Taxes, Interest Rates and Hauser’s Law
I can’t wait three weeks for the Finance ministry to unveil their new budget! I only wish the opposition in Parliament will grill the Bill the same way PJD used to when they were opposition backbench:
Still, I would like to share some thoughts on the projected tax receipts and the mounting public debt; the Treasury released a new batch of figures for January 2012, and some of the projected figures give a certain flavour of Minister Nizar Baraka’s first Budget Bill.
Domestic Debt: 322 Billion
S’établissant à 322 MMDH à fin janvier 2012, l’encours de la dette intérieure est en augmentation de 2,4% par rapport à son niveau à fin décembre 2011. Ceci s’explique par le recours du Trésor au marché des adjudications pour un montant net de 7,5 MMDH.
First off, I might reconsider my earlier projection of 420 Billion in total public debt (foreign and domestic) by the end 2012 as too optimistic. Indeed, and based on projections from the latest Q3 2011 Foreign Debt survey (adjusted for the projected Debt Service) we are in for at least 500 Billion dirhams of total public Debt for 2012, that is 61.2% of total GDP. For reference, we are back to 2003 levels, minus the economic affluence back then and the downward trend in government debt observed ten years ago. What is more, the paid interest for 2012 on the 322 Billion debt is about 4.9%, which is a lot more than any term structure one can compute per all ten maturities served with Treasury Bills and Bonds (maturities yield between 3.44% and 4.45% nominal rates)
Such high levels of public debt, especially when one considers the closing moments of the decade-long expansionary cycle observed since 1999-2000, might drive the level of interest rates up, with the accrued effects of a worsening Balance of Payment deficit. Bank Al Maghrib has a set of targets to meet, and it cannot do so if its own foreign currency reserves are dwindling that quickly. I do not mean to be melodramatic, but we might well be very close to the moment where Bank Al Maghrib board would switch priorities (from domestic demand to foreign concerns) and increase interest rates from historically low 3.25% to sustain itself and fire-fight the foreign deficit. The 150 bps real spread will inevitably compound with the projected decrease in available liquidity as per HCP estimates; this means less available liquidity, higher required premium for debt, including public debt. I suspect Finance Ministry officials are hurrying up to the money shop before prices go up.
Fiscal Receipts: Morocco’s own Hauser Law
Long time-series on Moroccan economic data are often difficult to gather, but eventually perseverance wins the day. I bumped into Hauser’s insightful paper on the remarkably constant share of US Federal fiscal receipts relative to GDP. While I do not entirely buy into the “Government creates no wealth” argument, I do understand there are limits to what a public budget can extract in terms of taxes, and in Morocco’s case, that seems to be about 19.4% of GDP.
The argument is neat and can be turned to the Government’s advantage; there has been an ongoing trade-off that favours public debt to taxation, a policy that drove fiscal receipts as low as 17.5% of total GDP. There are several explanations available to that effect: first off, the actual fiscal pressure relative to GDP is relative higher, of 20.3%, because agricultural output is not taxed; a fair fiscal policy would be to spread taxation across all sectors with perhaps a cut in nominal rates to balance things up. Ever since 2000, 84 Billion dirhams (in real terms) worth of fiscal receipts have been missed, precisely because past governments have refrained from using the margin provided by the Hauser Law.For 2012, while the projected fiscal receipts are estimated to some MAD 144Bn, a tax increase within the 19.4% boundary can generate an additional MAD 18Bn, that is 72% of projected deficit for 2012 – or most likely 41% – which is still a good policy to have the deficit to the 3% limit.