Fiscal policy and business cycle dynamics in Morocco: an empirical study

A sustainable fiscal policy is expected to perform a countercyclical behaviour in order to stabilise economic growth during business cycles fluctuations. This requires increasing public spending during recessions and decreasing it during expansions, while public taxes move in the opposite direction. As a result, budget deficits increase during recessions and decrease during expansions. Although this pattern of fiscal policy is prevalent in most advanced economies, emerging and developing economies tend to adopt a procyclical policy due to economic and political factors such as debt level, inflation or institutions effectiveness. Through a benchmarking approach, our study explores the dynamic relationship between fiscal policy and the business cycle in Morocco. Our results suggest that Morocco pursues a procyclical fiscal policy that is largely influenced by the business cycle fluctuations, and this conclusion is supported by robustness checks. This could potentially lead to a crowding-out effect on economic growth and weaken the impact of fiscal policy multipliers. Our research contributes to the growing body of empirical evidence on fiscal policy cyclicality in developing countries and highlights the urgent need for a transition towards a sustainable fiscal policy framework.