“Resorting to pension populism threatens the very survival of the welfare state”

Interview: Vinaye Ancharaz, International Economic Consultant

‘The government has the means to deliver a ‘budget labous doux’ – some people are even calling it a ‘budget diabète’!’

* ‘Why would the government sacrifice its cash cow? Why will it cut taxes on petroleum products, which bring in millions?’

* ‘It is clear that the education reforms of the MSM government aren’t working, and yet our policymakers seem impervious to it’

Economist Vinaye Ancharaz makes a realistic overview of several issues of immediate and long term concern while commenting on the Budget. He advances his reasons for thinking that it will follow the populist trend like previous ones, and expresses concern about the continuing high inflation rate that will impact the purchasing power of the vulnerable in particular, the failure of MSM’s education reforms and the need for a radical re-orientation of that sector including at tertiary level, the demographic changes and the increasing burdening of the pension system, etc. Read on:

Mauritius Times: Budget 2023-24 will be presented today. This comes at a time when politics may be more important than economics for the government as it’s getting nearer to the end of its mandate. Do you expect therefore it is that consideration that will prevail in a big way in this budget itself rather than in the next one – that is if the government alliance is still at the helm?

Vinaye Ancharaz: In the democracy that we claim to be, only the PM knows when the elections will be held. But if I were to take a cue from the recent amendment to the Local Government Act to extend the life of the municipal councils, the elections may not be for this year. Unless the amendment is a ‘trompe l’oeil’ or the Privy Council verdict in the Suren Dayal case turns out to be damning for the government…

However, if you follow the philosophy of the Budget over the past three years, you’ll notice that politics has always trumped economics. All the Budgets since the pandemic year of 2020 have put a premium on the social; they have been populist Budgets. The 2023-24 Budget will be no different, especially since expectations among the people are exceptionally high, and the Government too has upped the ante by stoking rumours of a rise in the basic retirement pension, possibly to Rs15,000 and a consequent realignment of the minimum wage to the same level. 

*In light of the current economic context, the question that arises is whether the government has the means to buy in with attractive budget measures a large enough mass of the electorate sufficient to tip the scale in its favour. Would the current state of the country’s finances give the government the leeway to do that, or are there other options available to it?

I believe the government has the means to deliver a ‘budget labous doux’ – some people are even calling it a ‘budget diabète’!

First, the economy has recovered from the massive 15% decline in 2020 and tax revenues have picked up. Second, with inflation in the double digits, the government has collected a substantial amount of ‘inflation tax’ – that is, consumers pay more in taxes because the VAT is calculated on the prices of goods, which have increased by 10.8% (the inflation rate in 2022), on average. Third, the CSG is expected to bring more than Rs 10 billion into the public purse. Fourth, with the prices of petroleum products maintained at such arbitrarily high levels for months, the government has surely amassed a considerable sum of money. And finally, let us not forget that, in case these revenues aren’t enough, the temptation to borrow is ever-present.

However, having the means to spend does not mean that the government should go on a spending frenzy. With the global economy slowing down, and several European economies, including Mauritius’ key markets, officially in recession, and our own growth projection for 2023 slashed from 5% to 4.6% by the IMF, prudence should be high on the agenda.

Unfortunately, judging by the national debt, which is dangerously approaching the half-a-trillion-rupee mark, the ploughing of the central bank’s reserves to finance budget deficits, and the handing out of various perks to the population since 2020, it is clear that we are dealing with a fiscally irresponsible government, which will not hesitate to give another tax-and-spend Budget.

* You wouldn’t expect the government to bring down the VAT rate as currently being canvassed by consumer organisations and opposition parties or roll back some on the taxes being levied on petroleum products, given that such taxes are needed more than ever in the current economic context, would you?

I don’t think the VAT rate is negotiable! However, the population has been crying out for relief from the high prices of petroleum products. We expected these prices to be slashed at the last two meetings of the Petroleum Pricing Committee, but that did not happen.

Naturally, therefore, the expectation now is that the price cuts will be announced in the Budget Speech. However, why would the government sacrifice its cash cow? Why will it cut taxes on petroleum products, which bring in millions? I think that the Minister of Finance will balance populism and pragmatism and announce a symbolic reduction in the prices of gasoline and diesel.

* If the government decides to hold on up to the end of 2024, latest June 2025, it will nevertheless have to address the present economic hardships of the low- and middle-income earners, the unemployed, etc., if it wants to preserve peace in the country. What can it do and how far can it go?

The source of the economic hardships facing low- and middle-income families is the prevailing high rate of inflation. The headline inflation rate for the 12 months ending March 2023 amounted to 11.1%, compared to 10.8% in December 2022. This means that there is no sign of inflation slowing down. With commodity (food and petroleum) prices falling, external causes of inflation can be ruled out.

Much of the inflation in Mauritius has been caused by the depreciation of the rupee. So, if the government is serious about fighting the rising cost of living, it should prevent the rupee from sliding further. Instead, the government has resorted to a series of palliative measures – like instituting subsidies on some food products, offering a CSG allowance of Rs1000 to those earning less than Rs50,000, and encouraging the State Trading Corporation to market its own brands of oil, milk powder, and rice at discounted prices.

These measures provided little relief, which was drowned by the incessant increase in prices.

* On the other hand, economists could argue that ‘good politics is bad economics’ and such goodies like pensions increase – whether to Rs13,500 or even Rs15,000 – would amount to crass populism and overlook the element of welfarism in such measures especially in today’s economic context. Can that dose of populism do harm to the country’s economy?

The case of pensions is a tricky one. I am also in favour of treating our senior citizens right. But we should do it without compromising the economy. Every Rs1000 increase in the basic retirement pension adds more than Rs 3 billion per year to the social security budget. This should be understood in the context of an ageing population.

With the number of working men and women who pay taxes to pay for pensions shrinking relative to the number eligible for a pension, our pension system is inherently unsustainable, especially since the National Pension Fund was abolished. Resorting to pension populism in such conditions threatens the very survival of the welfare state.

I believe there are other ways of ensuring a better standard of living for our elderly. For a start, we need to put a brake on the ongoing inflation. Lower inflation will reduce the need to pay compensatory increases in the Basic Retirement Pension​.

* You can bet that opposition parties/alliances will also come forward with their own dose of populism with promises like pension increase or other goodies, which they hope will make for a convincing argument to a large section of the electorate. Our politics has been reduced to the level of auctions and competitive bidding for votes, hasn’t it?

It’s true that every political party bats for populism. Before 2014, this happened around election time, and the perks offered were limited. More importantly, the freebies benefited the economy over the long run. Think of the offer of free education in 1976 and the promise of free public transport for school students and senior citizens in 2005, both by the Labour Party. These measures have largely contributed to the success of Mauritius as a nation today.

However, most of the goodies promised by the MSM government are about giving more money to different segments of the population. These perks are consumed away by inflation, leaving the beneficiaries wanting for more. The MSM government is the father of the entitlements-based economy, as we see it today. Since 2014, Mauritians have become accustomed to Budget Day as harvest time. The 2023-24 Budget will surely follow the tradition.

* On the other hand, questions will have to be asked about the country’s future prospects, for instance what does the economic context – present and, according to growth forecasts, that of the future – provide in terms of opportunities for growth and employment for the new generation?

I mentioned earlier that economic growth this year is projected to slow down to 4.6% from an initial estimate of 5%. The medium-term outlook for the Mauritian economy is not very optimistic either. The IMF forecasts our GDP growth rate to drop further to 4.1% and 3.3% in the next two years. Obviously, these forecasts are subject to significant downside risks.

Domestically, the Mauritian economy is in the grips of a severe labour shortage and skills mismatch. These problems suggest that our model of economic development, based on the pursuit of growth at all costs, is dépassé. Mauritius achieved the high-income status temporarily in 2020, before the negative growth of 15% caused us to slip back. So, it’s a matter of months before we make it back to the high-income league.

High-income economies generally don’t grow as fast as lower-income economies because they have used up their resources and their potential – an idea called ‘convergence’ in growth theory. So, Mauritius should become accustomed to lower growth rates – even if the economy is more innovative and discovers new growth poles. Our focus should therefore shift from more growth to better growth – that is, growth that is more inclusive, and greener, and creates decent jobs.

* Again, in relation to the future, besides economic issues flagged by the IMF or Moody’s, there are also other issues that are extremely important to sustaining our economy: education, for example, in view of its social inclusion function. For having taught at the University of Mauritius for many years, are you today worried about the quality and output of our education system? What are your thoughts about what needs to be done in terms of leadership, institutional and academic support?

I have been an academic for the better part of my career, and I still am. In my 15 years at the University of Mauritius, I witnessed a systemic decline in the quality of education provided to students. I blame it on the quality of the intake. Over the years, the University admitted students with poorer A-level grades, and weaker students caused a sort of levelling from the bottom. I suppose these adverse trends are still around. In the meantime, other universities, including online and part-time courses, have sprang up. All of this is making it harder to control quality.

One thing I’ve noticed, especially while teaching on master’s-level courses, is that most students just want to get a degree. They study to pass their exams, but they aren’t focused on learning. As a result, they don’t develop the critical skills that the real world requires. This also explains why Mauritius ranks so low on global competitiveness and innovation rankings.

Much of the problem is cultural or systemic. Our education system is extremely academic, and our culture glorifies the university. For this to change, we must revalue trades and professions like plumbing, electrical and mechanical work, jewellery-making, baking, cookery, design and fashion, etc. There is an acute lack of skills in these areas, which is contributing to the current situation of youth unemployment, on the one hand, and the need for imported labour, on the other.

Harsh as it may sound, we must accept that a university education is not for everyone. Just see how Switzerland does it. Early on, they separate students into two streams: those who will go on to get a degree and those who will get a vocational education. And their culture does not stigmatize those who did not go to university. In many cases, these people are more successful later in life than those who went down the academic route.

In Mauritius, we are desperately clinging to a dysfunctional education system. The recent revelation that only 2.2% of students from the Extended Stream (71 out of 3291) passed the National Certificate of Education (NCE) is perhaps an eye-opener, but the seeds of failure had been sowed much earlier in the system. It is clear that the education reforms of the MSM government aren’t working, and yet our policymakers seem impervious to it.

In today’s competitive world, it is the quality of education that will decide the fate of a nation. Our education system is not only failing our youth, it is also producing some bright minds who, sadly, choose to leave the country because they feel that their competence won’t be duly rewarded in a society where political influence prevails over merit.

* There are similarly other issues like climate change and its impact on our economy and our quality of life, land use and food security, etc. There is no easy solution for such challenges, but they should at least be receiving the attention they deserve from the government and the political class generally. But that does not seem to be the case, so busy is it tracking political adversaries… 

Indeed, these issues don’t come into the spotlight since Mauritians have become avid consumers of sensationalism. And that is exactly what we are being fed every day.

This government is paying lip service to its commitments on climate change in the 2015 Paris Agreement. The metro project has caused irreversible damage to the environment and, as if the government has learned no lesson from the recent flash floods, it is adamant on the smart city project on the coast of Roches Noires, after allowing La Tourelle to be shaved for a luxury villa project. These projects won’t stop because the real estate sector has now become our magnet for attracting foreign direct investment (FDI) – at the expense of productive sectors like agriculture and manufacturing.

Food security issues also are hardly debated – even after the pandemic revealed in dramatic fashion the dangers of overdependence on food imports. Mauritius imports practically all its staples. While our agricultural land and climate are not suitable for the production of many food crops, there is no reason why we should continue to import thousands of tons of staples like potatoes and onions, and maize, mostly for animal feed.

A sound agricultural strategy, with food security at its core, should give thought to democratizing access to agricultural land.

* There is also the issue of population ageing, population demographics and future labour market challenges. It’s everybody’s responsibility, but few seem to care. Are you worried as regards the long term?

As an economist, I am very concerned about the demographic trends in Mauritius.

Our population is ageing and declining at the same time. The birth rate last year was 7% lower than in 2021, and the population decreased by 0.2%. According to projections, the population will peak in 2025 and decline continuously thereafter. By the end of the century, the population will be about 830,000, the same as in 1970! Yet, the number of marriages is on the rise, increasing 17% in 2022 relative to the previous year. This means that young couples are having less and less children. True, they may be more focused on their career, but other factors are also at play, including the high and rising cost of living, and hopes of emigrating to greener pastures.

The ageing population is altering the socio-economic fabric of the country. It puts pressure on the pension system, and the welfare state as the demand for social security entitlements and health care increases. It also forces painful adjustments in the family as the question arises of who would take care of the elderly when everyone is at work. 

Luxury homes are emerging, but they are beyond the reach of the common people. We need integrated and more-affordable care facilities for our senior citizens. A national long-term strategy for the elderly will help focus public resources more efficiently to address the issues around ageing.

Mauritius Times ePaper Friday 2 June 2023