“Anything can happen as the status quo is not sustainable”

Interview: Rama Sithanen – ex-Minister of Finance —

 “Anything can happen as the status quo is not sustainable”

‘New forces are knocking on the door while the old ones do not want to give way’

 * ‘Government must reverse the crisis of confidence and restore trust. Otherwise it will be in trouble’

* ‘The BAI saga has distracted the Government and continues to haunt them’

Rama Sithanen is an economist and ex-Minister of Finance. He is therefore well placed to comment on the current state of affairs in the country. He accepts that responsibility for the disparities that we are witnessing on the social and economic fronts is shared between successive governments, but that the previous government’s policies were more skewed in favour of the masses than the corporates. He gives an overview of how the taxation approach facilitated this goal, and proffers some advice to his successor as to how to use the remaining time to fulfil at least some of the promises made in terms oe social justice, job creation and so on. Read on…

Mauritius Times: You have been saying lately that “the writings are clearly on the wall” and the government would be heading for trouble unless a “radical shift in policies, strategies and attitudes” is adopted to meet the numerous challenges facing the economy, namely “low level of investment, disappointing exports, declining manufacturing, falling productivity, lacklustre growth and job stagnation…” But that would take more than one mandate to set things right, isn’t it?

Rama Sithanen: Of course nobody expects Government to get everything done within a mandate. The issue is the gap between expectations and aspirations on the one hand and delivery and outcome on the other. People are exasperated that many announcements and forecasts were made during last two years and not much has happened. Government has not performed on the main economic and social indicators. Growth was forecast at 5.5%, it is only at 3.5%. They undertook to create 25,000 jobs in 2016, only 300 have been generated. Investment as a share of GDP was to attain 25%. It has fallen to 17.2% in 2016. The PM announced the setting up of a plant to manufacture bicycles and motorcycles and nothing has materialized. He promised the establishment of a gold refinery and the production of gold. There are many other ‘effets d’annonce’. Poverty remains an issue and the Marshall Plan is still on the drawing board while the CSR is in an utter state of chaos and confusion. Income inequality is rising while wealth disparity is widening.

 

Hence my remarks. Government must produce better economic outcome and improved social performance to reverse the crisis of confidence and restore trust. Otherwise it will be in trouble. We hear it every day on the streets, in offices, in factories and at dinner tables and social functions. The PM cannot come again and read a list of measures and promises that he knows very well he will not be able to implement or keep. The gap between promises and realisation is simply too wide. People will lose trust in the exercise. It would be more credible and serious for him to focus on few key objectives and then concentrate his time, effort, resources and energy on their implementation.

* But there is only so much any Minister of Finance can do within the relatively short span of time remaining in the current government’s mandate, however competent or brilliant he might be or even if he were to benefit from the full support of the Cabinet. The good news for the opposition therefore is that you do not really see Pravind Jugnauth being able to come up with the appropriate policies and resources to turn the situation around before 2019?

They made mistakes in the first place. Right from the beginning of its mandate Government should have introduced key measures and policies to reform the economy to produce jobs. Tough decisions are easier made early on so that positive results are obtained two or three years down the line and the population will focus on them. They were glued to the rear mirror window in an attempt to inflict damage on their political opponents with little realisation that they were cutting their nose to spite their own face.

However it is not too late if the right policies are embraced to reverse the declining trend. The PM should fix a few economic, social and political priorities and focus on their achievements. He will not attain these goals with a machine gun approach that tries to satisfy each and every group with confetti economics. He must lift the wave of growth and employment and then the mood could change. On the economic front, it should be investment, manufacturing, exports, growth and jobs. Socially it should be about inclusive growth and the elimination of absolute poverty. Politically he should bring more discipline and direction by putting an end to what many believe are rising corruption, unacceptable levels of nepotism, lack of economic competence and growing financial scandals and malfeasance.

All these are possible with strong leadership, policy coherence and structural reforms. The PM will benefit from such a changed perception.

* As a former Minister of Finance, economist by training and “electoral expert” in-between ministerial mandates, what would you expect, in the light of the current socio-economic and political context, the Finance Minister to propose in his forthcoming budget and in those that his government will be presenting thereafter till 2019? Would these, according to you, be worth the while, politically and electorally speaking?

The perceived reality among the population is clear. Those in office are too smart politically not to feel the pulse of anger. There is a lot of disillusion in view of the poor economic and social performance of Government. It seems that the trenches have been dug between the people and the government with a breach of trust.

However, whatever may be his electoral prospects, the PM has a duty to create the conditions for higher growth, significant job creation and social inclusion while being fiscally responsible in terms of the debt and the deficit of the country. He cannot practise economic populism and raise the public debt significantly and give the impression that he will use all accounting tricks and colourable devices to conceal the scale of public indebtedness and the fiscal deficit.

The PM must try his best to reignite the engines of growth and employment and hope that he can turn the corner and restore confidence.

* Tell us, Mr Sithanen: how much of the present economic woes is of the Lepep government’s own doing? Isn’t much of the present economic difficulties carry-forwards from earlier governments’ failures to address the economic challenges facing the country and indeed mismanagement of the economic portfolio?

To be fair, it is a combination of both even if the degree of responsibility is probably much higher with the current government.

True, there have been no meaningful structural reforms and economic adjustments since 2006 to sustain growth and escape the middle income trap. However we have rarely seen the combination of sub-optimal growth, falling investment, declining manufacturing, dipping exports, stagnating employment and rising income inequality and wealth disparity.

While there was a case to take actions against BAI, the way it was handled smacks of a disastrous mix of financial mismanagement, economic incompetence and political vindictiveness. Once the decision of closing Bramer Bank was made, the rest was bound to collapse like a pack of cards. You can’t cut the trunk of a tree and expect its branches to stay. It could and should have been handled more diligently and more professionally – with acumen, with less animosity and rancour and far from the prying eyes of the world. Public interest should not be confused with what is interesting to the public. The solution was worse than the problem and the sanction disproportional to what was at stake.

In life, passion and emotion combined with a desire to mete out punishment is no substitute for reason, rationality and informed analysis especially when you are in office. They simply did not realise the scale and scope of the collateral damages. The assets were disposed in a fire sale exercise. The BAI saga has distracted the Government and continues to haunt them to the extent that their economic mismanagement will force taxpayers to foot the expensive bill as the amount to be recovered from the distressed assets will be largely insufficient to meet the liabilities. And now every protagonist is suing the State for damages.

The case of Betamax also underscores the sheer amateurism in handling a situation when hate and haste carried the day instead of informed judgement and the interests of the country.

* When you speak of “rising income inequality, widening wealth disparity and significant asset and power concentration” – and the belief among many of our compatriots that the “wealthy, the corporate and vested interests are taking a rising and disproportionate share of the cake, leaving only crumbs to the majority” — this ‘discourse’ strikes a chord with the Labour Party’s “economic democratisation” electoral programme of 2005 – which remained largely unfulfilled. Surely past Governments are also responsible for this state of affairs?

It is a fact that income inequality has risen, wealth disparity widened and asset and economic power more concentrated. It was clear since 2005, if not before, that globalisation, openness, liberalisation and even technology, automation and technical progress are likely to benefit some people who have intellectual, social and physical capital more than those who are not equipped to leverage the gains of globalisation.

In 2005 we had reached the end of an economic cycle. All the major economic indicators were in the red. We had to face the triple shocks in sugar, textiles and oil. Economic growth was low at 2.3 % with declining investment rates and very low FDI. There were a rising budget deficit and a soaring public debt. We had no choice than to embrace a new economic strategy. The reforms of 2005 were essential for unlocking the opportunities while being fair to the population.

The 15% corporate tax while removing many tax niches was done primarily for efficiency and competitiveness considerations. Anyway large firms in sugar, EPZ, tourism, ICT were under various schemes paying lower than 15% effective taxes. The uniform tax delivered remarkable results within a short span of time in terms of growth higher than 5.5%, investment close to 25% of GDP, annual employment creation above 10000, significant rise in FDI and higher tax revenues.

* The perception then was that people welcomed the reduction in taxes but they were not happy to give back some of the benefits through new taxes. They argued that the reforms were pro-rich… What’s your take on that?

People usually like to gain but do not like to give back some of their gains for redistribution and fairness. We decided in 2005 to implement a series of measures to ensure redistribution and fairness and protect the poor. The income exemption threshold was raised substantially from Rest 85,000 to Rest 215,000 for a single person. That resulted in 36,600 taxpayers from the lower middle and middle income groups being removed altogether from the tax net. 51% of PAYE taxpayers were excluded from the payment of personal taxation. If this is not fairness, I wonder what is?

We introduced a Solidarity Levy on hotel and tourism, a special tax on banks, higher fees for the global business sector, a tax on IRS to fund projects for local communities, a new and fairer way to charge campement site owners and two taxes on passive income – interest and property — that targeted predominantly the wealthiest 5% of the population who were net winners from the corporate and personal tax reductions. All these measures did not affect the lower and middle income groups. We refused to increase VAT or broaden the VAT base with tax on exempt goods such as chicken, fish, meat, water and electricity which the IMF had suggested to fill the fiscal gap.

Concurrently we increased significantly the income support for more people in the vulnerable groups, implemented the Empowerment Programme to broaden opportunities for the less fortunate and subsequently introduced a 2% contribution on book profit to finance CRS to fight social exclusion. We did not remove capital gains on large property deals, maintained a minimum alternative tax to ensure that those who earn significant dividends and salaries pay a minimum tax as a share of overall income. We also kept the land transfer tax, the land conversion tax and registration duties for large land holdings transfers.

Whatever capital some have tried to extract from criticising this reform package, including those in Government at that time, and with the benefit of hindsight and away from the rough and tumble of political demagogy, I still believe it was overall a balanced reform package in terms of economic efficiency, global competitiveness, social fairness and redistribution.

* But many of these tax policies have changed subsequently. What happened?

Unfortunately, over the years, two things have happened to disturb this equilibrium. Many of the fairness components of the reform have been removed by Government while the wealthiest and the corporate elite have received more benefits. For instance, taxes on passive income paid by only 5% of richest households was replaced in 2011 but simply abolished in 2012. Capital gains tax was also scrapped on all large scale land transactions. In 2015, the new government eliminated land transfer tax, land conversion tax, registration duties and morcellement tax on large real estate property. The minimum alternative tax also has gone.

As if that was not enough, the very people who were criticising a tax of 15% have given many companies, including large ones converting land into smart city schemes, a zero corporate tax. Furthermore, many other enterprises are benefiting from tax holidays with zero tax. I always thought 15% were higher than zero! And to crown it all, the CSR contribution has been transformed into a tax on chargeable income instead of book profit, thus depriving poor people of about Rs 500 m per year that goes to only around 10 most profitable companies/family businesses in the country. Such is the power of policy capture in Mauritius.

It is clear that we have shifted very far away from a balanced strategy between economic efficiency and inclusive growth. And we are surprised that inequality in both income and wealth has risen.

* According to the 2016 report on employment released by Statistics Mauritius last week nearly half i.e. more than 208,700 of the 427,700 persons employed in 2016 earned up to Rs 12,000 per month. The median salary for 2016 is Rs 12,200 whereas only 2% or some 8,554 persons earn more than Rs 75,001 per month. Wouldn’t it be right to say that the same economic policies dictated by the neo-liberal ideology which pressed for such policies as labour market flexibility, trickle-down economics, etc., will produce the same counter-productive consequences? Isn’t there an alternative?

I believe there are things we can do to ensure inclusion and shared growth, invest in human capital and broaden the circle of opportunities. However, we cannot walk away from globalisation as we have a very open economy and our prosperity is closely linked to what we sell in the global marketplace. Whether it is sugar, apparel, fish products, tourism, ICT/BPO, global business, and other goods and services. But we have a duty and a responsibility to tame the excesses of globalisation and liberalisation and to support those who feel they are victims of the system. The situation will probably get worse with technical progress, automation and artificial intelligence. Those who have intellectual, social and physical capital are likely to capture most of the benefits. It is occurring elsewhere. In the US, more than 90% of the benefits have accrued to 1% of the population. This must be avoided in our country.

I see at least five main areas of public intervention.

First, in investment in education, human capital, technical and vocational training and skills to ensure that a very large majority of our fellow citizens participate in the openness of our economy and are integrated in the mainstream with higher wages. Without an increase in productivity through human capital, it will be difficult to raise wages significantly. We shall see whether the level at which the minimum wage will be fixed will address this issue.

Second, we need to reshape the economy so as to create new sectors with higher value added and substance that can pay our citizens higher wages. Better jobs with higher wages.

Third is the introduction of a negative income tax that tops up the low income of working families. A threshold is defined as the living income and an ‘income subsidy’ is granted to those households that fall below that minimum.

Fourth is a broadening of the circle of opportunities for SME and other entrepreneurs to also benefit from the prospects unlocked by globalisation and new markets in Africa. Especially in the digitalisation of the economy which has huge potential for our younger generation. The regulatory framework, institutional support and incentives must be revisited to support their emergence as a powerful contributor to growth, employment and inclusion.

Fifth, we must ensure that large corporates share some of the businesses with small and medium firms, either through clustering or subcontracting or integration in the supply chains.

* Do you have the feeling that our private sector has not played the game as it should in spite of so many concessions dished out by successive governments down the years, with their investments in productive sectors going down and opting instead for the quick bucks in real estate development?

Some in the private sector are dynamic, entrepreneurial, risk taking and forward looking. They contribute to growth and prosperity. This should continue. The private sector is not monolithic as there are many groups each with its own specific challenges and opportunities. However, we have to diversity the private sector to broaden the circle of opportunities and to avoid being at the mercy of a few large conglomerates. Government should also check the monopolistic tendencies of a few, their ability to concentrate assets and wealth closely through financial and asset leveraging without giving much chance to small and medium entrepreneurs even for outsourcing, their propensity to capture policy for vested interests, their rent seeking proclivity and their insatiable appetite for fiscal incentives even when taxation is low.

It is the responsibility of Government to create a business climate that is conducive for the broadening of opportunities to new entrepreneurs. The imperfections of the market are such that on a level playing field those that have benefited from legacy advantages will always take away more from globalisation and liberalisation.

You are absolutely right about quick bucks in real estate development. Very few companies are making considerable profit in converting their agricultural land into real estate development. With the removal of ALL taxes from corporate tax to customs duties, from land transfer tax to land conversion tax and registration duties, there is not much that Government and the population gain from it. They are simply not sharing the fair burden of taxation with zero taxes.

* To come back to the present state of affairs on the economic front, where do you think current trends will lead us to and what will be the implications thereof?

I think we will crawl on the slow lane of the growth motorway for the next few years. Around 3.7% to 4% growth with few jobs being created. We will certainly not meet the main targets set by Government in its ‘second miracle statement’. Growth will not reach 5.5%, there will be no 25,000 jobs created per annum, manufacturing will not account for 25% of GDP and our GDP per capita will not be US$ 13,500 in 2018.

I am concerned about the impact of Brexit for our exports and of the introduction of General Anti Avoidance rules (GAAR) in India since April 2017, base erosion and profit shifting (BEPS) by the OECD and the EU score board of cooperative jurisdictions on global business soon. In addition to the replacement of the deemed foreign tax credit (DFTC) in the very near future. Even if we have no choice than to adapt to changing global tax and regulatory landscape and must reinvent our business model, these are dramatic changes. I am yet to be convinced that we have a robust road map to cope with the scope, scale and speed of the changes being imposed on us.

* You have mentioned earlier about the need for the country for “strong leadership, policy coherence, clear direction, structural reforms…” whilst at the same time noting the “lack of cohesion and absence of transformational reforms in the main opposition parties”. Where else do we go for that strong leadership?

I wish I knew. I have no crystal ball. Who last year would have thought Macron would be the President of France? This is an era characterised by volatility, transformation but also doubts, uncertainties and lack of clarity. The only constant is change. A time of disruption in technology, economy, politics and society. A period of post truth, alternative facts and faked news.

Conventional wisdoms are being challenged. Anything can happen as the status quo is not sustainable. New forces are knocking on the door while the old ones do not want to give way. Social media is changing the way people are informed, behave, work, live, play and vote.

I see a lot of disillusion and disappointment with the current team but there is also no great enthusiasm for the current alternatives. Political parties must embark on a major transformational change to align to the new and different expectations and aspirations of the population. Can they rise to the challenge or will they suffer the same fate as the Socialist Party in France? Become irrelevant and insignificant after a glorious past. Time will tell.

Tags:   Interview Rama Sithanen    BAI Saga    GDP   CSR   Bramer Bank     Brexit     Betamax    PAYE    Solidarity Levy    IRS    French Socialist Party    General Anti Avoidance Rules    Base Erosion and Profit Shifting    OECD    EU Score Board of Cooperative Jurisdictions    Emmanuel Macron    Corporate Tax    Land Transfer Tax    Land Conversion Tax    ICT/BPO    Statistics Mauritius    Campement Tax    Empowerment Programme    Labour Party Economic Democratisation Electoral Programme    Lepep Government

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