20 Measures to Spur Growth and Strenghten Middle Classes
Reading about the -finally!- upcoming government statement about their plans for the next 5 years prompted me into thinking about the 20 economic/fiscal policies I would endorse, or to that matter would like PSU leadership to consider and advocate for 2016 and beyond. My contribution on how growth can be boosted and benefit at the same time to the Middle Classes.
How to get to a higher growth trend? First by focusing on stability rather than levels of growth; 7% average is of no interest if it means high volatility; growth gains are accrued best when volatility is low, and the proposed policies are targeted at stabilizing growth, basically setting a target growth -just like for M3 for instance. The immediate benefits are obvious; while it is true growth can be sort of stochastic process, nothing prevents us from compounding growth, i.e. computing the increase in wealth over half a decade for instance.
5% growth with a very close (small) variance provides modest but strictly increasing growth gains; in fact, growth gains due to growth stabilization are pretty much the next thing to a geometric sequence, and it can be proven there is no explosive -infinite- solution to it (come to think of it, it might be the subject of a boring post)
Dams didn’t change much; estate distribution still slows down agricultural output to the benefit of a small, tiny group of wealthy farmers. Average deviation of agricultural output over the last 40 years is about 2.3 times higher compared to that of non-agricultural output, and 2 times higher than the overall output growth. The mere fact that agricultural output volatility is at such high levels means all past policies -including the massive investment in dams during the late 1960s-early 1970s have been quite ineffective, since output productivity per worker is low compared to other sectors, specifically so when one considers that about 40% of workforce is enrolled in Agricultural production.
2/ Re-establish the agricultural tax ahead of the December 2013 moratorium deadline: Budget bills up to 2011 have been reasserting the moratorium on agricultural taxes will expire on December 2013. But so far no structural reforms have been carried out to justify such moratorium. And so, an immediate interruption would put pressure on government policy-makers to come up with a workable legislative framework not only to levy some fiscal receipts per exploited acre, but to establish precisely productivity differentials in terms of utilized surface, and thus direct more efficiently policies designed to help small farmers to face up their larger, wealthier opposite numbers.
The Agri-tax will obviously target only about 60,000 farmers, making up for 15% of total SAU surface – those who actually benefit from the tax moratorium, basically.
3/ Drop Fiscal penalties on Cooperatives: it was the case for a long time; but because a modest cooperative from the outskirts of Agadir created a great deal of trouble to the very lucrative private monopoly of Central Laitière, a sneaky regulation taxed them up just to get the spoiled competitor on par with a very dynamic and original form of business, to the expenses of the final consumer and a very original business structure.
4/ Create small, regional applied research centres to improve productivity per acre: from the available agricultural survey data, small farms tend to have low productivity, which is due to either small surface or to labour-intensive exploitation. Small units of applied research, with a roster of technicians and experts for all farmers to provide counsel and support to expand their production. A system of tax credits can be engineered to price the service these regional agricultural centres provide to farmers.
5/ Eliminate ‘Special Funds’ from the budget and attach performance objectives for ministries to meet before they get additional funding: so far, there are about 52Bn appropriated for ‘Special Funds’ that do not submit to regular scrutiny procedure, and yet these do define in a way government policy outside their ministerial departments. In fact, the establishment of a debt ceiling can curtail the amount of discretionary spending through these special funds.
6/ Fix a Debt-ceiling on the public Budget: The standard reason for such a policy is to keep government deficit and debt in check; it also means fewer liquidities will be diverted for public expenditure, which means that government officials as well as members of parliament will have to be more efficient in their trade-offs. It is a question of fiscal discipline: discretionary spendings can be tempting for ministers to go crazy with their budget submission.
7/ Impose a short-term freeze on pay-wage and get mean payroll closer to the median salary: it sounds phony, but the discrepancies in civil service payroll are actually such that freezing or cutting salaries, not all of them obviously, are the only way to bridge the gap between the highest and lowest pay-grade, a ratio of about 1:37 according to a UNPAN report. The closer the mean gets to the median pay wage of 170,000 per annum, the better.
So far, international indicators do point out the fact the current ratio of Moroccan adult citizens per civil servants (1:35) is sustainable and there is no need to expand, but rather reorganize the civil service: 600.000 civil servants, 2/3 of which work with central services; the idea is to reverse the ratio, so as to get a small and dedicated central civil service, while the bulk of officials would be working on the local or regional level.
8/ Re-instate the marginal income 42% tax rate, create a wealth tax on millionaires: its scrapping came to the cost of at least 7Bn every year, even though only a tiny minority of rich households benefit from it. Furthermore, and because the marginal 38% tax rate provides a break starting from about 180,000 per annum, there is a need to establish a wealth tax on millionaires, a specific rate of 60% can provide as much as 40Bn.
9/ Stop subsidizing real estate developers and use the money to help households for home ownership directly instead: 5.5 Billion tax breaks to developers vs 800 Million to household are perhaps the best available proxy for surplus transfer from consumer to suppliers; unfortunately, the transfer does not benefit the society as a whole; this is why some of the overall fiscal expenditure on real estate needs to be diverted to households; real estate business has such a large operating margin that they can do with not a tax increase, but an end to tax exemption, which can be dealt with in accounting just like a subsidy for investment.
10/ Provide cash relief of 700-1000 dirhams to the bottom 10% to boots their consumption: food stamps, tax credits, tax cuts, and other incentives to provide poorer and lower-middle classes with enough resources to lift themselves up to the average consumption and bridge the gap of wealth inequality; and that comes to the tenth of the tax break the top 10% benefit from when the 42% marginal rate was scrapped in 2008.
Thanks to their structural consumption, no immediate impact will be observed on the trade balance deficit, and that will most certainly boost agricultural business to meet the new demand, thus filling the considerable capacity production created with the agrarian reform; no trade deficit, no increase in core inflation, and standards of living increase markedly.
11/ Phase out the Compensation Fund: 45 Billion is too much, and is basically subsidies the top tier of Moroccan households, as well as a small group of business that do not always report the same surplus transfer on consumer prices. This is why cash incentives, easier to target and less expensive; as for international commodity prices, Morocco’s imports represent a tiny percentage in global volumes, and that is why the Finance Ministry ought to consider hiring a team of brokers so as to trade the best terms in futures and options on strategic commodities. The total cost surely can be brought below the 45 Bn the taxpayer is paying for.
12/ Focus on terms of trades rather than trade deficit as a performance index for export industries policy: the trade deficit is sustainable as long as the terms of trades are in favour of Morocco. But the trouble is, the heavy trend indicates it is not, or that it is too volatile to consider structurally safe.
13/ Shift export subsidies to exports with highest value per physical unit: though there are less than 2Bn provided as fiscal incentives for exports, textile and related businesses benefit most from it, courtesy of the very powerful Textile lobby; and yet indicators show textile actually destroys value; while it is true this particular business provides jobs for many workers, a gradual shift to more value-added businesses can not only make up for the job destruction due to the subsidies shift from textile to other businesses, but they can actually create jobs, and at the same time redistribute the surplus captured by textile.
14/ Free up Universities by allowing them to get as much private funds as they can.
15/ Transfer universities into hyper-campus outside metropolitan cities – create one self-sufficient campus city in each region.
16/ Stop the ‘Grima’ system altogether, offer a deal for incumbent grima-holders: unless figures are released on that touchy subject, but so far indicators point out to a very unfair system where insiders benefit more from closed businesses. And whenever a particular sector is protected, consumers are harmed: transports, fishery, sand careers, alcohol, import/export licenses… all of these sectors once regulated in the late 1950s should now be liberalized because they harm more than anything consumer welfare.
17/ Start working week with Sunday: a simple computation leads to a modest boost in productivity, and thus in GDP growth: there are 48 working weeks per year, and for every Friday half a day is squarely lost; moving forward the week-end to Thursday evening would save as much as 0.2 basis points of output growth, or approximately 25 Billion dirhams, perhaps 5 to 6 Billion in additional tax receipts.
18/ Differentiate retirement age, from 55 to 67: the Unions need to be taken on board, but a uniform retirement age across the board tends to harm a specific population more than the other. Furthermore, and starting from 2010, the number of minors has started to decline, which means that in 10 years’ time, considering no change in demographic indicators, there will be a need to retire workers later, and the sooner contingency and transition plans are implemented, the better conditions will be for a whole new generation for business and at the same time provide safeguards for health and insurance costs.
19/ Relax paperwork needed to create businesses: this is the most straightforward measure needed to bring undeclared business out of the shadow and into the legal limelight: all that is needed is to justify a capital of, say 5,000 dirhams, no past criminal records and no past history of bankruptcies.
20/ Spend 30 Bn per annum in Research and Development: so as to get productivity contribution to growth from 0.16 basis point to 1-2 full points and over a decade or so, push the boundary of potential growth beyond 5% and up to 7% with the same level of stability.