The Honourable Pravind K. Jugnauth, Vice-Prime Minister, Minister of Finance and Economic Development, came up with a set of disappointing proposals in his 2011 budget speech.
The Minister talked of productivity challenges, that the time had come ‘to cut the links with a social policy framework that was excessively centred on giving and spending’, and that we should focus on empowerment and social integration.
The measures announced, in our view, fell well short of these ambitious statements.
Driving productivity at the national level is about Government spending less and borrowing less. What was done about the deficit?
With GDP growth rates of 4.1% in 2010 and 4.2% expected for 2011, clearly the envy of many countries, we feel that the Minister had ample room for manoeuvre to act on the deficit. Instead the budget deficit is expected to move only from 4.5% this year to 4.3% in 2011. We would have understood this level of deficit had Government suffered from a drop in its fiscal revenues. Instead, and against expectations, it appears that Government did have reasonable fiscal buoyancy as the revenue shortfall of Rs3.8bn was due to reductions in dividends and EU grant monies.
We also expected a much more elaborate discussion on the deficit options and strategies for the medium term. These issues were unfortunately not addressed.
So instead of less Government, measured through a lower deficit, it looks like we will get more of the same.
Next on the social policy framework, we heard of a vast number of schemes, new bodies, special tax exemptions, all of which will probably require yet more civil servants to administer and control. The budget speech had a strong political undertone with monies being paid out to various categories of citizens depending on a mix of seemingly complex conditions. We are at a loss as to how we shall be moving away from that ‘social policy framework that was excessively centred on giving and spending’.
On the empowerment front, the Minister has reintroduced taxation on dividends, a tax that was removed in the early 90’s. The rate shall be at 10%. Taxing dividends is, in our view, a highly retrograde measure as income is effectively taxed twice and is a clear disincentive to entrepreneurs and investors. More contradictory, the Minister removed taxation on interest as ‘it was a tax that weighed too heavily on our elders’ and yet is penalising those very elders that took higher risks and invested in private and public companies! The impact of this tax on the flight of capital to safer shores should not be underestimated.
Moreover, all gains from sales of land and immovable property shall be taxable at 15%, except if the development is in the name of an individual, in which case the rate will be 10%.
It is clear that we shall be moving back to a world where tax planning was a serious activity for many people. Again, at PwC, we believe that the way forward is through simplification of our income tax laws as this improves collection and compliance.
All is however not negative. Tax on interest and the NRPT have been abolished and new homeowners will get an additional interest exemption on acquisition of a new home.
Further, we have for years lobbied for refunds from Government (including the MRA) to be interest bearing. The Minister did not give much detail but announced measures to ensure that henceforth Government would pay its dues on time, and that delayed payments would be subject to interest – we shall see!
In conclusion, we believe the Minister should have shown much more fiscal discipline and gone for a deficit of around 3.75%. Taxation of dividends is a definite ‘no go area’ and we can only be extremely concerned as to measures in this area in future years.