2015 and today is around 4733 per annum and they include those enrolled in the youth employment programme and other training and apprenticeship schemes. While the unemployment rate has come down, 5800 people have been artificially removed from the labour force in 2017 even if they are unemployed. They are characterised as ‘potential labour force’ while 117,700 employees state that they are ‘underemployed from a time-related perspective’.
– Inflation is rearing its ugly head at 5% at April 2018 compared to 1% in 2016.
– The budget deficit is being massaged by off budget transactions and by a huge underspending in the capital budget.
– The public debt would represent more than 70% of GDP if the debts contracted by the Special Purpose Vehicle created by SBM and by Mauritius Telecom for the Safe City project are counted and contingent liabilities such as Betamax and the BAI refunds are acknowledged. And there is a massive deficit of Rs109 billion in the trade balance representing 22% of GDP and the current account deficit at 7.7% in 2018, following the huge decline in exports.

* To be fair, you would agree though that good economics is rarely the only or the major consideration for Finance ministers at this stage when general elections are drawing near and are 18 months or so away, wouldn’t you?

It depends on whether you take a very short-term view or a medium- and long-term perspective of your responsibility as Minister of Finance. One needs to have a fair balance between creating the conducive environment for the economy to grow, to diversify, to enhance its resilience, to address sectoral challenges, to sharpen competitiveness while ensuring that such growth is shared and inclusive while being environmentally sustainable. Most independent economic observers seem to suggest that the balance has not been well struck.
People may easily forget the short-term goodies if the economy does not perform well, good and smart jobs are not created, if insecurity rises, income, wealth and asset inequality widens to unacceptable levels and there are major issues with respect to corruption, governance, nepotism, drugs and abuses of power in recruitment and promotion.
In the meantime, investment as a share of GDP continues its declining trend to around 17% compared to the promise of 25%, manufacturing is in permanent and structural fall at 13% of GDP compared to 25% that was prognosticated and exports of goods at only 43% of imports of goods. Unsurprisingly, we have had to postpone our graduation to a high income economy from 2018 to around 2028.
GDP per capita in US$ has declined compared to 2014. The pension bomb continues to tick away while the ocean economy which holds tremendous opportunities for manufacturing, exports, value addition, food security, renewable energy generation remains trapped in the starting block.

* In that case, what would have made for good economics then at this stage in the country’s economic development and which would have been doable given the environment we are operating both locally and globally and which would have been politically acceptable?

We must focus on raising investment as a share of GDP to 25%, in lifting manufacturing to much more than its present low level of 13% of GDP and to raise exports of goods and services. Enhance competitiveness, raise productivity, invest in research and development and innovation and quicken the pace of growth of new economic sectors.
We have three economies that coexist in our country. The old economy is made of up sugar and agriculture, manufacturing, fishing and tourism. The first three are in trouble while tourism is doing well thanks to the opening up of the skies and market diversification. However growth of tourism has slowed down for the first five months of 2018 while arrivals from China have tanked.

The emerging economy consists of financial services, ICT and real estate development. The financial services have to rise to the challenges of the new treaty with India as from April 2019, the implementation of BEPS and anti-avoidance provisions and the fierce competition from other jurisdictions. ICT has to graduate to higher value-added services through blockchain technology, artificial intelligence and Fintech. The fiscal incentives to land and real estate development have misallocated resources in our economy. If we make abstraction of the sale of CIM and ABAX global businesses in 2017, foreign direct investment is far lower than in 2014 and almost composed of 80% of real estate development, while investment in both manufacturing and ICT is negligible.

We must urgently reconsider our strategy towards manufacturing, domestic-oriented industry and export. The new growth poles which revolve around the ocean economy, the Africa strategy and making of Mauritius a service centre for Africa have not really taken off. Equally we need to focus on food security and on harnessing the multiple prospects of the ocean and fishing industry. All these are feasible. They are sound economics which will also yield political dividends.

* What about the measure aimed at offering high net worth individuals the possibility to acquire the Mauritian passport and/or Mauritian nationality against a non-refundable contribution to the Mauritius Sovereign Fund? Are you also not comfortable with that proposition?

It is a politically sensitive matter. While I am in favour of opening up the country and creating a conducive environment to attract talents, skills, technological knowhow and transfer, and competence that our country requires for its economic transformation, I am against the sale of nationality or citizenship to foreigners.

We cannot and should not sell our nationality to investors of any ilk or reputation who want to simply park their money here. This will change the identity of Mauritius with adverse impact on access to land and property prices for our children and to fundamental rights, to the welfare state and to a host of other entitlements and facilities. We do not need this for a country like Mauritius that has a broad-based and diversified economy to enhance the quality of life of its citizens. We are not like small islands in the Caribbean such as St Kitts and Nevis, Dominica, Grenada, Antigua and Barbuda or St Lucia that are devoid of resources for development.

Would they have the right to vote, to stand as candidates, to become MPs, Ministers and even Prime Minister as it would be difficult to have two types of nationality with different sets of entitlements? I prefer the ‘permanent residency’ status as it exists in some countries rather than the monetisation of our nationality and citizenship. There are also risks of due diligence, corrupt practices and becoming a haven for fraudsters and owners of ill-gotten wealth such as we have seen recently.

The timing of this measure is also very poor after the Alvaro Sobrinho episode and the damaging allegations against our international financial centre. It looks like this idea is the outcome of a desperate attempt by the PM’s spin-doctors to find a ‘wow measure’ for the budget that would attract attention. They have simply done him a major disservice. I hope the PM realises this mistake and removes this measure.

* Given the state of the economy right now, would you say that it might be possible for the present government to reverse and/or brighten its political fortunes by the end of its mandate through the adoption of the economic measures contained in this budget and of those presumably more voter-friendly that will undoubtedly come into play next year?

There are some good social measures in the budget. There are others that must be executed and implemented in a timely manner to deliver the expected outcomes, such as the formidable challenge to build 6800 houses in 18 months when they have built fewer than 800 in 42 months.

There are too many ‘effets d’annonce’ that have led many people to distrust what are stated in the budget. For instance, I am almost certain that Government will not achieve the 3.9% economic growth forecast. It has already brought it down from 4% in Dec 2017 to 3.9% in March 2018. I think the next prediction will lower it to no more than 3.8%.

Tourism is forecast at 5.1% for the year and we have registered an increase of only 2.7% for the first five months of 2018. The same applies for exports. It is predicted to post a small growth and it has fallen sharply in the first quarter of the year. Also there will be delays in the implementation of major public infrastructure projects and in the capital budget.

* Do you think that politics will trump economic considerations in the remaining time of this government’s mandate?

Of course both politics and economics are key to the success or otherwise of the government. If the economy does not improve at both the macroeconomic and sectoral levels, I think people will feel it. And if the rupee continues to depreciate and oil prices go up, they will feed into inflation that will affect the quality of life of our compatriots. While the 10% income tax will give some purchasing power to few people in the middle income group, I believe its impact will be marginal. Politics also will be important. What happens to the case of the PM before the Privy Council and what alliance will be entered into by the different parties will shape the agenda for the next elections.
* It may be premature at this stage to come up with a sketch of how things will shape up for the next general elections, or which alliances will be unmade or remade, but do you see the Labour Party – and its leadership — capable to take up the challenge of facing the MSM and the MMM in alliance or separately should there be a three-cornered fight?

Electoral reforms look increasingly unlikely, in spite of the promises made and the case brought by Reziztans ek Alternativ against the state. Sadly, I think we are heading towards a situation which existed prior to 2014 where all candidates will have to declare their community belonging. The one-time constitutional amendment will be difficult to be renewed as it has discriminated against a very important component of our rainbow nation.

In that case, there will be significant pressure to have a straight two-horse fight between two ‘big tent’ alliances. The strategy of having a coalition after the elections may not make sense as some parties may not be at the negotiation table as they could be wiped out in a FPTP three-cornered contest.

While I understand the rhetoric of political leaders to go alone so as to mobilize their core supporters and present an undiluted programme, I believe the voice of reason and reality, if not survival, will dictate the choice of political parties. However with electoral reforms, the cards could be reshuffled.

 


* Published in print edition on 22 June 2018

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