The need for prioritizing investments in public infrastructure in the next budget is self-evident.
The Minister of Finance and Economic development has already indicated that this should indeed be the case although he suggested almost in the same breath that with the prevailing level of budget deficit this could prove to be a tricky act to handle.
It is true that a seemingly incompressible and persistent budget deficit of around 3.5% is not a comfortable starting point for any Minister preparing his next budget. It must be pointed out however that nothing is cast in stone especially in this era of what has been dubbed the “new normal” following the Great Financial Crisis of 2008. Exceptional fiscal and monetary policies have been adopted in developed countries including the United States – not to mention the “nationalization of losses of private sector banks through massive investments of public funds.”
Quantitative easing and now negative interest rates have been applied in order to rescue whatever could be rescued from the mess resulting from the days of excessive financial deregulation. In all these cases caution has been thrown to the winds as these governments went all out to prevent an economic meltdown.
Although the nature of the problems which we face presently are not comparable to those with which these developed countries were confronted in the aftermath of the 2008 crisis, the challenges which we face can have dramatic consequences if they are not properly addressed in the coming budget. This is why it is argued here that there is no need for the Minister to be overly cautious in his approach. Which obviously is not the same as saying that he should be reckless. Admittedly, sustainability is a relative concept and is fraught with the threat of run-away deficits against which constant vigilance must be maintained.
The issue of what is an appropriate fiscal policy has been at the heart of economic and political debates forever. The centrality of the issue has been highlighted recently in the case of countries with as diverse economic situations as Greek, Japan or France, and a lively confrontation between “pro” and “anti” austerity policy supporters has dominated economic policy formulation for a number of years now.
A clear line of divide has emerged between those who consider fiscal consolidation as a sort of incontrovertible mantra and those who believe that there is no absolute imperative to reduce budget deficits under all and any circumstances especially when the social fabric is under stress and creation of employment is a critical issue.
For those supporting the latter view, fiscal sustainability is the guiding principle. The goal of fiscal policy is to maintain a sustainable balance between budget deficit and economic growth and productive employment creation and the right balance is a function of economic and social conditions prevailing at particular times.
It is of course undeniable that the different approaches are often correlated with the political views of their holders – the fiscal consolidation school is generally supported by technocratic/Conservative forces while the fiscal sustainability version is usually associated with progressive/social democratic politicians. These positions are therefore not devoid of ideological underpinnings and take us beyond the purely macro-economic considerations into the realm of political economy i.e. the distributive and equity effects of policy decisions.
To come back to the forthcoming budget and the need for investments in public infrastructure, it might be useful to reiterate the obvious i.e. the need for and the resulting benefits of such a policy decision. In a country labouring under the misery of secular stagnation — defined in our case as a stretched period of economic growth at less than 4% per annum — one of the most evident options open to policy makers is to stimulate the economy by injecting funds into the construction of public infrastructure.
The multiplier effects of such expenditure have been verified to be particularly effective in the past. In order to benefit fully from these multiplier effects, though, it might prove necessary to review the procurement process to ensure that local construction companies are competing on a level playing field when it comes to international tenders.
New and improved public and social infrastructure will then contribute to improved productivity by facilitating the physical movement of people (roads and bridges) or considerably improve external communications (ports and airports) and contribute to modernisation and development of the telecommunications and media industry(improving internet access and networks). Such investments will have the immediate effect of re-booting economic activity through the direct creation of jobs in the construction industry while stimulating consumption and improving fiscal buoyancy in the country.
The point that is being made is that the risks associated with a marginal increase in budget deficit in our present circumstances will surely be offset by the benefits which will result from investments in public infrastructure and the Minister should not therefore be exceedingly concerned with the inevitable critiques which will inevitably come from the aficionados of fiscal orthodoxy.
The most casual observer of the Mauritian society will have noticed that the country is fast reaching a tipping point as a consequence of years of chronic underinvestment in such key areas as transportation, water treatment, and energy including renewables. The only saving grace could have been road infrastructure had it not been for the scandalous implementation and financial aspects of the programmes.
Government must take urgent action to correct this trajectory of underinvestment before it impacts negatively on our overall production capacity. The next budget is an opportunity for bold measures and one expects a clear signal from government regarding the level of priority which will be given to this matter. Of course the government need not be the only source of financing for public sector infrastructure investments. At a time when banks are flush with liquidity the institutional framework for PPP projects need to be finally made operational.
Stronger administrative and technical capabilities as well as regulatory clarity and predictability are necessary conditions for greater participation of private and corporate finance in public infrastructure. But more of this later.
* Published in print edition on 1 July 2016