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':
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 and 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);
For all its simplistic setting, the 1957 Solow paper provides enough of a case to support the following claim: accumulation of physical capital per capita does not create growth. And as far as the domestic economy goes, this is what comes out:
Y | H | K | TFP ------+-------+------+------- 1.40% | 0.07% | 0.22% | 0.83% | 5.12% | 15.68%| 59.38%
(Quarterly growth. Y: Output, H: Labour, K: Capital, TFP: Solow Residual)
Over the past half a century, capital accumulation accounted for only 15.7% of the average GDP growth in the Moroccan economy, three times as much as demographic growth (actually, growth in the labour force) but most of the observed growth (in real terms) comes from TFP, Total Factor Productivity, or commonly known as ‘The Solow Residual’.
TFP accounts for almost 60% of the long-run average GDP growth. It does a lot more than that: it is more aligned with GDP growth, more correlated, and most importantly, a 1% increase in the Solow residual accounts for .96% in output growth, even as 1% in Capital growth accounts for only .08% in output What can the policy-maker learn from this very simple yet robust model? First, that accelerated accumulation of capital is unlikely to get output to grow faster. In the universe of our government’s commitment to get the 5.5% growth over their legislature, they need to generate a mind-boggling 23% increase in gross capital formation – i.e. an annual additional investment of 9.42 Bn dirhams above the current trend.
The findings are easy to sum up: what drives most of economic growth is not physical capital accumulation, but rather those things policy makers in Morocco care little about: research & development, labour and capital efficiency (a sad story I can recall from a lecturer in my Alma Mater, about a project of diesel-powered desalt water plant in Laayun, a wasteful process the Moroccan officials were reportedly proud of) and most important of all, institutional changes. These of course do not refer exclusively to political reforms, it encompasses labour market regulation and rigidities, rule of law and enforcement of contracts.
What is the real effect of this ‘technological change?’ first, a 1% sustained increase in innovation (such as it is) over 4 periods (or one year) results in boosting investment productivity 4.24%, with spillover effects going up to 3.2% on average over a 5-year period. Just think of it: this is sustained investment over just the first year in office. In budget terms, this means a relatively low investment of 50 Million dirhams in efficiency programs can increase investment efficiency by 4.24%, hence contributing an additional 12.5 Bn dirhams a year, a net contribution to growth by 360 basis points in one year – that is, an additional 3 Bn in added value, jobs and economic activity.
In fact, the accrued effect of a one-year investment produce a marginal effect of almost one percentage point of GDP growth. And it is only right GDP grows thanks to technological change – because these resources when allocated to capital accumulation have a much lower return (one observes in the second graph capital accumulation declines by similar amounts (4.43% the first period). I argue this provides good evidence that accumulated investment for its own sake (which is about anything when it comes to some of the ongoing Grand Design workshops)
One last thing; since the mid-1970s, a particular component I have not described here accounted for the remaining 20% in real growth: even the impact of foreign trade (or perhaps just foreign productivity spillover effects) generates more growth than capital accumulation.
See Cooley & Prescott for the model used to generate the IRF graphs. Steady-state values have been used to calibrate the deep parameters.
@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.
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.
Ever wonder how much of your taxpayer’s money went to other regions? Of course, if you are from Casablanca, or Agadir, you are entitled to ask if you are from Rabat on the other hand, not so much. Unfortunately however, some budgetary constraints prevent the curious inquirer to get the raw numbers from our administration. And so, I endeavour to crunch these available numbers together to get some idea of how things are computed.
In fact, I can even assume that equality is simplified to Y=C+G+I since most of our exports are concentrated on two seaports at the most (Casablanca alone attracts 42% of total export/import shipping ) and use data from the MINEFI paper on regional contributions to GDP, as well as an HCP survey from 2007. It is without much surprise that 5 regions concentrate about 60% of total GDP (Casablanca, Rabat, Marrakech, Tangiers and Souss) and a little less than half of total population. We can also safely assume productivity per capita in these regions is significantly larger, paradoxically because their respective occupation level of active population would be lower.
Why would I need the national accounting identity to check which regions rely on government subsidies and transfers? Well, it is a matter of simple economics: a thriving region would not necessarily have a high regional GDP – Soussa Massa has a relatively low GDP per Capita, yet it is one of the richest regions in Morocco (4th richest not including Raba-Salé). What matters really is how their regional GDP is formed; a wealthy, productive region should produce its own consumption and pay relatively high taxes – or at least close to nationwide levels.
The following results are based on computations of aggregates per capita: there is a logical enough argument to be made that poorer regions might be over-populated; as it turned out, richer regions tend to have larger populations, they are however more productive, even more so, given the fact their active population is actually smaller, when compared to nationwide occupation rate of active population as well as those of the poorer regions. Per capita results take the demographics out of the equation, and even the odds somewhat.
The initial point made about wealthy regions stems from the standard national accounting equation: regional output is (roughly) consumed, taxes or invested. A good point can be made as to how local output matches local consumption, i.e. food and other goods consumed in one region are not necessarily made there; after all, sea-fish consumed in Marrakesh has to come from a coastal city, and Melons down South in Laayun need to come from another, cooler, watery place. Still and all, productive regions are able to produce enough output to buy them their consumption from other regions. Those too poor to afford anything will have to rely on government subsidies, or else reduce their consumption to subsistence levels. six regions emerge in this case: the Southern provinces, Tadla-Azilal and Taza-Alhuceimas. Their cumulative contribution to total GDP is less than 10%, and their average GDP per capita is roughly that of Souss-Massa.
Taxes and Government spending however are a different place; government money levied from or spent on a region stays there. Unfortunately, we do not have the exact amount of government spendings per region, though the other side of the equation is out there: there is evidence about how much each region contributes to total fiscal receipts; As it turns out, the 5 super-regions contribute about 91.5% of 2011 fiscal receipts, about 138.2Bn that is. So the initial body of evidence is there: the richest regions tend to pay more taxes than they produce output, and if Rabat-Salé is excluded from computations, the 4 super-regions account for 74% of fiscal receipts, versus a little less than half of total GDP. In simple arithmetic, every 100 dirhams these 4 regions paid 19.1 of it in taxes, and these were transferred to other regions.
The figures at hand are not gross taxes however; these have been netted with subsidies (our Compensation Fund) which makes computations even easier; indeed, national accounting equalities tend to assume perfect funding from taxes to pay for government expenditure. Poorer regions – in this case, the bums are the Southern provinces, Taza-Alhuceimas and Tadla-Azilal would share their output between consumption and government expenditure. This is precisely the case for Taza and Tadla, where Investment per Capita (and at a smaller extent, Net Exports) make up for less than 2% of GDP per Capita. These two regions, by the way, should have received a net 1.5Bn dirhams either as tax cuts, or direct government transfers. But they did not: the local population had to make do.
On the other hand, the Southern regions are a riddle when it comes to national accounting; its taxation is a record low, and the assumption behind national accounting does not stand. And that is so because the tax aggregate used for that matter was net of subsidies. Think of it as a reversed budget balance: G – T instead of T – G. One additional step would be to propose: where is government subsidies expenditure. The balance is the net government transfer the region benefits from.
So what is the score? It is always difficult in view of the numerous shortcomings of proposed methods, but it is clear the remarkably high Southern GDP per capita (30,000 dirhams) which marks these regions as the third richest is solely due to large government transfers, in this case 7.2Bn dirhams in 2011 – .89% of GDP, 17.1% of subsidies dispatched to 3.5% of total population. The bums in this case, those who benefit from government transfers, are the Southern provinces.
Regional solidarity is an admirable principle, and should be encouraged at every level of government business. But it assumes transparency in these transfers, and some kind of economic logic to it. In this case, transparency is a vain word – let us not forget the assumptions behind all these computations are very formal, and that means reality might be a lot dimmer, i.e. actual transfers are higher. And the proposed newly redrawn regional boundaries will certainly not help.
The political ramifications of unequal and unjustified (from an economic point of view, anyway) government transfers from hard-working citizens to others will exacerbate resentment, and there is no doubt unscrupulous politicians will seize upon this if and when an electoral advantage would weigh in. Another way to look at it is instead to push for larger devolution; fiscal autonomy would then show how each region actually does in terms of economic performance, and a dedicated federal fund can then be set up to support those regions with structural difficulties, on the grounds of economic support, not back-room political strategies as it is now.
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.
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.
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).
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.
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.