Budget 2014
arouses at best mixed feelings. It attempts to give the impression that under a
very difficult economic environment, the Minister of Finance has been able to
walk a very tight rope to achieve fiscal consolidation and at the same time try
to boost economic growth and improve living standards. It includes various
measures which are positive and which we approve of. But the budget is also
deceitful as it has concealed the negative aspects while highlighting the
positive measures.
Positive measures
There
are a handful of short-term measures
that will help to boost some sectors namely the removal of VAT on photovoltaic
panels which should reduce the cost by 15 per cent and greatly encourage
production of renewable energy, the provision of a subsidy of 25 per cent of
the freight cost on containers exported to all countries in Africa except South
Africa and Madagascar, a Special Fund to
boost arrivals from regional destinations during the low season, full VAT
refund scheme for agricultural machinery, equipment and tools and the introduction of an investment tax credit scheme
to encourage high-tech manufacturing .
There are also one-off goodies to win the hearts and minds of voters.
Poverty alleviation and Housing Empowerment Scheme.
In addition
to these Budget sweeteners, there have been some laudable determined efforts to
provide real relief to the working poor and to those below the poverty line.
These include. the measures for some 17,000 low-income families to have full
ownership of their lands, financial support to the 125 private pre-primary
disadvantaged schools, the innovative pedagogy project in 6 low performing
schools across the country with the assistance of ESSA Foundation, a non-profit
organization from UK, and the African Development Bank, the free internet
access to children from families on the Social Register and income support to
some additional 8,000 vulnerable families. These whole set of measures to
tackle poverty issues are laudable indeed. It is a daring and frontal attack on
the conservative stand of the traditional elite who have consistently resisted
the inclusion of such measures in the Budget on the grounds that it encourages
a move from culture of work to a culture of stipends.
Instead we have stop-gap measures like the
opening up of the country to high calibre
professionals; these has more cons than pros in the present context where real estate prices are outrageously
high and land prices has risen out of reach
of most Mauritian households and when the majority of the young and educated are
leaving because they have no prospect of finding decent work here. What is more
important than big level spending right now is private and public sector investment in the economic
arteries of this country to get growth flowing to every part of it . We need a
more focused prioritized investment expenditure in the economic heart of this
country – science, engineering, ICT, technology and innovation – if we're to
become a high-skills, high-tech economy.
Fiscal
slippage
Budget 2014 is deceitful
because it omits many things that
government should have included to paint a
clear picture.
It is a budget concealed in a pretty dress to look good, a
pretty
facade which lacked transparency and does not stand
up to proper accounting
standards. It reflects reality only partially.
Indeed the budget figures,
adjusted for the special funds, (Table I)
tell a totally different story.
Table I
:Consolidated Budget ( including special funds )
|
||||||
2010
|
2011
|
2012
|
2013
|
2014
|
||
Revenue
|
21.3
|
21.0
|
21.5
|
20.9
|
21.4
|
|
o/w Tax
revenue
|
18.5
|
18.3
|
18.9
|
18.5
|
18.8
|
|
Expense ( current expenditure)
|
21.4
|
20.0
|
19.9
|
21.3
|
22.0
|
|
o/w Compensation of employees
|
5.9
|
5.6
|
5.4
|
6.2
|
6.4
|
|
Use
of Goods and Services
|
2.1
|
1.9
|
1.9
|
2.1
|
2.1
|
|
Interest
|
3.4
|
3.0
|
2.9
|
2.7
|
2.8
|
|
Subsidies
|
0.3
|
0.4
|
0.3
|
0.4
|
0.4
|
|
Grants
|
5.2
|
6.0
|
4.7
|
4.8
|
4.5
|
|
Social
Benefits
|
4.5
|
4.4
|
4.5
|
4.7
|
4.8
|
|
Capital spending
|
3.4
|
3.5
|
3.7
|
4.5
|
4.4
|
|
Budget Deficit
|
-3.6
|
-2.4
|
-2.2
|
-4.8
|
-5.0
|
|
Budget Deficit
(ExcL Special Funds)
|
-3.2
|
-3.2
|
-1.8
|
-3.7
|
-3.2
|
|
Absence
of reforms
The
silence on reforms gives the impression that the government is at best a
reluctant, low-key reformer. Potentially concerning is the low growth in tax
receipts, the high growth in the government wage bill and the continuing upward
trend on welfare benefits. The budget falls short of sufficiently curbing the
growth of the welfare state, cutting wasteful expenditure by government
departments and reforming the public
sector, especially the SOEs which are like albatrosses around the neck of
government draining public finances . The
reform agenda seemed to have just died.
No
strategic direction
Budget 2014 is not a document that could be used to derive a coherent
picture of our vision. It could be described as a motley collection of initiatives,
projects and fine-sounding hubs. It reads as though each of
the ministries and departments have made their own separate veritable wish-list
- a patchwork that reflects the fragmentation of the whole 10 year ESTP- a mere
assemblage of inputs from different quarters
that are then presented as a new vision.
Stakeholders unanimously agree that the budget lacks strategic direction.
Given that the overall picture is
missing , there is ample confusion and uncertainty about the vision, the policy
orientations/strategies and the Plan. Some even say that these measures , “c’est du bluff, du fla fla.”
Conclusion
The Budget should have aimed for a calibrated balance between providing
measured short-term stimulus to a recovering economy and medium-term (fiscal)
consolidation. The budget should have remained focused on the strategic
priorities of growing the economy and protecting the most disadvantaged in
society while balancing the Budget through a mix of savings, efficiencies, reforms,
asset realisation and revenue-raising measures. With growth hit by the
downturn, Mauritius needs more than wagers. It needs well-targeted public
spending and the reform route to resource mobilisation. That means it needs
policymakers who can take tough decisions, starting now.
We have not heard much from the members of the
Monetary Policy Committee (MPC) in reaction to the macroprudential measures
taken by the Bank of Mauritius. Or do they consider it not to be their turf? But whether they like or not, the use of
macroprudential policy is likely to interact with the transmission mechanism of
monetary policy decisions as they both affect the behaviour of financial
intermediaries.
The Bank of Mauritius (BOM) is supposed to discuss and
take account of the financial stability risks connected with a given monetary
policy stance in formulating its macroprudential policies. Monetary
policymakers in turn should take account of action or inaction on the part of
the macroprudential authority when calibrating monetary policy. Mutual internalization
of policy action that is conducive to an optimal policy mix can be more readily
achieved when the central bank works in coordination with the MPC. They are
expected to complement and support each other. However, there is also potential
for a conflict of interest, or at least trade-offs, between them, such as a
monetary policy that is too loose and is amplifying the financial cycle or,
conversely, a macroprudential policy that is too restrictive having detrimental
effects on credit provision and hence monetary policy transmission.
What exactly is macroprudential policy? The financial
crisis has demonstrated the need for a broader set of policy tools that can be
used to mitigate systemic risk. Time-varying macroprudential policy aims to
enhance the resilience of the banking system and over-exuberance in the supply
of credit by discouraging the build-up of financial imbalances that might
otherwise have led to a systemic banking crisis. A number of macro-prudential
instruments (MPIs) such as caps on loan-to-value ratios or loan-to-income
ratios, margin and haircut requirements and loan-to-deposit ratio thresholds
are used. This broad array of macro-prudential instruments is intended to
ensure that the goal of macro-prudential policy, namely of reducing systemic
risk, is achieved. Systemic risk is an elusive and multi-layered concept, and
hence it is generally recognised that multiple macro-prudential policy
instruments may be needed to prevent the materialisation of systemic risks.
What surprises us is the facility with which the
measures are being implemented without any questioning, especially from the MPC
members, on the timing, appropriateness and effectiveness of some of the
macroprudentail measures. Since when has the Central bank acquired the expertise of diagnosing "bubbles"
and "systemic" risks? Which systemic risks?
Our financial system does not have those
toxic innovative financing mechanisms like securitisation, credit swaps, over
the counter hedging vehicles and so on that led through some systemic shocks to
the near collapse of the financial systems of some developed economies. So
why this heavy arsenal of MPIs that may turn out be countercyclical and a major
hindrance to growth?
In its October Inflation Report, the BOM
blames the MOF for the lack of an expansionary fiscal policy that has stayed
too focussed on the need to meet statutory debt targets and this has led to
sustained cutbacks in public investment. But in chasing the barely visible
cobwebs of systemic risks, the BOM may equally stand guilty of throttling
growth and investment. Fine-tuning a poorly understood system goes quickly
awry. The science of "bubble" management is, so far, imaginary”
How can the BOM predict bubbles but the market can't? How does the BOM know
what is an actual bubble and what isn't a bubble but just a rise in prices?
Much of the macroprudential policy is still under
development. To date, a variety of MPIs have been suggested, but verification
of their effectiveness is needed if they are to be applied in the real world. A
review of the existing literature shows that studies are still being done on
the effectiveness of macroprudential tools, including quantifying the effect of
macroprudential policy instruments on credit growth, leverage, asset prices,
and asset price bubble.
Another set of research addresses how monetary policy
and macroprudential policy should be coordinated, including the question of the
interaction between macroprudential policy and monetary policy and modelling of
financial intermediation and frictions therein in macroeconomic models used for
monetary policy purposes.
Though there is a growing consensus among academics
and policymakers that macroprudential policy is theoretically an effective and
sophisticated policy tool to combat systemic risk, there is need for further
research on the effectiveness of macroprudential instruments in order to yield
more consistency to findings reached by means of cross-country experiences. In
some emerging markets, the specific calibration (design and magnitude) of the
macro-prudential rule determines its effectiveness in contributing to
macroeconomic stabilisation .
In
the recent discussion paper by the Bank of England on ‘The role of
macroprudential policy’ mention is specially made of the clear limitations
on the extent to which prudential policy might moderate the credit cycle, given
free capital mobility and uncertainties over the transmission mechanism —
particularly at peaks and troughs of the cycle which are very relevant to our
local context. It also recommends that “that constraints be placed on a
macroprudential regime to ensure transparency, accountability and some
predictability. That would call for clarity around the objectives of macroprudential
policy, the framework for decision-making, and the policy decisions themselves.
It also suggests the need for robust accountability mechanisms.”
If our tone of scepticism about the
macroprudential measures seems to be overly cautious, it is only because the
stakes are indeed so high.
* * *
The Poverty Trap
There has been too
much talk recently about “assistanat” on the issue of poverty rather
than the painstaking sustained and consistent efforts that are needed to
support the poor. What if you were told that for those
living in poverty, they develop a scarcity mindset, that makes coping with
poverty even harder. “If you want to understand
the poor, imagine yourself with your mind elsewhere. You did not sleep much the
night before. You find it hard to think clearly. Self-control feels like a
challenge. You are distracted and easily perturbed. And this happens every day.
On top of the other material challenges poverty brings, it also brings a mental
one… The failures of the poor are part and parcel of the misfortune of being
poor in the first place.” Then your whole thinking about poverty would actually be different.
This is exactly what Harvard economist Mullainathan
and Princeton psychologist Shafir using behavioural economics argue in their
recent book ‘Scarcity: Why Having Too Little Means So Much’. Their book
examines the psychology of scarcity and the scarcity mindset that narrows
perspective and perpetuates lack through the limiting of one's options. This is
an important new work that addresses the psychology of poverty and how people's
minds work differently when they feel they lack something. The results of their
research show empirically that the feeling of scarcity places very real limits
on what people are able to see, and the authors offer strategic interventions
as behavioural solutions to help break these cycles that lead to the scarcity
mindset
By making
people slower-witted and weaker-willed, scarcity creates a mindset that
perpetuates scarcity, the authors argue. In developing countries too many of
the poor neglect to weed their crops, vaccinate their children, wash their
hands, treat their water, take their pills or eat properly when pregnant. “The poor are not just short of cash. They are short on bandwidth."
Ingenious
schemes to better the lot of the poor fail because the poor themselves often
fail to stick to them. The authors describe these shortcomings as the “elephant
in the room”—which poverty researchers ignore because it is disrespectful to
the people they are trying to help. But if these so-called character flaws are
a consequence of poverty, and not just a cause of it, then perhaps they can be
faced and redressed. There are also some excellent ideas about ways to improve
social support programs, such as graded reductions in support rather than a
shocking cut-off. Perhaps this can be of help to our NEF instead of the sterile
statements like “nous ne tolérons pas l’assistanat’.
