Rama Sithanen, former Minister of Finance from 1991 to 1995 (Sir Anerood Jugnauth) and 2005 to 2010 (Navin Ramgoolam), dissects the second Budget of Renganaden Padayachy presented last Friday. According to his analysis, the finance minister hid the true size of the budget deficit.
Being frank would have been better in the context
Why such a compulsive need to window dress the size of the budget deficit? The Minister should have been transparent and told the population the absolute truth about the economic, financial and social distress inflicted upon us by Covid-19. Instead of playing a very irresponsible game of hiding the actual facts, concealing the figures and not preparing the country for the absolute necessity of fiscal consolidation in the medium term. Especially as some had already accused him before the Budget of “fabricating some main macroeconomic statistics”.
I believe there is no need at this current juncture to become a “fanatic” of fiscal consolidation as the situation warrants a twin strategy of recovery and reforms as long as the money is well spent to generate good outcomes. Even the rigorous International Monetary Fund (IMF) has stated that we should prepare for fiscal consolidation when the time is right and the urgency of the moment is to revive a moribund economy.
Not all the economic mess is attributable to Renganaden Padayachy. He has inherited an economy that was already showing signs of structural weaknesses. Covid has amplified and worsened the predicament and raised the urgency of reforms and adjustments to build a new economic architecture and embrace a resilient, green and inclusive development agenda in addition to kick starting the economy.
We all know that the pandemic has devastated our economy and decimated the leisure and hospitality industry with spill over effects beyond the sector itself. The direct, indirect, induced and catalytic impacts is such that the disastrous ramifications of the pandemic will reverberate both downstream and upstream along the value chain for a long time. As the Minister has himself rightly pointed out, we have lost five years of wealth and growth in one single year. The more reason he should have been frank with the nation.
Rs 60 b from BoM as revenue item to shrink the 2020/21 deficit
Last year, he proudly announced a balanced Budget by using the trick of accounting for the Rs 60 b from the Bank of Mauritius (BoM) as revenue instead of as a source of deficit financing. All expert institutions and independent economists have criticised that window dressing, including the IMF. He stated in his speech that the budget deficit for 2020/21 would be Rs 24.6 b or 5.6% of GDP. However, this is based on his characterization of the Rs 60 b (Rs 33 b of recurrent revenue and Rs 27 b of Capital revenue) as revenue even if the IMF has strongly recommended against this practice and the BoM had issued a communique to treat part of that sum as advanced future dividend payments (potentially a debt). While one could debate whether he should have had recourse to unconventional monetary policy, it is the treatment he makes of it that is under scrutiny.
Rs 60 b represents 13.7% of GDP. Had he classified the Rs 60 b as a financing item, the budget deficit would have risen to 19.3% of GDP.
Furthermore, if we account for the excess of payments over receipts in the off budget special and other extra budgetary funds, the fiscal deficit rises further. This does not include some expenditures incurred outside both the budget and the special funds.
Broadening considerably the size and scope of special funds
Even though some previous Ministers have used the special funds, it was not very large in size and not broad in scope as it was destined for specific capital expenditures. The current Minister is creating a huge fiscal monster that is neither transparent nor accountable. Nor under Parliamentary scrutiny. In his Budget last year, he provided for a huge sum of Rs 15 b to be transferred to the Special fund in 2020/21 and Rs 1.5 b in 2021/2022. In his Budget last Friday, he has substantially increased the amount credited to the special fund from Rs 15 b to Rs 31.7 b for 2020/21 and raised the transfer for 2021/2022 by over 450% from Rs 1.5 b to Rs 8.5 b.
The Special fund has itself become a budget outside the consolidated fund. There is significantly more money in the Special fund than in the capital expenditure of the consolidated fund. Rs 35.4 b in the Special fund compared to Rs 16.7 b in the consolidated fund if we combine the acquisition of financial assets with grants to various statutory bodies.
A 4 % rise in expenditures when he promised a 25 % decrease
The Minister announced that the budget deficit for 2021/22 will be Rs 24.9 b or 5% of GDP. Many, including some economists and financiers, are surprised at such a low deficit against a Budget of very high expenditures. The Minister had promised to lower spendings by 25%. As a former Minister who has presented 10 Budgets, I had argued that it would be impossible for him to achieve such an ambitious target and had proposed a more modest decrease of 3.5% of GDP representing around Rs 15 b or 9% of total expenditures of Rs 160 b. Not only has the Minister utterly failed to meet his objective, in fact, recurrent expenditures are almost unchanged at around Rs 135 b. And if we adjust for subsidies that have come down from Rs 8.2 b in 2020/21 to Rs 1.6 b in 2021/2022, recurrent expenditures have in fact risen by 4% when he pledged a 25% reduction. The difference in capital expenditure is attributable to the huge unbudgeted transfer of Rs 31.7 b to Special funds instead of the earmarked Rs 15 b.
How the massive budget deficit of 2021/22 is being financed?
- Officially, there is an excess of recurrent expenditures (Rs 135.3 b) over recurrent revenue (Rs 133.8 b), yielding a recurrent deficit of Rs 1.5 b or 0.3% of GDP. Then, there is a massive deficit of Rs 23.4 b or 4.7% of GDP in the capital budget with revenue of Rs 3.9 b and expenses of Rs 27.3 b. The overall deficit is Rs 24.9 b or 5% of GDP. It will be financed mostly by domestic debt;
- ii) Due to the huge transfers, the Special fund has a gargantuan amount of Rs 35.4 b as starting balance on 30th June 2021. It will receive Rs 10.3 b in 2021/22 and will disburse Rs 25.9 b, leaving a balance of Rs 19.7 b at 30th June 2022.
In fact, the Minister can use all of the Rs 35.4 b in 2021/22 if he so decides.
This would represent an additional deficit of 7% of GDP. However, if we include only the difference between payments and receipts of Rs 15.6 b (Rs 25.9 b less Rs 10.3 b), the budget deficit rises by another 3% of GDP.
- Worse, the Special funds are being used to finance explicit recurrent expenditures. A comparison of what was earmarked for spending by the Resilience Fund o ver two years underscores the cold cynicism with which the budget deficit is being fabricated. One example will highlight this cynical manipulation. In 2020/21, the main item under the Resilience Fund was a support of Rs 9 b to the national carrier out of a total amount of Rs 9.3 b. In 2021/22, the support to the national air carrier is zero while wage assistance (which is clearly a recurrent expenditure as was the case last year) will take Rs 2.5 b. Training will absorb Rs 1 b while refund of registration duty (which ought to be a reduction in revenue) will account for Rs 2 b. Equally, the Covid-19 project development fund has been transformed in a catch all expense account to conceal the size of the deficit. In 2020/21, contribution for the construction of 12,000 social housing units took Rs 6 b out of a total Rs 7 b. In 2021/22, only Rs 4 b is earmarked for social housing out of a total fund of Rs 11.7 b. There is also a huge sum which should ordinarily appear in the capital budget of Government, such as flood management programme for Rs 3.6 b and infrastructure development for Rs 2.5 b. Had all these expenses been included in the consolidated fund, the fiscal deficit would have been much higher.
A new trick in town: overestimating tax revenue to lower deficit
There are two ways of artificially lowering the budget deficit. First is to knowingly exclude some recurrent and capital spending from the computation. Second is to deliberately raise Government revenue. The Minister has used both to conceal the true size of the deficit. He pompously terms it «la dividende de la croissance au-delà du rebond technique». He is projecting a 9% growth rate in 2021/2022. In his macro economic framework of 2020/21, the same Minister projected a growth rate of 4.5% in 2021/22 and 5% in 2022/23. Now it has metamorphosed into 9% in 2021/22 and 6% in 2022/23. The IMF is forecasting a lower growth rate. With such a high growth, the revenue from VAT rises by a surreal 41% and corporate tax receipts by 45%. Even with the depreciation of the rupee, it would be difficult for VAT revenue to grow by 41%. Corporate taxes are usually paid on prior year profit. How can it increase by 45% when most companies have either lost money or made much lower profit this year even if we provide for the difference between taxable and book profit. The forecast tax revenue of Rs 110 b in 2021/22 compared to an actual of Rs 82.9 b in 2020/21 is largely overestimated with a 33% year on year growth. Actual tax revenue this year is down by 8% compared to what was predicted last year. It seems to me that tax revenue is overstated by some Rs 13 b to Rs 14 b, representing around 2.7% of GDP. An artificially higher growth also lowers the budget deficit and debt as a share of GDP.
After the heist at the BoM, now a hold up on four SOE
Last year the Minister was accused of a heist on the Reserves of the BoM. He has resisted the temptation of another loot at the BoM. However, he has dug into the reserves of four state-owned enterprises (SOE) to the tune of an extra Rs 9 b, representing around 1.8% of GDP. It is an unusual transfer of Rs 3.5 b from the CEB, Rs 2.4 b from the STC, Rs 1.5 b from MPA and around an extra Rs 1.5 b from the FSC. No idea why it is called “Property Income” which rises magically from Rs 1.8 b this year to a massive Rs 11.4 b in 2021/22. It is simply a transfer from these SOE’s to the consolidated fund to finance the very high deficit.
Instead of focusing on reigniting private sector investment in the productive sectors of the economy, introducing major reforms to address the structural weaknesses, doing more with less for efficiency and effectiveness considerations, investing to enhance productivity and sharpen competitiveness and reversing the declining trend in the export of goods and services which are vital to turn around the substantial trade, current account and balance of payment deficit, the Minister has embarked on an unbridled expenditure ride impregnated with relaxed but irresponsible populism. As a consequence, he has chosen to finance his very high but concealed budget deficit with a combination of conventional debt financing, a radical transformation of the size, scope and remit of the extra budgetary special funds, an artificial increase in tax revenues and a raid on the reserves of four state-owned entreprises.
At best a conceited window dressing. At worst a cynical ploy to disguise the economic and fiscal realities of the country. Time will tell how this will affect the brand, image and reputation of our country vis-à-vis international financial institutions. One thing is however certain. It is not the right signal to regain confidence, instill trust and enhance credibility in the economic management of the country. At a critical juncture when we need a lot of them.