When Paul Romer, University of Stanford's distinguished economist, gave a lecture in Mauritius in February 2008, few would have realized that his doctrine would have had such a huge impact on the preparation of the 2008 - 2009 budget. Indeed, Paul Romer is the brainchild behind the New ("Endogenous") Growth Theory, a school of thought that advocates knowledge and innovation as key drivers of technological progress, which is a major determinant of economic growth.

Romer then claimed in a local newspaper that "In education, I think you should be benchmarking yourself to the leaders: Singapore, China, Sweden, etc., because that's the standard you should be aiming for." The response in the 2008 - 2009 budget has been unprecedented and massive, strangely sounding like making tertiary education universal. This is bound to contribute significantly to boosting innovation, productivity and competitiveness in the medium to longer terms in a sustainable manner since knowledge can be reused at zero marginal cost infinitely.

Sustainability preoccupations are also a cornerstone of the budget. This represents a bold move towards reducing the dependence on fossil fuels and nurturing a culture favouring the use of renewable energy.

However, those who were expecting more on the long-term energy policy of Mauritius need to call again.

On the social front, the budgetary measures announced are a clear indication that Government is going ahead with the much-debated system of targeting ("ciblage".) The measures announced to eradicate absolute poverty (some 7,000 families living in 299 pockets of poverty) are most commendable. Lifting this segment of the population out of the poverty trap would contribute to generating economic activity at all levels of society, thus allowing all segments, including the poorest of the poor to fully participate in, and contribute to the development process.

As the financial services sector moves to its next level of sophistication, the seeds for a fully-functional Derivative Market have been sown by amending the legislation to encourage financial institutions to leverage derivative products to improve efficiency and spread risks.

What is required now, amidst growing inflationary pressures on a global scale and reduced growth in both developed and emerging economies, is a savvy blend of fiscal and monetary policies to surmount the challenges ahead, many of which are beyond our control. Fiscal policy alone cannot do the job, thus requiring the monetary authorities to play a crucial role in the 2008 - 2009, especially with regards to inflation risks.

Finally, the fact that the Minister of Finance and his team have managed to resist calls for tax cuts to counter food and energy prices (which is against economic wisdom) is a clear indication that, when it comes to the formulation of economic policy, Mauritius is not very far from international best practices.

By KPMG