The Case For Progressive Deficit Reduction
To put the question simply: “are deficit hawks bad for Morocco?” Obviously, we are heading towards fiscal consolidation, and whatever government formed after elections will have to ditch part (or all) of its electoral manifesto. In normal times, and that applies fully to Moroccan politics, a government does not carry out its electoral promises. But it is now more obvious that spending commitment will be cut, that even existing spending will be cut as well; furthermore, we can trust the next Finance Minister and their team will trigger social resentment with their target spending freeze.
Still and all, being a deficit hawk -a structural deficit hawk- could well be the most progressive stance one might take when it comes to the current state of public finances, the proposed remedy to make their way out of it, and more generally in the whole fiscal and budget policy a government can have. This brings about the question of the government’s own policy: do they have models and procedures to estimate precisely how much they can borrow? Let me ask rephrase the question: does the Finance ministry have an econometrics model as a benchmark for its policy? If so, why isn’t it made public? Surely the model is of no national security interest, and it would actually help the public debate if ministry officials were to release it into the public domain. Perhaps the next government will be kind enough to be more open about it…
The 2012 budget bill provides for a 61Bn borrowing to pay for expenditure -and narrow the deficit gap a bit. In terms of central budget it represents 20% of all receipts (excluding SEGMA autonomous departments) and 18% ex-SEGMA expenditure. So far, official reports have been confident in the budget and its sustainability, because (at least on paper) ordinary receipts still match equivalent expenditure: levied taxes still can cover pay-wage, stationery requisitions and investments; the orthodox balance is thus still observed: 170Bn in tax receipts vs 172Bn current expenditure. But then again, the balance is observed on paper; because there is already a 2Bn ordinary deficit, and the negligible amount of any possible primary surplus seriously impairs public finances sustainability. It is a bit worrying to notice that the 2012 Budget bill relies on dividends, rent and miscellaneous receipts to inflate artificially the primary deficit to 17Bn.
But a good point can be made about these figures: the government has engaged in what it has considered to be vital to the national interest (and I am not making this up, you will find below a reference to this flimsy argument) to subsidize goods and hire unemployed graduates to keep things stable. The 2012 deficit can easily be dealt with once growth picks up pace beyond the 4.5%-5% GDP forecast. In effect, the government made provisions for extra expenditure – as reported in BO n°5978 page.2122 (p.52 on pdf) such:
Vu l’Article 14 du décret n°2-98-401 […] relatif à l’élaboration et à l’exécution des lois de finances;
Considérant la nécessité impérieuse d’intérêt national,
Sur proposition du ministre de l’Economie et des Finances
[…] Décrète: […]
Article Premier – Des crédits supplémentaires d’un montant de 18 Milliards […] sont ouverts au titre des dépenses de fonctionnement du budget général de l’année budgétaire 2011.
“Imperious necessity of National Interest nature”: the money needed to subsidize further strategic goods was considered then a national security issue, supposedly. The decree also shows how much power the Moroccan executive wields, and how much money it can levy whenever it suits them. But the truth is, the public finances have been endangered with no serious case that the levied 18Bn were indeed required, and whether swiftly reforming the compensation fund wasn’t a considered move. The decree, it seems, embodies the utter failure of any political power in Morocco to take reasoned decisions, and betrays a lack of hindsight on behalf of the ruling class. The technocrats, the Grandes Ecoles graduates, the well-educated bunch took fright from stepping up and ultimately got it wrong.
There is another reason piling on debt or deficit is endangering Morocco’s future; by HCP own projections’ account, there are 10.6Mln young Moroccans aged less than 17. This generation makes up for 33% of total population, and they are in the process of being loaded with a mortgage even before they get out of school and go into active life. The national public debt should now stand at around 416Bn, that means MAD 13,000 per Moroccan inhabitant. But to the younger generation, the burden is heavier: MAD 17,000 per young Moroccan, almost 40% in excess of the debt per capita among the 30-60 age bandwidth; And a substantial amount of this debt (90%) is domestic; paradoxically, a domestic debt is more dangerous to the future generations: while foreign-held debt is more related to sovereign risk, domestic debt impairs future performances and growth perspective; a high public debt could well trigger a rise in interest rates, and new entrants on labour market will have to cope with it.
In that respect, the next government will have not only to cut the deficit and halve the debt. It means reducing discretionary and unnecessary spending, and above all, a deep and far-reaching structural reforms in fiscal policy. The difference between a liberal deficit-hawk and a conservative one is how they will deal with fiscal policy; It did show that Minister Mezouar and Head of Government El Fassi were very modest when they set on creating a modest 2Bn “solidarity fund” in the scrapped version of the bill. Incidentally, 2Bn is more or less the amount of unexpected expenses, or tax receipts in cars. The Finance minister assured the public on numerous occasions that he had secured the funding, another argument that strengthens the point made: conservatives will not raise taxes and reform tax regulations.
The income effective national tax rate is less than 4%; when compared to the tax brackets (from 10% to 38%) one can easily notice how many loopholes have been set up for taxpayers to deduct or escape taxation, and there is nothing wrong with it. But the trouble is, these loopholes are not evenly distributed; in fact, they are hardly there for any social equality purposes, and their distribution is anything but fair; The ab absurdo argument can be made that even a fiscally conservative policy of uniform effective income tax rate can out-take the present performance. A uniform 6% EIT (Effective Income Tax) can yield 45.6Bn instead of the existing 28.5Bn. For sure, the top 10% still gets away with less taxes relative to their income, but at least everyone will be on equal footing with the uniform 6% income tax.
Agriculture has benefited long enough from a generous fiscal amnesty; the Budget bill allows the minister to revoke the amnesty well before December 2013 and institute a flat tax on large farms. These are less subject to fluctuations, and they are already subsidized for their export-oriented goods. In effect, there are some 107Bn no tax is imposed on, and whatever effective receipts are more than welcomed.
The narrative in the next months is going to be about excessive expenditure in the Moroccan government. It would be wrong for anyone to buy into it just because it is half-true. It is wrong because on the other side of the balance sheet, there are only too much loopholes and exemptions around for the government to close and end; the deficit is a problem, but cutting expenditure alone is not going to solve it.