Crafting the future -
Minister Sithanen delivers a friendly, yet balanced budget
By André Bonieux
Country Leader

Price WaterHouse Coopers

Vice Prime Minister and Minister of Finance Dr The Hon. R. Sithanen took many by surprise by announcing a budget for the 6 months to 31 December 2009 with an expected deficit of 4.8%, compared to a deficit of 3.9% for the year to June 2009. More surprisingly still, he committed to a deficit of 5% for 2010, an election year.

Given the impact of the current global context on the growth of the economy – growing a meagre 2% - and the cost of the Additional Stimulus Package, many had expected the deficit to be more important than 3.9%, thus putting pressure on the Minister to find additional revenues. The only taxes brought in have been labelled Solidarity Levies, are targeted at banks and telephone companies, and are meant to be of a temporary nature.

Not increasing any taxes must have been made possible by a reasonable buoyancy in tax revenues – almost at forecast levels – which must be considered a good performance given the growth rate. At time of writing, the detailed budget has not been made available to the public and it is not possible to comment on where the buoyancy came from.

The planned deficits of 4.8% for the remaining six months of 2009, and of 5% for 2010, augur well for the country. Firstly, we are far from the massive deficits of the US, the UK and other European countries. We must read in these statistics that the country could come out of this global crisis relatively unhurt, even if job losses in certain vulnerable sectors will be inevitable. Next, running very high budget deficits will take years of strict medicine for the developed economies to correct, a treatment we could well escape from. The traditional solution to large budgetary deficits is a period of high inflation and depreciation of one’s currency, thus restoring a deficit of acceptable proportions, when expressed as a percentage of GDP. According to this macro economic analysis we could be heading for a stronger Rupee than we have been used to. 

Back to the budget, we noted targeted measures to the poor. Several initiatives were targeted to the Very Small Enterprises (VSEs) / Small Medium Entreprises (SMEs) which must be highlighted. The VSE and SME sectors can be tremendous employment pools and if the measures are effective, jobs lost, in say the textiles sector, could be replaced fairly easily.

Further, the Minister announced a ‘tax’ of 2% of profits that profitable companies can pay directly to an NGO of their choice, as long as the NGO is officially recognised. It is a well-known fact that NGOs are far more effective than Ministries in bringing relief to the needy. This is a novel way to raise taxes and to address poverty relief, an experiment worth trying.

We also noted targeted measures for the Construction/Tourism/IRS sectors which will help these core industries and support job creation, more specifically the possibility to acquire hotel rooms and villas for leaseback to hotel operators and Land Transfer Tax which has been brought back to its 2008 level of 5%.

Once more the Minister has announced mega infrastructure projects but unfortunately the country sees little in terms of realisations. Time is pressing and more should be achieved more quickly, particularly in road projects.

To conclude, the Minister went into detail on a great number of projects for the coming 18 months, from very large to micro projects. Our appeal is to the civil servants who shall be responsible for the realisation of same. If it’s business as usual, then we shall probably not see all the potential impact of the funds being spent. When our fellow citizens are losing their jobs, an effective management of public affairs becomes critical – it is even a moral issue.

The Minister has proposed, Government will vote and we believe the country will support this well crafted budget.