By Sushil Khushiram
The fiscal deficit is an important indicator of the macro-economic situation, especially on account of its impact on the public debt, and also on the external current account of the balance of payments. The current level of fiscal deficits is definitely too high to ensure public debt sustainability. The extent of fiscal consolidation is not sufficient to comfort the International Monetary Fund and Moody’s that the public debt situation is not deteriorating further.
The budget outcome for fiscal year 2021-22 stems mainly from the following developments:
1) Taxes and revenue have recovered fairly strongly, mainly on account of VAT, and also from taxes on income and profits. Total taxes reflect a shortfall of only Rs 2 billion. Actual revenue is thus in line with the budgeted amount.
2) Capital spending has shown a shortfall of about a third of the budgeted estimate, representing a capital expenditure savings of Rs 5 billion.
3) An effort has been made to restrain current expenses, which still exceed the budgeted estimate by about Rs 4 billion. Some current expenses of Rs 3.8 billion on Covid related wage and employment subsidies have also been made from Special Funds, instead of the budget.
4) The overrun in current expenses is matched by the shortfall in capital spending, and actual total expenditure is the same as budgeted. The budget deficit is at Rs 25 billion, or 5% of GDP, as budgeted, with GDP estimated at Rs 498.6 billion in 2021-22.
However, this budget deficit for 2021-22 needs to be adjusted as follows:
- a) Other revenue includes about Rs 8 billion of income from quasi corporations, namely the Central Electricity Board, the Mauritius Ports Authority and the Financial Services Commission. According to the IMF Manual on Government Finance Statistics, this exceptional amount is not treated as revenue but as withdrawal of equity, and therefore implies a higher deficit by 1.6% of GDP.
- b) The bail-out costs of creditors of Air Mauritius financed by the Bank of Mauritius (BoM) for about Rs 12 billion, or 2.4% of GDP, have not been accounted in the budget. Government exchanged its shares in Air Mauritius Holding for Mauritius Investment Corporation/BoM financing of a total of Rs 25 billion, but in the government accounts, only receipts from an equity sale of Rs 13 billion are recorded. The balance of Rs 12 billion representing expenses to bail out Air Mauritius creditors is not recorded in the budget. The equity sale is shown as net of these expenses, as a clear example of deceitful accounting. Including the Air Mauritius bail-out expenses, the deficit increases further by 2.4% of GDP.
- c) In 2021-22, an equity investment of Rs 2.4 billion, or 0.5% of GDP, has been made in the National Property Fund, for investment in the National Insurance Company. This is a continued bail-out of BAI insurance business, and these bail-out expenses are disguised as an equity investment. The budget deficit would be higher by 0.5% of GDP.
- d) The overall budget deficit for 2021-22, after adjustment for income from quasi corporations, and bail-out expenses of Air Mauritius and BAI, is therefore much higher at 9.5% of GDP (5.0+1.6+2.4+0.5).
In 2021-22, the revenue and expenses of Special Funds were broadly balanced at around Rs 14 billion. Despite huge budget transfers to Special Funds, the spending shortfall is sizeable, leading to a surplus balance of Rs 36 billion at June 2022.
For the following fiscal year 2022-23, expenses from Special Funds are budgeted at Rs 23 billion, with revenue of only Rs 4 billion, implying a deficit of Rs 19 billion in Special Funds. This Special Funds deficit of Rs 19 billion will be additional to the official forecast budget deficit of Rs 23 billion for 2022-23. The overall deficit, including Special Funds, will thus stand at 7.3% of GDP instead of the official figure of 4%.
The extent of fiscal consolidation is not sufficient to comfort the International Monetary Fund and Moody’s that the public debt situation is not deteriorating further.
Government is defaulting on its debt through inflation
Public sector debt (PSD) is estimated at 87% of GDP at June 2022. This figure, however, excludes an incorrect consolidation adjustment of Rs 12 billion, and a Special Drawing Rights (SDR) allocation of Rs 8 billion, representing a total of 4% of GDP. The real PSD/GDP ratio is 91%. The MIC/BoM equity transaction of Rs 25 billion has provided government with financing to avoid borrowing and thus hold back on PSD. The consequences of such central bank financing will only aggravate depreciation and inflation pressures.
The PSD budget estimate for June 2023 is 78% of GDP. After adjusting for a consolidation item of Rs 8 billion and the SDR allocation of Rs 8 billion, the PSD/GDP ratio would be 80.5%. The drop in the debt ratio between June 2022 and June 2023 is partly due to an over optimistic increase in real GDP of 8.5% in 2022-23, but also on account of high inflation. In effect, government is defaulting on its debt through inflation.
To meet the official debt target of 78% of GDP, government must realise a huge equity sale of Rs 22 billion budgeted in 2022-23. A budgeted equity sale of Rs 4 billion in 2020-21 never happened. Government could again tap on MIC/BoM financing by exchanging shares of state-owned companies like the State Insurance Company or the Mauritius Telecom, and lead Mauritius into spiralling inflation. Without the proposed equity sale, public sector debt would be another 3.5% of GDP higher, and stand at an elevated level of 84.6% of GDP in June 2023.