With words like ?historic?, ?momentous?, and ?ambitious? punctuating his speech, the minister of Finance gave the impression that he was deliberately reaching for the heights as he was unfolding his measures and proposals for 2005-06. But in so doing, he was also generously practising the art of giving, as evidenced by the two dozen donations he offered, either for ?free? or as ?one-off grants? to an impressive range of individual or corporate citizens, such as small planters, bus and taxi owners, special needs children, cultural centres and workers thrown out of their jobs by closing factories. To crown it all, he announced that Mauritius would become a duty-free island four years from now and, to show his determination, knocked off Rs 1.4 billion from customs duty revenue for the next financial year.

This significant customs duty reform is in line with World Trade Organisation requirements, and this is indeed why, over recent years, we have been witnessing the emergence of the Value Added Tax (VAT) which is meant to provide the Treasury with the billions it needs to finance government expenditure. At its present rate of 15%, the VAT is already a tax of consequence and it is understandable that it has not been increased to make up for the customs duty shortfall.

The downside, however, is that once again, the budget deficit has not been reduced in accordance with previous projections and that the goalposts have been moved as last year. The projections were that the budget deficit would be 4.0 percent of Gross Domestic Product (GDP) in 2005-06 and 3.5 percent in 2006-07. They have now been changed into 4.8 percent in 2005-06 and 3.8 percent in 2006-07. As could be expected, this has a direct bearing on government debt, as shown below:

The deterioration is a cause for concern. We must avoid falling into the spiral of indebtedness.

This is a risk-prone budget in a number of ways. Apart from the threat of a higher debt servicing impact on the recurrent budget and on the balance of payments, there are the risks arising for manufacturers who sell their products primarily on the domestic market. They will face stiffer competition from imported substitutes. Their sizeable contribution to GDP (12 percent) and to employment (55,000 workers) may be negatively affected.

While those manufacturers were on notice for a phased reduction of their existing protection in line with Southern African Development Community and Common Market for Eastern and Southern Africa trade protocols, they look like being thrown into the arena earlier than expected.

Beware of rising consumption

There is a further risk. To the extent that duty reductions and exemptions translate into lower prices in the market, the purchasing power of Mauritians will rise and it can be expected that consumption will go up. While it is to the credit of the minister that he intends to submit for review the Hire Purchase and Credit Sales Act and to better control sales and promotions, it will not be easy for him to keep the consumption rate of the economy under control.

The latter has gone up consistently over the last four years, from 71.6 percent of GDP in 2001 to a projected 76.7 percent in 2004. This means that the savings rate has gone down from 28.4 percent in 2001 to a projected 23.3 percent in 2004. If our investment rate (22.3 percent projected in 2004) goes up, as is indeed necessary for the growth of our economy, we run the risk of a resource gap in the near future, meaning that we could have to rely more on foreign resources. Still another risk is the bet that the duty-free route will attract investment in tourism.

That will no doubt require substantial facilitation which the minister intends to address by investing in targeted infrastructural works such as the airport, the port and roads.

But, in the final analysis, there is one risk which the minister has preferred to steer clear of. He has refrained from taking firm measures which would have improved the public finances. He has chosen to give to the budget a popular touch which will go down well with the population at large.

It remains to be seen whether, in the medium term, it will serve the nation well for, as Général de Gaulle once said, ?ce qui est salutaire à la nation ne va pas sans blâmes dans l?opinion?.

Pierre DINAN