Economic growth and sustainability of public finances: evidence from Morocco

ABSTRACT

This study focuses on the sustainability of public finances in relation to economic growth in Morocco for the period from 1987 to 2019. We set out to explore therewith the non-linear relationship between government size, the level of fiscal discipline and economic growth. This issue at hand has attracted broad public interest and decision-makers’ attention in Morocco, especially after the financial crisis of 2008 and during the COVID-19 pandemic. In order to determine government optimal size, we apply the Hansen's approach which postulates the coexistence of different fiscal regimes conditioned by the public debt, government expenditures, and tax revenues in the form of a non-linear inverted-U curve. These regimes are separated by an optimal threshold maximizing economic growth below which the impact is positive and above which the impact becomes negative, as the rising side of the curve is interpreted as consequence of higher taxes providing more resources for public investment, which in turn promotes growth. Once the economy reaches the slippery side of the curve, more taxes and excessive public debt become more distortionary and negatively correlated with economic growth. Our findings indicate that Morocco is relatively in a prudential fiscal stance with recessive effects on growth.

KEYWORDS:

• Sustainability of public finances
• threshold effects
• government optimal size
• fiscal policy
• public debt

JEL CLASSIFICATIONS:

• E62
• H21
• H50
• H60

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 The Council of Government adopts Amended 2020 Finance Bill: 08/07/2020. Ministry of Economy and Finance, Morocco 2020. https://www.finances.gov.ma/En/Pages/detail-actualite.aspx?fiche=5076

2 Moroccan Center of conjuncture: Agriculture in Morocco: what future for Morocco? https://www.cmconjoncture.com/conjoncture/actualites/agriculture-au-maroc-quel-avenir-pour-le-maroc

3 Forecast economic budget 2021, High Commission for Planning HCP, Morocco; https://www.hcp.ma/Budget-economique-previsionnel-2021-Situation-economique-en-2020-et-ses-perspectives-en-2021_a2642.html

4 "La capacité de mobilisation des recettes fiscales au Maroc", Bank Al-Maghrib, 2020. http://www.bkam.ma/content/download/722361/8287183/La%20capacit%C3%A9%20de%20mobilisation%20des%20recettes%20fiscales%20au%20Maroc.pdf

5 National Tax Conferences, Morocco 2019: https://www.finances.gov.ma/Publication/dgi/2019/recommandations-assises-nationales-fiscalite-fr.pdf

6 Morocco Draws on Funds Available under the Precautionary and Liquidity Line to Address COVID-19 Pandemic. IMF, 2020. PRESS RELEASE NO. 20/138. https://www.imf.org/en/News/Articles/2020/04/08/pr20138-morocco-draws-funds-available-under-precautionary-liquidity-line-covid19-pandemic

7 Morocco Rating, https://tradingeconomics.com/morocco/rating

8 The 2011 Moroccan Constitution. https://www.constituteproject.org/constitution/Morocco_2011.pdf

9 The Moroccan Organic law n ° 130–13 relating to the finance law: http://lof.finances.gov.ma/sites/default/files/loi_organique_130-30_fr18.pdf

10 Ordinary revenue means all income or contributions to the revenue of the Government that are classified under the Headings Tax revenue and Non-Tax Revenue, excluding loans, capital grants and other capital revenues; https://www.lawinsider.com/dictionary/ordinary-revenue

11 Tax Revenues means the Personal Income Taxes and such other revenues, including Alternative Revenues (but excluding Building Aid), as the Authority may derive directly from the State from taxes imposed by the City or the State and collected by the State. https://www.lawinsider.com/dictionary/tax-revenues