The Moorish Wanderer

Flip-Flop Or Incompetence: The 7% Controversy

Posted in Dismal Economics, Moroccan Politics & Economics, Morocco, Read & Heard by Zouhair ABH on January 13, 2012

Do you know the guy who goes through the figures and crunch numbers together to tell you that they don’t add up, even though nobody cares? That’s me.

During the electoral campaign, I took the trouble to read, then compare party manifestos, including that of the senior partner in the maiden government, PJD. I was very sceptical of their promised 7% annual average growth rate, given that the current and future performance of domestic output does not allow for more than 6%, and if we are at all to keep with the current level of inflation, a 5% would do no harm.

The graph was taken too literally

But (mis)informed commentators only now caught up with the fact that in the minds of Najib Boulif and Mustapha Khalfi the 7% pledge was not for all next 5 years; it was a “target rate” for 2016 (page 16):

1. معدل النمو المستهدف 7 في المائة

Following their definition of ‘target rate’ is some sort of aim the economy works its way up to reach: 5% in 2012, 5.5% in 2013, and so on and so forth, until it reaches 7% in 2016. I don’t know, but a) I have been told that a target rate is an average the policy-maker wants to stick to as closely as possible, and b) growth does not work like it is some sort of cumulative aggregate. GDP in value and volume does, but its rate of change does not.

I am sorry, but a target rate is not something a policy maker works their way to reach in a defined time-frame, it is a standard they don’t want to deviate from. Economists know it, and it is only right to ask the question whether Najib Boulif and Mustapha Khelfi are trying to spin their way out of an incoming flip-flop, or plain incompetents.

I very much doubt they are incompetent: Najib Boulif was a prominent back bencher in the Finances parliamentary committee, and is a professor of Econometrics and Economics of Energy at the University of Tangiers, and Mustapha Khalfi has spent some time as an intern in Capitol Hill. They have dealt with pretty major issues, and such a trivial definition of target rate is well within their intellectual grasp and working experience. That is why I would go for the flip-flop. And a major one, if I may say so.

My Blogger pal Abmoul did ask the question: why bother about GDP growth predictions? These are important for a host of reasons, but since we are considering government policy, the one we are interested in is surely the projected receipts from growth. The story goes very simple: high growth means a lot of business, a lot of consumption, and a lot of transactions. Because there are taxes on almost all of these economic activities, their steady increase means more receipts for the Inland Revenue Services; and in fact, a 7% growth will deliver more tax receipts than a 5%.

Let’s consider a simple example: consider an economy with a GDP of 100 this year. Next year, it can grow to 5% or 7%. This means GDP is either 105 or 107. The budget taxes GDP at, say 20%.

Case 1 – 5% growth: tax receipts increase from 20 to 21

Case 2 – 7% growth: tax receipts increase from 20 to 21.4

That’s 0.4 additional gain for the treasury thanks to higher growth. In order of magnitude, 7% GDP growth delivers, ceteris paribus, 8% more receipts for the budget i.e. 26Bn per annum. It also allows the treasury to keep on borrowing: high growth also means high liquidity, and a very convenient way to avoid the latter to turn its growth into inflation is to basically deviate some of it into public debt. 7%, everyone benefits from it, and more importantly, the budget can afford to expand its balance sheet.

Why is it so important for PJD then? Because they have committed to a lot of spending, and above all, they also committed to a 3% limit on deficit per GDP. Again, high growth enervates this limit in absolute numbers: consider the same example, with a GDP of 100. The government cannot go beyond 3 in terms of budget deficit, but if they can deliver a 7% growth, their future deficit limit is 3,21 while it can be only 3,15 in a 5% growth setting.

Compounded gains from higher growth go as high as 20Bn by 2016

By my account, PJD has pledged some 70Bn annual additional spending, and they need to be financed up to 50Bn in additional taxes. Now, the only way to make the tax increase look small is to get a high growth; these are initial figures; when matched with growth rates, their weight decreases relative to total wealth when growth goes higher: 50Bn represents 7% of 700Bn (about the size of GNI in 2010) but only 6.3% of the economy grows at 5%, then 7%. By contrast, if the economy growth 5% in the next two years, tax burden is 6.5%. 14Bn makes all the difference – that’s an annual MAD 2300 per household. Suppose that the government wants to keep the same level of fiscal pressure (about 23.6% of GDP) a reasonable assumption, given PJD’s pledge for a 3% GDP deficit limit, then how can they have to assume a higher GDP growth to anticipate higher receipts.

And so, by spinning their way on that 7% pledge, PJD admits implicitly it will fail to reach their spending commitments. Farewell programs to reduce unemployment by two basis points (200,000 individuals) or doubling public investment.

In a sense, the pre-Constitutional Referendum discourse was right: political parties are not fit to run the country, let alone its economy. But what is more worrying is that no one, so far, has proven to be fit to run the country: PJD opposition-turned government coalition maker has conceded much of the economic policy-making apparatus, and got mixed up in its electoral promises, their junior partners have been part of almost all coalitions for more than a decade, and even at the highest level, mismanagement has led to unsound policies (labelled “Grand Designs“) that impoverished middle classes have to endure, those very middle classes that constitute the bedrock of any liberal society.

Who is in command? Is there a plan? And if indeed there is, is the body of evidence robust enough to show it benefits the many, not the few?