Introduction

This analysis of the 2025-2026 Budget attempts to explain the thinking of our decision makers, reading between the lines to inform readers about the true objective of this exercise and the context of this economy, government and the people’s predicament. The Budget adopts a three-pronged strategy which rests on three pillars, namely economic renewal, a new social order and fiscal consolidation. Let us be clear, this is a budget of fiscal consolidation ‘lite’, with a view to improving fiscal sustainability while attempting not to slow the economic revival and not to disrupt the socio-economic setup too much. A challenging task.

Setting the stage, the country emerged from years of multiple shocks (Covid-19, pandemic-induced supply disruptions and subsequent inflation, wars, trade wars, a strong USD and high economic uncertainty) and from almost 10 years of severe economic mismanagement. Today, the cat is out of the bag and there was a need to pay attention to the elephant in the room, fiscal sustainability. It is therefore understandable that all eyes were turned on the first budget of the new government which had the onerous task of balancing priorities and navigating through the rough seas which lie before us.

This year’s budget was thus awaited with much apprehension and expectations. On one hand, the apprehension emanated from the fact that the government inherited a catastrophic budgetary situation and was walking on a tight rope with little room for manoeuvre. In this context, the spectre of additional taxes was looming which, in turn, would have an impact on inflation at a time when the population is exasperated with the ever rising cost of living. On the other hand, the expectation was that the government would adopt a strategic approach to steer the economy on the right path to growth, let alone inclusive, and lay the foundation for sustainable development and usher in a new economic order. In fact, both preoccupations seem to have been justified, and the first steps on this journey were always going to be painful.

Revenue mobilising strategy

The budget comes after years of pillage of public funds and voodoo economics, where growth was overestimated and economic statistics falsified, where the deficit was aggravated since the revenue was blown up and expenditure underestimated. In the current fiscal year, recurrent revenue growth fell short of the projected estimate by over 50%, 13.9% compared to the estimate of 29.4%. Recurrent expenditure, on its part, which was expected to grow by 14% ended up growing by 22%, exceeding the budget estimate by 8%. As a result, the government had to contend with a huge budget deficit of 9.8% of GDP and a staggering public debt of Rs 642B representing 90% of GDP. With a rough calculation of debt sustainability where the interest rate payments work out to 3.4% (interest payments divided by the stock of debt) and an expected growth rate of 3.7% and a negative primary balance, there were serious concerns over debt sustainability by many economists, except for those in the previous government.

The government had two options of either raising taxes or reducing expenditure, or a combination of both. To show that government means business, the recurrent expenditure has been kept under tight control; it is projected to increase by a meagre 2% in 2025-2026. Whether this will be achieved is debatable since government does not have much leeway. Compensation of employees, interest payments and social benefits absorb almost two thirds of our expenditure. There is no doubt that the government had to take drastic measures to raise additional revenue to reduce the budget deficit within reasonable limits and forestall a further deterioration of our debt problem.

The government introduces a number of taxes that will raise recurrent revenue substantially from Rs 180.8B to 223B, a big jump of Rs 42.2B or by 23.3%. It is wellknown that revenue increase depends on economic growth, inflation as well as on the in-built elasticity of taxes which is quite high and new additional taxes. This year a new element has come into play with the Chagos Deal which provides a safety valve to government and which obviates the necessity of raising more taxes. Otherwise, the bitter pill would have been difficult to swallow. It is worth adding that the Chagos Deal should not be used to finance government consumption expenditure. It is a temporary expediency and it is gratifying to note that, after three years, receipts from the deal will be transferred to a Future Fund with a view to creating wealth for future generations.

The government has trodden carefully to protect the lower income groups and minimize the impact of taxes on inflation. Some of the salient features of our resource mobilisation strategy are given below.

1. Government raises revenue through both direct and indirect taxes with few and selective measures.

2. Revenue from direct taxes will increase by 31% whereas revenue from taxes on goods and services will increase by a mere 9%. Therefore, the direct tax burden increases more than the indirect tax burden, a deliberate strategy to protect the lower income groups from inflation.

3. 36% of the revenue increase will come from taxes on income and profits. Three items, namely, direct taxes, taxes on goods and services and the Chagos Deal account for over 82% of the increase in revenue.

4. The reform of the individual income tax system reduces the tax bands from eleven to three thereby simplifying the system and making it more progressive. This progressivity is further enhanced with an additional contribution of 10% on chargeable income of individuals earning annual income in the range of Rs 12M-Rs24M and 20% for income earners exceeding Rs 24M.

5. This measure is in line with the ability to pay principle and distributive justice. It will reduce the gap between the rich and the poor and improve the income distribution. However, the high tax rates will affect a very small number of taxpayers, probably not more than 1000. The Income Tax Statistics available for 2023-2024, the latest year for which statistics are published, indicates that there were 2,054 taxpayers with a net income exceeding Rs 5M and an average income of Rs 10M. It is reasonable to assume that half this number will currently exceed Rs 12M.

6. The Tax Exemption Threshold is raised from Rs 390,000 to Rs 500,000 or by 28%. It means that income earners of about Rs 38,500 monthly will not be liable to pay income tax, thereby providing relief to lower income groups.

7. The Fair Share contribution is time-bound for a period of three years. It is, therefore, a call to support the spirit of solidarity for a temporary period among the high income earners in favour of their less fortunate brethren until the situation improves.

8. The few measures in the field of indirect taxes are targeted to achieve desired objectives. They start with the favourites of Ministers of Finance. First, enhanced taxes on alcoholic drinks and cigarettes are justified on grounds of preventive health care although they are regressive. Second, the rise in the rate of excise duty on sugar content of sugar sweetened products is also motivated by healthcare considerations. Third, enhancement of indirect taxes and registration duty on motor vehicles are graduated and as such are progressive in nature. Motor vehicles with higher engine capacity will bear higher excise duty as well as higher registration duty and Road Motor Vehicle Licence.

9. The immediate impact will be substantial price increases, which in turn will cause a fall in sales. Import of motor cars accounted for Rs 23B in 2024 which constitutes the largest single import item after refined petroleum products.It is a micro-measure which helps to address a serious macro structural problem. It will not only reduce imports but also reduce balance of trade deficit, will have a salutary effect on the balance of payments and our foreign exchange reserves and ease pressure on the value of the rupee.

10. Cost push elements have been strengthened with increases in taxes on alcoholic drinks and cigarettes and higher taxes on motor vehicles and soft drinks. While soft drinks have a low weight in CPI motor vehicle purchase represents almost 5% of CPI and alcoholic drinks and cigarettes another 10%. The taxes are just added to cost and passed on to the consumer. There will therefore be an immediate bout of cost-push inflation with prices rising in the range of 10-20% for most of them and by higher magnitude for motor vehicles, in some cases by more than 50%.

11. The removal of VAT on some infant foods, canned vegetables and frozen packed vegetables are too few to curb inflation.

12. Given the higher income tax rates, higher taxes on profits and the gradual reduction of BRP also mean that consumption will be kept in check and demand pull forces reduced. Demand pull pressures will also subside since there will be no resort to deficit financing on the scale of Rs 180B. The borrowing requirement will be less than Rs 40B in 2025-2026.

13. The Price Stabilisation Fund is expected to protect the purchasing power of the population but its functioning and objectives are not defined.

14. The Fair Share Contribution on corporations and individuals may also impinge on investment since firms will have less funds for investment and expansion.The corporation income tax has a much greater impact on operation and expansion of businesses. In this respect, a contribution of up to 5% of chargeable income on domestic enterprises having a chargeable income above Rs 24M and an additional contribution of 2.5% by banks may adversely affect investment and hamper growth.

15. Overall, the tax measures are progressive thereby protecting the lower income groups.

16. With the new taxes, the tax burden on the population has increased since the Revenue/GDP ratio goes up from 25.3% to 29%. This means that the population has to make a special effort to mobilize resources and make a sacrifice for a brighter future. Although the apprehension has subsided at the moment but this will be only a temporary respite since the Debt/GDP ratio will remain unduly high even in the next two fiscal years.The Debt ratio will only decline marginally to 88.3% in 2025-2026 and is expected to drop to 79.7% in 2027-2028 which is still high. We will not be out of the woods soon. Things will only improve if the growth momentum is sustained. We will remain in the quagmire so long as the economy grows at around 3-4%.Herein lies the necessity of accelerating the growth momentum. The budget has a target to attain a growth of 4% which is not within our reach in the short term. The Budget is above all meant for fiscal consolidation which is the overriding objective. Economic renewal and a new social order will not happen unless we put our house in order, which the third pillar of fiscal consolidation intends to do. In fact, fiscal consolidation should have been the first consideration rather than the third objective. Boosting investment and growth and sustaining social benefits hinge on a sound fiscal policy and judicious utilisation of funds.

Economic revival

The measures for economic renewal are not new. Most of them are a restatement of what was already in the Government Programme presented in January 2025. In this context, there are not many new measures. They are important but do not constitute the primary focus of the budget.

First, economic growth occupied a back seat under the previous government which was bent upon distribution of goodies to the population no matter what was the social cost – put the cart before the horse. Ultimately, it has brought the country to its knees. Economic renewal will be driven by Research, Development and Innovation, Information and Technology as well as Artificial Intelligence. The objective is to unlock transformative investment and the growth potential of the economy.

Second, the New social order depends as much on education, health and housing as on social security and not merely on dishing out money right and left without any economic justification. It is not surprising that the new social order provides for some major reform to come and rightly so. Although the changes fall short of a major reform, we have to agree that at least the process has started. But these have financial implications. In fact, the phasing out of various allowances has been spread over time which will facilitate a gradual adjustment and will not generate a great hue and cry. For example, the phasing out of age eligibility for BRP to 65 years will imply a saving of about Rs 3-4B annually.

The budget identifies four ‘poles de croissance’, namely the renewable energy sector, Waste to Wealth Investment Scheme, the Blue Economy and the Creative Art sector. Not all of them are new. We have already made some progress in the renewable energy sector and we have a base on which we can build. We have talked about the blue economy for decades without making much headway. The government has identified six strategic ocean economy sectors and intends to come up with a new blueprint in collaboration with stakeholders and experts and it is hoped that this time something will come to fruition. Likewise, there is a huge potential for Mauritius to be a regional hub for higher education, research and innovation. This was also a pillar in the making but never took off for diverse reasons. It is up to the Minister of Tertiary Education, Science and Research who is aware of the constraints since he comes from this field to take it forward.

A number of measures are announced for Tourism, Agriculture and Financial Services and Banking sectors. For example, sugar cane planters are guaranteed a fair price and income and Rs 800M is allocated to support farmers, planters and breeders. It also sets up a Food Resilience scheme to incentivize controlled environment agriculture. For Tourism, a blueprint with nine well-defined goals will be prepared to look into the structural problems and position the industry for sustainable growth. The benefits of these measures, if implemented, will only accrue in the medium term. It is worth adding that development of a blueprint is becoming popular in different sectors, which should be encouraged. It gives a sense of direction and provides a framework to develop and implement an action plan and to assess its effectiveness.

However, local and export manufacturing sector are conspicuous by their absence although the budget takes cognizance of the huge trade deficit and calls on the EBD to lead government’s export-driven growth driven strategy. A strategy to boost our exports should have been a priority. It appears that closure of export enterprises and consequent loss of jobs will become a ‘fait accompli’. Another lacuna is the lack of measures in favour of SMEs.

Conclusion

It is a budget of leadership. The Prime Minister has taken some bold decisions albeit unpopular dictated more by the concern of a downgrading of Mauritius by Moody’s to junk status with all the negative implications for our financial sector and the country. The government has set the tone for sound economic management which was direly lacking the past 10 years. It aims at encouraging a better utilisation of funds and promoting accountability. While previous budgets had a social orientation as their prime objective – at the expense of economic considerations – this budget sets the record straight. The budget aims at inculcating the spirit of fiscal discipline and it is investment oriented and professes a return to growth philosophy of development.

On the whole, it has been a successful public relations exercise and instills confidence among economic operators in spite of some unpalatable taxes. But the problems are still very much with us. The bitter truth is that rebuilding the future will take time but at least it lays the foundation and steers the economy on the right track. The biggest challenge will remain the implementation, which seems to be a weak link of the government. The taste of the pudding is in the eating.