Unlocking the Budget Figures

This last budget of this government needs to be put in its proper context; it is its fourth budget that had as precursor the 2006/07 Budget which promised to usher in a new socio-economic model centred on global competitiveness to return the economy to higher growth paths and full employment.  This involves a transition from the obsolete and counterproductive preference-based development model to an environment of fully liberalized trade where no activities, be it for export or for import, are shielded from international competition.

Prior to this new development strategy, the economy faced a decline of 24 % in the terms of trade from 2003 to 2005 , an explosive increase in the price of petroleum which increased by 2 and 1/2 times over five years . The world economy grew at an annual average rate of 2 per cent over the period 2001 to 2005. World trade grew by 7.9 % and world tourism by 3.4% on an average annual basis over the same period. Despite the relatively adverse international situation, the September 11 terrorist events, SARS, the geopolitical tensions with the war in Afghanistan and Iraq and the erosion of trade preferences, and unfavorable climatic conditions locally, the Mauritian economy has shown remarkable resilience growing at a satisfactory average annual rate of 3.2 % over 2001-2005. This includes a performance of 5.2 % in 2001. The budget deficit had reached 5.3% of GDP and public debt had reached Rs 118 billion rupees... Then came the stop gap “setting the stage for more robust growth” which proved to be a mere stunt before the  2006/07 budget, who was moulded by the infamous “ triple shock” and the pressing need for bringing in the new socio-economic model that stood for change ,the disruption of the status-quo but unfortunately it delivered the worst of the same.

But let us examine the first pillar of the reform programme that was drafted along the lines of the usual IMF/WB prescriptions - Fiscal consolidation and improved public sector efficiency. They told us that there was no alternative (TINA). So in the first budget itself the TINAs promised us a sea change with a plethora of fiscal consolidation and restructuring measures being undertaken, many of them at the behest of the noteworthy Golden rule; the purpose was to impose some rules-based fiscal discipline on government finances. Other measures initiated included the reduction of subsidies on rice and flour but without the liberalization of the prices, the hasty implementation of NRPT without adequate preparation and without careful thinking on the various implications of the new tax; the introduction of a flat tax that replaced a progressive income tax system by a regressive one and has allowed the better-offs and the corporate sector to capture all the gains of our generous taxation policies - a typical IMF one-size fits-all approach that did nor reflect the local expenditure and savings needs and incentives realities.

These reforms were to have far-reaching consequences for the fiscal position of government in terms of improving their deficit indicators, augmenting own revenue and decreasing the debt burden. A review of the fiscal performance is attempted in the following sections :

As % of GDP	2005/06	2010
Deficit	-5.3	-4.5
Current revenue	19.9	20.4
Grants	0.3	1.3
Total revenue & grants	20.1	21.7
Current expenditure	21.5	21.5
-wages & salaries	6.3	6.1
-goods & services	2.3	2.3
-Current transfers and subsidies	9.2	9.8
adj.Capital expenditures	3.6	4.7
TE & NL	25.5	26.3

 Analyzing the budgeted revenue figures, we see that for 2010 a receipt of Rs 2.3 billion (0.75 of GDP) is shown as a transfer from special funds. This is an irregular item; it should have been used below the line to finance the budget deficit ; we cannot transfer money to funds and bring them back in the budget as current revenues. We have to net it out of the revenue figures; there is also EU grant money, in compensation for sugar reform amounting to Rs 4.1 billion, 1.3% of GDP, which shows the new addiction and budget dependence on foreign donor funds: The EU grant funds should instead have been kept off-budget. Moreover it is not a result of revenue enhancing measures and is not likely to be a recurrent item. Without these items the total revenue figures is only 19.7 % of GDP and the budget deficit works out to be a catastrophic 6.6% of GDP , worse than in 2005/06, on the basis of the published figures for 2010.

 

As % of GDP	2010
Total revenue & grants	21.7
Rs 2.3 billion transfer from special funds	-0.75
EU Grants of Rs 4.1 billion	-1.3
Adjusted revenue	19.7
Total Expenditure & NL	26.3
Deficit	-6.6

 

Fiscal consolidation!!!

So the published figures reveal that the fiscal consolidation efforts have not improved revenue buoyancy and that on the contrary the budget continues to rely on one-off items like grants. The new dependence of the budget on substantial EU grant money, is taking Mauritius on a dangerous path. It is so more irresponsible when we examine the recurrent expenditures figures. Despite all the fanfare on reducing wasteful expenditure and the reduction in number of civil servants from 53,274 in September 2005 to 50,350 at present, recurrent expenditure as a % of GDP continues to be as high as in 2005/06 at 21.5% of GDP. Tough measures like reduction of subsidies on rice and flour, targeting of pensions, etc, were not accompanied by consistent efforts at fiscal consolidation, at redressing the imbalances.  What budget reform and Programme Budgeting is the MOF talking about when no substantial effort has been made to reduce expenditures; on the contrary the Budget situation is more fragile now with the increasing dependence on grants. Despite the waste squads , the big fuss on PBB and the Audit Committees , we note that expenditure on goods and services as a % of GDP has remained at 2.5% of GDP, the same as in 2005/06. Despite the promise of all kinds of targeting, reform in the pension system and removal of subsidies –measures that led to an inflation rate of 10.7% in 2006-07, the second highest rate in two decades - current transfers and subsidies has increased to 9.8% of GDP from 9.2% of GDP in 2005/06.

Capital expenditure

The budget deficit was reduced to 4.3% in 2006/07 and IMF Art IV 2006 noted that “The budget deficit target for this fiscal year is in reach, but the adjustment mix is unfavorable—almost half of the expenditure adjustment relates to lower capital expenditure”. That has been the whole story since  the underperformance in capital expenditure. All kinds of voodoo accounting have been used to try to hide the poor implementation of infrastructure projects. With the over-taxation of the population, we did not have a revenue problem; but a spending problem - the low capital expenditure as from the first budget.  The actual capital expenditure and Net Lending for the 2007/08 Budget is Rs 13,102 million, representing 5.3% of GDP. The Rs 13,102 figure includes the amount allocated to the six funds not expenditure incurred. There is also the investment in equity – Rs 1240-which has to be excluded from this total. If we remove these items, the true Budget Deficit for 2007/08 is -1.2% .

 

Fund (Rs million)	2007/08	2008/09(revised)
Food Security Fund	1000	50
Human Resource, Knowledge and Arts Development Fund	1000	50
Local Infrastructure Fund	130	550
Manufacturing Adjustment and SME Development Fund	-	1500
(Recovery Account) o/w Rs500,000 in equity		1000
RDA-LTA		500
Maurice Ile Durable Fund	1000
Social Housing Development Fund	500	1200
Total (Rs million)	3630	4850

 

We note that in the Actual figures for budget 2008/09, a total amount of Rs 4,850 billion has been added to the funds and these were accounted in Capital expenditure and Net Lending; and these have not been done in total transparency. Out of Rs 4,850 billion included in Capital expenditure and Net lending, only about Rs 1 billion had been spent and if we adjust the Figures accordingly (removing the net equity purchases of Rs 976) , we have a new Capital expenditure and Net lending figure of Rs 6,794 only 2.5 % of GDP, compared to the actual figures  estimates of Rs 10,927.

 

As % of GDP	2007/08	2008/09(Actual)
Capital Expenditure + Net Lending	5.1	4.0
Budget deficit	-3.3	-3.6
Without Colourable Accounting
New Capital Expenditure + Net L ending	3.1	2.5
NEW Budget deficit	-1.2	-2.1

 

 

 

 

 

 

 For the budget July-Dec 2009 revised estimates, the revised capital expenditure and net lending is an exaggerated 4.7% of GDP overloaded with purchase of software, vehicles, IT equipment, digital radio, CCTV, helicopters, vessels, etc.; even then given the dismal performance in meeting the capital expenditure targets, we believe by the end of the year the capital expenditure will not exceed Rs 4.5 billion that is, a mere 3.0 % of GDP. The only way that the MOF can reduce its budget deficit to more reasonable levels is by reducing its capital expenditures.

The budget figures thus reveal that Government has been most underperforming in meeting its targets on capital expenditures, thus jeopardising future growth.  It had an annual average capital expenditure of only 3% of GDP.( (3.3 + 3.1 + 2.5 + 3.0)/4)). It is the essential economic infrastructure - roads, ports, airports, schools, health etc. - and human capital formation that has been sacrificed. And with it, the new-socio economic model.

Social Expenditures

The excessive taxation over the first three years –extra revenue of Rs 3.1 billion in 2006/07 , Rs 11 billion in 2007/08 and Rs 6 billion in 2008/09 had created enough of fiscal space for social measures. But the figures show that the money had not been spent on social sectors - health, education or housing.

Total expenditure as a % of GDP	2005/06	2010
Health	3.5	3.5
Education	2.2	2.4
Housing	1.8	0.5
Total	7.5	6.4

 Total expenditure on the social sectors has declined from 7.5% of GDP in 2005/06 to 6.4% in 2010. The budgets of the MOF have been that fail the future test. With such paltry capital investment and sector reforms to generate productivity improvements, in agriculture, industry, public utilities, health, education, etc, it does not prepare us enough for the downturn in the world economy and significantly undermine the medium to long-term growth prospects, which would make it relevant to the man and woman in the street who sacrificed the short term gains for the promises of long term gains.