Mauritius: A Fair Effort

This note highlights some key features of the 25/26 budget, which is largely driven by the need to avoid the dire consequences of a looming sub-investment-grade country rating. The budget takes resolute action to address serious fiscal issues, but needs to do more to redirect public resources towards more productive spending.

Fiscal Deficit

The 25/26 budget aims at a significant reduction in the fiscal deficit, from 11.4% of GDP (Rs81 bn) to 5.2% of GDP (Rs40 bn), or a decrease of 6.2% percentage points (Rs41bn). Table 1 below reconciles Govt figures provided in the budget with figures derived after consolidation with special funds.

The fiscal adjustment relies primarily on tax revenue measures, resulting in a higher tax yield of Rs30 bn, or 2.2% of GDP, supplemented by revenue from the Chagos deal, classified as property income, amounting to Rs10 bn, or 1.3% of GDP. Higher corporate taxes generate an additional Rs10 bn of revenue, higher income taxes Rs5 bn, VAT Rs4bn, and excise taxes Rs4bn.

Expenditure is budgeted at Rs265 bn for 25/26, or the same level as in 24/25. The budget projects a GDP increase of 7.8% in 25/26 over 24/25, with 3.7% real growth and a 4% rise in the GDP deflator. The nominal expenditure freeze thus implies a cut of 4% in real terms. As GDP grows, expenditure drops slightly to 34.4% of GDP in 25/26, down from 37.1% in 24/25, reflecting a decrease of 2.7% of GDP.

Despite raising the eligibility age to the Basic Retirement Pension (BRP) from 60 to 65 years, phased over time, and some cutbacks on CSG allowances, social benefits drop by only about Rs2 bn to Rs81 bn in 25/26. Although there is no provision for a 14th month bonus for employees, high social spending still weighs heavily on the budget, at 30% of expenditure. The budget should mark a stronger and definite break with previous populist policies for squandering public resources.

The decline in the consolidated deficit, which stems entirely from a tax effort of Rs30 bn and Chagos revenue of Rs10 bn, amounts to 6.2% of GDP, with revenue increasing by 3.5% and expenditure decreasing by 2.7%. Boosting taxation is indeed laudable, especially higher excise taxation, including on motor vehicles. Notably, the budgeted 7% increase in VAT continues to be spurred by inflation.

Holding back on nominal expenditures is also commendable, but a more substantial social spending reform is needed to curtail expenditure to at least 30% of GDP. Deeper structural reforms to ensure pension viability and fiscal sustainability have been postponed for future action.

Pensions

Pension reform is key to restoring fiscal discipline, given the ageing of the Mauritian population. Still, the budget measure to increase BRP eligibility to 65 years has sparked much negative sentiment. After the 2014 general elections, the Alliance Lepep Govt also planned to initiate pension reform in their first budget. Enabling provisions were introduced in the Finance Act 2015 for new BRP regulations by amending Section 3 of the National Pensions Act. The proposed amendment is highlighted below, and Section 10 refers to inmates of charitable institutions.

Subject to Section 10 and such terms and conditions as may be prescribed, a person who has attained the age of sixty shall be qualified to receive a basic retirement pension.

The “terms and conditions” were ostensibly meant to specify income and other eligibility criteria, but this planned pension reform by means-testing was abandoned. The IMF’s latest report on Mauritius recommended a gradual increase in the BRP eligibility age from 60 to 65 years, while “targeting benefits to the most vulnerable elderly”. Pensions targeting should be proposed to accompany the announced BRP budget measure. Savings from means-testing BRP can be employed to strengthen the social safety net to support those unable to work longer than 60 years.

In formulating pension reform proposals, the proposed Committee of Experts should undertake wide consultations and conduct a close dialogue with trade unions and civil society organizations.

Credit Rating

The Govt deficit of 4.9% of GDP implies a higher borrowing requirement of 5.1% in 25/26 to finance the net acquisition of financial assets, like loans and equity. Total gross public sector debt in June 26 is thus projected to reach Rs680 bn, or 88.3% of GDP, lower than the expected level of 90% in June 25. Moody’s focuses on Govt debt rather than public sector debt. The General Govt debt to GDP ratio is also forecast to fall by 1 % point to 78.3% of GDP in June 26.

The potential of this budget to avert a sovereign credit downgrade for Mauritius hinges on two main factors: (1) the government’s ability to maintain nominal expenditure at current levels despite anticipated 4% inflation, and (2) the actual performance on projected revenue from income and other tax increases. Additional expenditure of Rs7 bn, or a 2.6% increase, and a revenue shortfall of Rs8bn due to a lower tax yield by about 1% of GDP, would raise the Govt deficit by Rs15 bn in 25/26. A decline in the Govt debt to GDP ratio in June 26 would not then be achievable. The upcoming IMF 2025 mission report on Mauritius should comfort credit rating agencies with a better insight on the reliability of budget forecasts for 25/26.

Conclusion

The 25/26 budget offers a serious adjustment effort to halve the fiscal deficit and tackle the soaring debt burden. However, it puts heavy reliance on greater and more progressive taxation, while maintaining an unsustainably high level of expenditure. Curtailing Govt spending is critical for relieving the protracted pressures on the external current account, foreign exchange reserves, and the rupee. Particular regard should also be paid to the effective realization of budget estimates, which is essential for achieving the needed fiscal adjustment.