# The Moorish Wanderer

## The Economic Chronicles of the Kingdom, 1955-2011 Part.4

Posted in Dismal Economics, Moroccan Politics & Economics, Morocco, Read & Heard by Zouhair ABH on July 23, 2012

The Hauser Rule exists and it is verified in Morocco. Over a long period of time, almost 60 years in our case, the percentage of main tax receipts to GDP has remained constant, or at least did not rise above an upper bound, in our case, it is a little below 19.4% of GDP, except four years (and in good reason, as we shall see later on)

[…] En réponse à Horani, Akesbi précise que la pression fiscale ne représente que 22 à 25% au Maroc (il n’a pas décliné sa méthode de calcul) et que à ce titre, il est hors propos de demander des baisses d’impôt.

My Hauser boundary would at first glance contradict official figures from say, Bank Al Maghrib or the MINEFI. It would also contradict a statement from Prof. Akesbi, who puts his figure for fiscal pressure around 22-25% of GDP, which is probably true for the last three or four years, if all receipts except new borrowings are taken into account. It seems Bank Al Maghrib in the predictions laid in their 2010 annual report have made a similar assumption that public finances have been at their best in 2008 (a historical surplus in the Budget is indeed a plus) and the 24.2% should, if I am not mistaken, point to the total receipts (barring borrowings) relative to GDP. Unfortunately, both Prof. Akesbi and the BKAM team have missed the point of genuine fiscal pressure; the percentage is supposed to measure the treasury’s extraction of resources relative to wealth creation.

I do not buy into their argument for two reasons: first, the percentage itself provides little explanation as to its individual component, chief of which the contribution of taxes on Capital and Labour, and second, it gives disproportionate importance to various sources of treasury income with no immediate link to government and budget policy. The economic argument, the fiscal pressure should be computed so as to discuss the effects of distortionary taxes, and only then look at other lump-sum type of taxes, but certainly not pay too much attention to the miscellaneous receipts the treasury cashes in from the government’s portfolio, privatization or other minor sources of income.

Hauser said back in 1993:

The historical record is quite simple, if surprising. Not matter what the tax rates have been, in postwar America tax revenues have remained at about 19.5% of GDP. This is a lesson Congress should remember as it considers President Clinton’s proposed tax hikes. If history is any guide, higher taxes will not increase the government’s take as a percentage of the economy.

In relative size, the last decade has seen Morocco’s effective, “Hauser” fiscal pressure hover around 18.2%, the lowest effective rate since the days of fiscal conservatism and austerity of the Structural Adjustment Plan of 1983-1992.

Distortionary vs Lump-Sump: VAT is a distortionary tax, and so is Income tax. stamp duties and local government taxes, more likely to be lump sum taxes. The difference is two-fold: first, lump-sump taxes do not affect economic decision-making. Because economic agents are assumed to behave in a rational fashion, their optimized decision equate marginal effects, which means constants such as the lump-sum tax do not enter into account. This is perhaps why economists prefer them. On the other hand, these taxes are very unfair to the poorest and less-endowed economic agents. Proportional or quasi-proportional taxes are said to be ‘fairer’, but at the same time, they alter, or distort, economic calculations. In size as well as in importance, distortionary taxes are worth the study, while lump-sum taxes are a secondary element that need not be involved in the way described above.

the Hauser boundary evolves around 19.2% and 19.4% of GDP. This means fiscal policy has little impact on government’s fiscal pressure over the economy.

Some of the computations I present the reader with are built on a very strong assumption, almost a dishonest one: the only available data time series I could put together involved government expenditure, and not taxation. What you see really is government expenditure relative to GDP. My assumption postulates the primary balance is stationary around zero, i.e. government expenditure is almost fully funded by tax receipts. It is a strong assumption indeed, but some results from empirical data tend to vindicate yet again that assumption.

The years 1976-1979 stand out as a bit odd, because there was a primary deficit back then for obvious, historic reasons: huge transfers to the newly recovered Southern provinces, and a rapid expansion of Morocco’s military capacities have put a strain on its public finances. Besides, even though Morocco’s GDP grew at very high rates, it was not economic activity that pulled it off, and that might explain why it did not translate into additional tax receipts. Barring these 3-4 years, government expenditure and main tax receipts are not statistically significant, when one takes into account for instance the GDP deflator. For reference, I compare my expenditure-turned-tax receipts against the World Bank’s nomenclature GC.TAX.GSRV.CN and GC.TAX.YPKG.CN.

The assumption about the primary budget balance is one of long-term consequences: no country can afford a deficit in its primary balance, i.e. not fund its daily expenditure with taxation over a long period of time. This is particularly true for the past decade, where a primary surplus of 0.1% relative to GDP, on average, has been observed – this figure is merely the difference between distortionary taxes and government expenditure relative to GDP, and shows the long-term behaviour of public finances: primary taxation funds entirely government expenditure.

How should distortionary taxes have been levied? First off, we need to take a look at the long-term breakdown of production per input: if we restrict ourselves to capital and labour, total receipts from primary taxes should encompass the same proportions -captured by $\alpha$ and $\beta$ in $Y = A K^{\alpha} H^{\beta}$ in order to neutralize the effect of exogenous technological process (captured by A) we assume $\beta = 1 - \alpha$. In this respect, growth gains and the respective contributions of inputs are distributed such: $\ln(Y) = \alpha \ln(K) + \beta \ln(H)$

In the realm of public finances, and with no loss of detail, labour taxes are levied on income, consumption-oriented goods and services (typically, VAT) while taxes on Capital are usually centred around corporate tax (a tax on profit or in accounting terms, operating margin). When one considers fiscal receipts from the last 20 years however, this does not seem to be the case: Capital is over-taxed, and Labour under-taxed.

the spendthrift late 1970s have ransacked the fiscal house, and impaired its stability for the next decade, and deflect it away from a 50-years mean of 15.6%

There are many ways to explain these discrepancies, both at the aggregate and input levels: first, fiscal policy in Morocco does not seem to take into account the repercussions of its implementation, meaning that the various tax breaks, deductions and even the new fiscal measures fail to anticipate the behaviour of agents subject to these fiscal regulations.

This is not a new phenomena, really: if indeed the Hauser boundary is verified, fiscal policy, translated into fiscal receipts, appears to exhibit higher levels of volatility -almost twice as much as GDP’s, though the trend observed since the mid-1990 points to a stabilization close to GDP fluctuations. The second point about these discrepancies is policy-making: the figures in this post fail to account for the differences in fiscal regulations, especially those pertaining to agricultural output, whose tax system has been frozen in effect since the mid-1980s. The same fiscal regulations miss out on the upper income bound due to the standard income tax, whose marginal rate actually falls when it comes to the top decile income earners.

In policy terms, income rates have been too low, or inadequate. The same can be said of consumption-based taxes, such as VAT. As for corporate taxes, though the effective tax rate is comparatively low, the receipts are not up to scratch, in terms of Laffer Curve, corporate taxes are not efficient, and need to be cut accordingly. To make up for the shortfall and to balance the fiscal ratio up, wealth tax and the agricultural tax need to be levied at some point.

## Pure Income Tax: a Rate for Everyone

Posted in Dismal Economics, Moroccan Politics & Economics, Morocco, Polfiction, Read & Heard by Zouhair ABH on March 23, 2012

I suspect lawyers got the better of economists when it comes to the proper rates that apply to Income Tax rates. income brackets are determined somewhat arbitrarily -I haven’t come across any MINEFI stating otherwise yet- and all exemptions, tax breaks, loopholes and other regulations are yet to prove their usefulness, both as a policy instrument and as an incentive to influence taxpayers’ behaviour.

As it stands now, Income tax represents 3.8% of total GNI; roughly speaking, that means every household in Morocco pays some 4.440 dirhams in taxes – which is quite absurd, since a lot of these do not pay it actually, and another bunch is getting away with it; while it is understood the poorer 10% do not pay income tax due to their very low average annual income – some 25,172 dirhams, the wealthiest 10% earn an average of 427,931 dirhams per annum. So in effect, the real average tax payment is closer to 3.97% or 5,000 dirhams per household. But even that amount of money is phony; how can one explain the high discrepancy in the 38% marginal rate, the average 3.97% and the real marginal rate of 1.16%?

The is simple: there is an incredible inequality in household income distribution, and the present tax system is intrinsically unfair, as it lays a heavier burden on the middle/median incomes relative to the higher ones, and finally, there are many wealthier individuals with Agricultural Business whose taxes are negative, i.e. subsidized in their income. Indeed, the present tax code presents (urban) taxpayers with the following rates:

<30,000 per annum: ……………exempted
[30,001 ; 50,000] per annum: ………..10%
[50,001 ; 60,000] per annum: ………..20%
[60,001 ; 80,000] per annum: ………..30%
[80,001 ; 180,000] per annum: ………34%
>180,000 per annum: ………………….38%

which does not compute with income distribution, since the actual IR rates tend to hit the middle class harder – and by middle class I mean the 75,500 dirhams these households earn annually, and many of these cannot get away with the various loopholes and breaks the tax code allows for, thus creating an actual tax break for the 38% marginal rate.

Is it possible to provide an alternative tax system then? Sure. It would have the advantage of being simple, progressive and easier to carry out, because rates would adjust themselves automatically. There is one little caveat though: the statistical evidence from income distribution has to be solid and significant. Since I do not have access to the detail, I would venture some results based on the public data HCP released regarding income distribution in 2009.

Let me first start with some doodling with some simple assumptions – just to get my point across. Let’s assume income distribution is normally distributed with the present mean 114,420 dirhams, and (sampled) deviation of 1,474. Computations are therefore easier to run with custom tax rates: depending on how far a household’s income falls from the average 114,420, they have to pay a commensurate tax rate computed with the same normal distribution; since the average income rate households in Morocco below the median threshold are supposed to pay is 7%, then we can match Normal income distribution $N(114,420 ; 1,474)$ with an equivalent Normal income tax distribution $N(7 ; 1)$ in this simple setting, the wealthier 1% with an income of 117,850 dirhams and above would pay at least 9.3% income tax, while the middles classes, those close to the average 114,420 dirhams would pay no more than 6.9%. Under this scheme, and following this income distribution, tax receipts would increase from existing 28.96 Bn dirhams to 46.82 Bn dirhams, with an overall income fiscal pressure of 6.3% of total Gross National Income. and we still get to exempt the poorest 651.600 households from income taxes. The windfall profit from the scheme is essentially motivated by the fact that income and tax distributions have been matched with the same random parameters, hence insuring perfect fairness in taxation, cutting red tape and making sure every individual has a clear understanding of the tax system.

Application: under this scheme, a household earning 111,000 dirhams would have to pay 4.68%  income tax, such:

$w_{t}\pm \alpha_{t}\sigma=114,420$

and thus using the level of confidence to compute the custom income rate:
$t_{p}=7\%\pm\alpha_{t}$

another household earning 117,000 would thus pay a 8.75% income tax rate. Simple, quick and easy to implement. In each case, households with comparative incomes would pay respectively 5,194 and 10,237 dirhams, which is still far below the respective taxes of 20,540 and 22,580 dirhams they would have to pay under the present tax code.

#Income Distribution
#Phase 1: assume Income follows Normal Distribution
#Sample 1/1000 of total number of Households - HCP Census
n<-6516
I_M<-rnorm(n, mean=114420, sd= 1474)
hist(I_M, prob=TRUE)
quantile(I_M, probs = c(0.01,0.99,0.95, 0.25,0.5, 0.1, 0.05))
Tax_Norm<-rnorm(n, mean=0.07, sd=0.01)
quantile(Tax_Norm, probs = c(0.01,0.99,0.95, 0.25,0.5, 0.1, 0.05))


But we do not live in a Gauss-Laplace world; there are such high income inequalities that mean and median household income in Morocco are at a 2:1 ratio, yet another indicator of the disparities. As a matter of fact, I did point out -in a rather hurried manner- that the best estimate for income distribution across Moroccan households is the well-known Pareto distribution. I will try to provide a correct estimator this time, and from then on apply the proposed tax policy instrument;

Cumulative share of decile households (HCP)

How do we know income distribution in Morocco is indeed a Pareto distribution? Well, the first item to look at is the cumulative distribution function built from the published data; the graph gives compelling evidence that indeed income distribution is Pareto – which is not great news since it means high discrepancies in income across households, and subsequently unfair tax brackets embedded in the tax code.

The object of interest here is indeed income share per decile, and the basic idea is to match it up continuously with custom tax rates, hence eliminating tax brackets and all loopholes to the benefits of all: government receipts increase, and a pure tax rate ‘discrimination’ (discrimination in the sense that every individual has only to pay its own, intrinsic tax rate) allows for a lower tax burden compared to the present tax system. Everybody gains from it. Luckily enough, there is little to estimate; what is more, the properties of the Exponential distribution allow for some computations to run smoothly;

since we are considering a 1/1000 sample, the maximum income in this case is 1.18 Million dirhams – the richest household in this sample, so to speak. We check easily that the minimum income earned at the 1% level is 520,600 dirhams, while the median sample is 79,500 dirhams – which in line with the real-life data (75,500 dirhams)

The next batch of computations is pretty straightforward, we need income tax rates to match income distribution with its own Exponential distribution, and so:

#Phase 2: generation Exponential Income distribution
n<-6516
#Sample as previous: 1/1000 of total number of Households
I_Exp<-rexp(n, rate = 1/114420)
summary(I_Exp)
quantile(I_Exp, probs = c(0.01,0.99,0.90, 0.25,0.5, 0.1, 0.05))
Tax_Exp<-rexp(n,rate=1/7)
summary(Tax_Exp)
quantile(Tax_Exp, probs = c(0.01,0.99,0.90, 0.25,0.5, 0.1, 0.05))


And so we end up with interesting results: the richest 1% have to pay some 31.47% income tax – which is still below the nominal existing rate, and the median rate 4.73% for those earning around 79,500 per annum. The same computations apply equally to different incomes: for a household earning 86,000 dirhams, the custom rate would be 5.72%. All you have to do is look at the probability value at which household income wt lies, then match it up with the corresponding rate – with perhaps an exemption for the bottom 10%. Households below 420,000 dhs income would benefit from this scheme: median income households of 75,500 dirhams would pay about 4,873 dirhams compared to the 10,325 dirhams they would pay under the present tax system. As a matter of fact, even households earning 173,918 dirhams would pay 10.91%, i.e. 18,978 dhs which is still below 41,900dhs they would pay under the existing tax code.

Again, receipts from the new tax system under this scheme would top the existing receipts to 46.4Bn dirhams, way more than the, again, existing 28.96Bn, with no prejudice to the overall fiscal pressure relative to GDP or GNI.

the boost in fiscal receipts is mainly due to the tax discrimination effect described above – and the elimination of a host of loopholes and tax breaks do contribute as well.

## Was 2011 as Rosy as N. Baraka Makes out?

Posted in Dismal Economics, Moroccan Politics & Economics, Morocco, Read & Heard by Zouhair ABH on February 18, 2012

A press conference was held a week ago in Rabat, during which Finance Minister Nizar Baraka and his Budget liaison Driss Azami presented journalists with their primary findings on Morocco’s economic performances for 2011.

I would like to start off with the conference’s closing statement:

LE MAROC A FAIT FACE AVEC SUCCÈS AUX GRANDS DÉFIS ENGENDRÉS PAR LA CRISE MONDIALE :

Après plusieurs années de politiques macroéconomiques et de réformes politiques avisées, le Maroc a disposé des marges de manoeuvres nécessaires pour affronter la crise internationale de 2009 et répondre aux demandes sociales qui se sont exprimées lors du Printemps arabe en 2011.

Dans cette conjoncture difficile, le Maroc a enregistré de bonnes performances économiques ainsi qu’une amélioration de ses indicateurs sociaux.

The steady decrease in absolute and relative public Debt was eroded in 2007 and post-2007 gains were wiped out

But did it? While it is understood Morocco has engaged in structural macroeconomic reforms, it seems the presentation exaggerates the effects of these reforms; In fact, the only viable policy to display efficiency was the steady decrease in Debt relative to GDP, a sound policy scrupulously carried out for almost 20 years. This has allowed for discretionary spendings and borrowings in the last two years, but this is hardly a victory.

In fact, the euphemism used to justify the obtained ‘room for manoeuvre’ hardly provides a disguise for the response to social demands; the Compensation Fund was short of some 18Bn, and a matter of ‘national interest’ was invoked to wrestle executive control over the money. For reference, 18Bn dirhams represents:

* 96% of total domestic VAT receipts

* 90% of total foreign borrowings accounted for in the 2012 Budget Bill

* 71% of total income tax receipts

* 8% of total receipts for the Budget.

* 40% of the projected deficit for 2012.

that amount of money was appropriated with no parliamentary oversight, since the ‘national interest’ motive allows MINEFI officials to go ahead with it. Macroeconomic reforms have failed in that respect to make sure money is properly appropriated, I would argue.

And there goes another policy mistake: while the last government aggressively supported the compensation fund, it has also taken away some of its subsidies by means of VAT receipts; the presentation reports the stunning figure of 6% VAT receipts relative to GDP, about the same amount spent on compensation: 48Bn dirhams giveth and taketh away – with perhaps some snide trickle-down effects that harm purchasing power and middle class wealth. Even more disturbing is the fact that Income tax receipts have decreased after the 2008 tax code reform, and that is mainly due to the scrapping of the 42% marginal rate. Ironically, the presentation boasts:

Une hausse des dépenses ordinaires sous l‘effet de l’aggravation de la charge de la compensation et des mesures prises dans le cadre du dialogue social.

“dialogue social” indeed…

There are many hidden facts in this seemingly triumphalist communiqué, perhaps most importantly the claim that inflation was ‘tamed’, to an average of 1.8% between 1996 and 2011, compared to 6.2% between 1990 and 1995. Be that as it may, but the claim overlooks the recent change in CPI computations – the new ICV-based inflation index has been computed with a relatively inflationary base year (2006) and core inflation tends to disparage the volatility effect on households’ purchasing power. The minister couldn’t have picked a worse indicator, even with a break down analysis per category. non-food inflation rate of 0.6% increase with a 3.3% base inflation year does not tell much about the government’s policy towards price control. For the record, this is not the first time minister Nizar Baraka has stumbled over figures, mind you.

Moroccan Exception: supposedly "skilled" labour suffers from higher unemployment.

Unemployment has not improved much as well:

LE TAUX DE CHÔMAGE DES JEUNES ET DES DIPLÔMÉS DEMEURE ÉLEVÉ

since it is an established fact that unemployment in Morocco falls heavier on graduates and young individuals. And there goes one particular aspect of the ‘Moroccan Exception’: economic theory stipulates unemployment should be lower among those with labour skill, usually signalled with a degree; But the sorry state of Morocco’s basic and higher education creates a perverse state whereby universities tend to produce unemployed graduates – who usually consider public sectors jobs as rightfully theirs and refuse, for those keen to challenge common sense, point-blank to work somewhere else.

The trouble is, opposition and government alike are bound to uphold that rosy picture. At one point or the other in the selected time frame (1990-2011) each and every major political party has been associated with government, or sanctioned these policies (including MPDC-turned-PJD in 1997 for a while) and a strange consensus is strongly established to defend a common record, hence denying it any particular scrutiny.

## The Open Society Project: Bridging Income and Wealth Gap

Posted in Dismal Economics, Moroccan Politics & Economics, Morocco, Read & Heard by Zouhair ABH on August 12, 2011

Large numbers to illustrate policy ways and means do not, usually, speak to the average voter. And up to a point, they are right not to care whether the Compensation Fund increased to some MAD 32 Bn, first off because even the most civic-spirited citizens of us cannot put together a detailed account of how much it would benefit them, and second because for all governmental policy and its supposed benefits on all of us, it takes a while, and a certain approach to convince people that these taxes are well spent, and these actually benefit them.

I used to convince myself that a successful political party in Morocco can win favours with some “populist” lines on income inequality and wealth. I wish we had some serious polling companies (and a more relaxed set of regulations) to gauge the mood of the nation regarding the introduction of progressive taxation on dividends, large agricultural businesses, real estate tycoons, grima-holders. In a curious, almost virtuous ring, populism, high-brow policies and sound economic decisions have been united in one single fiscal policy: wealth taxation. I mentioned in an earlier post the possible levy of at least MAD 45Bn by introducing a 60% tax rate on millionaires. As a matter of fact, that measure is net of a tax break which would benefit directly to the 20% less affluent, and 60% of total households. The following is an effort to breakdown those measures into real, individual impacts.

But first off, some macro-figures are needed to illustrate why wealth taxation is necessary, and could actually help stem inequalities and boots domestic economy. The cornerstone of governmental policy is twofold: first, the introduction of wealth tax regime, and the implementation of discriminatory (in the pure economic definition) VAT and Income Taxes. Based on the assumption revenue distribution evolves within the observed trend of the last decade, and following available figures on GDP growth and the 2011 Budget, we can establish the following windfall receipts from the new changes in income and VAT taxes: out of some 5,210,000 urban households, distribution between income structure and paid income tax shows a marked discrepancy, an injustice that should be dealt with swiftly by re-arranging the income brackets.

20% Wealthiest own 60% of GNI, but pay only 40% of Income Tax

It can be observed that even with a uniform distribution of individuals across households deciles, the 20% richest do not pay taxes commensurate to their incomes, while the less affluent households do pay comparatively more. This is mainly due to the virtual tax break for all households earning more than MAD 180,000 (though actually, the tax break starts at MAD 165,000) which means individuals earning on average MAD 500,000 and up (the top 10% bracket) earn a tax-free Dirham when they turn millionaires. The tax subsidy goes even worse, and conservative estimates, the tax receipts from the introduction of progressive  tax policy will be quite large.

a family of 5, with one breadwinner and a stay-at-home mum is likely to earn, on average MAD 59,642 per annum. They are likely to pay MAD 3,900 i.e. about 7% actual tax contribution -These, by the way, are households HCP officials refer to as “the middle class”. A smaller household (say of 4 members), with two working co-heads of household earning MAD 560,000 per annum pay in taxes MAD 44,000. Both households pay comparatively the same percentage of their income in taxes. The income ratio however, is 1 to 9. The super-rich are on average paying less than the middle class in terms of income taxes, and we are considering only their non-agricultural incomes. Any fiscal reform that shifts the burden from 40% of households to a minority within the 10% more affluent is not only a progressive policy, but would also most certainly bridge income gap. The other implication of such fiscal reform would necessarily increase all 60 to 80% of households’ standards of living.

Am I too greedy with the super-rich? Am I? Following their 2010 financial statement, listed companies on Casablanca Stock Exchange (and thus required to publish their financial statements with the CDVM regulatory body) have distributed in 2010 about MAD 27 Billion of dividends. Considering how concentrated the shareholding structure is in Morocco, these dividends simply do not benefit to the many, but only to the (already rich) few. Besides, tax code regulations to that day do not seem to tax these dividends. Indeed, under Art.6 subsection C regulations, company shareholders registered in Morocco (that is, virtually all of BVC listed companies) do not pay income tax on at least 95% of their earnings. A financial tax of of 65% over these earnings (as well as the rising of the legal reserves ceilings) can provide the budget with an additional MAD 17 Billion receipts.

The untaxable happy few (Brahim Zniber) Picture: Flickr

Agricultural income is not taxable in Morocco. It is argued that since the strategic sector has been agriculture, and since this economic sector has suffered severe setbacks due to a series of droughts, farmers should not be burdened with taxes; Up to a point, the argument is valid and seems economically sound; nonetheless, the legislative process that exonerates farms from taxes is a pure royal fiat decision, one that comes back every couple of years. Lately, His Majesty decided to postpone the end of farm tax exemption till 2014. The second argument is economic: are all farmers benefiting from the tax exemption? Evidence from estate conservation and ownership concentration most certainly suggest that the answer is no, only a super-privileged few are benefiting from the moratorium.

Following the latest agricultural survey (1996) there is a huge concentration around large farms. As a matter of fact, 12.3% of farmers own about 67.1% of total area (Surface Agricole Utile) and every one of them owns more than 12,000 ha. It is even more interesting to note that those owning the largest farms are 5 times more likely to be urban dwellers, rather than established farmers (respectively 66.4% and 13.9%). Under assumptions of stabilized total agricultural surface, uniform returns over areas, and bearing in mind the That agricultural GDP was in 2010 about MAD 95.30 Billion, and assuming commensurable distribution in GNI distribution, total income generated was MAD 121.53 Bn. Assuming only those farmers with 10,000 ha and above are subjected to a low, indiscriminate tax rate of 12%, gross generated income would amount to MAD 12 Bn, all of which could be used in favour of smaller farmers, or at least to fund the necessary agrarian reform (a proposal to consider instead of Plan Maroc Vert shambles) because, quite frankly, it is high time we have dealt with the intricacies of estate status that do not benefit to communities. Just ask the Soulalyates:

What would happen if indeed the lower bracket was to benefit from a tax cut that basically eliminates the 10% lower tax threshold? Obviously income to some 40% households -the worse off- would increase significantly from MAD 600 to MAD 4000 per annum. This does not mean their consumption would increase accordingly. Let us consider some households to make the point.

Let us consider a family of 7 members household with a total annual income of some 33,000 dirhams. They are likely to spend some 18,000 in food, 97% of which mainly devoted to the following items: crops and derivatives (MAD 3,000) Meat (MAD 1,900) Fruits and Vegetables (MAD 1,800). Not enough of course to get a healthy meal, since consumption of milk and derivatives, for instance, is too low (MAD 400) even Meat consumption does not rise to expectations. Fortunately, in the event of tax breaks in favour of this household and many others, there are ways to anticipate how much is going to be spent on food and other items. But for the time being, let us concentrate on domestic food consumption;

Most likely, milk and meat consumption are going up, then less so edible oil, fruits, vegetables and sugar. Now, since we are considering a tax break of 300 dirhams, crop, bread and other derivatives consumption does not increase much (no more than 20 dirhams as a matter of fact) So sceptics can put to rest any criticism that a tax break to the poor would increase our crop imports, or put a further strain on the Compensation Fund’s finances. The good news is that the benefits of tax relief would lead to an increase in consumption of what many Moroccans view as “luxury goods”: meat, milk and fruits. Indeed, even though national capacity might not satisfy meat demand, fishery resources can more than make up for the shortfall (fish-made flour can be a valuable auxiliary to improve standards of living too); in any case, this household would, in all likelihood, increase its consumption of meat to MAD 1,940 per annum. Of course, these numbers do not show marked improvement, but suppose that universal benefits scheme was introduced, and that household was to benefit from a MAD 700 boost: meat consumption goes up to MAD 2,000, and same story goes with other items: sugar consumption goes up to MAD 680, fruits and vegetables to MAD 1,900. The conjugated effect of tax breaks and a MAD 700 cash contribution increase, overall consumption of the 10% worse off some increases from MAD 9,600 to 9,800 in the most conservative estimates (indeed, these numbers have been computed with nation0wide wealth elasticity, even though poorer households tend to consider almost all food classes to be luxury goods)

Nota: ratios are 10% top to 20% bottom. all computations are based on income earned by urban households

Indeed, tax breaks and cash relief work pretty good to the extent that they not only increase food consumption to better standards, but also bridge the gap between poor and rich households’ consumption, and that is particularly true for all food classes, and not only the Giffen goods; Families of 7 and less that belong to low median income, i.e. who earn less than 7,200 a month can witness substantial increase in their consumption (from an average of 27,000 per annum to 31,000) as well as a narrowing gap with the upper, families of 3 and less from the top 10% income bracket.

The great news for business is that this increased demand is more than likely to fulfil its needs in domestic markets: lower and middle classes tend to consume locally, and because production capacity is so underused, there is little danger of inflationary pressure, contrary top what might be expected. Inflationary demand is usually triggered by more powerful consumers, in a mass consumption society, two features that do not show in national consumption pattern.

What seems to hold for food consumption equally applies to other classes. Indeed, tax reforms, for all the fairness it achieves, also allows ordinary Moroccans to reach a better class, higher standards of living, and by narrowing income and wealth gaps, a major risk of social resentment is taken away. I do not believe these policies to be socially divisive if they do benefit to 60-80% of Moroccan households, are they?

## Fiscal Policy? What Fiscal Policy?

Posted in Dismal Economics, Moroccan Politics & Economics, Morocco, Tiny bit of Politics by Zouhair ABH on July 3, 2011

Sometimes, reading the budget from top to bottom does not tell much about the policy the government of the day is set on pursuing. So other documents come in handy, like the fiscal expenses report attached to the budget law; It shows how articulate government policy is in its effort to stir the economic variables deemed to be important in a certain direction, so as to achieve a certain policy objective. It might be interesting to have a look to these figures, because it is a cause of concern for me: it seems the Finance Ministry cannot make up their mind on the proper policies, especially on fiscal policies, and end up every year squeezing its receipts, and not in a good way.

Caring Government.

Assuming that the broad ideological objective is to relieve Moroccan taxpayers (households and businesses alike) from the burden of excessive taxation, and that such policy is bound to increase welfare among the communities and the economy as whole, the least Finance Minister Salahedine Mezouar and his staff can do is to make sure there would be some sort of equitable effect across classes and sources of revenues. Though the supply-side economics can be beneficial -up to a point- these policies have unfortunately been damaging, rather than healing income dispersion and discrepancies. It seems budget policy -at least since 2003- is to hope for high growth figures, so as to reduce income inequality. The 2007 tax cuts are an even more obvious faith in an economic growth robust and long enough so as to reduce poverty and income dispersion, indeed, HCP study “La croissance est-elle pro-pauvres au Maroc ?” (2009) reports:

“Il en résulte un indice de croissance pro-pauvres inférieur à l’unité (0,930) et un taux de croissance d’équivalent pauvreté de 44,7% inférieur, de son côté, au taux de croissance observé (48,0%). Rappelons que lorsque l’indice de croissance pro-pauvres est compris entre 0 et 1, les riches bénéficient plus que proportionnellement de la croissance que les pauvres. C’est exactement ce qui s’est passé entre 1985 et 2007″. (p.2)

Suffice to say that what holds for extreme levels of poverty is particularly true when it comes to the difficulty, for the real middle class in Morocco (and the lower, working classes too) to benefit this growth. That supply-side economics of his makes the 2002 and 2007 governments more pro-Business than ever, but with no obvious positive effects on the vast majority of ordinary Moroccans.

The 2011 Budget bill has passed a deficit of MAD 12.13 Bn, a rather modest figure when compared to earlier deficits (but already topped by the unexpected increases in expenses, mainly on subsidies and wages) though it hides some policy decisions that do not seem to be very sound, or if they were, are quite ideological and socially very divisive. Among others, there were MAD 4.2 Bn income tax cuts in 2010 (and an effective MAD 7.6 Bn) only half of which benefited to middle and lower-class households; These cuts are not economically beneficial to the majority, especially when those economic sectors that benefit from these tax cuts (whether on income tax or others) are not productive: over the last couple of years, certain fiscal measures have been taken to boost real estate in Morocco. In 2010, real estate tax deduction amounted to MAD 4.438 Bn that is 15% of all the MAD 29.8 Bn tax cuts plan in 2010 (scheduled for the 2011 Budget) The 39 measures that enabled these cuts benefited only up to MAD 1.3 Bn in social housing (while other cuts benefit to the well-off) while the rest goes in the pockets of property and real estate developers, large housing owners and corporations. The problem does not reside in these categories benefiting from these tax cuts, the real problem is the hypocrisy surrounding the social housing project. This is but one instance of the amateurish at best -if not outright carelessness on the government’s behalf- in assessing the effects of implemented policies.

Jobs for the boys. An annual MAD 10Bn goes into rich pockets

On average from 2003 to 2011, tax cuts and loopholes amounted to MAD 21.75 Bn; Real Estate and Agriculture get an average share of 30% of these measures, while education gets at most MAD 100 Million while the financial sector receives on average a Billion a year. The trend of this concentrated distribution increases markedly with 2007.

As for Agriculture, it is understood the sector employs a large workforce -thus requiring a particular social policy designed to insure the balances in this potentially volatile part of Morocco are left untouched (a left-wing government would try to improve them in favour of the peasants against the cambradores) governments since 2006 have been cutting taxes on agriculture at increasingly higher paces, from a MAD 1Bn exemption in 2003 to MAD 4 Bn.

But then again, doesn’t this square with the idea that government taxation should not fall on this fragile sector? Of course it does, unless these measures were actually helping the affluent farmers, those who can afford dozens of thousands acres of land, mechanized techniques and large markets, both abroad and domestically. As for the small peasant with a few dozens of acres, these tax breaks mean nothing. On the other hand, tax breaks can also be applied, so as to improve the domestic purchasing power (at least, that’s the official argument behind these cuts) it seems that the Finance Ministry has fully assimilated the supply-side economics, since their tax policy also believes in a trickle-down economy, whereby a decrease in costs (and in this particular case, VAT taxes) can generate a lower price for consumers. While this argument might hold -when buttressed with some serious econometric computations, we in Morocco do not observe this, and the starkest example is that of subsidies: indeed, edible oil, sugar, milk and other strategic commodities are subsidised, and yet manufacturing companies are recording high levels of profit, and prices are not always low.

Consider the 32 measures targeting Agriculture and Fishery sectors:

Exonération à l’intérieur et à l’importation d’engins et filets de pêche destinés aux professionnels de la pêche maritime. Art.92 (I-3°);123

Exonération à l’intérieur et à l’importation des engrais. Art.92 (I-4°);123

Exonération à l’intérieur et à l’importation de matériels destinés à usage exclusivement agricole. Art.92(I- 5°);123

Exonération des ventes aux compagnies de navigation, aux pêcheurs professionnels et aux armateurs de la pêche de produits destinés à être incorporés dans les bâtiments de mer. Art.92(I-34°)

Application du taux réduit de 7% avec droit à déduction sur les aliments destinés à l’alimentation du bétail et des animaux de basse-cour. Art.99(1°); 121

Exonération à l’importation des bateaux de tout tonnage servant à la pêche maritime, les engins et filets de pêche, les rogues de morues et appâts destinés aux bateaux pêcheurs ainsi que les appareils aéronautiques destinés aux armateurs et aux professionnels de la pêche en haute mer et utilisés exclusivement pour le repérage des bancs de poissons. Art.123(9°)

Exonération à l’importation des Animaux vivants de race pure des espèces équidés, bovine et ovine ainsi que les caprins, les camélidés, les autruches et les oeufs à couver des autruches. Art.123(12°)

And the list goes on. It seems these tax breaks are very much subsidizing imports of specific items the vast majority of farmers and fishermen cannot afford. Of course, there are some commendable measures to be recorded, like those:

Exonération de la vente des dattes conditionnées produites au Maroc ainsi que les raisins secs et les figues sèches. Art.91(I-A-4°)

Exonération de l’huile d’olive et des sousproduits de la trituration des olives fabriqués par des unités artisanales. Art.91(I-A-7°)

Application du taux de 14% sur le beurre à l’exclusion du beurre de fabrication artisanale. Art.99(3-a°);121

But that’s about it. And these amount to very little in terms of fiscal expenses, compared to the potential gains when imports taxes are applied to the item delineated above. The same can be said of the fiat exemption until 2014 of the whole Agricultural output from any taxation; such a measure, while seemingly populist and caring, benefits mainly to the wealthy farmers, and adds up to the double-exemption this population benefits from: tax exemption when importing these items the Budget bill considers vital for farming, tax exemption on exports -their main market- and finally, tax exemption on income they derive from these businesses.

Bumpy road ahead: Morocco's CDS is taking up a few dozen bps

The list of strange and unjust exemption is long; suffice to say that this unsound fiscal policy, added to the debt the Moroccan government is taking on to defuse social discontentment, do not allow for optimistic outlook. On financial markets, the Kingdom’s CDS Debt -a good measurement has climbed some 50 basis points up since the beginning of 2011, and is now at the same level it was during the 2009, while it almost doubled over one year. It is also worth mentioning that the fundamentals of Moroccan debt are not the ones to worry about, nor the current level of CDS (compared to other countries like Greece or Ireland) but rather the discrepancies between terms: while all maturities move across time in the same direction, the shorter maturities seem to be more sensitive than the longer ones. It does vindicate the idea that somehow, fiscal and debt policies do not seem to be motivated by any kind of long-term strategy, but the one to prevail, even at the price of abysmal budgeting and subsequent austerity plans.

Best of luck to the next Finance Minister. Oualalou’s and Mezouar’s respective legacies are a tribute to a pro-wealthy policies… and to the present potential mess lurking in the shadows and ready to burst off. Great show Ministers, you have done very well.