Budget 2012: Short-term fixes

By R. Chand

The IMF in its two latest reports on the Mauritian Economy (Public Expenditure and Financial Accountability Assessment and the 2011 Article IV Consultation -Staff Report) pointed fingers at some of the curious arithmetic in our budget numbers. It noted that the chronic underspending on the capital side was not allowed to flow through to the budget bottom line, resulting in smaller deficits. Government re-appropriated and transferred the funds to a set of special funds. The IMF did not go to the extent of qualifying it as colourable accounting but subtly advised us to adjust the overall deficit to include spending from special earmarked funds which are macro-economically important.

The recalculated deficit is shown in Table I. The IMF Staff welcomed the government’s intention to close most special funds in 2011 and to place these operations in the budget. This will reduce budgetary fragmentation and is likely to result in stronger expenditure controls. 

Table I

% of GDP	2007/08	2008/09	2009
Budget deficit	-2.1	-1.8	-2.0
Capital spending	2.4	2.9	2.7

For Budget 2012 they were back at their old tortuous accounting ways, flouting the principles of sound public finances and the Government Finance Statistics Manual 2001 standards. They inflated the capital grants from Rs 1.1 billion in the estimates to Rs 7.0 billion in the revised figures for 2011. This explains the upward revision of the budget deficit estimated around 3% in August 2011 to 3.8% of GDP. The surplus funds were credited to the resuscitated Special Funds as shown in Table II:

Table II – Special Funds

Movements in Special Funds (Rs million)	2010	2011	2012
Receipts
Food Security Fund		25
Local Infrastructure Fund		250
Social Housing Infrastructure Fund		1500
National Resilience Fund	2100	4200
Road Decongestion Program Fund	1000	500	1700
Payments
Maurice Ile Durable Fund	140	11	200
Human Resources, Knowledge & Arts Development Fund	5	172
Food Security Fund	14		49
Local Infrastructure Fund	553	502	261
Social Housing Infrastructure Fund	19		502
National Resilience Fund	941	1087	3275
Road Decongestion Program Fund	686	1730	2801
Total Fund Receipts	3100	6475	1700
Total Fund Payments	2568	3502	7088
Net Expenditure from Funds	532	2973	-5388
As a % of GDP	0.2	0.9	-1.5

Adjusting for the transfers to and the subsequent payments out of the funds results in a significantly lower budget deficit in 2011. And, as payments out of the funds exceed transfers, the budget deficit in 2012 is therefore considerably larger than reported, and projected to reach 5.4 percent of GDP (see Table III). 

Table III – Consolidated Deficit

As a % of GDP	2010	2011 (Revised)	2012
Total revenue & grants	21.8	21.3	21.7
Total revenue (without grants)	21.2	20.5	20.8
Total revenue (without special funds and grants and irregular items)	20.6	20.2	20.2
Tax revenue	18.4	18.1	18.3
Total Expense	22.3	22.4	22.3
Capital Spending	2.7	2.6	4.1
Deficit)	-3.2	-3.8	-3.8
Net lending/borrowing – Special funds	0.2	0.9	-1.5
Minus transfers to revenues from special funds	0.6	0.4	–
Consolidated Budget Deficit	-3.6	-3.3	-5.4

 

That’s not proper fiscal management, that’s irresponsible management. The Minister of Finance is right, these are ominous signs that trouble is in store. Revenue as a % of GDP has stagnated at 20%, tax revenue drops to 18%, current spending shows no improvement as a proportion of GDP whereas capital spending stayed at a dismal 2.7% of GDP as in previous years.  

These shifty tricks of parking special funds outside the budget to hide the ineffectiveness in implementing capital projects are having serious economic consequences. Such poor fiscal consolidation is not providing the country with the means to tackle its challenges and realise its ambition of a trillion rupees GDP economy by the 2020s. It is choking off growth by limiting public investments in key sectors at a time that the private sector finds it more profitable to invest in real estate activities.  

We are marking time and keep missing out on targets while there is so much to catch up in terms of infrastructure priorities. For example, the expansion of the road network has to outpace the rate of addition to the existing fleet of vehicles if we are solely relying on it to reduce congestion. 

Indeed, it is not responsible budgeting to show such generosity on capital gains tax, tax, on dividends and interest rates, land transfer tax and the environmental fee without at the same time announcing any meaningful reforms to reduce expenses which stays at 22% of GDP. This is the time when prudence is the choice in carefully managing our infrastructure and productivity enhancement spending to relieve our bottlenecks while ensuring that the implementation of our policy priorities do not blow up the deficit to an unmanageable 5.4% of GDP and a higher public debt figure in 2012.

Narrow paradigm

Budget 2012 must be followed in its proper sequence. After the neoliberal policies of the TINA-wallahs (the ‘There-is-no-alternative’ brigade) that allowed the rich and the corporate sector to capture all the gains of the TINAs’ generous taxation policies, we marked a pause with a re-centering of the policies towards the middle class before the reckless pressure to conform to a previous narrow, established paradigm in 2012. While demarcating itself from the previous budget by totally bypassing the middle class — with a vengeance, it would seem — Budget 2012 is a nice hotchpotch: on the one hand, it makes a dignified attempt at trying to reach to the downtrodden (not ambitious enough, though it has the means to do so); on the other hand, it kowtows obsequiously to the big cats of the private sector — even outperforming the TINAs with its concessions on taxation, privatisation, Corporate Social Responsibility and a revamped stimulus package, and provides some quick fixes.

Part of the rhetoric that disappoints is the contention that what is best for the fat cats should equally be so for the thousands of middle class-owned management companies in the Global Business Sector. The latter is being imposed a 10% levy on chargeable income whilst other fat cats, for instance commercial banks that are “funding themselves by paying a paltry 3.5%”, are reaping huge profits from their exorbitant service charges and interest rates and exchange rate spreads.

In the non-sugar agriculture, the short-term quick measures to provide finance for seed purchases, market intelligence and the Rs 138 million for food security will provide some relief. Fair trade certificates and new freight rebate schemes are mere add-ons to a badly needed ambitious food security Action plan (cattle-rearing, milk production, maize and some other food crops, food processing, a modern auction market, etc.) that integrates a regional food supply strategy. Where are we, by the way, with the Regional food Company?

In the ICT/BPO sector it seems that we will develop our human resources by giving occupation permits to foreign workers earning more than Rs 30,000. That’s it, full stop! We would have solved our human capital formation needs in the sector! Plus short-termism que ça, tu meurs ! Similar absurd thinking is reflected in the proposal to offer part time employment to foreign students. Let us, first of all, start by attracting foreign students by the quality of our institutions and tackle the problem of our unemployed graduates before offering employment to others. We have a long way to go before adopting the Singapore model, we have to first of all build our institutions of learning and bond them to the world of work and thus diffuse the present explosive situation of unemployed graduates in a context where the creation of jobs is not matching the demand.

The changing nature of the tourism industry, the increasing number of air links, the bulging affluence in emerging markets, and the general technological improvement in global travel have changed the profile of tourists as well as the demands on the destination. The challenge is to formulate the sector policies that best reflect these changes as well as ensure that the benefits accruing from tourism activity be spread more evenly throughout society. The new rating system, the voluntary green certification and the cleaning and embellishment programmes are very practical short-term fixes. Much more is needed. The industry has to gear itself for the longer term for a new tourism that is sustainable, environmentally and socially responsible, and characterised by flexibility and choice given its limits to growth.

Some of the measures taken in the alleviation of absolute poverty, in social housing and for the welfare of children from vulnerable groups as well as the pre-primary education grant and the access to crèches are laudable. But poverty has also to be tackled at its roots; it should not be dealt only at its superficial level, in its manifestations. Our education system, for example, is geared to creating these ‘failures’. Far from being a system that encourages creativity and help children realize their full potential, it imposes an academic discipline that limits or destroys their creative potential.

To address this problem, we have thought of solutions to bring these 30% failures back to the system – the remedial classes, the introduction of pre-vocational education (with a stigma of failures attached to it), compulsory education until 16 (with a high number of drop-outs) and now the Summer School Programme. Such programmes have been tried elsewhere — and not achieved the expected outcomes. We have been creative about turning round the problem. It is high time for us to see and understand each child in his particular environment, to think of him as a potential of creativity and to gear our pedagogy and teaching and learning system so that we can bring these potentials to life. We are persisting in continuing in doing the other way round.How effective has been the Enhancement Programme of the Ministry of Education? We are told that some of the ‘star’ primary schools use the time allotted to the Programme for tutoring the students in academic lessons. We have developed a typical Mauritian culture that excels in finding ways to go round a problem rather than addressing the problem at its roots. And this is costing us a few billions.

Budget 2012 – ‘Growth for the Greater Good’ distributes some goodies all over the place for the greater good. The only missing part is the growth part. We can’t find any trace of the broad-based and inclusive reforms that would generate the necessary productivity improvements and ensure long-term public investments in education, in building skills, in research and innovation, in export expansion and diversification and in boosting the overall growth rate of the economy.

While the private sector jubilates, tricked into believing that the public finances are sound and that growth is not faltering, the middle class sulks and the downtrodden is pushed in the limelight befuddled by the attention they are getting, some of groups on the left summarises Budget 2012 in the following terms: “Dans ce budget, il n’y a aucune mesure de développement de nouveaux piliers économiques en vue d’assurer notre souveraineté alimentaire ou notre sécurité énergétique et la création d’emplois décents.”

After nine years of implementation of ProgrammeBased Budgeting (PBB) and continuous struggling with “deliver­ology”, the foreword to the PBB Budget Estimates acknowledges the fact that the TINAs had been putting the cart before the horse. It also contains 17 recommendations (to keep moving up the PBB learning curve); some of which seem to have been lifted straight from the columns of the Mauritius Times where we have often argued in favour of a medium- to long-term national plan to being the foundation of the PBB exercise. If the Minister wants concrete results in terms of “deliver­ology”, he will require a team that delivers on its promises.

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* Published in print edition on 11 November 2011

Tags:2011 Article IV Consultation, Budget 2012, Food Security Action Plan, GDP, Global Business Sector, ICT/BPO, Public Expenditure and Financial Accountability Assessment, R. Chand