Fiscal Consolidation: An Urgency

In his reply to a PQ on the consolidated budget deficit inclusive of Special Funds, the Minister of Finance has stated figures of -2% in 2011, -1.9% in 2012 and -4% in 2013.

However using the same methodology as applied by the IMF in the 2011 Public Expenditure and Financial Accountability (PEFA) Assessment Report, the consolidated budget deficit works out to be -2.4 in 2011, -2.2 in 2012 and -4.6% in 2013 — more or less the same figure posted by Martin Petri in his presentation at the 32nd Monetary Policy Committee meeting on February 3 of this year. (His presentation titled ‘Strengthening the Monetary Transmission Mechanism’ is available on the website of the Bank of Mauritius.) We have every reason to believe that our figures which tally with that of the IMF are correct (IMF’s: -2.1 % in 2012 and – 4.5% in 2013).

From Table I, we can see that potentially concerning is the low growth in tax receipts, the high growth in the government wage bill and the continuing upward trend on welfare benefits. The budget falls short of sufficiently curbing the growth of the Welfare State, cutting wasteful expenditure by government departments and reforming the public sector, especially the State-Owned Enterprises (SOEs) which are like albatrosses around the neck of government draining public finances. The reform agenda seemed to have just died. Most of the proposed reforms now give every sign of being trapped in Samuel Beckett’s absurdist play, ‘Waiting for Godot’.

 

Table I: Consolidated Budget
(including Special Funds)

Fiscal Aggregates
(as a % of GDP
)

08/09

2010

2011

2012

2013

Revenue

22.4

21.3

21.0

21.5

21.0

o/w Tax revenue

18.8

18.5

18.3

18.9

18.6

Expense (current expenditures)

21.5

21.4

20.0

19.9

21.5

o/w compensation of employees

5.8

5.9

5.6

5.4

6.2

Use of Goods and Services

1.8

2.1

1.9

1.9

1.9

Interest

3.8

3.4

3.0

2.9

2.6

Subsidies

0.3

0.3

0.4

0.3

0.4

Social Benefits

4.2

4.5

4.4

4.5

4.8

Capital spending

2.1

3.4

3.5

3.7

4.1

Budget Deficit (Excl. Special Funds)

-3.0

-3.2

-3.2

-1.8

-3.5

Consolidated Budget Deficit

-1.3

-3.6

-2.4

-2.2

-4.6

The TINAs (There Is No Alternative) and remnants have been kicking the can down the road, ducking major decisions and it was just plain old statist thinking for the past seven years. We did not really go through the pains of restructuring – the painful changes involved in improving competitiveness and ensuring cost-effectiveness in education, health care, the public sector, social security and pensions. At the first outcry, the TINAs backed down. They preferred the easy way out – some few touches to the tax rates and some improvement to the investment climate framework. The reduction in direct taxes was unaccompanied by efforts to reduce wasteful expenditures and inefficient transfers; their fiscal consolidation efforts did result however in budget deficits as low as 1.3% of GDP which was achieved by drastically slashing capital expenditures to an average of only 2.6% of GDP over the period 2006-11. This drastic fiscal adjustment generated surplus funds which government re-appropriated and transferred to a set of Special Funds that were left idle in bank accounts and some of it were credited to some sort of “Resilience”, “Rainy” or ‘Build Mauritius“ funds. It was plainly a case of missed opportunities in achieving the twin objectives of sound public finances and economic growth/job creation.

Now the chickens have come home to roost and the jackasses have nowhere to turn and would not know how to turn anyway because they have never tried to turn in the first place.

But we cannot delay any longer for we have reached a point of no return. Now that we are having a salary revision every three years, we do not even have the luxury of waiting for a declining wages to GDP ratio to restore some respectability to the budget figures. There is an urgent need for substantial fiscal consolidation to put our public finances back on a sustainable path. This time because of the personal efforts of the Financial Secretary we have been able to ward off a sovereign credit downgrade from Moody’s but continuous failure to meet our debt and deficit reduction targets would inevitably lead to a downgrade that would hurt the economy quite badly.

We need to persist with fiscal consolidation and instead of hiding behind figures that do not reflect the real budget deficit, we need to come up with a package that can serve all of these different purposes we’d like to serve, which is to grow the economy, create jobs, raise revenues, reduce expenditures and bring down the budget deficit and debt. This underlines the need for a comprehensive programme of fiscal reform that will include measures to (a) enhance tax and non-tax revenue, (b) curtail current expenditure growth, (c) improve the productivity of public expenditures and its quality by reallocating towards areas that are more conducive to growth, in particular by increasing the share of public expenditures on productive investment in physical and human capital, (d) restructure public sector undertakings, including disinvestments, and (e) improve fiscal-monetary coordination. It is also important to ensure that the economy is able to absorb the deadweight effects of fiscal reform.

No significant budgetary and expenditure reforms are likely to succeed unless a robust and functioning accounting, reporting, monitoring, evaluation and implementation facilitator/delivering system is in place. The second step is to upgrade the system of evaluation of projects and programs which is quite weak in many ministries. Evaluation generally takes the form of financial audits. Few examples of engineering and quality control assessments for major capital projects exist. Similarly, there are rare examples of cost effectiveness studies. Attempting performance audit without agreed performance benchmarks and proper systems to record and track and evaluate performance is equally unlikely to be effective. These are some of the basics that must be satisfied for the Programme Based Budgeting (PBB) to be effective – “real” performance and policy-based budgeting – a PBB that secures delivery of government’s major domestic policy priorities.

In the recent IMF working paper ‘Inclusive growth and the incidence of fiscal policy in Mauritius- Much progress, but more could be done’, Antonio David and Martin Petri recommend that “the Mauritian authorities could improve the targeting of social protection expenditures… In addition, it would be useful to replace existing untargeted programs with a new absolute poverty benefit based on objective targeting criteria. The more widespread use of conditional cash-transfer schemes could also foster human capital accumulation and help to address skills mismatches in the labor market in the longer term. Pension reform, including a redesign of eligibility criteria for the basic retirement pension, could also have a positive redistributive impact… The authorities should continue to pursue their efforts to reform the educational system focusing on primary and secondary levels as well as technical and vocational training…”

To conclude on a promising note, we can safely assert that at least on the fiscal versus monetary front, we can expect a cease-fire for a while. Until the Ministry of Finance steers the public finances back to health, it’s going to be difficult for it to keep pressing the central bank to cut rates to boost sagging growth.

* * *

Mauritius as a Centre of Higher Learning: Challenges ahead

Given the present predicament of the tertiary education sector, we wish to reproduce this piece to refresh our readers on the issues we have raised earlier to forewarn them about the challenges ahead.

Mauritius is positioning itself to be a key centre of higher learning in the region. Its tertiary education sector is aiming at world-class status; it will be attracting international students, brand name institutions of higher learning and a highly-qualified teaching staff. Are we going in the right direction? Dr Harrish Bheemul, Director of Train to Go warned us some time back that we are still a long way behind and off target. So did Professor Dr Raj Gill, Pro Vice-Chancellor of the University of Middlesex who in his intervention at the Mauritius International Knowledge Investment Forum (MIKIF), who alerted us to some of the dire realities of shaping the transformation of the country into a knowledge-based economy with emphasis on the important contribution of the university sector. Besides the problems of air access, facilities for on job training and accommodation for international students, we have the issue of the quality of our tertiary institutions. “Of the 65 private tertiary institutions, only 5 of them, that is a mere 8%, are worthy of being among the top of the higher institutions of learning.”.

To continue forging ahead in establishing ourselves as “world-class”, “elite”, or “flagship” universities that are expected to compete effectively with the best of the best, first of all we will need more financial resources for the huge costs involved in running a world-class complex research-intensive universities. Second, we have to continue our efforts at attracting a critical mass of top students and outstanding faculty. Only such universities with a sophisticated level of teaching faculty, plus a highly productive and competent level of research capabilities and facilities for university faculty members will be able to select the best students and attract the most qualified professors and researchers.

The Indian Institute of Technology (IIT) has shown interest to establish an Institution in Mauritius on the lines of IITs in India. This will help not only in boosting the quality of tertiary education in Mauritius but also force our feeder system to adjust and upgrade itself to the higher entry standards of such institutions. And last we need a more powerful and effective Tertiary Education Commission which will have to assume its role as a driver of the tertiary sector, upgrading quality audits and enhancing the international comparability of its quality assurance framework for quality tertiary education.


* Published in print edition on 11 April 2014

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