Budget bickering

The latest in a series of articles that I regularly write for national dailies - Le Express and Le Mauricien.

Article publié le Mercredi 20 septembre 2006.

From governments, people expect many things. Not just peace and security, but also, good roads and gardens, interesting jobs and subsidized commodities. Some demand housing, clothing, food, medicine, education and childcare. At the same time, most do not want to pay taxes. This strange public expectation of good jobs, subsidized commodities, free transport and advanced medical care without the willingness to pay for it, is rooted in the immediate years following Independence, when a form of socio-economic makeover began – effectively directed by the State. Through licensing new businesses to making education free, a set of people saw their fortunes bloom with active state support while most benefited from the welfare policies hitherto unavailable. A new class was born. Not surprisingly, such state intervention also engendered a culture of scrounging. It created special groups based on community, caste, color and cultural differences, each competing for the state munificence. The political masters doled out favors wherever they could; elsewhere they made people do with empty promises. The demonstration effect was profound. Free lunching and economic scrounging lasted a long three and half decades on the back of a business boom ensconced in protection and trade preferences that filled government coffers. For a short while, the country also became the tiger of the Indian Ocean attracting global acclaim. The World Bank wrote profusely on the Mauritian Miracle and politicians basked in glory. Some deserved it. Most simply took credit. The comfort of the warm water slowly killed the frog. This is the essence of the boiled frog parable. For the Mauritian economy, the alarm bells of its unsustainablity started ringing in the mid-nineties, yet essential reforms were conveniently postponed by successive governments. Deficit rose in the wake of increased public spending and lower tax collection. The water was never scalding hot and the frog never jumped out. It simply boiled. Most of the revenue from successful economic activity that filled the state coffers which in turn allowed it to bankroll inefficient state activity and crony public enterprises has dwindled. That leaves the government with a mounting bill that it cannot pay anymore. A local famous economist thinks that Rama Sithanen’s theory of triple shocks is unfounded. He also thinks Mauritius can do without the proposed reforms. Strangely he also advises the government. Such diverse opinion is healthy, yet it only indicates that Mauritius is still not psychologically and intellectually prepared for the big bang reforms that Rama Sithanen introduced in the last budget. For some people water istill warm and the frog is comfortable. Our four distinguished guests from the World Bank, who recently came to tell their country’s tale of transformation amidst adversity, had an important advice – big bang reforms require unequivocal support. In their own cases the government, opposition, trade unions, industry, general population and the media all stood together to fight their own downfall and they won Such unity in the Mauritian context is currently missing. Should the situation deteriorate further before the need for unity is felt? Rama Sithanen’s budget contains measures to improve investment climate, attract more FDI, eliminate red-tapism and increase employment opportunities. All this is unquestionably right. He is also right to tax people who exploit common goods for private comfort such as the pleasure of dwellings on the limited shoreline. Yet he cannot tax businesses that generate employment and still collect monies to pay for the public welfare. Reforms are painful. “There is nothing more difficult to carry out, not more doubtful of success, nor more dangerous to handle, than to initiate a new order of things,” said Dr Manmohan Singh, the Indian Prime Minister during a recent parliamentary debate. Dr Manmohan Singh introduced extensive economic reforms in India some 15 years ago as a Finance Minister, amidst unprecedented opposition. These reforms are widely recognized today as the key to India’s rapid economic growth. “The reformer,’’ said Dr Manmohan Singh quoting from Machiavelli’s The Prince, ‘’has enemies in all those who profit by the old order, and only lukewarm defenders in all those who would profit from the new order”. No wonder Rama Sithanen’s own men in the government and some of his political advisors oppose his budget in private. This is sad. Look deeply. Rama Sithanen’s reforms are comprehensive and address the larger socio-economic context. Why are they unpopular? Or. Are they simply misunderstood? Let us ask one straight question. With provisions for targeted subsidies that protect the vulnerable groups on one end and lower taxes for the corporate world on the other, who should be exactly complaining about the budget? Is it the same class of people, with their acquired rights and need for political munificence that the State created in the post Independence period? For a majority of the people, the grumble is two fold – the rising inflation and tax on their property investments including bank deposits. It is neither bread nor the removal of subsidies on rice and flour or the campement tax, as is popularly made out to be. This class of people is educated, earns a decent living, works hard, pays taxes, buys property for investment and keeps their undeclared money in the bank. They also want freebees wherever possible and strike a hard bargain with the State in return for their votes. They are vociferous, make opinions, speak to the media, write columns and religiously cast their vote at the polling booth. In sum, they have become powerful since Independence. They also decide and change governments when they are angry. Is their response to the current budget irrational? Why do they not see the impending dangers, the budget’s advantages in the long run and the absolute need for reforms right now? Prof John T Scholz , a political scientist, conducted various experiments to understand people’s response to paying taxes especially when they are increased. He concluded that people are more willing (less unhappy) to pay taxes to the government when they think that their tax is being spent wisely and in transparence. If they are called upon to make sacrifices they would expect the government to reciprocate. In times of distress they look for strong signals and stronger public leadership. While they turn a blind eye during prosperous times, they start questioning every single move and demand explanation during crisis. They use the press and the opposition to demand reciprocity. ‘Ultimatums Game’, perhaps the most important experiment in behavioral economics demonstrates that individuals would punish their opponents for bad behavior even if they hurt themselves in the process. This is a clear deviation from the rational man theory of economic textbooks; however that is how, sometime, human behavior manifests itself. Simply put, individuals wish to punish politicians who drive themselves around in expensive cars bought from public funds, demanding more sacrifices and… more tax. They also hate government action that take away their deemed rights without a clear demonstration of reciprocity. For insight, look no further than the case of free bread in schools. The children of most people, who participated in the protests, do not eat that bread. Their mothers give them an extensive preparation of three course meals. Why should their parents protest? Admittedly the cause lies far away from the bread that their children do not even eat. Yet it becomes a rallying point against the budget. Rama Sithanen’s wonderful budget truly needs wider support and less opposition. It also needs stronger communication starting with government’s own behavior, politicians’ body language and personal conduct. Common man would then hopefully decide to respond.