Public debt: budget and election year dictate the analysis battle

As the next Budget approaches, which will be presented in an electoral context, the subject of public debt is sparking debate. The amount of this has increased, while its percentage of GDP has decreased.

The increase in public debt in one year is of the order of Rs 41 billion. This increased from Rs 483 billion in March 2023 to Rs 524 billion during the corresponding period this year. Faced with this swelling figure, concern lurks, especially since the macroeconomic factor of public debt is closely monitored by international institutions. One of them, namely the International Monetary Fund (IMF), has on various occasions raised the subject during consultations in Mauritius within the framework of Article IV. Indeed, earlier this year, IMF delegates emphasized the importance of implementing the fiscal consolidation plan in Mauritius in the medium term, “pro-growth, to reduce public debt and reconstitute the budgetary shock absorbers”.

Two years ago, in 2022, the IMF made it clear that for Mauritius to succeed in becoming a high-income country during the present decade, it will be necessary to ensure macroeconomic stability and reduce the risks linked to the decline in growth, to the increase in debt and the rise in inflation. Pre-Covid, i.e. in 2019, the IMF recommended that the Mauritian government continue fiscal consolidation from the next Budget “in order to strengthen budgetary credibility and firmly place public debt on a downward trajectory in the medium term”.

However, public debt had exceeded 90% of Gross Domestic Product (GDP) during the pandemic. On June 13, 2023, during his Summing up at the National Assembly, Renganaden Padayachy highlighted that public debt marked a clear deceleration, going from a peak at 92% of GDP in June 2021 to 79% in June 2023. ” What matters is the sustainability of the debt and in particular its trend in relation to GDP. Between 2006 and 2014, debt per capita increased by 61%. Public sector debt should therefore continue to decrease to reach 79% at the end of June 2023 and 71.5% at the end of June 2024. We will meet the objective set by the IMF by lowering our public debt below 80%. We will continue our efforts to achieve our medium-term objective which is to reduce the debt to 60% of GDP,” affirmed the Minister of Finance.

Public debt stood at 78.3% of GDP as of March 2024. MP Reza Uteem and Minister Mahen Seeruttun addressed the issue of public debt during a program on Radio Plus last week. Both were trying to analyze the level of public debt to the advantage of their own. Yuven Peechen, lecturer in finance, explains that the revenue generated by the government through the tax has increased. “This helps reduce the level of debt that was necessary for the government. It should also be noted that the government has revised the definition of public debt. The government can now offset profits with those from parastatal bodies, for example. The reduction in net debt and an increase in Gross Domestic Product (GDP) also made it possible to reduce the level of public debt. However, it is in relative terms that the public debt has fallen and not in absolute terms,” he explains.

The Selected Issues Paper on Mauritius published by the International Monetary Fund (IMF) in 2022 indicated a new anchor point for medium-term debt, i.e. 80% of Gross Domestic Product (GDP), against the initial alert rating of 60% of GDP. It had been reviewed during the pandemic. Economist Ganessen Chinnapen suggests analyzing debt as a percentage of GDP. Debt, he says, is not a problem as long as it creates wealth and the Gross Domestic Product (GDP) increases. “The public debt had increased at the time of Covid-19 with the various social protections provided. The Mauritian State has made it clear that it will advocate financial discipline and will target public debt at 60% of GDP. These are economic parameters that are taken into account to analyze the growth or robustness of an economy,” continues Ganessen Chinnapen.

Furthermore, with expectations for a 'labous dou' Budget and the election year, as Yuven Peechen concedes, the level of public debt will most likely be impacted. However, he moderates, this should not increase considerably, because the government will, among other things, draw from the Consolidated Fund or the Generalized Social Contribution (CSG) as room for maneuver.

Funding

Will the government review value added tax or other taxes? Will he use other avenues to generate revenue to finance the next Budget? According to Ganessen Chinnapen, we will have to wait for the presentation of the 2024-25 Budget to know how the measures will be financed. “I don’t think it’s going to affect the debt. The commitment was made to the International Monetary Fund, the World Bank and the Organization for Economic Co-operation and Development (OECD) in relation to financial discipline and to maintain the debt within the target range,” adds- he.

Still, Yuven Peechen insists on the need for the government to be vigilant regarding the public debt. Because, he concludes, it is the future generation who will be forced to bear the weight of this debt.

Questions to…

Paul Baker, CEO of International Economics Consulting: “in most countries, election years are conducive to generosity”

Public debt went from 92% of GDP in June 2021 to 79% two years later, before ending up at 78.3% in March 2024. What analysis do you make of these figures?

The debt has fallen impressively. This is due to both spending discipline and the rapid growth that followed the implementation of the Covid program. I think debt ratios are more sustainable and moving in the right direction. It is too early to tell whether the changes in income tax rates have had an impact on government revenue.

Generally speaking, is public debt relegated to the background in an electoral context? Should we be worried?

In most countries, election years are conducive to generosity in terms of tax cuts and/or increases in pensions and other social benefits. This can have an inflationary tendency and widen budget deficits. This is more than likely to happen in this election year. I think everyone is wondering what the next Budget will reveal and whether or not business costs will increase.