Lepep Budget May Miss Boat, Again

Budget Doesn't Address Dominant Issue

Namely the extensive damage caused by the flat tax: 1. a massive GDP gap; 2. a serious impairment of our domestic savings; 3. making Mauritius less competitive and dynamic by keeping local pump prices at unreal levels and 4. generating the smallest increase in real disposable income for the poorest 20% of households of the last twenty-five years. Besides the flat tax was implemented on the basis of spurious claims.

A Trillion Rupees of GDP Missing, Almost

The idea behind the flat tax if you recall was that robust growth would follow the slashing of top tax rates. But as our economy didn't grow at the required 8% in any of the last eleven years Mauritius has sustained a growing GDP shortfall for every single one of them. Adding them together yields the astronomical total of Rs927 billion by the end of 2016 as shown in Chart 1. That's greater than our GDP for 2006, 2007 and 2008 lumped together by almost Rs200 billion. Or a little more than three times our domestic production for 2010. We will be hitting a trillion rupee next year if some very basic common sense does not find its way into the forthcoming Finance Act.

Government Ended Up Doing a Lot Less

Of course the massive GDP gap has translated into a revenue shortfall for our government. The exact size of the shortfall can be estimated using government revenue expressed as a fraction of GDP. That has been around 20%. We need to adjust that number downwards given that the whole purpose of the flat tax was to lower tax rates for corporates and the rich in exchange for higher growth rates. If we assume that the plan was to reduce that share to 15% we're looking at a cumulative shortfall of Rs139 billion. The actual number is larger if the shift from 20% to 15% is done gradually. Now Rs139 billion is quite an interesting number. It's close to the increase in government debt over the same period: Rs129 billion.

Budget Numbers Lost Some of Their Meaning

Budget numbers have to be taken with a big pinch of salt because of the ferocious bean-counting that has been going on since 2006. For instance the 3.3% budget deficit -- as a share of GDP -- forecasted for 2016-17 doesn't include the rice/flour subsidy that was whisked away to the STC. Nor does it reflect all the legitimate and recurrent projects that should have materialised during the last decade to make Mauritius stronger but which did not. Similarly national debt levels don't reflect the real size of the mess because of gimmicks such as the Build Mauritius Fund. Still that doesn't prevent us from considering the merit of some of the proposed policies.

The Budget in Its Current Form

For sure there are some interesting things in the budget like the repayment of the $120 million foreign currency loan. This is a good move after one Financial Secretary increased foreign debt by a factor of five from Rs9 billion to Rs47 billion in seven short years. While telling us that his reforms had saved Mauritius or made her more resilient. Yeah right. But it's not like the early debt repayment effected by Lutchmeenaraidoo a couple of decades ago. That one was made on the strength of a good string of growth rates. This one follows a discussion in a recent IMF report. 

Attaching Some Muscle to the Tiger's Bones

The emphasis on SMEs is a plus point given their proven capacity to create jobs and to invent the future. And provide true resilience. We should aim at having a good enough version of Germany's Mittelstand as fast as possible. One which The Economist reminds us shuns debt, goes for niche markets and puts a big premium on effective vocational training. This should be kept it mind while setting up the SME and industrial parks. Producing bicycles and motorcycles to serve the African market is a good idea. Hopefully this will inspire the sprouting of bike lanes and city bikes in Mauritius.

Water supply should keep on improving with the roughly Rs2 billion which will be invested into replacing leaking pipes in seven regions. Our port is getting about Rs1 billion a year for the next five to buy more cranes and to help develop a petroleum hub. We might need to reconsider that last part given the recent experience at Le Bouchon. And it will help clear the air if the Prime Minister reassured the nation that his government will not be going forward with any acts of zero governance such as the privatisation of the CWA or the CHCL.

Glaring Contradictions

But there are also some glaring contradictions. For example the duty reductions proposed for vehicles are going to delight our traffic Frankenstein. Something we don't want to happen. These should be reviewed to help optimise travelling time and minimise fuel burnt. Likewise are we helping launch a new generation of entrepreneurs with pump prices that have stayed disconnected from their international levels for almost a decade? Making it easier for foreigners to inflate property prices is not the best of decisions and is at odds with recent policy statements.

Plans For New Parliament Should Be Scrapped

The one we got is good enough for many more years. Also, do we need new government offices now? And do they have to be near Ebene? Aren't we heading to have our own green ghost town like Masdar City? Right, Google it up. The Metro Express project must likewise be shelved. We should instead start by putting more and better buses on our roads that would run till late at night and reap almost immediately the benefits of an improved flow. Yutong has more than one bus model. There are other brands too.

Absolute Poverty Will Not Disappear

An average monthly subsistence allowance of Rs3,200 will certainly improve the living conditions of the 6,400 families receiving it -- definitely more judicious than to splash half a billion rupees on a new set of unnecessary notes. They will trade places with those that are slightly less poor and which will not be receiving that support. Income distribution tables will tell us where they are likely to land. But we know that the flat tax has been producing an additional 1,000 poor people -- or about 280 poor families every quarter on average between 2007 and 2012. If that trend is maintained that's an extra 2,240 poor families we're looking at in the next twenty-four months. Many of which will be trapped into absolute poverty. And when the program ends many of its beneficiaries will also fall back into it.

Although it is evident that more thinking should go into the proposed policy it looks a lot more serious than the predictions of a former Minister of Finance. Indeed he told us back in 2007 that his flat tax would make poverty history in seven years. About ten days ago he predicted that poverty would now be eradicated between 2026 and 2031. We have to wonder what he'll say in 2032.

Policy-Making Should Be Upgraded

Naturally nothing comes closer to reducing poverty than good policy-making. We just need to look at how it has delivered unprecedented upward social mobility to tens of thousands of Mauritians over many decades. Not believing in the rubbish of 'competitive depreciation' won't hurt either. Ask Singapore. Which by the way has a grand total of two casinos. Establishing a Parliamentary Policy Office (PPO) that offers sharp and vigorously independent insights to our MPs would also be a wise move.

Flat Tax is Simplistic, Not Simple

The mess we're in can mostly be traced back to the implementation of a simplistic flat tax. And how it has been financed. The robust growth rates never arrived so two buddies went on a bean-counting spree. The damage is extensive: domestic savings are approaching single digits, inequality has increased tremendously and our competitiveness has been weakened. We're missing almost a trillion rupees of GDP from the promised growth trajectory. As Chart 3 shows a little more than half of that was enough to help drive Ramgoolam out of power. Lepep should reach a similar threshold in twelve months if common sense doesn't prevail. Soon.