## Deficits and Cycles in Morocco

No one needs to be hardcore Keynesian to understand why governments – and Morocco is no exception to that- prefer to go deficit-spending when the economy is in recession, especially when it is a serious one. Indeed, Robert Lucas (a big name from the University of Chicago) quipped:

I guess everyone is a Keynesian in a foxhole.

And Morocco has been -and continues to be- a Keynesian-style economy. Unfortunately, it indulges a lot more into Zombie Keynesianism, fiscal and expenditure policies are indeed supposedly designed to stimulate domestic demand, but they do not reach the majority of our citizens (just think of household consumption distribution in Morocco: a third of its aggregate total is controlled by 10% richest households) the same can be said of public investment, although the argument is not as clear-cut as one might think it is.

Look at the graph: deficit as a percentage of GDP opposite GDP growth over the period 1960-2011. correlation seems strong enough to sustain the assumption deficits are there to alleviate deficit. However, beware of confusing correlation with causality; we can also produce equally good evidence that deficits are the ones responsible for GDP volatility.

There is also the question of how much historical volatility is linked to deficits. The choice of 3-years deviation of GDP growth was purely arbitrary, and if anything, the strongest correlation between deficit and volatility in GDP is observed for 6-years periods, and immediate correlation between GDP growth (as it is) and deficit in percentage of GDP is equally significant. Finally, there is relatively weak evidence deficits limit somehow fluctuations in the economy (less than two years). This result seem to be in line with usual assumptions in taking 5-years averages to smooth things over.

We therefore have a glimpse to the double effect of deficits: in the shorter run as well as the longer run, deficits are negatively correlated to GDP volatility and growth.

Why do we care about standard deviation in GDP growth? For many reasons, chiefly because of government targets and growth itself; large deviation in GDP from one year to the other reflects badly on average growth – think about the 5.5% average growth projected for 2012-2016 and the impact of large ups-and-downs in GDP growth; as it stands, 2014-2016 needs to deliver consecutive growth figures close to 6.75% each year.

Second, volatility in growth means higher uncertainty. Last year, Morocco created in 2008 some 72.6Bn dirhams worth of goods and services. But the next year, only 43Bn where created, and the next years after, an average of 36Bn. These differences in expected additional GDP – about 30 Bn from one year to the other that could have benefited to many businesses and individuals, but did not, because GDP growth fluctuated a lot (not as much as the 10-year average).

Let us take a leaf from serious academia from the World Bank about the matter:

This paper examines the relation between fiscal deficits and growth for a panel of 45 developing countries. Based on a consistent treatment of the government budget constraint,it finds evidence of a threshold effect at a level of the deficit around 1.5% of GDP.

While there appears to be a growth payoff to reducing deficits to this level, this effect disappears or reverses itself for further fiscal contraction. The magnitude of this payoff, but not its general character, necessarily depends on how changes in the deficit are financed […] and on how the change in the deficit is accommodated elsewhere in the budget.

Now, this paper (from 2005) shows the optimal level for budget deficit is 1.5% for emerging economies, even as Morocco tends to flaunt the 3% target as an article of faith. **A 1.5% deficit today means the government needs to cut about 38.7Bn from its deficit, or enact a net cut of 21.8Bn in the 2012 Budget – a 6.3% reduction in the Budget size**. But then again, the figure of 1.5% GDP is not absolute: there are other parameters to take into account, which makes the ‘optimal’ deficit for Morocco a bit higher, and more manageable; in fact, 3% deficit GDP falls within the 95% confidence interval for the estimated, optimal 1.5% deficit. **With a 3% deficit target, the Government needs to cut the deficit some 24Bn dirhams, or enact net spending cuts of 14Bn** (on the basis of a maximum tax increase of 14.6Bn)

All in all, the past 40 years have been a period of relentless deficit spending policies, that ultimately culminated with the 1970s (8% over the period 1970-1981). Even the Structural Adjustment programs did not do that well; while they did indeed reduce the budget deficit considerably with respect to the spendthrift years of the 70s, the deficit between 1983 and 1992 averaged 6%, while the deficit between 1999 and 2010 was cut in half, close to 2.9%, with two surplus consecutive years.

**In many respects, Budget deficits in Morocco are not deficit-spending per say**. The ‘*Rapport du Cinquantenaire*‘ correctly pointed out in this graph that investment lags behind current expenditure (pay-wage and stationary, for instant). The deficit has a lot more to do with weak fiscal structure, that prefers to tax *easy* aggregates (consumption mainly, and it companies are actually the ones collecting the money) instead of taking on special interests (the supplementary report to the Budget bill estimates 33Bn in tax exemptions and breaks are embedded in the 2012 Budget) and broadening the tax base.

## The Middle Class, The Median Class: Growth Did Not Benefit Everyone

And we are back with the Median/Middle class tantrum. I sketched in a hasty post describing the “Middle Class Rip-off” perhaps It would be nicer -and more transparent- to describe the process by which I reached the conclusion our Median Class has lagged behind growth and has actually lost purchasing power over the last decade or so.

The data is public and easily accessible on the World Bank’s Open Data website, more precisely on Morocco’s matrix of indicators with the following references :

SI.DST.02ND.20

SI.DST.03RD.20

SI.DST.04TH.20

SI.DST.05TH.20

SI.DST.10TH.10

SI.DST.FRST.10

SI.DST.FRST.20

NY.GNP.MKTP.CN

(All of which are related to Income Share per Decile and GNI in Current Local Currency).

For more up-to-date data (2007 and onwards) HCP Annual Social Indicators for 2009 was processed so as to get a complete picture of how incomes evolved over time. Since the data is computed in terms of decile/quintile households, I use the HCP table data 1960-2030 and make up for the missing years by computing an average proxy for demographic growth. When all these numbers are crunched together, we get that the average GNI growth between 1999 and 2010 was 6% in current terms. This means the Gross National Income doubled in 12years; Good news for the wealthiest 10%, their income quadrupled to peak at an average of MAD 430,000.

Now let us put things into context: the Median families -to my recollection the best available proxy for Middle Class households- have increased their income over the last 12 years. This is good news and should be noted. But on the other hand, they have lagged behind the artificially constructed average household; One explanation might be that averages are inherently biased toward individual occurrences scoring high values; there is a weight favouring those way more wealthy than the others that increases the average, as well as the measure of dispersion around it.

But increasing the average, or for the Median household to increase their own income is not a goal on its own. Indeed, every household has increased their income since 1999, but what about inequality? The ratio between the top 20% and bottom 20% went up from 1:7 in 1999, to 1:9 in 2010. In other terms, for every additional dirham the bottom 20% made between 1999 and 2010, the wealthiest 20% made 20. And the median household made 3 during the same period. If anything, the observed growth for the whole decade has benefited more to a tiny 20% minority (if not less) than it did to the rest of the population. Eliminating poverty is good; squeezing inequality is even better.

On the other hand, the Median-income households have lost pace with GNI growth both per capita and aggregate levels: it their income grown at an average of 2.63% in current terms between 1999 and 2010, while GNI per capita increased 2.9% on average over the same period. By contrast, the top 20% scored an annual increase of 4.8% -and since the top 10% increased their own income a 5.3% a year, the *Super-Über-*rich must have made a lot more.

But this is beside the point. We focus on the Median Class, who increased their wealth but did so at a level below the nationwide mean, and certainly lagged way behind the wealthiest. In relative terms, they have lost some of their purchasing power because of this; their social standing, for one.There is a social cost to the marginalization of the middle class: they increased their wealth, to be sure, but they are stuck and could not increase their income and wealth. It is as if a glass ceiling has been put above the Middle Class, an unbreakable and unseen obstacle that prevents hard-working Moroccan households from achieving a higher status. And there goes the argument: if the middle class cannot feel empowered, and their status envied or at least considered to be the norm, then the very seeds of class warfare are sown: a small, effete nucleus has reached upon and confiscated an increasing share of GNI: the 10% wealthiest concentrated National Income from 31% to 38%, while the Median Class saw their own share decrease from 15% to 13.2% of GNI between 1999 and 2010.

In terms of real purchasing power, the effect of inflation has been crippling: considering Consumer Price Index with base year set at 1999, prices have increased 40%, or an overall annual inflation 3.1% rate -CPI inflation is preferred to *GDP deflator* because it focuses on items that affect consumption and real incomes. Also, since comparison takes place on the 1999-2010 period, the 2005 CPI is re-computed so as to fit the base year.

So unless some household have increased their nominal income by a higher percentage in the meantime, they would have lost some of their purchasing power. And unfortunately, not everyone have increased their income by more than 40%: Over the last 12 years, the Median class have lost an average of 0.5% of their nominal income to inflation. In monetary terms, this means since 1999 the Middle Class have lost, on average, inflation-discounted value of MAD 1,201, that is MAD 14,400. This number is higher than what I posted earlier on because between 2007 and 2010, the income share decreased 1.3 basis points. The accrued effect of inflation takes up the loss in real income to the level mentioned above; so it goes from 11,000 in 2007 to 14,400 in 2010.

*The only people pulling it off are the top 20%; net of inflation, their income increased 31% since 1999, and at annual rate of 2.3%. The top 10% did even better: 42% increase since 1999 net of inflation. That’s a MAD 140,000, almost double the gross returns for the remaining 90%.*

The Median class, who saw their income go down while GDP and GNI went up during the last decade are only a prelude, a preview of what other classes are ailing from; they are both representatives of the increasing inequalities we live in our society and the key to bring together all classes around a granite-solid middle class that brings affluence to the economy. And for political parties to gain support (and votes) their policies should be designed toward the median, not the mean. Otherwise, their manifestos become meaningless.

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