Budget: Tightening Of the Screw
About a week ago, Morocco received it’s Article IV report from the IMF. Though the gist of it does not shed great concerns about Morocco’s economy, but it has doubts over the government’s fiscal responsibility; given the political creed of our Finance Minister, an austerity package is likely to be bundled together and sent up to parliament. Instead of going for structural reforms, budget cuts are preferred to deal with a deeper problem than just a temporary imbalance in receipts and expenses.
But then again, with an official timetable for general elections on November 5th, Finance Minister Salaheddine Mezouar is not worried about the next half a decade, or even the decade laying ahead: he managed to land that $ 1.2 Billion Euro-bond deal June last year, but he does not have to answer for the subsequent coupons, or whether that precious hard currency stock is well spent. He might not return as minister after all, and wasn’t elected in the first place, so why would he answer to anyone if the appointing power does not hold him to account? But that is petty politics, His legacy, the unsoundness of many decisions theoretically under his watch will be, for the better or the worse (and I am sadly betting on the latter) is going to be more than a burden on the future generations, a potential danger indeed.
But first off, let us consider what IMF analysts had in store for Morocco; the report published on August 11th stated:
“Morocco has successfully met major challenges in the past two years. Thanks to sound macroeconomic policy and political reforms, Morocco was well-equipped to address the 2009 international crisis and to respond to the social unrest which has emerged in many countries in the Middle East and North Africa (MENA) region since early 2011. In this challenging environment, Morocco has performed well economically and has seen its social indicators improve”.
And there is evidence to buttress that claim, even though it was mainly a ping-back on strengthening domestic consumption, not something the economy usually relies on, and that barely averted disaster, considering how low our exports sunk in during the early quarters of 2009. Because domestic consumption sustained growth early 2009, social indicators improved, with of course a help from that raise in public servants’ pay wage. The report goes on:
“…driven by the strong performance in the manufacturing sector, nonagricultural GDP grew by 4.5 % in 2010 offsetting the contraction in the primary sector. […] Average inflation in 2010 remained at the very moderate level of 1 percent. In 2011, a good agricultural year and the fact that prices of certain foodstuffs and petroleum products held steady despite rising international prices, are expected to help limit the increase in the average inflation to around 1½ percent. […] Morocco is expected to continue recording sound economic performance. Growth in nonagricultural GDP is expected to reach about 5 percent and to contribute to overall GDP growth, which is forecasted to attain 4½-5 percent in 2011″.
But, and that’s where budget policy comes in, the government’s showing on budget management is the challenge. Simply because both the IMF and the goverment are set on pursuing a very simple, almost simplistic policy: create growth. As much as the economy can, in the hope of:
“…achieving a GDP growth rate that will help reduce unemployment and improve living standards, while ensuring medium-term macroeconomic stability. […]”
and that recommendation does seem sound, though it skips the important fact that economic growth only profits marginally to the poorer households.
Same story goes for unemployment, as there is only a weak tie between the former and growth – under assumption of linear correlation, growth does not affect significantly unemployment. As for macroeconomic stability, it is up to the growth’s stability itself. Now, these objectives need to be completed by sound budget policy, and that’s where the packages of pay rise’s and further subsidizations come into effect: because central government is not willing to increase receipts (for instance, by ending the moratorium on farmers’ tax exemption) they are more likely to cut departmental expenditure, and that, it seems, is the IMF opinion as well:
“Revenue efforts were intensified and higher than budgeted revenue were collected at end June 2011 –mainly from indirect taxes. These efforts should continue in the second half of the year and should enhance revenue collection by 1 percent of GDP compared to the 2011 budget. Consequently, total revenues are expected to remain almost unchanged compared to 2010, at around 25 percent of GDP. […] Given the importance of demonstrating the government’s determination to maintain fiscal sustainability, the mission believes that there is little room for further measures to increase government expenditure”.
The government believes there is little room, because it has tied its hands over income taxes and exemptions on various sectors. So while I welcome constructive criticism over what I believe to be sound economic policies, “ideological” and “divisive” do apply more to Mr Mezouar’s decision to cut 10% spendings across departments than my own set of proposal regarding fiscal reforms and the institution of a wealth tax. Contrary to what the press seems to hint to, the 10% cut is not an IMF recommendation, it is a stated governmental policy that has been agreed upon and sanctioned by IMF experts:
“On the expenditure side, all budget entities have been requested to economize 10 percent of their budget allocations for some nonessential current expenditure items”.
The budget entities are to economize these 10% at the Finance Ministry’s request and initiative, not to the IMF; That is a clever way of distancing oneself from an unpopular policy decision;
But that goes beyond pwtty politics. For all the expected communication that “these cuts will not affect the quality of public services, nor would they affect essential public sector services”, under the veneer of equanimity and moderation, a uniform 10% cut across ministerial departments means, among others, the following:
– MAD 4,148,818,260 cut from the Education department. That means the following expenses need to be scrapped:
♣ Annual central investment allowance: MAD 1,401,550,905.
♣ Four major Regional Academies need to cancel their orders for hardware and supplies allowances: Souss-Massa, Marrakesh-Hauz, Grand-Casablanca and Rabat-Sale. A total of MAD 1,584,029,581 of tables, chairs, electric cables, the works pupils will not benefit from next year.
♣ The paychecks of about 10,000 teachers and high-school professors frozen for a year.
– MAD 1,089,555,900 cut from Health means one hospital out of four will have to cancel its investment program, or lose 1/6 of the total expenditure on hardware, equipment and other items essential to keep hospitals going.
– MAD 723,124,820 cut from Police & Law enforcement allowances: it means half a billion will be cut from 60,000 policemen and policewomen pay-checks, a measure that is going to affect one law enforcement member out of 6 will be virtually out of job or with a freeze on pay-wage.
– MAD 134,357,600 cut from the Penitential administration, even though the exisiting resources are no match to alleviate the crumbling standards inside overcrowded Moroccan jails. Half of the administration’s investment plan will need to be cancelled.
These few instances -and they can be observed with other items on the budget law- show how difficult, almost impossible to perform a 10% cut across governmental departments by targeting “non-essential current expenditure”. These cuts will inevitably hit essential, front-line jobs, planned investments and essential hardware supplies purchases. As a matter of fact, a 10% cut in current expenditure across departments means a MAD 22.65 Bn package cut, or a MAD 39.95 Bn total expenses package. It would be fun to find out how ministries and autonomous agencies will manage to save up 20 Billion in “non-essential” expenditure.
While it is understood compensation fund reform will be more of a long-run project, there is a need to address these tax loopholes the same minister created in 2007 by decreasing the marginal tax threshold from 42% to 38%, or by caving in and refusing to end tax moratorium over agricultural income, paid dividend at BVC exchange, or indeed the creation of a wealth tax over high-income earners. A moderate 60% tax on millionaires can easily bridge the gap of 10% cuts, a break that allows to think in pondered terms structural reforms, like the 37 to 1 ratio in public sector pay-wage, or the imbalance structure of tax receipts.
That 10% cut is likely to damage the economy more than anything else: a 22 Bn budget cut means 2.7% of GDP. Considering the economic importance of government, and considering the contribution of each item in the domestic and foreign demand in GDP growth, that budget cut of 10% is likely to drag down public GDP contribution from 2% to 0.9%, a contribution in line with the 2003-2008 period, with the noticeable difference that the 2009-2011 years are crisis period, and government intervention is vital to keep the economy going. The Mezouar Doctrine, if indeed it turns out to be on, is a bet that smaller government expenditure will whip up the private sector. That is an audacious bet that, so far, has proven to be a losing one in a couple of countries (like the United Kingdom) not because the cuts are economically bad, but because uniform, indiscriminate cuts in public services will harm domestic demand, including that corporate output the minister seems so keen to promote. (There is a small recovery on CFG25 and FTSE Morocco indexes, but there is no evidence that was a reaction to the budget cut announcement)
Are we really considering this? The public sector is already a shambles, so there is no need to cut funding so abruptly and make it worse. Are we really going down the path of “it’s not real until it hurts”? Really?