Efficiency and Welfare Effects of Fiscal Policy in Emerging Economies: The Case of Morocco

Abstract

This paper studies the welfare cost of fiscal policy in developing economies where a significant fraction of the population is government spending-dependent, using as an example Morocco. We develop a Dynamic General Equilibrium model representing an economy populated by three types of households: Standard Ricardian households with access to the financial market, households who supply labor but have no access to the financial market, and non-active government-dependent households (who behave as hand-to-mouth agents). The paper computes welfare changes of different tax rates and alternative spending policies and quantifies the trade-off of fiscal policy across the different groups of agents. We find that: (i) Distortions from some taxes can be positive due to the presence of public inputs; (ii) Output efficiency can be gained by changing the tax mix while keeping constant fiscal revenues; and (iii) Social welfare gains can be obtained by increasing public investment and reducing government consumption and keeping lump-sum transfers constant.

Keywords:

• Fiscal policy
• active households
• government spending-dependent households
• government spending
• Laffer curves
• welfare

Acknowledgement

We thank Anelí Bongers and Benedetto Molinari for their helpful comments and suggestions. José L. Torres acknowledges the financial support from the Spanish Ministry of Science, Innovation and Universities through grant PID2019-107161GB-C33.

Disclosure Statement

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

Ethical Approval

The authors declare that the work original and do not have been published elsewhere in any form or language.

Data Availability

The datasets generated during and/or analyzed during the current study are available in the ‘Haut Commissariat au Plan’.

Notes

1 Most existing dynamic general equilibrium models show that an increase in public spending causes a negative income effect, leading households to increase labor supply and reduce private consumption (for example, Aiyagari et al., 1992; Baxter & King, 1993). However, a number of empirical studies using estimated VAR models find that private consumption increases in response to a positive shock in government consumption (for instance, Blanchard & Perotti, 2002; Perotti, 2007).