Budget 2012

By André Bonieux 
Country Senior Partner

Brave and bold

Honourable Minister Xavier-Luc Duval delivered a brave and bold budget this evening, showing a strong hold on Government expenditure, and starting on a reformist track by proposing measures towards less and more effective government.

From the macro economic front, recurrent expenses are expected to grow by 4% to Rs76.1bn, a rate of increase that is lower than next year’s inflation estimated at 5%. This is indeed a feat and in our view shows the Government’s responsibility in managing public affairs. Revenues on the other hand are expected to grow by 11% to Rs76.9bn. This figure appears optimistic but is driven by the proposal to reintroduce the voluntary declaration of income for this year only. The end result is a budget that is in surplus of Rs750m before capital items are taken into account. The country had not seen such a budget in many years.

Taking into account capital expenditure of Rs14.3bn (+67% on 2011), the deficit is at Rs13.6bn or 3.8% of GDP. This figure is still on the high side but in the capital budget are the new airport and the Terre Rouge ring road, two rather large projects. Overall, the national debt is expected to remain stable at 57.7% of GDP compared to 57.5% for 2011.

One can only congratulate Government on these statistics as some may have been tempted to spend the substantial increase in revenues forecast for 2012.

On the reformist measures, we have to highlight the proposed sales of Government’s investments in the casinos, Domaine Les Pailles, the Port-Louis Waterfront retail outlets, Lakepoint and the Belle Mare Tourist Village. Further, La Citadelle will be placed under a privately run management contract. These are privatisation measures and we hope the first in a long series to come.

Another interesting measure is the proposal for people to opt to contribute to a private health insurance instead of contributing to the NSF. This is truly ground breaking and we could see a real boost to private sector health care with the consequential benefits for the public health sector through less demand for public services.

The Minister has declared his strategy for the economy to transit to higher efficiency, higher productivity and higher wages. Clearly, less Government is one of the key steps to this new economy. We feel that more could have been done in this direction but the Government has 3 more years before the elections and hopefully we’ll see additional measures in that direction.

One area where we feel the Minister should have spent more time is the reform of the civil service. Higher productivity and higher wages are also possible in the public sector and the way forward is for investments in technology, staff performance and service evaluation, rather than the sheer number of employees. Civil servants should be shown the way forward in terms of the potential for high value jobs and hopefully some long awaited reforms can be initiated.

Nevertheless, for the first time, the Minister has published a timetable for the implementation of the announced measures. This will clearly put substantial pressure on all ministries to deliver and is a welcome initiative for better and more effective public administration.

On the tax front, the removal of capital gains on property transactions will please most and the removal of taxation on dividends is a just measure. We agree with the analysis that these taxes were unfair and will give a boost to private sector investments.

The Global Business sector was however targeted with an additional income tax of 10%, meaning they shall be paying tax at 25%.  We believe it is wrong to target a specific sector for additional taxation and see no valid reason for such measures.

The basis of calculation of CSR has also been simplified to 2% of chargeable income. This had been requested for 2 years now and the reform is welcome.

Duties were increased on tobacco and alcohol, annual favourites, but also on large motor bikes, outboards and other sundry items. Taxes on car benefits will henceforth be 50% higher but the taxation level was so low that the impact will hardly be noticeable. The Minister has also introduced a 10 cents tax on each SMS and MMS.

The Minister declared a comprehensive list of measures affecting several sectors and these measures are detailed further in our comprehensive analysis. Our reaction however is globally positive: the budget is responsible, new revenue generating ideas are being implemented, the new taxes are fair, except for the one on the Global Business sector, and critically, trust has been restored.