Ambitious Reshape of Economic Trajectory

Budget 2025-2026

The next 18-24 months will be decisive, not only for macroeconomic indicators but also for the real-world impact on businesses, households, and the government’s ability to deliver

By Manisha Dookhony

The 2025-2026 Mauritian budget, unveiled in the midst of a severe fiscal crisis (deficit: 9.8% of GDP, debt: 90% of GDP), represents a bold and high-stakes effort to fundamentally reshape the nation’s economic trajectory. The government aims to pivot from a consumption-driven model to one centered on productive, investment-led growth, while imposing strict austerity to restore fiscal sustainability and overhauling a strained pension system. The strategic vision — shifting from consumption, aggressive fiscal consolidation, leveraging the Chagos windfall, and pension reform — is coherent, but its execution could result in significant sectoral changes and presents substantial risks.

The real estate sector, previously a major source of growth and FDI, faces a major shift with the dismantling of Smart City incentives and the abolition of VAT/tax holidays. Non-citizens will face doubled taxes on property purchases, including a 10% Registration/Land Transfer Tax and Capital Gains Tax, which may deter FDI, threaten construction jobs, and reduce foreign exchange inflows. However, this could rebalance incentives that have long favoired construction and real estate, potentially improving equity. Pic – L’Express Property

Core Pillars of the Strategy

1. Investment-Led Growth Pivot

The budget marks a decisive break from the post-Covid focus on consumption support, such as subsidies and cash transfers, instead prioritizing private and public investment in high-value, productive sectors. This pivot is the cornerstone of the proposed “New Economic Model,” aiming for resilience and diversification.

Targeted Sectors:

• Technology & Innovation: The government plans to integrate Artificial Intelligence (AI) into policy and public services, supported by the ICT Blueprint. A National Research and Innovation Institute (NRII) is being established, with MUR 200 million allocated for policy research to improve service delivery, reduce wastage, and drive innovation-led growth.
• Green Transition: Significant investments are earmarked for renewable energy (solar, biomass), “Waste to Wealth” schemes (compost, recycling), Blue Economy corridor development (sustainable fisheries, tourism, blue finance), and climate adaptation projects. These initiatives align with global trends toward a circular and sustainable economy.
• Creative Economy: New economic pillars are being built around the creative arts sector, including the establishment of a Creative Arts Centre and the development of art trading as an asset class, reinforcing the Economic Development Board’s (EDB) efforts in this area.
• Productivity Enhancement: The budget supports innovative agriculture (MUR 800 million), advanced techniques, AI for SMEs, land productivity maximization (Digital Twin project, land database), and boosting manufacturing capital productivity.

Inclusive Elements: The strategy incorporates measures for broad-based participation, including flexible/hybrid work arrangements, support for women entrepreneurs (Women Entrepreneur Loan Scheme), workforce training and reskilling, and a less restrictive Diaspora Scheme. Allowances under the Contribution Sociale Généralisée (CSG) are maintained but will be phased out over three years as the system is reformed.

Key Manifestations: The budget launches new schemes such as the Innovative Mauritius Scheme, Diaspora Scheme, Land Repurposing Scheme, Waste to Wealth, and Heritage Stewardship Scheme. It also allocates MUR 128 billion for infrastructure, including transport (M4, Ring Road, port expansion), water security (Rivière des Anguilles dam), and digital transformation. The EDB will be restructured, with some agencies closed to focus on boosting productive investments and exports.

2. Aggressive Fiscal Consolidation

Given alarming fiscal metrics (MUR 70 billion deficit, MUR 642 billion debt), the budget takes drastic action to avert a sovereign downgrade and debt spiral. The depletion of the CSG fund, adding MUR 9 billion to government debt, highlighted the unsustainability of previous policies. The budget sets ambitious targets: reducing the deficit from 9.8% in FY25 to 1.3% in FY28, and lowering the debt-to-GDP ratio from 90% to 79.7%

Revenue-Side Measures:

• Tax Reform: Personal income tax bands are simplified from 11 to 3 (0% on first MUR 500k, 10% on next MUR 500k, 20% above), resulting in a net tax increase for most earners above MUR 2.1 million. The middle class faces higher effective taxes and CSG allowance losses, potentially squeezing disposable income and dampening demand.
• New Levies: A 15% “Fair Share Contribution” (FSC) is introduced for individuals earning over MUR 12 million annually, including domestic dividends. For the first time, a Capital Gains Tax is imposed, significantly affecting real estate resales by non-citizens (higher of 10% value or 30% gain), likely impacting investment allocation.
• Corporate Tax Hikes: A 5% FSC is levied on corporate chargeable income above MUR 24 million (standard 15% rate companies); a 2% FSC for companies paying a reduced rate (3%); an additional 2.5% FSC on banks’ domestic income; and a 10% Alternative Minimum Tax (AMT) on book profits for hotels, insurers, financial intermediaries, real estate, and telecoms. Denial of Foreign Tax Credits (FTC) against both FSC and AMT raises the risk of double taxation.
• Base Broadening: The VAT registration threshold is lowered from MUR 6 million to MUR 3 million turnover, bringing more SMEs into the VAT net and increasing compliance costs, which may reduce unfair competition.
• Excise Hikes: Substantial increases are imposed on alcohol, tobacco, sugar-sweetened products (extended to chocolate/ice cream), and vehicle taxes. EV/hybrid incentives are removed, and conventional car taxes are hiked up to 100%, alongside increased registration duties and motor vehicle license fees.
• New Fees: These include a Tourist Fee (€3/night), higher Environment Protection Fee, processing fees for Bills of Entry, and increased gambling license fees.

Expenditure Cuts: The phase-out of CSG allowances for non-SRM households is announced, along with the phasing out of fuel subsidies for bus operators, trade schemes, closure of redundant entities/funds, and institutional mergers. Performance budgeting and actions on the Audit report may yield further cuts1.

3. Chagos Funds Strategy

The first MUR 30 billion (1.5% of GDP) from the Chagos windfall will be used over three years for debt repayment, mitigating 69% of domestic debt maturity by FY30. Subsequent inflows will go to a “Future Fund” dedicated to food security, climate adaptation, Blue Economy, AI/blockchain, and entrepreneur equity, requiring robust governance. Ideally, this fund should operate as a sovereign wealth fund1.

4. Pension System Overhaul

The retirement age will be gradually increased from 60 to 65, addressing the 26% recurrent expenditure burden and boosting the labor force. The transition from the bankrupt, tax-funded CSG to a contributory, earnings-linked National Pension Fund (NPF) is intended to ensure sustainability for the formal sector. However, there is a risk that the large informal sector will be excluded without adequate safety nets, making this fiscal transition complex

Sectoral Impacts and Risks

The real estate sector, previously a major source of growth and FDI, faces a major shift with the dismantling of Smart City incentives and the abolition of VAT/tax holidays. Non-citizens will face doubled taxes on property purchases, including a 10% Registration/Land Transfer Tax and Capital Gains Tax, which may deter FDI, threaten construction jobs, and reduce foreign exchange inflows. However, this could rebalance incentives that have long favoired construction and real estate, potentially improving equity.

For the banking sector, an effective 7.5%+ surcharge on domestic profits, loss of dividend exemptions, and denial of Foreign Tax Credits threaten profitability and could constrain lending capacity at a time when investment needs are high. The global business sector also faces uncertainty, as ambiguous “substance” rules for partial exemptions may undermine Mauritius’ competitiveness as a financial center1.

Overarching Risks

The greatest risk lies in implementation capacity. Simultaneously executing investment schemes, austerity measures, pension reform, institutional mergers, mega-projects, digital/AI transformation, AML/CFT compliance, and introducing a Capital Gains Tax demands unprecedented bureaucratic competence and coordination — a historical weakness for Mauritius. New committees and agencies, such as the National Crimes Agency, heighten coordination risks. Complex new schemes, like Waste to Wealth, require flawless execution amid bureaucratic restructuring. Past delays, such as with the Rivière des Anguilles Dam, signal high risk for timely and effective implementation.

Conclusion: A Defining High-Wire Act

The 2025-2026 Mauritian budget is undeniably ambitious, presenting a coherent vision that leverages severe fiscal consolidation (through structural tax reforms, spending rationalization, and Chagos funds) to create fiscal space for a strategic shift toward productive, investment-led growth built on technology, sustainability, and new economic pillars. It also addresses the urgent issue of pension system unsustainability.

The diagnosis of the country’s challenges — fiscal profligacy, over-reliance on consumption and vulnerable sectors, and the pension crisis — is largely accurate. However, the path forward is fraught with dangers that could derail the entire endeavour. The introduction of a capital gains tax marks a profound shift in the tax landscape, impacting investment decisions across the board.

The next 18-24 months will be decisive, not only for macroeconomic indicators but also for the real-world impact on businesses (especially banks, global business companies, real estate, SMEs), households (cost of living, access to services), and the government’s ability to deliver on this extraordinarily complex and interdependent agenda.

Mauritius Times ePaper Friday 6 June 2025