We were among the ones who did not applaud when the TINAs (There Is No Alternative), moulded by the infamous “triple shocks”, ushered in their new socio-economic model that promised us a new phase of sustained, broad-based growth and full employment but ultimately failed to deliver on our economic, social and environmental goals. We were equally sceptic when they unravelled their neo-liberal and purely theoretical policies -- 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 taxation of interest income; the introduction of a flat tax that replaced a progressive income tax system by a regressive one and allowed the better-offs and the corporate sector to capture all the gains of our generous taxation policies -- in other words, a typical IMF one-size-fits-all approach that did not reflect the local expenditure and savings needs and incentives realities; the setting up of a CSR Fund that gave a free hand to companies to implement their own approved CSR programmes which turned out to be more of a mess than a substitute for public redistributive policies and the launching of the Loto and the abnormal zealousness to issue gambling licenses.
Budget 2011 deals a lethal blow to many of these TINA policies while exploring new paths to an endogenous inclusive development. Budget 2011 carves out some decisive moves towards an alternative development paradigm that recognizes the importance of providing ourselves with the means to realize our vision of becoming a more diversified services and knowledge-based economy as well as economic security and diversification to widen the economic base required for long-term sustainable growth. It has also vindicated our doubts on the TINA policies. While the TINA stooges in the press and in the private sector were building up the TINA-wallahs and their friends as the most brilliant and super competent economists that ever walked on Mauritian soil, we have, in the very columns of this paper, maintained a consistent opposition to their ruthless neo-liberal policies that wreaked havoc on our values of generosity, solidarity and community.
The widening income inequality that was shrugged off when economic times were good has become intolerable in the slowdown. The gaps between rich and poor have exacerbated. The successive TINA budgets amassed huge revenues and generated unacceptable inequalities. The TINA policies did not succeed in diversifying the economy and in developing other pillars that would have rendered it more resilient to external shocks. They have, however, attracted massive resources into real estate activities whose contribution to the economy is questionable. Land prices have risen beyond the reach of most Mauritian households, while sugar barons extracted huge profits on their large property holdings, but contributed marginally to taxation. The middle classes were made to pay higher property taxes -- the infamous NPRT -- while corporate tax was slashed and huge promotion budgets were given to the tourism sector, and most importantly, the EU compensation money for the restructuring of the sugar industry went to the sugar barons, instead of supporting those who had shed their sweat and toiled for decades to enrich these barons. The TINAs also pressed in favour of the depreciation of the rupee to boost sugar and other export revenues of the oligarchy, while the population, especially the poor, had to bear a rather high inflation burden. Budget 2011 aims instead at rebalancing the relationship between the different stakeholders of the economy for a fairer and more equal distribution of the national cake.
Tax Reform: Budget 2011 has brought in an element of progressivity in personal taxation as income earners above Rs 2 million will be charged 10 percent on their exempt income. It has also removed the tax on interest income in line with our arguments that a progressive tax structure with limited taxation of savings would be a better tax system. The TINA-inspired tax regime was unable to comply with the other main canons of a good tax system – fairness (based on ability to pay) and equitable (decrease of tax distortions for the couple). It had eliminated the possibility of any tax planning by taxpayers for the medium-to-long-term. Taxpayers earning more than Rs 25,000, especially the middle income earners, were imposed a relatively higher burden of the new tax.
Inequality increased slightly with the imposition of the TINA tax regime whereas the previous regime showed signs of progressivity, taking a greater share from high-income earners and a smaller share from low-income earners. The reintroduction of deductions for first-time home owners and for those taxpayers investing in the education of their children will encourage our taxpayers to plan for a better future. The middle class, which has to substitute for an ineffective State in investing in the higher education of its children and thus ensuring that the country is provided with the necessary qualified human resources of international standard to meet its needs, is thus being compensated. On the issue of the taxation of savings, we have consistently maintained that standard bank accounts should be entirely free of tax for they represent the risk-free or ‘normal’ return to saving as compared to other holdings of risky assets that tend to have returns above the ‘normal’ rate and thus subject to tax.
Corporate Social Responsibility: The TINAs introduced a flat tax on personal incomes as a way to simplify the tax system and increase compliance. It replaced a system within which income tax rates vary from 15% to 30%, but which also contains many concessions. The philosophy of the tax was either charging a high tax rate accompanied by numerous concessions and preferences or a low tax rate without any tax-free minimums or deduction of inherent expenses from the taxable amount. There were also arguments that the lowering of the corporate tax rate would render the investment climate more attractive, especially in our quest for foreign direct investment. The commercial banks saw their tax liability go down by 15% and they thus reaped enormous profits which generated a huge outcry against the regressive flat tax. The anti-TINAs were scoring too much and the TINAwallahs were losing too many feathers in the political arena. They had to do something to give a semblance of correcting their private sector bias. A solidarity levy was thus imposed on the profitable banks; this was increased to 1% of turnover and 3.4 % of profits – the 1% of turnover is equivalent to 6 to 8% of corporate tax. Moreover, the profitable companies have to spend 2% of their profits on Corporate Social Responsibility activities approved by government or alternatively transfer the funds to government to be used in the fight against poverty. The CSR Fund turned out to be a mere “tick the box” approach which defeated the spirit and intent of the concept of Corporate Responsibility, without necessarily leading to any better outcomes. It was also fast acquiring a peculiar nasty ethnic overtone, for the potential beneficiary has to carry his begging bowl all around the corporate world looking for potential sponsors and seeking their consent for financing his project. And who is not aware of the prejudices and the ethnic demarcations/compartments of our private sector? Budget 2011 corrects this to some extent by repossessing 50 percent of the CSR resources to focus on three national Programmes, namely Social Housing, Welfare of Children from Vulnerable Groups and the Eradication of Absolute Poverty.
Recommendations
(a) In addition to the new measures taken in Budget 2011 to widen the tax base, more revenue raising efforts should be made, especially from the larger companies, by a closer review of their accounting practices. The corporate sector fails to bear its fair share of the burden, on account of its opaque accounting practices that shield the true extent of its profitability -- missing accounting policy disclosures, absence of consolidated financial statements of sociétés, inappropriate depreciation methods, disclosures about related parties and related party transactions, limited disclosures about valuation. A strengthened Financial Reporting Council (FRC) would be able to tap these sources of revenue.
(b) Increase investments and continue providing more room for capital spending, while restraining current spending to limit the overall fiscal deficit. The price paid for the welfare state, among others, has been deficient infrastructure. Capital expenditures should reach at least 5% of GDP, and the implementation of capital projects upgraded to ensure that budgeted amounts are actually spent, and project outcomes delivered. The Project Design and Monitoring Unit should be supported by a multidisciplinary Delivery Unit, under the direct responsibility of the VPM and Minister of Finance, which will ensure that necessary steps are taken to reform the system in the right sequence and with the right rigour for the implementation of some 20-25 priority capital projects,
(c) Start reviewing the provision of ‘free’ health, education and other public services in a long-term plan, and bring about greater public accountability, while exempting lower income groups,
(d) Improve civil service efficiency and productivity, especially through a fair, open and transparent recruitment process and the High Level Committee, in addition to establishing a national policy and strategy, should also propose a revised HR remuneration structure to attract top-notch skills. (The question of the PSC delegating recruitment and promotion authority to Ministries and Departments for technical and managerial staff seems to be another croc-en-jambe, like the discredited Discussion Paper of the National Tripartite Forum, which will only serve to open the Pandora’s box giving free rein to the occult forces to ruin our Civil Service), and
(e) Strengthen the framework for PPPs to encourage more infrastructure investments.
