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PWC : a shower of social measures

PWC

With the elections on the horizon, The Hon. Minister of Finance presented a social Budget with the objective to gain popular support.

In recent years, GDP growth has been oscillating around 3.7%. Whilst inflation has been contained and unemployment falling to its lowest, job creation and private sector investments have been subdued. The ballooning budget deficit, deteriorating balance of trade and escalating public debt have all been source for concern. Further, with the downturn in the textile, tourism, and sugar sectors, there were mounting expectations on the budgetary announcements. Amidst this state of affairs, has the Budget lived up to expectations?

Many observers feared populist announcements, especially given that this Government has pursued many socialist goals with the introduction of minimum wages, free university education, negative income tax, increased pension, and so on. PwC’s pre-Budget survey (refer to Figure 1) confirmed that this was one of the top concerns for the population and, as expected, the Budget contained a shower of social measures aimed at a wide cross section of the population (planters, public servants, workers, pensioners...).

We are disappointed to note that the Government, yet again, is using the surplus revenues (up 7.5%) arising from the fiscal buoyancy to finance populist measures. Better fiscal discipline would have helped contain the recurrent budget deficit.

At PwC, we have been advocating a more targeted approach to social benefits as, even with imperfections, targeted programmes are shown to use public money more efficiently. The Budget felt short on this front.

At a time when our competitiveness is being eroded and investments remaining timid, we welcome the measures to promote further business facilitation, the incentives under Law Enforcement Message Switch (LEMS), as well as the push for innovation. The pursuit of the ‘Moris Nou Zoli Pei’ campaign is also a positive aspect of this Budget as it will promote a more sustainable and environment-friendly model. These measures should not only help our traditional industries but also lead to the emergence of new growth pillars. However, we have raised concerns over the Government’s drive to fuel growth through public spending and consumption, as our productive assets are being diverted.

Again, we note the Government’s desire to boost purchasing power by further increasing pension, making an interim pay allowance to public servants, reducing the price of cooking gas or maintaining the subsidies on rice, flour, and so on. Today, consumption and public spending are so critical to GDP [refer to Figure 2] that these can blur policy decisions.

The public infrastructure programme has been a key feature in recent budgets and the Minister reported good progress, especially the Metro Express and Côte d’Or multisport complex. With empirical evidence showing that such large infrastructure projects are prone to cost overruns in excess of 50%, and the recent history of overruns (the Bagatelle Dam costing twice more at Rs6.2bn or the Terre Rouge Verdun motorway tripling in cost at Rs5.8bn), we hope that there are no surprises ahead with the Rs18bn Metro Express project.

We have experienced a period of ‘jobless’ growth in recent years, with little net job creation. There are currently around 20,000 youths unemployed and the country is facing difficulties in absorbing new entrants into the labour market. The current skills mismatch highlights issues with the education system and the proposed reforms to modernise the education were needed.

Mauritius spends around USD2,600 on each student of compulsory school age, similar to South Africa (USD2,200) but over five times less than Singapore (USD14,500) [refer to Figure 3]. Much public funds have been directed to social protection (up 15% from 2017) against an increase of only 7% in education; we are pleased that the Government has taken active measures to stimulate training and innovation in the education sector.

The Budget also announced some reforms in order to promote a more efficient public administration and, although there has been limited details in the Budget Speech, the sale of non-strategic assets to reduce the public debt as well as the simplification of the Public-Private Partnership Act are steps in the right direction.

The Government also addressed concerns over public debt and aims to curtail this level to 61.6% of GDP in the next fiscal year to everyone’s surprise by using the accumulated undistributed surplus of Rs18bn held at the Bank of Mauritius. Our concern is that such an approach may have broader implications on the country’s monetary policy, ability to manage its foreign exchange risk or reliance on more domestic debt funding in
the short-term.

Looking back at this Government’s mandate, besides infrastructure and socialist measures, there has been little progress made in tackling public sector inefficiency, structural bottlenecks, or labour productivity gap.

While an attempt has been made in this year’s Budget, it did not go far enough and, clearly, the Government has elections in mind.