The Moorish Wanderer

Tax Cut Design versus Deficit Spending

Posted in Dismal Economics, Flash News, Moroccan Politics & Economics, Morocco by Zouhair ABH on December 13, 2012

The following is a small model designed to simulate the effect of a tax cut targeted on middle classes. The idea is to review the respective effects of each tax cut category (on VAT, Income, etc…) and weigh it on versus an increase in government expenditure. Over the (very) long run, both policies are fundamentally the same, but one needs to keep in mind government expenditure is potentially infinite, while taxes are constrained by the existing resources.

The idea is to compare the effect of a government expenditure increase versus tax cuts on growth and the subsequent created welfare. And the results are clear-cut: tax cuts stimulate GDP a lot more than increased expenditure. On average, a 1% tax cut would deliver on average of .85% in additional growth, while a 1% deficit would contribute only .06% to growth. Investment tax credit (fiscal incentives to investment) contribute a lot more to growth – a 2.16% additional growth for a 1% increase in investment tax credit. These results are compared for a 1% change in government budgetary policy, and then extended over a couple of quarters.

The argument behind this can be summed up in the following ‘policy transition functions’:

y = 1.91 + .028 k_{t-1} - .038 r_{t-1} + .7 z_{t-1} - .006 \tau_{k_{t-1}} \pm .029 def - .0047 \tau_{w_t} - .041 \tau_c + .003 \tau_k + .028 \tau_i + 2.55 \epsilon_t

and

g = .076 + .004 k_{t-1} + 1.29 r_{t-1} - .026 z_{t-1} + .19 \tau_{k_{t-1}} \pm def+.16 \tau_{w_t} + 1.37 \tau_{c_t} - .0005 \tau_{k_t} - .47 \tau_{i_t} - .0972 \epsilon_t

It is worth pointing out these policy transition functions are not the product of usual computations, i.e. these are not structural models estimated afterwards, but they are rather the end result of a more complex set of equations and assumptions. They (among other policy functions) provide policy recommendations that can be further expanded to account for specific fiscal policies, my particular insterest for instance, tax breaks and cuts for the middle class, has some useful applications.

It shows for instance that unfunded government expenditure (deficit-spending) contributes weakly to GDP growth, not as much as a single or aggregate tax cut, or indeed one tax credit scheme. This is not to say any spending-based stimulus is useless: there is evidence of counter-cyclical budgetary policy -detrended budget and output are negatively correlated- but it is not as persistent as output, and cannot provide optimal cycle smoothing: ‘unpredictable elements’, the technological shocks captured by z_t and \epsilon_t exhibits excessive diturbances deficit spending cannot bridge when these are negative exogenous shocks (a factor of 22:1 against deficit spending). On the other hand, a relatively modest increase in investment tax credit (which acts as a tax cut) can immediately make up for a negative shock and deliver a .19% boost to GDP growth, ceteris paribus. Obviously, there are some repercussions as to a fiscal policy geared toward investment tax credit, as it results in lower domestic consumption, regardless of any accrued consumption tax cut.

I am posting the code I have used to generate those results (applicable via the Dynare Matlab/Add-in) and will elaborate on this in the next couple of posts. I am very excited about these results because they have confirmed some of the policy recommendations conveyed in the Capdéma Budget Draft, with quantitative interpretations to specific policies. It also confirms some measure of fiscal consolidation and debt-deflation are needed not only to maintain the 2016 3% deficit ceiling, but also put growth back on track.

(For detailed description of the proposed model, have a look at Ljungqvist & Sargent’s “Recursive Macroeconomic Theory”)

</pre>
// endogeneous variables: debt, government budget,
// consumption capital, output, labour, investment, wages, interest rates and technological change
var b g c k y h x w r z;
// taxes and deficit are considered to be exogenous
 varexo def tauw tauc tauk taui e;

parameters zig, alpha,delta,beta,theta,rho,sigmaw,sigmac,sigmak,sigmai,sigmad;

alpha = .335966;
 theta = 1/3;
 delta = .02909;
 beta = .9895569177;
 rho = .2742;
 zig = .0037;
 sigmaw =.007;
 sigmac =.0671;
 sigmak =.219;
 sigmai =.209;
 sigmad =.005671;

// The model depicts optimality conditions for all agents
// Simple FOC

model;
 z = rho*z(-1)+e;
 y = c+g+x;
 y = exp(z)*k^alpha*h^(1-alpha);
 k = (1-delta)*k(-1)+(1+taui)*x;
 w =(1-tauw)*(1-alpha)*y/k(-1);
 w=b+c;
 r =(1-tauk(-1)+delta)*alpha*y/k(-1);
 (1-alpha)*y/c = theta*h/((1-theta)*(1-h));
 g+def+(1+r(-1))*b=b(+1)+tauk(-1)*(r-delta)*k(-1)+tauw*w+tauc*c-taui*x;
 c(+1)=c*beta*(alpha*y(+1)/k+1-delta);
 end;

endval;
 y = 0.7976304742;
 k = 9.7353698337;
 c = 0.5367196072;
 h = 0.3079168146;
 x = 0.2832019085;
 b = .51;
 z = 0;
 e = 0;
 g = .192;
 def = .03;
 tauk =0;
 tauc =0;
 tauw =0;
 taui =0;
 end;

steady;

shocks;
 var e; stderr zig;
 var tauw; stderr sigmaw;
 var tauc; stderr sigmac;
 var tauk; stderr sigmak;
 var taui; stderr sigmai;
 var def; stderr sigmad;
 var tauw, tauc = 0;
 var tauw, taui = 0;
 var tauw, tauk = 0;
 var tauw, def = 0;
 var tauk, def = 0;
 var tauc, def = 0;
 var taui, def = 0;
 end;

stoch_simul(order=1, periods=224, hp_filter=1600,nograph);
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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.

A 5-year Austerity Package The Government Wouldn’t Dare Think About

Posted in Dismal Economics, Flash News, Moroccan Politics & Economics, Morocco, Read & Heard by Zouhair ABH on August 14, 2012

It is plain clear now we are headed toward the end of an expansionary cycle that dates back to late 1990s. Government stimulus cannot do much about it, and we have to bite the bullet. Not only that, but the “if it ain’t broken don’t fix it” policy about Morocco’s structural problems has taken us down the dark path of debt. Austerity, as I have mentioned before several times, is necessary to pre-empt any draconian conditions if we ever fall short.

From BKAM annual report, 2011. The Compensation Fund has reached historical levels, and threatens more than just budget balances.

The austerity package, like all austerity packages -but unlike the present course of action down here- involves both sides of the balance sheet: revenue enhancement as well as expenditure. The single biggest budget problem, I would argue, has a lot to do with the subsidies: in the name of stabilising prices (and preventing social unrest) the Compensation Fund exploded in absolute and relative terms, to threatening levels to the budget and foreign trade.

Taxes: Close Loopholes, Simplify the Tax Code, Broaden the Tax Base

In effect, these principles call for a radical re-alignment of tax sources: the treasury relies too much in indirect taxes, stamp duties and other discretionary revenues, which either denotes of an institutional weakness to extract taxes where it needs to, or chooses to pick easy targets (read: the middle class) rather than confront powerful special interests. From a personal point of view, I can hardly find economic (and quantitative) argument behind allowing farmers and real-estate developers generous tax breaks, and even subsidies even as their profits are going sky-high.

This is an opportunity to assert an economic-oriented fiscal policy, instead of the daunting pile of bureaucratic regulations, with no economic justification whatsoever: why would we make individuals pays VAT on some of their subsidized consumption? And why would we keep the arcane progressive taxation system (designed some 150 years ago when Teddy Roosevelt was President) when we have much more sophisticated (and simpler) taxation systems? Not to mention the chaotic fiscal structure: the academic body of evidence is overwhelmingly in favour of keeping the overall fiscal pressure constant over time, and it clearly isn’t.

a little more than 40% of total major taxes come from consumption. Guess why the Government cannot commit to a serious subsidies reform?

Let us look like at the numbers: the total fiscal receipts for the 2012 Budget is expected to be 170.67Bn MAD: that’s the total amount of taxes expected to be collected from VAT, Corporate Tax, Income Tax, Customs and miscellaneous stamp duties. To give you an idea of how much that broad measure of fiscal pressure, think of it as the Government’s share in every good and service produced in this country, and that is GDP: 21.2% of it goes into the pockets of government – and that is not enough. They borrow money too, but that’s another question. Incidentally, you can find the best evidence explaining why the past governments and the current one cannot commit to a serious reform on the subsidies system: about 40% of the main taxes come from consumption, that is a third of total fiscal receipts. this mainly VAT-funded receipt has a perverse link to the subsidies: the higher consumers buy subsidized goods, the higher VAT receipts are going to be, and the better the treasury will feel about its primary balance. A defiant reform  of the Compensation Fund would mean the instant denial of a lucrative resource to the budget.

Obviously, there is nothing wrong with the existence of a government funding itself through taxation – for those interested in the theoretical argument behind it, there are some papers worth looking into (don’t get sidetracked by the Maths, the conclusions are rocking) but, the present structure is flawed: 14.35% of these fiscal receipts are coming from discretionary taxes. So the main course is the so-called distortionary taxes, i.e. those who affect the behaviour of all agents, consumers or businesses: VAT, Corporate and Income Taxes. The optimal fiscal policy is actually far simpler than the arcane tax code we currently have: we first look at the contributions of each aggregate component to GDP, then produce at a long-term rate the respective average rates for labour, taxes and consumption; We know for instance that Capital relative contribution to wealth creation (that is, GDP) ranges between 33.5% and 32.7%, while that of Labour captures the remaining to 67% to 66.5% (the odd discrepancies, around 0.16% is left to technological progress) – assuming a long-term average maximum fiscal pressure of 19.2%, total primary fiscal receipts should be around 151Bn dirhams (against the current 123Bn for the 2012 Budget) with Consumption and Income Tax accounting for 96Bn and Corporate/Capital tax for the remaining 54Bn. These are moderate tax increases considering the present levels, but then again, the effective tax rate on the capital stock is less than 2.6%, and total taxes on the labour force around 11% (consumption and production). Why so? First, these discrepancies belie the unequal distribution in both income and consumption, and second, Morocco is a developing country, so the effect of taxation on low capital stock per capita (181,759dhs) can hamper growth. Note that I referred to the capital stock, and not its distributed dividend. Taxes on labour and consumption are further split into respective 48Bn – an effective tax rate per household of 7% (recall the pure income tax from an earlier post) and 11% per household consumption (that new consumption rate I might post something about).

Based on a pessimistic 4.3% annual growth (average growth since 1999) all the way up to 2022, this should be the expected level of fiscal receipts from the proposed tax system.

All in all, without boring you with the details, this fiscal revamping should be a net tax cut of 12Bn, down from 171Bn to 159Bn(we make room for various discretionary taxes worth 1% of GDP) what is more, the broader definition of fiscal pressure is brought down below 20% of GDP, the closest I can get to the Hauser ceiling.

These computations are based on the aggregate number of households, including the agricultural sector – this reform effectively ends the subsidy where fewer than 15% wealthy farmers benefit from a tax break on potentially as much as 90Bn worth of agricultural products. In the process, fiscal equality rewards other sectors and agents by cutting their taxes and/or simplifying them. Finally, I would like to point out these figures are computed on the basis of a 4.3% annual GDP growth with historical volatility, which means the uncertainty factor has already been taken into account.

Expenditure: Freeze, Cuts and Postponements

This is always the least popular item in the austerity package (as if austerity wasn’t already a killjoy), especially when there are talks of cuts to public service pay-wage and related items. And if any serious fiscal consolidation were to take place, it will do something about the 94Bn expenditure on human resources, especially the higher echelon.

Though cutting expenditure is not on the table, it would be interesting to see how a freeze on half the civil service – and a 2% annual increase for the lower echelon. Let us not forget that for the last couple of years, the average annual salary was 192.000dhs per annum, i.e. 65% more than the average annual income per household, and about 3 times more than the median income per household. If anything, the average income where at least one breadwinner is working with the civil service could be earning more than 83% of all the households in Morocco. Fairness dictates some of these civil servants need to see their taxpayer-funded salaries trimmed a bit.

The other juggernaut is the Compensation Fund: never, since the early 1980s, has household consumption been so heavily subsidized, and yet the large gap in consumption and standard of living creeps in, stronger than ever. A complete overhaul of the fund will have an initial negative effect on household consumption, but then again, it should not last no less than 10 quarters (based on domestic exogenous shocks) or 15 quarters if exogenous effects from foreign trade are taken into account; this means any unpopular reform needs to be undertaken at the very first year, until the negative effects eventually die away before election season. My plan subsidizes about 20% of the median consumption basket to the benefit of 60% Moroccan households, costs in 2012 about 25Bn and is indexed to household consumption growth. The poorest 10% receive an annual cash relief between 7,200 and 9,500 dirhams. Incidentally, it cuts subsidies twice its current budget and insures strategy-proof allocation of subsidies to those who genuinely need it, and does not harm middle class standards of living.

The Debt, Rates and PSBR

This whole austerity problem is not out there to serve a sinister right-wing dogma: our fiscal house was quite in order for the past decade, and yet we did not bother to push for continuous reforms; instead, the past government chose an unnecessary large tax cut (from 4 to 7Bn in 2007-2008) to the wealthiest while nothing was done to close loopholes and tax breaks for the privileged few. Obviously, these tax cuts and preferential treatment were funded by increasing public service borrowings: it went from 51Bn in 2007, to 65.7Bn in 2012, and that number can be expected to increase even further.

What the government fails to understand -and so would Paleo-Keynesians in the process- is that public borrowings are crowding out small businesses and individuals; this is even more perverse as these small companies in business with public service procurements are punished twice: the budget pays at later terms, and takes away the existing liquidities from M3. Big business is secured in its day-to-day financing; it is the small guy who takes the fall for the growing public debt.

Accordingly, there is a need to introduce a ‘debt ceiling’ mechanism, where over-borrowing is subject to a floor vote in Parliament, and conditioned by commitment on behalf of ministerial departments to cut or freeze spending over the same period of time the newly issued debt matures; for instance, a 5-year treasury bond has to be matched with spending cuts/freezes whose effect is likely to last 5 years as well. In this particular example, The expected borrowings cannot go beyond 5% of M3, or 47Bn in 2012.

Bottom Line: What Will You Bring Us, Mr Moorish?

Blood, Toil, Tears and Sweat. Well, almost. Unfortunately, making the deficit disappear while fighting government debt is mission impossible; if anything, there will be a large deficit in 2012 (about 7% of GDP) but that gradually disappears, with the first surplus reached by 2020. If anything, the effects of this 5-year austerity plan show around 2018, too late for the 2016 general elections. On the other hand the size of government relative to GDP would have shrunk from the current 44% to 25% by 2021, with all public services and welfare mechanisms in place. The deficit for 2012, projected to be 55Bn, would gradually go down until it reaches 20Bn surplus – or 12Bn if 8Bn dividends are not taken into account. We would however left by then the danger debt zone, with projected overall public debt ratio of 50% by mid 2014 to 2015, not to mention a robust 3% growth in public investment.

“The path Of Prosperity” vs “The Light at the End of the Tunnel”

If anything, the Moroccan economy would look at lot healthier by 2018: lighter, better and fairer government touch, lower tax burdens, lower rates and sustainable deficits and public debt. As always, any of these reform proposals assumes incredible courage among our elected officials, and a sheer willingness to take on special interest, lobbies and established rents. And most of all, an unwavering sense of social justice, because fiscal consolidation, whatever its initial motive, tends to fall harder on the weak, and treat harshly the middle class.

Only a keen interest in keeping suffering at the lowest possible level can bring about the broadest consensus around austerity; for this like so many other policies, a sense of purpose is needed, and carried by committed responsible politicians.

Austerity and the New Engines of Growth

Posted in Dismal Economics, Moroccan Politics & Economics, Morocco, Tiny bit of Politics by Zouhair ABH on June 3, 2012

Paul Krugman on Chris Matthews‘ Hardball argued forcefully in favour of a larger fiscal stimulus package

How come the Moroccan mainstream media doesn’t provide comparable levels of debate? Surely Ministers Nizar Baraka and Driss Azami El Idrissi, or even the parliamentary leadership (Said Khairoun, Chairman of the Permanent Parliamentary Committee on Public Finances) can afford to go on TV or the radio and be scrutinized on more than just platitude (I doubt Milouda Hazib, senior ranking PAM member in the same committee fully grasps the implications of the marginal income tax rate. Mr Technocrat himself, Ahmed Reda Chami seems to be more interested in pandering in view of the next USFP convention than actually doing his job as a member of the said parliamentary committee)  The Finances ministry uploaded not long ago a useful compendium of new fiscal measures, but as far as I can tell, no mainstream journalist has had the interest of writing a paper on how effective the revenue enhancement in car stamps and duties have on reducing car use and, indirectly on oil consumption. Government officials go on with the business of making the Budget bill, the elected representatives supposed to scrutinize them do not seem to be interested in the policy implication of these decisions, and the fourth estate is far behind on this particular piece of news.

That decision to lift moderately oil subsidy on industrial and car fuel is not a sign of the government coming to their senses regarding the compensation fund, it is merely a half-measure designed to curtail the runaway cost of the said fund. At best, the deficit will remain within the 5% projected for 2012, otherwise that decision will hurt significantly growth, paradoxically even more so if a more radical scheme was introduced with the idea of replacing fuel-inefficient vehicles.

Suffice to say there are about 2.001.458 cars and other vehicles in Morocco (2009 figures) and 74.4% of these are more than 6 years-old (2008 figures) more than half have more than 10 years of service. Older car models tend to consume more, and these are usually (mainly) driven by less well-off Moroccan households and businesses. In effect, the decision to increase diesel and fuel by about 14% overnight will hurt a majority while the better off minority will not adjust their behaviour and continue to take full advantage of an indiscriminate and ultimately unfair subsidy system.

I am drifting here… Paul Krugman makes a very good case for the stimulus package, and warns austerity measures would plunge the US economy into a recession similar to that experienced by Spain, Portugal and many other countries in Europe. And yet Morocco is experiencing increasingly dangerous economic hardships, a piling public debt, a sluggish growth in M3 aggregate, and finally, that problem no one in Morocco can actually address, the abysmal trade deficit. a research paper by the IMF points out to the effects of European economic fluctuations on Morocco’s growth, and their conclusions are daunting: the recover in the Eurozone will be slow, and almost certainly not pulled by domestic consumption:

Our analysis confirms the important role played by the European Union for the Moroccan and Tunisian economies. We note, however, that this close tie might also represent a challenge for the future.

For the two countries, enhancing competitiveness and diversifying trade flows is essential for sustaining future growth.

This means Morocco’s foreign demand is unlikely to improve over the next couple of years, and with it, any possibility of growth around the government’s objective of 5.5% average by 2016. The best of best scenario (net) exports can do is to give a modes 1.5 percentage point to growth, which is way below what the economy needs to reach the vicinity of 5% to 5.5%.

Morocco’s growth is therefore left to domestic consumption and government expenditure. This is a particular recipe for disaster: on the one hand, any consumption-led growth means about 30% of household consumption will be insured by a wealthy few less than 600,000 households, and these people are  very hungry for transportation, luxury and imported goods. To these top-tier consumers, one needs to take into accounts the demand pressure implied by the aspiring middle-class, the various increases in public sector payroll. As for government expenditure, assuming our elected officials are taking their pledge to bring the deficit back under 3% GDP seriously, an expansionary budget cannot go one forever, as the pressure on rates, barely alleviated by Bank Al Maghrib’s decision to cut rates 25bps, is going to eventually penalize the private sector, if it is not already the case.

GDP Growth and two components’ contribution to growth: Household Consumption and Government Expenditure.

So Morocco and its public finances are between a rock and a hard place: on the one hand, any Keynesian-like stimulus program is unlikely to restore Morocco’s economic stability, and might well turn out to be a bad temporary fix, whose price are high borrowings now and higher taxes next; on the other hand, growth cannot be fuelled by domestic demand indefinitely because it will result in deteriorating Morocco’s terms of exchange and trigger a run on the currency. That is where cutting the budget comes in: to rebalance the engines of growth.

Government expenditure and Household consumption have contributed an average of .72 and 1.52 percentage points respectively of the 3.58% average growth over the 1992-2010 period. Their contribution goes higher in the last decade with respectively .79 and 2.31 percentage points for an average growth of 4.64% since 2000. An austerity program, that is, discretionary cuts in government expenditure mean a reduction of the budget’s contribution in growth, and in the short term results in a small contraction of GDP, with an undetermined time lag for agents in the economy to adjust themselves, and then growth goes on.

The picture is quite clear as to why government expenditure has to be halved: the Moroccan economy cannot sustain itself with high levels of of consumption and government spending; there are arbitrages to be made, and these come to the expenses of two other equally important national accounting aggregates, Investment (Gross Capital Formation) and Exports (Trade Balance): Y = C + G + I + NX

Cutting the budget by means of restraining public service payroll with growth rate well below inflation rate (since 1992, payroll increased 6.6% on annual average, while CPI inflation rate established itself around 2.6% over the same period of time) is necessary because the available resources have to be used somewhere else. It is a bit of a vicious circle: high public payroll means high household consumption and higher imports, which in turns means high receipts from VAT – these make out 21% of total fiscal receipts, and the trend is upward since 2004. Obviously, the government cannot just agree to kill a lucrative source of income for the sake of economic stability, but the fact of the matter is, the economy badly needs it.

We will have to agree to the unbearable fact that we cannot secure anything near 5% by 2016. Growth has been the magic wand to solve, or at least hide Morocco’s deep structural and social problems: trickle-down effects from income inequality were relied upon to improve (marginally) the condition of poorer households, and government jobs were there to appease unions and the unemployed graduates. On the other hand, other engines of growth have been neglected: Investment makes up for 1.5 percentage point of GDP growth since 1960,  2.38 points since 2000. Same goes for Gross Exports, with 2.19 percentage points as well. High consumption and higher government expenditure means higher imports, with the immediate effect of penalizing promising prospect for the Moroccan economy.

Investment and Exports: the first is just a matter of corporate interest in buying assets, the second needs to adjust to the end of an era: the Europeans are no longer a good trading partner.

5 Questions To Nizar Baraka

Posted in Dismal Economics, Moroccan Politics & Economics, Morocco, Read & Heard by Zouhair ABH on January 10, 2012

As a returning minister with a bigger portfolio, it is only right these questions need to be asked to our new Finances Minister. Beforehand, some congratulations are in order, this is a huge promotion indeed.

From the presentation document to the now defunct 2012 Budget Bill:

[…] L’Etat poursuit ses efforts de soutien des prix intérieurs des produits de base, en l’occurrence la farine nationale de blé tendre, le sucre et les produits pétroliers et ce, par le biais des mécanismes de la compensation qui représente pour le Budget Général une charge de plus en plus lourde.

En effet, les dépenses de l’Etat au titre de la compensation se sont élevées à près de 90 milliards de dirhams sur la période 2007- 2010. En 2011, la charge de compensation pourrait atteindre un montant de 45 milliards de dirhams en raison notamment du renchérissement des cours des produits pétroliers et du sucre brut sur le marché international. (Presentation Document, p.27)

Minister Baraka was the liaison minister to the Prime Minister for economic affairs; his portfolio included the Compensation Fund, and I can distinctly remember him on TV, September 2008, at Mustapha Alaoui’s “Hiwar” political show, boasting about his resolve to reform the fund. three years later, the 2011 Budget accounts for half of all compensation expenditure under El Fassi’s government. Way to go, minister, and there goes my first question:

Question 1: What will the minister do about the Compensation Fund?

How the Compensation Fund measures up to Budget figures

MAD 46 Bn, that’s about 6% of GDP, 15% of total Budget receipts and about 2/3 of all direct tax receipts.

The fact that the budget swelled from  46Bn is a sign of failure on behalf of Salaheddine Mezouar, Nizar Baraka and Abbas El Fassi, first because the 3% GDP limit every Budget bill constraints itself with holds no credibility, and second because the justification behind the discretionary increase was not about the fund’s official mission of stabilizing standards of living, it was a matter of “National Importance” all of a sudden.

Minister Baraka has made the Tayssir program his main theme as a junior minister. The 2012 Budget bill was supposed to provide funding for about 360,000 households (that is the bottom 10% income) will he extend that program to other income deciles as well, or is he planning to scrap the Compensation Fund altogether? It is worth pointing out that the Tayssir program has yielded no particular report, and no prerequisite targets have been set to assess its efficiency. We have yet to see some government figures on that.

Question 2: Will the minister make debt reduction a priority over spending commitments?

With an approximate 420Bn public debt as of last 2011, government resources will have to be directed to paying back the debt. I am not the one saying it, Bank Al Maghrib, the IMF and the minister’s own economic manifesto, all point out to debt reduction as a priority to be dealt with before any further increases in spendings are committed for the next legislature.

To that respect, the finance ministry can either reduce its expenditure and/or expand its fiscal receipts. Either ways, it is crucial to bring debt-to-GDP ratio from a likely 54% to BKAM’s 50% target. that 4% real cut -or MAD 30Bn or so will have to be financed somehow.

Perhaps more concerning for the minister is the credibility attached to Morocco’s foreign debt. True, it represents only 23% of total GDP -or 182Bn; so far, it matches up almost perfectly with Bank Al Maghrib’s net foreign reserves – but only just.

Question 3: Which average growth rate will the minister forecast for the next 5 years: 5% or 7%?

The senior partner in this government has pledged to insure an average 7% GDP growth throughout 2016. It seems they are bulking from it now, but that matters very little since Istiqlal party is firmly in charge of the finance ministry; by contrast, their manifesto pledged a modest but more realistic 5%. Given the fact that a 5% projection of growth for 2011 is now pretty much a reality, what will be the ministry’s prediction?

Question 4: Will the minister eliminate rent activities, end the moratorium on agricultural taxes and look through some 33Bn worth of tax loopholes, deductions and exemptions?

Rent-seeking activities are the blight of Morocco’s economy; unfortunately, institutional incentives are there to provide motive for economic agents: “grimas” are distributed on discretionary basis over closed sectors that would benefit to consumers and fiscal receipts alike if opened: transport, sand careers, high-seas fishery, these are billions of economic activities that not only fail to fall within fiscal scrutiny, but the private monopolies and oligopolies that constituted themselves have done so thanks to an over-regulatory legislation that protects them rather than consumers or enforce health and safety standards.

PJD officials claim that up to 1.5 basis points of growth are lost due to institutional corruption (on the basis of some reports). Is the minister going to lead the way and do the Head Of Government’s bidding on that respect?

Question 5: Any news about the 2Bn ‘Solidarity Fund’?

(No Comment)

Thank you.