The Moorish Wanderer

What Debt and Deficit mean for All of Us?

Posted in Dismal Economics, Flash News, Moroccan Politics & Economics, Morocco, Read & Heard by Zouhair ABH on March 4, 2012

As much as I care about Debt and Deficit, I fear these subjects do not catch on with the mainstream media in Morocco.

There is some kind of fatality attached to it: “Deficit? Can’t be helped.” “Taxes? Debt? Can’t be helped either, as long as taxes are not high, who cares?” But the fact of the matter is, to care about deficits is essential. First off because abstract issues related to public finances have, sooner or later, a direct impact on our lives: the mortgage, the basic public services, even the level of prices are affected by government finances.

I wish there was some official report to vindicate my prediction the expansionary cycle reported by a 2009 paper from MINEFI on Moroccan business cycles, has, in fact, been put to an end:

Phase d’expansion entamée en 2000T4 et non encore achevée Les huit cycles d’affaires enregistrés durant les décennies 80 et 90 ont été marqués par la comptabilisation de 13 années de sécheresse entrainant de fortes oscillations de la production agricole et des secteurs de l’activité économique qui lui sont associés à l’amont et à l’aval. Toutefois, à partir du 4ème trimestre de l’année 2001, deux caractéristiques qualitatives ont particularisé l’économie marocaine et portent essentiellement sur :

* La baisse notable de la volatilité, mesurée par l’écart type de la variation du PIB trimestriel, pour atteindre 1,38 contre 4,2 dans les années 90 et 2,9 dans les années 80.

* La rupture avec les cycles d’affaires courts par l’amorcement d’une longue phase expansionniste record de 31 trimestres.

La phase expansionniste que connait aujourd’hui l’économie marocaine se démarque clairement de l’expérience des décennies précédentes puisqu’elle est réalisée dans une conjoncture difficile et instable, marquée essentiellement par des aléas climatiques défavorables (2001, 2005 et 2007), par l’instabilité des marchés financiers internationaux, par la flambée des cours du pétrole et par l’essoufflement de l’activité économique chez les principaux partenaires du Maroc. Ce contexte d’évolution démontre distinctement dans quelle mesure l’économie nationale a réussi à amorcer un changement positif de structures économiques et à développer une grande capacité d’adaptation et d’amortissement des chocs.

what follows might be either a mild depression or a long, painful recession, it is up to the appropriate public policy to smooth business cycles over the troubled path ahead. And increasing debt when available liquidity dries up and upward pressure is exerted on the level of interest rates.

Better operate modest and harmless cuts today than deep and unpopular cuts tomorrow

1/ High Deficit means an increase in taxes/decrease in spendings are coming fast: a deficit doesn’t usually go on for ever, especially a 6% deficit to GDP. Simple: high deficits need to be paid for, and at a premium, usually paid for by the taxpayer, one way or the other.

The operating logic is quite simple: government spending keeps on rising -save for two fateful years, 1965 and 1983- and is usually matched with taxation, debt and… the deficit. The deficit is a convenient way to finance government policy, but it is so when the deficit is created because of a precise set of government agenda, not because a government wants to spend itself into social stability or just to sustain its administrative lifestyle. in fact, the very existence of CST treasury funds contradicts the idea that ministerial departments conduct a policy of their own.

And so an unjustified high deficit cannot sustain itself for a long time -and 5 years is a short time in politics; sooner or later, deficits have to be halved, and from past experience, Moroccan officials tend to favour lower government spendings instead of increasing taxation: In fact, during the 1980s, during which the Structural Adjustment Program was implemented, the total increase in fiscal receipts was scaled back, and was kept well below 16% of total GDP. The rest is pure budget accounting: the government has to freeze or cut spending (which it did 30 years ago), including pay-wage, basic services like Health, Public order, Education and, most worrying to the government, Compensation and Subsidies.

2/ Expansionary spending at the end of an expansionary cycle are hazardous: the figures disclosed ahead of the new 2012 Budget clearly point out to a moderate expansion in government spending in the hope to allay the backlash induced by pessimistic projections in growth figures: the government was gunning for an average of 5.5% GDP growth all the way to 2016, they start off on a low 4.2%, which puts the pressure to come up with a higher growth figures for 2013-2016, an average of 6%, actually. One has to agree that in these trying times, with huger economic uncertainty from the EU, there is very little chance the economy can pull off a straight 6% growth all the way to 2016, whatever tax cuts, generous subsidies and mani pulite this government can indulge in.

In fact, the government has got itself caught in what is usually a weakness in left-leaning styles of government: generous social programs with no immediate focus on growth, pro-business agenda of sorts. (By pro-business, I mean businesses that generate growth, innovation and jobs, not the rent-seeking, oligopolistic type of businesses that rule Morocco) and I suspect they get a free ride from the press for a host of reasons: a gutless Finance Minister who is more interested in wrestling control of key Finance departments from his sidekick generates more news headlines than anything else, in addition to a convenient, almost opportunistic government timetable to deflect public scrutiny to more superficial matters (Grima-Gate, Choubani‘s and Hakkaoui’s controversial statements respectively on culture and abortion)

3/ An unbalanced fiscal base means no harm done to the Economy if taxes are raised: just look at the average fiscal pressure on GDP: we are far from the net average of 19.4%. Now this is always a touchy subject: increasing taxes isn’t really a popular subject, unless the discourse is directed to the various fiscal exemptions and breaks a privileged few benefit from; the 2012 Budget makes room for about 33 Billion, 2/3 of which benefits to big, profitable business and wealthy individuals; the scrapped 42% marginal rate on Income Tax, and, last but not least, the discretionary, unjustified, uncalled for moratorium on the agricultural tax, an actual tax cut that benefits a tiny, urban and wealthy group of farmers whose profit margins are high enough and aren’t usually invested back into the agricultural economy. This is a 120Bn business with untapped fiscal receipts and large tax subsidies. The least one can do is to tax agriculture, then allocate the money back to smaller farmers to help them expand and improve their output, and thus extract themselves from poverty into middle-class affluence.

And there goes the argument on taxes: it is better to operate now a fiscal consolidation with moderate and fair tax increases, so as to sustain growth and redistribute wealth, instead of dodging the issue until it is no longer possible, and then carry on with a fiscal consolidation that taxes the middle class, with proceeds used to pay off the debt instead of spurring growth, and that what might very well happen if the next couple of budget bills do not get their fiscal house in order.

4/ the Political choice has not resolved anything, and the price for it is Debt: the government self-proclaimed ‘virtue’ doesn’t provide an adequate plan to bring spending under control. In fact, I suspect total public borrowings will grow to some 500Bn by the end of 2012. The public debt has a direct impact on everyone’s livelihoods: high debt, especially when one consider shrinking available liquidities, put pressure on interest rates across the board; high interest rates mean fewer households can manage to buy their house, and those with a mortgage will be faced with higher rates. Businesses with tight financing capabilities will have to close down. In expansionary times, a relatively important deficit doesn’t matter a lot: liquidities are available for everyone, banks, individuals and businesses alike to dispose of, even government finances.

But when one considers the latest monetary figures, liquidities have dried up from 962Bn to 900Bn, and there lingers an uncomfortable question: aren’t additional borrowings going to dry up liquidities further? High government debt means fewer liquidities will be available for private markets, a textbook application for the crowding out effect. Furthermore, the money paid back on past public debt bears little value, even with interest rates. The government is set on borrowing 66Bn, it projects a 42Bn payback -including interest- but each payback is valued less than the money taken away from existing liquidities; quite simply, and because of the conjugated effect of opaque government finances and ineffective spending, the net public extraction of liquidities is higher than the mere arithmetic difference of 24Bn. It looks as though government officials observe how ineffective their fiscal policy to boost growth and investment, and try to make up for it by borrowing to finance spending, only to worsen the liquidity and investment problem.

5/ Fiscal Consolidation has just been postponed, a can kicked down the road: we now move to a different time-line, whereby future generations of taxpayers will shoulder the cost of fiscally irresponsible choices. A deficit is justified as long as a tangible assets are put up as collateral; TGV, F16 fighter airplanes and the (future) purchase of M1A1 Abrams Tanks [pdf] are no use for the future generations. And so, any future fiscal consolidation plan will be tougher and more painful, simply because there will be higher spendings to cut, and higher interests to pay back. Available money for education, health, law and order will inevitably be squeezed. When the government commits for a net increase in government balance sheet by 30Bn for a 5% budget deficit, it seems the government has indeed opted in for kicking the can down the next fiscal year. We will therefore have to wait for the 2013 Budget, and there is little we can do about it.

A Dangerous Game: 5% Deficit and Mounting Public Debt

Posted in Dismal Economics, Moroccan Politics & Economics, Morocco, Read & Heard, The Wanderer by Zouhair ABH on March 2, 2012

I most certainly will devote a post underlying the inherent dangers of a large public debt on the Moroccan economy, especially when one considers it lives the closing moments of its expansionary cycle. But for now, I can only make the argument that a well-meaning government balks at serious fiscal policy schemes, and subsequently is running this country into uncharted and dangerous territories.

The various disclosed figures every now and then for the past week all point to a relatively high public borrowing requirements to match the unchanged total fiscal pressure – that stands at around 17.5% GDP and pay for the rather large increases in public spendings, in education, health and housing.

Will they make it safely to 2016?

While the government has pursued a commendable agenda in boosting spending in these departments, I fear the hikes in public debt, and the high levels of deficit will soon put a stop to the committed level of spendings.

Le Matin Newspaper reported on the press briefing during which some of the most important Budget figures were unveiled, and one can read:

Le deuxième volet a trait aux politiques sociales. L’enseignement sera doté de 51 milliards de dirhams, la santé de 12 milliards de dirhams, la politique de l’Habitat de 3 milliards de dirhams. […] Côté fiscalité, on n’enregistre aucun changement au niveau des taux déjà appliqués que ce soit au niveau de l’IS ou de la TVA.

That explains how the deficit first went from an initial projected 22 Billion deficit (around 3.2% GDP) to the 5% projected for 2012, that is 41 Billion – or almost 20 Bn of net additional spending. The previous Budget Bill projected 144Bn in fiscal receipts. The new deficit compounds the following:

* +4 Billion in education

* +2 Billion for Health

* +3 Billion for Housing

* +13 Billion for collective bargaining

I have some doubts about the last two items, given the high spending commitments relative to the budget allocated to departments in charge, and these might as well be part of the bombastic 188 Billion public investment target (most likely 64 Billion of Investment Budget) as for the other spending pledges, the 1Bn support scheme for private employment already exists -the net increase is a modest 360 Million dirham, up from the initial 640 Million. Moreover, the budget bill seems to provide for an additional 470 new public service jobs (up from the initial 25,734) the only new alternative -but not exclusive- policy to the Compensation Fund quagmire is a meagre 1Bn for the so-called solidarity fund – 50% less from what was talked about before the Election.

Overall, that means, ceteris paribus, the total Public Borrowings Requirements for 2012 will go up to *drum rolls* 66 Billion dirhams. For 2012, the government has to borrow that amount of money, which equates 1.6 receipts from the corporate tax, 2.3 receipts from the income tax, and most worryingly, one-fourth of total receipts for the Budget.