Aligning Public Spending and Taxes in the Moroccan Economy: A Dynamic General Equilibrium Model analysis

We examine the implications of different redistribution policy reforms in Morocco, considering taxation, and based on a dynamic general equilibrium model of three agents: households, firms and Ricardian government. Consequently, a policy that supports public investment guarantees significant social welfare gains, and has a positive multiplier effect on output and tax revenue. However, in the presence of a highly government-dependent population -which behaves like the hand-to-mouth population-, this policy destroys social welfare, through the effect of reducing other expenditure on this population. To counteract this negative impact, authorities can provide additional lump-sum transfers to this population. The paper also presents indifference curves (iso-output and iso-income tax) associating spending and taxes. A change in any tax could have negative effects on the economy if not combined with a new redistribution of public spending. On the other hand, reducing such a tax followed by a change in spending policy could have positive economic effects (on output, tax revenue and social welfare), and the gains are very high in the case of consumption taxes and employer payroll taxes.