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[Blog] Letter of Dr Sithanen to Prime Minister: «Proposals to review the two wage schemes for fairness, equity, compassion and solidarity» 

Dr Rama Sithanen

L'ex-Finance des Finances, le Dr Rama Sithanen, a adressé une lettre au Premier ministre, Pravind Jugnauth, le 19 avril dernier. Lettre dans laquelle il fait des propositions pour revoir les deux plans de soutien financier (Wage Assistance Scheme et Self-Employed Assistance Scheme) mis en place par le gouvernement en cette période de confinement. 

Voici la lettre du Dr Rama Sithanen au Premier ministre :


Dear Prime Minister

I am writing this letter both as a concerned citizen and a former Minister of Finance with some knowledge of and experience in policy making and implementation.

A.    Introductory note

Three remarks

i)    We are in an unprecedented predicament fighting an invisible enemy. We must be united to win this war.

Your government must be commended to have quickly  introduced two schemes  to support employees and assist those who are self employed and independent. These two measures are vital to ensure the ‘survival’ of our compatriots as a result of the medical imperative to lock down our country to contain the spread of the highly contagious and lethal virus;

ii)    As we do not have any experience of such pandemic and its disastrous economic consequences, there has been an element of predictable haste and alacrity in the design of these measures as is the case elsewhere and probably not enough informed discussion to seek an optimal social outcome. Which is  understandable in a very fast moving situation where Government must quickly adapt its responses as a result of pressure from the population;

iii)    Mistakes are bound to be made as President Macron has rightly acknowledged. Most countries were unprepared for this pandemic.  In these days, better to sit in the back of the car and criticise or in the passenger seat and  advise than to be the driver actively and permanently making critical decisions on what to do and what not to do in an environment full of uncertainty, unknowns and unknowables.  And having at times to choose between extremely painful policies with significant trade offs among different categories of our population. Or between saving lives and safeguarding livehoods.


B.    The current situation
Many stakeholders have complained about the inadequacy of the support of Rs 2550 afforded to the self employed and independents per fortnight. The Minister of Finance has also acknowledged its insufficiency arguing that money is a major problem and Government cannot do more for this category of people.
 
According to the figures given by the Minister of Finance, there are around 200 000 employees and 165 000 self employed who have benefitted from the two schemes in March. In its latest report, Statistics Mauritius states that there are 37 900 unemployed persons out of which 4 200 are heads of families while 4 100 live in households with no employed persons. Often these unemployed people would carry out some very informal jobs during the day to feed their families in the evening. Which they cannot do now because of the lockdown. They also deserve our compassion and support.
This gives a total of around 400000 persons (those who work in the broad public sector are not affected as Government and Para Statals are paying their full salaries). 
The treatments are different for the three categories.

i)    50 % (200000 persons) received  50 % of their monthly salary from Government  up to a ceiling of Rs 12500 for 15 days in March  subject to a maximum salary of Rs 50000 per month;

In April they will earn 100 % wage subsidy from Government up to a ceiling of Rs25000with a threshold of Rs 50000 per month;

ii)    41 % (165000 persons) obtained Rs 2550 for the second 15 days in March. If we add the Rs 2550 left from the March payment of Rs 5100 (putatively for the first fifteen days of April) with the proposed Rs 2550 for the second fortnight of April, they will receive Rs 5100 from Government for this month. Compared to 100 % subsidy for employees up to a maximum of Rs 25000 in April. This second group will earn significant less than the first one by a very high ratio ( 2 times  less compared to someone on the minimum wage, 3 times less for a salary of Rs 15300 and almost 5 times less for someone earning Rs 25000). 

This is unfair and unjust in these extremely challenging times for many of our compatriots. 

Even if I understand the challenges of lacking data and information on many of these independent entrepreneurs/ workers. But this does not diminish their needs to have access to financial resources to feed their families during the lockdown. This administrative distinction is hardly a reason to deny them needed support in such exceptional times. They also pay VAT and other indirect taxes which account for 53.7 % of Government revenue. Income tax makes up only 9.7 % of such receipts. And probably very few of the recipient of the 100 % wage subsidy pays income tax as the threshold of exemption from income tax is around Rs 25000 for a single person.

iii)    9 % (37900 persons) have nothing even if many are very deserving as shown above (single parents without any financial means). I do not know how many single parents (especially women) are drawing social aid or other allowances to survive this lockdown.
I am sure you will agree that as full fledged citizens of Mauritius they have every right to expect to be treated fairly and humanely. The Covid19  is not making any difference among various categories of our population . 
Anyway the wage subsidy given to employees in the formal sector is itself not exempt of many flaws precisely due to a lack of accurate information.

C.    Two lethal mistakes

As a former Minister of Finance I obviously fully appreciate and understand the financial implications of these measures. I both sympathise and empathise with you and your Minister of Finance during these extraordinary times. Again, not easy to be the driver. Better to be at the back of the car.

However there are ways and means to be fairer to ALL our compatriots without altering the budget proposed by the Minister of Finance in his press conference ( aroundRs 4 b ) . 

As we are making  two grave mistakes with the current schemes:

a)    Many who are accessing the wage subsidy either do not deserve it as their income is not being affected or do not need the full amount as their income has been only partially impacted. The current system is an either/or choice even if the effect varies from sector to sector and within sector between companies. What I call type 1 mistake. 
So it must be better targeted to give to those genuinely impacted by the economic lockdown;

b)    Many who either deserve more or desperately need some support are either obtaining a small amount (informal sector with Rs 2550 per fortnight) or nothing (the unemployed). 

What I categorise as type 2 mistake. We should reach out to them out of compassion and solidarity.

With some imagination and creative thinking, I believe we can mitigate both mistakes while appealing to the sense of sacrifice and solidarity of our fellow compatriots and enterprises. 
Of course it is more complicated and more complex but it is worth considering for the sake of compassion, fairness and equity. We have a duty to run the extra mile to allow many to survive the pandemic.

D.    Proposals to review the wage subsidy scheme

With the benefit of hindsight, I believe we can draw the lessons of the gaps from the implementation of the two schemes in March to better target them and impose some conditions to make them socially fairer to a significant proportion of our population who is in dire needs. We can also learn from the experience of other countries that have introduced and reviewed such schemes. 

i)    The wage subsidy must strictly apply only to companies who have been adversely affected financially by the lockdown. If necessary the rules must be better defined and tightened to ensure compliance; 

ii)    Some companies , fearing no or delayed payment by their clients at the end of March, have , in good faith and in anticipation , applied for the scheme to ensure they have enough liquidity to pay their employees the full monthly salary in that month. Now that they have the actual revenue figures (or will have it in some weeks) they should refund the subsidy if they have actually not been affected ex post. An appeal should be made to that end and I am sure they would understand that such funds would be better utilised to support more deserving cases;

iii)    We should be able to make the distinction between a revenue reduction of 10 % (may be some in financial services), 25 % (some in agro industry), 50 % (some in manufacturing) and 100 % (tourism and Air Mauritius)  and adjust the quantum of the support accordingly. Difficult but doable to generate some funds for the deserving ones;

For instance, both New Zealand and Australia do it and they are richer than us. We can decide the period over which we should do it (two or three months) and the percentage threshold (25 % to 30 %). New Zealand imposes a revenue loss of 30 % to be eligible while Australia has a double condition depending on turnover ( 30 % for lower turnover and 50 % for higher turnover). Of course we may have to tweak it for MSME as they are in deeper trouble. This is the time for sacrifice and solidarity;

iv)    There must be burden sharing. Should Government give 100 % of the salary up to Rs 25000 to ALL affected companies in April?. Not sure.  This has the effect of penalising other compatriots in a financial zero sum game as there is no money for them. Some companies should be made to pay a percentage of the salary as is the case in many countries. 

For instance, Government should impose a reduction in executive pay, fringe benefits and other non-essential costs for companies seeking assistance so that these saved resources can be redirected to pay salaries, thus relieving Government of a 100 % wage subsidy. Could it be 75 %  wage subsidy with the 25 % coming from these companies ? 

v)    Companies that form part of a conglomerate or a holding should be assessed on the basis of the group and not at the level of each entreprise. Many subsidiaries of a larger group have claimed the wage subsidy even if their group is doing fine and has reserves. However the rules are so crafted that they can access the wage subsidy. We should plug this loophole.

A simple example will drive home this point. Conglomerate A has 15 companies. Its holding takes out huge dividends from these subsidiaries and consolidates them at the group entity.

Is it fair Prime Minister for one company from this group to apply for wage support while its parents sit on reserves  and many of our single mothers with kids and who are unemployed get nothing at all ? Surely this cannot be right. 

vi)    There are many companies that have, for many years, declared massive dividends without any consideration for reserves for a rainy day. They have behaved like the reckless grasshopper. In some cases dividend distribution is higher (yes higher) than profit because of asset reevaluation. You should request the Ministry of Finance to look into this problem and I am sure you will be appalled with the findings. 

Is it fair to the country that those who have distributed 80 % of profit as dividends ( in some cases more than 100 % ) be given support without asking them to plough back some of these excessive dividends ?. Or inject some money.  While we give only Rs 2550 per fortnight to a small planter, a fisherman , a hawker or a hairdresser and nothing to an unemployed single parent with kids. Surely this cannot be solidarity and sacrifice. There must be burden sharing;

vii)    The subsidy must be passed on TOTALLY to employees. Not only in words but also to introduce a monitoring mechanism to ensure compliance;

viii)    Government should find out whether the other 50 % of salary has been paid by all employers who benefitted from the wage subsidy in March.

E.    Two specific recommendations

My broad calculations show that out of Rs 4 b mentioned by the Minister of Finance for April, around Rs 3.6 b  ( 80 %) will likely be used for 200000 employees and Rs 400 m for 165000 self employed and independents ( Rs 2500 has already been included in the March figure) 
I am absolutely certain that a review of the wage subsidy scheme for employees along the lines proposed above should free up enough resources to 

i)    provide an additional Rs 2550 to the self employed and independents in the month of April ( cost of Rs400 m);

ii)    grant a temporary relief to those among the unemployed who are very deserving. If we give Rs 5100 per month to say 15000 out of the 37900, it would cost Rs 78 m. To ensure survival.

Govt could also draw on the contribution from the Solidarity fund to support these cases.

I am equally sure that the technical team at the Ministry of Finance would find other ways to review the two schemes to make them more effective and more equitable. Time is of the essence even if there are challenges.

The cure will be better than the disease.    

It will be socially fairer to our nation. Sacrifice and solidarity in exceptional times.

I wish you well and ‘bon courage’ in these testing circumstances

Dr Rama Sithanen
Quatre-Bornes
19 April 2020

 

 

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