Without a more pragmatic and flexible approach based on imagination and out of the box thinking, we are bound to remain caught in the trap of secular stagnation
After a few weeks of consultations with various organizations from different walks of life the Prime Minister and Minister of Finance Pravind Jugnauth has announced that the national budget for 2017-18 will be presented on the Thursday 8th June.
This annual exercise is an important milestone in any government’s political agenda although a consensus has been building up since quite some years now that in Mauritius the level of hype created around the event may be a wee bit exaggerated especially given the fact that the excitement is generally short lived. Be that as it may the fact remains that the annual budget provides an active platform for lively debate on the economic and social policies which various stakeholders in the population wish to see implemented over the coming year.
Governments for their part indistinctively try to assess the mood of the population and to the extent possible and as a function of the proximity of the next general elections use this opportunity to try and mitigate what they perceive to be the greatest threats to their electoral popularity. In parliamentary democracies where elections are held regularly every five years or so, it is generally thought that it is only during the first three years of a government’s mandate that eventually unpopular policies are implemented while for the rest of the mandate budgetary measures are more driven by vote catching and “populist” announcements.
The political and economic context
The general context in which the Minister of Finance will present his next budget is far from serene. Regular denunciations of financial scandals and other press reports detrimental to its credibility have forced government into a defensive posture and much of its time and energy seem to be absorbed by activities of damage control. Even the former Prime Minister has admitted to what is now the consensus view that the first two years of this government have not been terribly successful in terms of creating the necessary conditions for attracting investments and fostering economic growth.
Although there are some encouraging signs for a marginal increase in GDP growth this year, the economic landscape in which the Minister of Finance will present his next budget is still characterized by a low-growth trap with weak investments, substantial reduction in trade, a fall in factor productivity, rising indebtedness of households and enterprises and a perceptible rise in social and economic inequality. The export of goods has declined substantially last year sandwiched between poor economic conditions in our main export markets and a fall in productivity due to numerous unresolved issues and the persistent mood of despondency and irresoluteness in the country.
The constraints of the fiscal responsibility thesis
The annual budgets presented by Ministers of Finance under regimes of parliamentary democracy have been variously described as vision statements, accounting exercises, policy instruments or strategic orientation documents. Actually any budgeting exercise in a governmental context generally consists of two distinct components and it is the weight accorded to each and the interplay between them that would ultimately define the nature of the exercise.
The first consists of a more or less technocratic exercise which aims to meet some of what we could describe as “policy credibility” requirements. One of the most pervasive effects of the opening of national economies in the context of the sweeping globalization of the past two or three decades has been the undisputed adoption of certain norms as being the universal criterion for defining the “right” macro-economic policy.
These are represented by “a firm commitment by governments to price stability typically defined as low single digit inflation, monitoring public sector debts and deficits so that they do not exceed certain thresholds and current account sustainability. Within these parameters the proposed fiscal targets are as follows: 60% debt to GDP ratio and 3% deficit to GDP ratio.”
In Mauritius since the beginning of this century successive Ministers of Finance, independently of which party or alliance is in power, have adopted these norms as their stated objectives and attempted to meet them.
The second part of the budget exercise then consists in structuring government revenue and expenditure for the coming year to conform to these stated objectives. The adoption of the “policy credibility” thesis as a quasi-universal norm applicable with very little variance in developed as well as developing nations and independently of local prevailing conditions is a testimony to and a direct consequence of triumphant “neo-liberal” ideology. The same one which has brought about the 2008 Great Financial Crisis, the Brexit, the election of Donald Trump in the US and the threat of a Marine Le Pen presidency in France.
Yet as Iyanatul Islam, of the ILO in Geneva writes, governments in developing nations persist in implementing these policy norms in the belief that they are essential conditions for the private sector to drive economic growth. Their supporters are motivated by the belief that “if these policy norms are met consistently — and the government is willing to take prompt action if they are breached — it instils confidence in the private sector about future prospects and hence motivates them to consume, save, invest and innovate. Not surprisingly the supporters of the policy credibility thesis offer eulogies to the remarkable power and potency of “market confidence.”
As pointed out earlier, the bane of such a technocratic approach is that it is totally disconnected from the prevailing conditions in the countries where it is being applied. Its avowed objective is to keep politics away from economic decision-making. It is postulated here that in a country like Mauritius, where there is a long tradition of state-led economic development model, such an approach is bound to have counter-productive unintended consequences as indeed has been the case over the last decades. These dysfunctionalities have resulted in economic stagnation, social disintegration and growing inequality.
Without a more pragmatic and flexible approach based on imagination and out of the box thinking, we are bound to remain caught in the trap of secular stagnation.