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.

The Case For Progressive Deficit Reduction

Posted in Dismal Economics, Moroccan Politics & Economics, Morocco, Read & Heard by Zouhair ABH on November 14, 2011

To put the question simply: “are deficit hawks bad for Morocco?” Obviously, we are heading towards fiscal consolidation, and whatever government formed after elections will have to ditch part (or all) of its electoral manifesto. In normal times, and that applies fully to Moroccan politics, a government does not carry out its electoral promises. But it is now more obvious that spending commitment will be cut, that even existing spending will be cut as well; furthermore, we can trust the next Finance Minister and their team will trigger social resentment with their target spending freeze.

Still and all, being a deficit hawk -a structural deficit hawk- could well be the most progressive stance one might take when it comes to the current state of public finances, the proposed remedy to make their way out of it, and more generally in the whole fiscal and budget policy a government can have. This brings about the question of the government’s own policy: do they have models and procedures to estimate precisely how much they can borrow? Let me ask rephrase the question: does the Finance ministry have an econometrics model as a benchmark for its policy? If so, why isn’t it made public? Surely the model is of no national security interest, and it would actually help the public debate if ministry officials were to release it into the public domain. Perhaps the next government will be kind enough to be more open about it…

Budget Bill 2012 - remember, you have read about it here first

The 2012 budget bill provides for a 61Bn borrowing to pay for expenditure -and narrow the deficit gap a bit. In terms of central budget it represents 20% of all receipts (excluding SEGMA autonomous departments) and 18% ex-SEGMA expenditure. So far, official reports have been confident in the budget and its sustainability, because (at least on paper) ordinary receipts still match equivalent expenditure: levied taxes still can cover pay-wage, stationery requisitions and investments; the orthodox balance is thus still observed: 170Bn in tax receipts vs 172Bn current expenditure. But then again, the balance is observed on paper; because there is already a 2Bn ordinary deficit, and the negligible amount of any possible primary surplus seriously impairs public finances sustainability. It is a bit worrying to notice that the 2012 Budget bill relies on dividends, rent and miscellaneous receipts to inflate artificially the primary deficit to 17Bn.

But a good point can be made about these figures: the government has engaged in what it has considered to be vital to the national interest (and I am not making this up, you will find below a reference to this flimsy argument) to subsidize goods and hire unemployed graduates to keep things stable. The 2012 deficit can easily be dealt with once growth picks up pace beyond the 4.5%-5% GDP forecast. In effect, the government made provisions for extra expenditure – as reported in BO n°5978 page.2122 (p.52 on pdf) such:

Vu l’Article 14 du décret n°2-98-401 […] relatif à l’élaboration et à l’exécution des lois de finances;

     Considérant la nécessité impérieuse d’intérêt national,

     Sur proposition du ministre de l’Economie et des Finances

[…] Décrète: […]

Article Premier – Des crédits supplémentaires d’un montant de 18 Milliards […] sont ouverts au titre des dépenses de fonctionnement du budget général de l’année budgétaire 2011.

“Imperious necessity of National Interest nature”: the money needed to subsidize further strategic goods was considered then a national security issue, supposedly. The decree also shows how much power the Moroccan executive wields, and how much money it can levy whenever it suits them. But the truth is, the public finances have been endangered with no serious case that the levied 18Bn were indeed required, and whether swiftly reforming the compensation fund wasn’t a considered move. The decree, it seems, embodies the utter failure of any political power in Morocco to take reasoned decisions, and betrays a lack of hindsight on behalf of the ruling class. The technocrats, the Grandes Ecoles graduates, the well-educated bunch took fright from stepping up and ultimately got it wrong.

There is another reason piling on debt or deficit is endangering Morocco’s future; by HCP own projections’ account, there are 10.6Mln young Moroccans aged less than 17. This generation makes up for 33% of total population, and they are in the process of being loaded with a mortgage even before they get out of school and go into active life. The national public debt should now stand at around 416Bn, that means MAD 13,000 per Moroccan inhabitant. But to the younger generation, the burden is heavier: MAD 17,000 per young Moroccan, almost 40% in excess of the debt per capita among the 30-60 age bandwidth; And a substantial amount of this debt (90%) is domestic; paradoxically, a domestic debt is more dangerous to the future generations: while foreign-held debt is more related to sovereign risk, domestic debt impairs future performances and growth perspective; a high public debt could well trigger a rise in interest rates, and new entrants on labour market will have to cope with it.

In that respect, the next government will have not only to cut the deficit and halve the debt. It means reducing discretionary and unnecessary spending, and above all, a deep and far-reaching structural reforms in fiscal policy. The difference between a liberal deficit-hawk and a conservative one is how they will deal with fiscal policy; It did show that Minister Mezouar and Head of Government El Fassi were very modest when they set on creating a modest 2Bn “solidarity fund” in the scrapped version of the bill. Incidentally, 2Bn is more or less the amount of unexpected expenses, or tax receipts in cars. The Finance minister assured the public on numerous occasions that he had secured the funding, another argument that strengthens the point made: conservatives will not raise taxes and reform tax regulations.

The income effective national tax rate is less than 4%; when compared to the tax brackets (from 10% to 38%) one can easily notice how many loopholes have been set up for taxpayers to deduct or escape taxation, and there is nothing wrong with it. But the trouble is, these loopholes are not evenly distributed; in fact, they are hardly there for any social equality purposes, and their distribution is anything but fair; The ab absurdo argument can be made that even a fiscally conservative policy of uniform effective income tax rate can out-take the present performance. A uniform 6% EIT (Effective Income Tax) can yield 45.6Bn instead of the existing 28.5Bn. For sure, the top 10% still gets away with less taxes relative to their income, but at least everyone will be on equal footing with the uniform 6% income tax.

Agriculture has benefited long enough from a generous fiscal amnesty; the Budget bill allows the minister to revoke the amnesty well before December 2013 and institute a flat tax on large farms. These are less subject to fluctuations, and they are already subsidized for their export-oriented goods. In effect, there are some 107Bn no tax is imposed on, and whatever effective receipts are more than welcomed.

The narrative in the next months is going to be about excessive expenditure in the Moroccan government. It would be wrong for anyone to buy into it just because it is half-true. It is wrong because on the other side of the balance sheet, there are only too much loopholes and exemptions around for the government to close and end; the deficit is a problem, but cutting expenditure alone is not going to solve it.

Debt Ceiling and Fiscal Responsibility

The claim for fiscal responsibility, indeed the claim for economic competence has been rendered farcical with the outgoing government’s reckless spending these last two years, even more so, considering their refusal, up to date, to increase government receipts while indulging in piling up a mounting debt, both domestically and abroad. However, they are not the only ones to be blamed for this: the Finance Ministry has always wielded an enormous amount of power over public finances, and Parliament does not have enough powers to curb spending or influence it, other than representatives attaching amendments to the Budget bill. The entire process is dominated by the ministry, which would be fine, if it wasn’t for its notorious lack of accountability to the Prime Minister or to Parliament.

Simplified process for budget-making

(a French version can be viewed by clicking on this link)

The Budget-making is entirely executive; meaning that members of parliament do not receive the draft bill until the late stages of the game, and have but the amendment prerogative as a leverage on ministry officials. Other than that, while the house gets to debate the content of the bill, representatives have no oversight over the projections ex-ante. The parliamentary debate itself is skewed, since representatives have little time to go through the numbers, they are not presented with other alternatives, and basically are cornered into voting on a fairly complete document -with the chance to make some cosmetic changes at the best-. Now, the argument against giving more power to representatives is valid: many of them lack the proper understanding of administrative proceedings, and are frequently the subject of virulent criticism for their alleged corruption and incompetence. But then again, perhaps this abysmal record is due to the irresponsibility and lack of proper parliamentary oversight they have been put it; I remain intimately convinced the average intake of representatives would dramatically improve in quality if actual power was devolved to their offices, with genuine involvement with lawmaking and proper resources to carry out their duty as the representatives of the Moroccan people.

Since constant criticism does not do any good, I would endorse (since my own tiny voice doesn’t account for much) any political organization ready to endorse legislation introducing a cap on borrowings and allocating human and material resources to make parliamentary business look and act more professional.

Debt-Ceiling mechanism on Budget making: the government can only too often circumvent parliamentary amendments they consider too uncomfortable a constraint, and these days, they have even preferred to borrow abroad rather than increase taxes. The ensuing result is a mounting deficit, inflating debt this government will be long gone when the time comes to pay the piper.

Debt ceiling could make a finance minister's reputation, or break a government.

The cap on public borrowings, in the Moroccan context, is not some move indulging in conservative, orthodox fiscal self-constraint. It actually links budget management responsibility -on behalf of government- to genuine control from the competent parliamentary committee: proposed legislation would require both parliament and government to pre-announce the expected debt ceiling they pledge not to break; extensive theoretical and empirical body of evidence suggests proofs of self-discipline strengthen the credibility of government actions, a reputation that could benefit effectiveness on other policies and announcements. This modus operandi, by the way, has been discarded by all governments in Morocco, on both sides of the political spectrum, because it entails fiscal discipline requirements they are not up to (to that effect, I wonder whether Pr. Najib Akesbi would subscribe to the submitted proposal on capping annual public borrowings)

Again, relative to the Moroccan context, the debt-ceiling is not necessarily attached to a particular political ideology, but rather belongs to the spirit of “good government“, and basically to the set of pieces of legislation likely to balance power between the executive and legislative branches: ministers in Morocco are not really bound by parliamentary scrutiny, and are not subject to known parliamentary censoring procedure, so even answering questions from representatives is not that a compulsory duty; A debt-ceiling program hits the government where it (metaphorically) hurts: the money it spends with little outside scrutiny, and definitely no danger of sanction if it crosses the line of good budget management; let us all remember that while debt is not a fundamentally evil thing, its mismanagement saddles the taxpayer with a trans-generational cost that can be avoided with a little bit of accountability on behalf of those spending the money.

Now, with the real likelihood of de-funding governmental departments, all the horse-trading on amendements put forward by various caucuses during the Budget bill debates are taken to a higher level, and can move away from marginally affecting budget policy, to influence it to the greater good with the newly acquired leverage; Unless government and parliament are bitterly opposed -an unlikely case in Morocco, since the incumbent government is supposed to benefit from a vote of confidence from the house- no party will go all the way down to a brutal showdown. The bottom line is, the taxpayer will be the first beneficiary from capping borrowings, and that applies to all taxpayers, present and future ones.

Professional help for representatives: It has been often pointed out by various members of parliament they lack the proper resources to carry out their jobs; meaning they do not have a decent pool of researchers and political analysts to provide them with the proper information to confront government officials. The 2011 Budget law allocates MAD 270 Million to parliament house, 300 Million when it encompasses the parliamentary liaison ministry (headed by the formerly petulant Driss Lachgar) a relatively insignificant figure, considering the vast resources put together by the finance ministry, vast enough to out-gun any parliamentary pretence to control finance ministry officials and hold them accountable. As a matter of fact, only half of total pay-wage is devoted to administrative staff (supposedly working full-time for representatives) and only 40% of total expenses allocated to parliament house. Some hired help to put together counter-proposals on budgets and legislation would do, and would not cost a lot (especially if these are young graduates interning for a caucus or a representative)

Parliament can achieve a lot, even with the present constitution, as long as it has the proper resources to carry out its duties; by introducing vanguard legislation on how money is levied and distributed, and second by allowing it to work in a professional, rather than amateurish setting. Moul Chkara only thrives where there is a lack of competence and working knowledges of the nuts and bolts of government. There’s the money, let’s put it in good use.