[Blog] Pension Reform: The "caisses vides" alibi

During the budget debates, every orator on the government side has invoked the empty coffers argument as one of the main reasons behind the controversial and highly contested pension reform. They have painted a picture of gloom and doom of the foreseeable future if no radical action is taken to redress the situation.

It is a truism that the economic landscape is gloomy. The document entitled The State of the Economy gives a snapshot of the dire economic situation.

The public sector debt has ballooned to Rs 559 billion compared to Rs 238 billion a decade ago, thus representing 87.8% of GDP and leading to a debt service trap that consumes 10.7% of government expenditure, with the fiscal deficit standing at 5.7% of GDP.

But this is one side of the picture, which is alarming, no doubt. On the other side of the coin, we see that the situation is not hopelessly desperate as we are made to believe. When the outgoing government left in November 2024, the Gross Official International Reserves stood at Rs 402.7 billion, roughly USD 8.5 billion. A country's financial safety net is measured by how many months of imports its reserves can sustain. This is called the "import cover metric". In this case, the sum of USD 8.5 billion represented 13.3 months of import cover. The international benchmark is usually 3-4 months.

A glance at the other indicators does not reveal a terrifying picture of doom and gloom either. Inflation stood at 3.6% and unemployment was 5.7% of the labour market by the end of 2024. For an economy with the structural makeup of Mauritius, sub-6% is considered full employment, exuding market resilience.

Let us now compare the above with the situation that prevailed in 1982 when the first government of 60/0 came into power, ushering in a new generation of young and dynamic politicians.

The country was on the brink of disaster. Unemployment reached 25% and inflation hovered around 15%. The budget deficit was massive, representing 14% of GDP. The debt-to-GDP ratio was colossal: 49% of GDP, peaking at a total public debt ratio of 60-70% when combined with domestic liabilities.

What is more, the country was on the verge of sovereign default as it had reserves to cover imports for only two weeks. The IMF and World Bank were breathing down the neck of the newly elected government, demanding aggressive and draconian cuts to public expenditure as a condition for a bailout. Yet the government did not touch any of the social benefits or pensions.

On the contrary, the then Minister of Finance had the audacity to come up with a new social measure: the unemployment hardship relief that provided unemployed heads of households with a safety net during that excruciatingly difficult period. To replenish the coffers, other means were found: the introduction of sales tax, linking the rupee to a basket of currencies to avoid devaluation, clamping down on government waste, requesting ministers to travel in economy class, rebooting the economy by encouraging investment, creating productive employment and incentivising the private sector while setting up the State Trading Corporation to import essential goods and thus cut down prices, etc. (Unfortunately, the government did not last long as it imploded after only nine months.)

This brings us to the theory of Joseph Stiglitz, Nobel laureate and former Chief Economist at the World Bank. For him, debt itself is not a problem per se, as long as GDP expands. The problem is "what you do with it". His core thesis is that the household analogy commonly used is wrong. Government debt is not the same as household debt. A household must cut spending when income drops. A sovereign state controls its currency, its tax laws and its investment levers. It can roll over debt indefinitely. Household borrowing is consumption. Government borrowing can be investment. For example, if a government borrows to build hospitals, ports, railways, climate adaptation projects, education hubs or enhance food security and green energy, these become assets. So, the problem is not debt but "unproductive debt".

Another of his core arguments, as proven in Greece in 2010-2015, is that austerity can increase the debt-to-GDP ratio. For example, if pensions are cut by Rs 10 billion but GDP falls by Rs 20 billion, then the debt-to-GDP ratio goes up, not down. From the perspective of Stiglitz, cutting the BRP to fix a budget can be self-defeating if it kills demand and growth. This is because elderly people spend most of their pensions on food, medicine and basic goods, and these have a "multiplier effect". Therefore, cutting pensions dampens local demand, slows down the domestic economy and can actually cause GDP growth to contract. This kills the grey economy, pulls purchasing power away from thousands of elderly citizens, and enhances dependency and ageism.

As a result, the government is using "manufactured panics" to manage its deficits on the backs of elderly citizens and rush through "structural rollbacks".

Azize Bankur

Sources:
(1) White Paper on the State of the Economy, 1982
(2) The State of the Economy, 2024
(3) Globalization and Its Discontents, Stiglitz, 2002