How Will the Budget Look Like in 2016 and Beyond?
166 Votes in favour, 49 against and 15 abstentions. Is this opposition going to fill the void left by PJD? Very unlikely.
On the news front, Finance Minister is hellbent on keeping his pledge to bring the deficit down to 3% of GDP by 2016, and maintains his sunny forecast for an average growth of 5.5% over the 2012-2016 legislature. Fair enough, these projections are going to be put to the test eventually. There is enough data out there to check whether this figures are likely to compute, or if the minister’s overly-optimistic projections are going to fall flat. Mister Sunny-side got it wrong, and no one calls him on his bluff.
First off, I would like to point out that the Finance Ministry does not seem to be bothered with the lack of year-on-year quantitative targets: a responsible government, one led by an economist no less, should put out a projection of future indicators, such as the deficit and the national debt. Perhaps the minist er and his whipping boy do not want to get caught if their projections do not fit reality, and perhaps these two have spent too much time at the ministry to see the woods from the trees (both Baraka and Idrissi were officials with the MINEFI)
Dreamy Scenario: 5.5% growth rate, 3% Deficit GDP over 2012-2016
First off, an average of 5.5% GDP growth over 2012-2016 means the Moroccan economy has to deliver about 6% over the next three years (2013-2016) a tall order, given its past performance as well as the constraints on the long-term trend. Nonetheless, the counter-argument in favour of a 6% continuous growth all the way to 2016 could be made by predicting a strong recovery in Europe. But then again, the uncertainty surrounding that is so dense that it would be wise to preclude any strong contribution from exports to growth in the near future.
A 5.5% average growth puts GDP to 1.02Tn dirhams (congratulations Mr Benkirane!) means the government can go up to 198Bn in primary fiscal receipts. However, that means Brothers Baraka & Idrissi thought of a comprehensive fiscal reform scheme – a doubtful endeavour, especially on an election year. However, a more realistic assumption is that some modest reform boosts primary (Hauser) fiscal pressure up at around 18% means some 183Bn can be levied by 2016, an average of 170Bn over 2013-2016.
The idea the deficit would be brought under control -i.e. below 3%- by 2016 finds some justification in the light of available data; assuming the deficit takes an AR(1) the following form: the average points out to a sustainable deficit of 2.2% relative to GDP, i.e. 21Bn on average over the next 4 years. This means either a freeze on discretionary spendings (paywage, essentially) which amounts to a spending cut (in real terms, paywage would actually fall) or a commensurate increase in borrowings to match inflationary pressures and make up for the shortfall in fiscal receipts. According to MINEFI figures, almost half the civil service payroll is below the average income, i.e. between 60,000 and 70,000 dirhams per annum.
Accordingly, and keeping in mind the projection for inflation in 2012 is likely to go up to 2.5%, there will be an automatic increase in almost half of the total public payroll to match it up, not to mention the fact that there are some 100,000 civil servants that are likely to retire by 2012, and many -if not all- of them will be replaced, which means the frantic pace of recruitment will most likely be maintained all the way to 2016, i.e. an incremental increase of 2% per annum.
This ties the hands of the government over another hot potato: this scenario assumes the Compensation Fund does not distribute more than 56Bn in subsidies on average over the next 5 years, an overly optimistic assumption, one that contradict the very initial claim made by the Minister: a 5.5% growth on average means that more and more wealthy households will consume goods, prompting a disproportionate increase in subsidies and resources allocated to the Fund.
This sunny projection by the minister’s own figures for 2016 shows the inherent contradiction of the government’s policies, as well as the hidden cost for the lack of reforms:
Likely Scenario: 5% growth over 2013 – the lowest possible deficit (but not 3%)
And I would say the smart money is on that one: there is no way the economy can recover straight from the present sluggish prospect and deliver a steady 6% a year all the way to 2016. The closest 3-years performance in recent economic history is 5.7%, observed in 2001-2003, and that was during an expansionary cycle.
In truth, the government will miss the 3% cut-off. and more likely than not, by a relatively large number, possibly as high as 7%. Indeed, the combined effect of high borrowings, high payroll and the increasing cost of compensation. Lest we forget, compensation grows at a higher rate than GDP growth – and the price of oil is a key component.
One thing is sure though: this government cannot deliver a 5.5% average growth rate, much less a 3% deficit by 2016.