The Finance Minister recently commented that 98% of the 300 letters that he had received recently concerning the upcoming budget, had suggestions concerning further tax cuts and spending increases. This is despite the fact that the country faces a high debt burden and hence high interest payments, and a still fragile economic recovery. In the face of such macroeconomic realities and political necessities, it is perhaps important to evaluate the current financial constraints facing the Minister.

On the revenue side, total revenues in the previous budget stood at 20,2% of GDP. The three main sources of revenue were taxes on imports which contributed 4% of GDP, taxes on goods and services (VAT) contributed 9,7%, while income tax contributed another 3,5% of GDP. Considering the fact that the Government has already announced that taxes on imports are to be reduced gradually, both income tax and VAT will need to generate more income in order for the Government to maintain the same revenue to GDP ratio, over the next four years. and considering the fact that the Government has already announced that taxes on imports are to be reduced gradually, both income tax and VAT will need to generate more income. In 2006, the Finance Minister had opted to broaden the tax base on income and consumption, and he even went as far as to announce corporate tax cuts in a phased manner.

The Finance Minister is betting that his reforms will be able to generate sustainable GDP growth above the five percent mark over the next four to five years. If this growth target is not met, he will need to increase taxes in order to finance his expenditure or risk an even larger fiscal deficit and debt burden.

With expenditure accounting for 25,3% of GDP last year, the fiscal deficit stood at more than 5,1% of national income. The four largest components of this source of expenditure were wages and salaries, which accounted for 6,3%, interest payments accounted for 4,1%, current transfers and subsidies account for 9,2%, while capital outlays accounted for another 3,5% of GDP. Considering the revenue constraints, increases in salaries and wages are likely to be well below nominal GDP growth rates in the coming years in order to cap this expenditure at 6% of GDP, hence, the low increases in compensation to employees that will be offered this year.

<B>Tax payers? money to be put to better use</B>

Furthermore interest payments are set to increase by more than Rs 3 billion next fiscal year and will account for 25% of total revenues. It is recommended that the Government continues to diversify available debt instruments at varying maturities and increase foreign borrowing so as not to crowd out domestic private investment and smooth out interest payments. Capital outlays are an integral part of generating and sustaining future economic growth. While this outlay may decrease in real terms this year, it will be important to increase this in the coming years, hence, transfers and subsidies remain the only expenditure left to cut and the current budget is likely to concentrate on this. The Government is likely to push for more targeted outlays to the poor and other vulnerable groups while capping spending on inefficient subsidies in this year?s budget and in the coming years. More will also need to be done to reform public enterprises in order to save tax payers? money and put it to better use.

The Government will need to head towards a fiscal deficit of around 3% of GDP over the next three years, in order to make any serious dent on the debt burden and interest payments. All this is assuming that our economy is able to even sustain a rate of growth that is in excess of 5% per annum, if this is not met, the only choice will be to increase taxes further. Mauritius has borrowed heavily over the past decades as we have and has lived beyond its means. and now it is time to pay it back with interest!

A contribution by <B>INVESTMENT PROFESSIONALS LTD</B>