The Moorish Wanderer

Stimulus v. Austerity in Morocco

Posted in Dismal Economics, Moroccan Politics & Economics, Morocco, Read & Heard by Zouhair ABH on September 29, 2012

@Capdema is set on releasing a ‘white-paper’ of sorts, a Budget proposal for the next decade if you will. This project, with which I was closely associated, provides the blueprints for fiscal consolidation, as well as a set of bold policy proposals on both sides of the balance sheet.

An acquaintance reviewed the document, and one of the many observations they have made caught my attention: the Budget proposal basically takes the side of fiscal consolidation (austerity, if you will) as a sort of ‘There is No Alternative’ policy decision. Maybe it is; Perhaps some mechanisms embedded in the proposal seemed too harsh and too controversial for an otherwise consensus-seeking mindset in Morocco, prevalent among policy-makers and pundits alike.

But then again, this is the beauty of policy-making: choices are made depending on ideologies, or perhaps, according to each one’s Weltschauung. A traditional left-winger in Morocco (including the vast majority of my own PSU) though it makes sense to get value for money from government expenditure, would find it hard to support policies designed to contain the size and cost of the civil service payroll. They would cheer the introduction of a de facto wealth tax on the rich, yet express scepticism to the idea of tax cuts to corporations. Strangely enough, the voices of pro-fiscal consolidation in Morocco are very far and between, and I mean, voices that advocate specifics in terms of deficit and debt reduction for instance.

I would like to discuss two aspects of that fiscal consolidation government and pundits alike want to see happening, yet fail to make it happen in terms of government policies: Subsidies and Tax exemptions.

Ceteris Paribus, the Compensation Fund accounted for less than a third of the Budget Deficit in 1979-2007, but then since 2008, it has been on par.

The Compensation Fund has long been a pain in the neck: it is inefficient, it showers the richest households and big corporations with government subsidies, and a small fraction of these actually reach the targeted populations (let us put these at the conservative estimate of the bottom 20% income households) But for the past 30 years (say between 1980 and 2007) the aggregate crowding-out effect of this fund has been relatively low compared to GDP – less than 1.61% of GDP, yet for the past 4 years, the system has proven to be unsustainable; the current narrative about the ‘Compensation Problem’ shifts the blame to international markets and the upward pressure on commodities’ prices. Actually, the increased reliance on domestic consumption to sustain growth over the past 5 years means richer households would consume more of these subsidized goods, hence putting pressure on the compensation fund to require more funding from the Budget.

Tax exemptions in themselves cost about as much as the Budget deficit – about 33 Bn in 2012, but they stir government policies in the targeted sectors for different tax credits, exemptions and moratoriums. But, it is quite difficult to argue a reasonable case for some of these, unless political calculations are considered as well. The agricultural sector is pampered beyond reason (there are tax exemptions as well as direct subsidies) with official talking points arguing the very existence of the generous moratorium is of social value. It is as though the 120-odd Bn dirhams are evenly distributed among Moroccan farmers, when it really is not, and the figure speak for it.

But I digress. The central question remains: do we go for Stimulus or Fiscal Consolidation? As a matter of fact, the two options are not mutually exclusive: a fiscal reform can be nested in an ambitious spending program, but for policy evaluation purposes the picture is blurred a bit. Yet let us consider the Stimulus option as fairly as possible. The bottom line is simple enough to make it government policy: push output growth as close as possible to 6.5% for a short period of time. But that’s about it: it is the very nature of a stimulus package to be short-lived – or perhaps the lefty punditocracy is referring to the Welfare State?

How would one go for a Stimulus in Morocco? We are already spending good money in public investments (Budget and State-managed companies put in 188Bn in investments for 2012) so perhaps we might consider some scheme to boost consumption; the Compensation Fund is already taking care of it, but not as efficiently as one might have hoped it to be, so a reform has to be included into the stimulus. The tricky part is to get other policy measures alongside the Compensation Reform, because it will harm growth and household consumption, and the latest HCP figures on that matter provide evidence to that effect. As for massive recruitment in the civil service, it will not do good, especially when the new civil service labour force is ill-suited to their selected job: is it enough to get more teachers and nurses, when quality is in higher demand?

So tax cuts are the way to go, specifically on distortionary taxes, like VAT and/or Income tax, which means there are 81Bn to be cut, with perhaps a targeted 31Bn worth of various taxes and duties on imports; on the other side of the balance sheet, potentially 50Bn, the Compensation Fund have to be cut one way or the other. Let us suppose this tax cuts-based stimulus wants to go back to direct fiscal pressure observed in the early 1990s, which means there are 2.07% worth of tax cuts to be enacted, 17Bn that is. This means 2,554dhs worth of tax cuts on average to Moroccan households, and that contributes a full percentage point to output in 2012, close to 4% GDP. The remaining .8% (to get to potential output) can be scrapped somewhere, surely, but it cannot go beyond 2014.

Unfortunately, I cannot go on about what a Stimulus-based budget policy can do, but it seems to me the exogenous factors from Morocco’s commercial partners are best matched with structural reforms, and these are better served in an austerity-based government program.

One Response

Subscribe to comments with RSS.

  1. karim said, on October 2, 2012 at 19:26

    Je suis de l’avis que les déséquilibres graves que connait l’économie du pays ne peuvent pas être corrigés à travers des actions ponctuelles sur les bilans et les chiffres afin de les rendre plus présentables et acceptables.
    Le seul secteur qui produit encore au Maroc, qui fournit un nombre important d’emplois et qui permet de cacher la misère de tout un pays est le secteur agricole. S’il est évident qu’il a besoin d’un nombre important de réformes, il me semble par contre pas sage d’en extraire des ressources qui seront surement dilapidées dans des salaires pour fonctionnaires productibles ou une caisse de compensation dont le seul mérite est d’acheter la paix social et de gagner du temps! Je conçois que d’un point de vue idéologique, il est injuste que des exploitants agricoles bien engraissés soient exonérés, mais je pense qu’il serait plus judicieux de trouver des mécanismes pour inciter le réinvestissement et la modernisation de l’appareil productif, la création de l’emploi et la formation.
    Je suis de l’avis de taxer le capital non productif, les gains boursiers, les énormes profits réalisés par un secteur bancaire, non compétitif où il est évident qu’il existe des collisions entre les différentes institutions financières le régulateur, un secteur des télécoms presque monopolistique et qui dégage des marges indécentes (vs moyennes internationales), des cimentiers organisés en cartel dans le cadre d’un marché bien protégé, des promoteurs immobiliers qui engrangent des profits indécents dans un secteur dont le chaos est le mot d’ordre …
    Pour un pays qui a financé sa croissance avec du crédit et rien que le crédit (voir les données de BAM sur les six dernières années), taxer un appareil productif presque inexistant est suicidaire. Ceux qui ont gonflé la bulle et en ont profité doivent payer. On ne fait pas de la croissance avec de la consommation, c’est plutôt la croissance qui génère plus de prospérité et la consommation.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: