… je pense que vers 2008 nous pouvons réaliser un taux de croissance de 7/8%.
Rama Sithanen, 2005
In this context, some people continue to defend trickle-down theories which assume that economic growth, encouraged by a free market, will inevitably succeed in bringing about greater justice and inclusiveness in the world.
This opinion, which has never been confirmed by the facts, expresses a crude and naïve trust in the goodness of those wielding economic power and in the sacralized workings of the prevailing economic system.
Meanwhile, the excluded are still waiting.
Pope Francis, Apostolic Exhortation 2013
No Miracle in Sight
Half of the fourth year of the Lepep government is almost gone and still no trace of the exceptional economic performance SAJ had promised for 2018. Only growth rates of less than 4% so far and the next two years are not likely to be any different. These are the lowest in decades.
We also know we’re not in the middle of an economic miracle when we check what happened to our currency – a huge wealth-lever – since December 2014. Plus there have been talks of postponing the age citizens are eligible for the basic retirement pension (BRP) by five whole years. That’s not the kind of stuff you’d expect if things were going well. So why hasn’t Lepep been able to produce a reasonable performance let alone a great one? Essentially because it didn’t fix a broken economy and got so many policy decisions wrong.
Lepep Failed to Fix a Broken Economy
It is convenient to decompose the performance of a government into the product of two components: skill and resources. We know the current skill level is very average just by looking around. Take our transportation policy for example. The traffic Frankenstein is getting bigger and meaner and we’re going forward with a tram which we don’t need. We haven’t made any progress with respect to road safety either. This year road fatalities are set to hit an all-time high. And that’s before adding the damage done by our energy Minister, a costly amateur. Nope, we’ve known better governments.
Very little resources have been available too. This is because of the flat tax which instead of delivering growth rates of 8% got us stuck in a decade-long L-shaped recession relative to what we could have achieved. We’ve kept you updated about the size of the shortfall – the infamous Sithanen toohrooh. Now we’ll help you calculate it. We’re doing this to respond to requests we’ve received and because we want a maximum of voters to understand why it’s central to so many current issues. For example how obscene tax waivers to smart cities and a 3% tax rate for exporters render PJ’s performance toxic.
Calculating the Sithanen Toohrooh
We’ve explained the computations in detail in a post on Kozelidir last March but for your benefit we’re reproducing the relevant table. The data requirements are very modest: real GDP growth and nominal GDP. That’s it. You then extract a measure of inflation called implied deflator which you use to gross up the real 8% growth into a nominal rate. Next you compute the corresponding nominal GDP target and compare it to the actual one to estimate the GDP gap while the government revenue shortfall assumes a conservative government revenue to GDP ratio of 20%. Running totals are in a couple of columns. If you can’t reproduce those numbers have a look at the relevant post and leave a comment.
Table 1 shows that 2017 ended with a toohrooh of Rs1.2 trillion – and a cumulative revenue shortfall (CRS) of Rs240bn. It will grow by another Rs300bn this year if PJ sits on his hands again. We should note a couple of things. One is that the CRS at the end of 2015 was already about enough for Mauritius to get herself a heavy metro system not the thing that’s bludgeoning the Promenade Roland Armand. Two is that during the past 9 years we got one year of 4.4% growth and 8 years below 4% (see second column). In other words trickle-down economics has actually been worse for us than the situation described by the Pope as growth rates after a bean-counter slashed taxes by about 50% have actually been lower than those before these tax cuts. This is due to the fact that our very basic welfare state prevents about a third of our population from falling into poverty (Poverty Analysis 2012, Statistics Mauritius). Mess around with it and the economy slows down.
Trillion-Rupee Private Sector Gap Ahead
It’s easy to estimate by how much our private sector is behind. We just need to multiply the toohrooh by its weight in our economy or 80%. This gives a GDP gap of Rs960 billion at the end of 2017 – it hits the trillion-rupee mark at the end of this month. Clearly the flat tax has been a total failure. This was expected as a corporate tax rate of 25% in 2006 was already kind on the low side and the damage done to push it down to 15% has disturbed so many things that are necessary for us to grow at a healthy clip.
One such thing is the price of oil at the retail level. Instead of raising taxes back to their sustainable levels in 2015 – this would have extended the myth that Lutchmeenaraidoo is Miracle Man for a few more years – government furthered the disconnect between its international and pump prices. This happened in 2008 too. Another one is the price of electricity which didn’t come down when it could have because a Minister is seriously out of his depth. Oil and electricity are basic building blocks of units of GDP. Make them too expensive and you cripple growth, build inflationary pressures and damage your competitiveness. And eventually lose elections.
Anaemic Growth Has Little to Do With the Great Recession
The 18-month recession didn’t affect us that much. We don’t have to adjust our growth target to take it into account as an average growth rate assumes we’ll hit a couple of bumps. Still even if we reduce the target for 2008 by half and that for 2009 by 25% we get a huge CRS of Rs189bn. If this was not enough proof of how damaging the flat tax has been you might want to know that the corresponding CRS for average growth rates of 7% and 6% are Rs168bn and Rs101bn – it’s Rs69bn for 5.5%.
The Shortfall is Actually Bigger
From Table 1 it is clear that the CRS is underestimated because the sums can be reinvested. If we assume that their real values stay constant the CRS increases significantly. For example the CRS in 2015 rises from Rs144bn to Rs261bn with an 8% growth. If we adjust the growth rate for the financial recession it drops to Rs192bn. How big a number is this? As Chart 1 shows the reinvested CRS (RCRS) was big enough to change all the leaking pipes (CLP) of the CWA ten times over or increase the resources of the NPF/NSF by 160%. Rs192bn would have been more than enough for a USD5 billion mass rapid transit (MRT) system or to wipe out 81% of our public debt.
The Second Best Time to Fix Our Broken Economy is Now
The best time is gone obviously. But sustainable top income and corporate tax rates of 30% will allow the economy to enjoy competitive energy prices, reduced uncertainty – this will lower road fatalities – and start growing from the middle out again. This should translate into much better growth rates. Something which PJ shouldn’t sneeze at especially when we compare his growth rates to those of the first mandate of NR.
He certainly doesn’t want to lower tax rates to 3% as requested by Business Mauritius unless he wants to treat his political career to a royal funeral in about 12 months. If tax rates at 15% have put our private sector behind by Rs1 trillion voters will certainly figure out what a 3% tax rate will mean for their livelihoods. He doesn’t want to give public funds to the sugar industry either because at less than 1% of our economy – that too after our rupee depreciated by 56% against the USD between 1985 and 2015 – it’s four times smaller than when it was granted Rs5 billion. And is on its way to be another 3-4 times smaller in 4-5 years. Maybe earlier if India unloads some of its massive reserves on the market. On the contrary it should be taxed so it moves from sugar into food production.
P.S. Retrograde tax policies of trickle-down were presented in a Sithanen budget on the first day of the 2006 World Cup.