The Moorish Wanderer

Policy Pets – Free the Public Debt

Posted in Dismal Economics, Moroccan Politics & Economics, Morocco by Zouhair ABH on February 5, 2012

Everyone has a cause pet: some like to defend unjustly detained individuals or women’s representation in parliament. I, on the other hand, am very much into public debt -among other things. And I feel that cause deserves its place under the media spot.

Free the Debt - from discretionary governmental decision

I guess my reading list these last couple of days took care of my tilting to the right on a few things, and I may as well wind up on the ‘conservative’ wing of whatever pro-democracy platform in Morocco, but that’s it: debt poses just a big a threat arbitrary arrests to individual and collective freedom; Hilarious, isn’t it? And yet, the principle remains the same.

First off, let us remember all that the most stable and recurrent source of government finance is taxes, collected from individuals on their wages and revenues; from businesses on their operating income and their sales. It is only because these individuals and corporations produce and consume that this government can pay for its expenditure, and display credible enough stream of future resources to borrow against. And yet the bureaucracy/taxpayer relationship bears too many similarities with Hegel’s master/slave: it is the taxpayer who pays and provides for government spendings, and yet the latter control and dominates the former.Government services are considered to be favours, dispensed to some privileged few, when they are a right that human rights organizations tend not to care much about; after all, these police truncheon are government property and taxpayers fund them, in a sense.

The way government budget is designed and prepared leaves very little manoeuvre for public scrutiny, i.e. from parliament or even citizens, individuals as well as public interest-oriented groups. unelected officials get to choose all essential elements crucial to the lawmaking process, and the elected members of the public, members of parliament house, especially those seating at the House of Representatives can only go as far as attach amendments to the budget bill in the hope that they can somehow influence an outcome they had no way to interfere with in the first place; finance ministry officials have at their ready disposal a host of experts and quite a lot of resources to fend off criticism and scrutiny; as I had the opportunity to point out, the legislative branch is the most underfunded, understaffed branch of government – and because of it, parliament cannot produce legislation on its own to exercise more scrutiny on public finances.

What has it got to do with the Public Debt? Quite a lot, as a matter of fact: the debt has to be paid back one way or the other; and unless the finance ministry engages in some sort of Ponzi Scheme, i.e.with new borrowings paying back coupons and interests on longer maturities, debt services are paid with taxpayers’ money. And whenever the treasury issues bonds on domestic and international debt markets, investors assess the Moroccan government’s solvency against their potential future receipts – from future taxes.

So taxpayers are basically the core security our governments stake whenever they have to go on markets to borrow some money; in that sense, all of these elements (and many others) weigh in the complex business of government debt: economic growth, productivity, demography, taxation and government efficiency.

Economic growth: as the size of GDP pie grows, so does the amount of pie devoted to government expenditure; assuming a baseline scenario of around 20% GDP with 5% annual growth, the next decade brings some 91Bn in revenues, 75Bn in real terms alone. The higher GDP growth is, the lower actual tax burden on individuals is, and the easier a government can borrow on markets, since they can always make up for debt service by increasing taxes marginally. The thing is, public debt isn’t much of a problem during times of high and sustainable growth, though public finances in United Kingdom now experience the downside effects of excessive optimism when it comes to projected receipts.

Growth isn’t just about immediate and future tax receipts; it also has to do with the potential to borrow money; it is always easier to borrow money when one’s debt-holders are optimistic about one’s future prospects. Morocco unfortunately did not have the opportunity to borrow during the rosy years, i.e. when the business cycles were on the upswing, since 2000 that is – and by the way, that might end sooner than one might think if the average growth for the next legislature does not stick to the 5% potential growth. During the upswing decade, the main fiscal policy item was to halve the debt to acceptable levels, a level of debt inherited from previous governments, that is. Not that it was bad policy, but there was nothing else on the table; debt policy had to be counter-cyclical; as a result, government finances could not have benefited from whatever leverage effect when the economy was recovering from the 1990s depression, and had to rely on privatization to make up for the budget shortfall.

stagnating productivity means no gains made to build on growth.

Productivity: productivity in Morocco is generally very stable. Bad news indeed, since growth through improvement of productivity. For sure Morocco is still an emerging economy -and by many accounts, has big trouble emerging, as it were-

productivity is important to the whole debt business, first because of workforce demographics, and second, because since the existing pool of resources is limited, the most straightforward policy to expand growth with no prejudice to inflationary targets or any negative impact on trade balance, is to improve productivity e.g. find some way to increase work efficiency, or any other measure that can increase wealth creation with the existing stock of inputs. These usually result in higher returns that would benefit in terms of tax receipts. Otherwise, fiscal pressure does not change, and in times of low growth, can actually harm private GDP.

Demography: 2009 is a cornerstone in pre-workforce labour demographics; the number of 15-17 is dropping ever since, from 1.95 Million to 1.76 Million by 2016. And by 2013, there will be as many active 18-59 as there are 60+ retired; this means the workforce has already begun to shrink; in fact, looking at data, the available pool of the total workforce is going down due to demographics, and it does at very different trends in rural and urban areas; but the point is, the tax receipts profile is likely to change dramatically, hence the need to rethink the way taxes and the debt are accumulated.

Government efficiency (in spending): in principle, debt is a financing vehicle for government spending just like any other. As a matter of fact, it can help stabilize fiscal pressure by providing indirect receipts and spread out the cost across time. But there is a need to find the right balance; contrary to corporate finances, Modigliani-Miller does not apply to government budgets: finance structure affects government performance, first because of its size, and second because it influences so many other macroeconomic aggregates, treasury and finance departments need to think carefully through these spending they plan (or usually don’t) cannot be financed indiscriminately with whatever available resources.

These are technicalities that might bore the general public. But hear this: the way our institutions are framed provides many unelected officials with discretionary powers over public finances, just like in the police and security forces. Public oversight is practically non-existent when it comes to the big money; there are even administrative principles for these things,  called “Principle of non-allocation

NON-AFFECTATION (PRINCIPE DE LA ) : principe selon lequel l’ensemble des recettes assure l’exécution de l’ensemble des dépenses.

So taxes and the debt are basically managed by unelected bureaucrats allocated with discretionary powers, but the ultimate liability lies with the Moroccan taxpayers. Taxation with no oversight is just as useless as taxation without representation.

Free the Public Debt; make government more accountable to the way it spends taxpayers money, whether taxes or borrowings. Put an end to arbitrary, bureaucratic control over the taxpayer’ money, and free the debt -and public finances- to be scrutinized by our representatives and citizens keen to make sure government provides good services for all of us.