generous nature of these subsidies, especially under the _régime spécial_ , was only applicable to a small number of loans. Thus, from the very beginning, sustainability problems were likely to occur given these interest rate parameters.

# <u>Subsidies through provisions in the Tax code</u>

- Deductions of mortgage interest payments from taxable income:  up to 10% of taxable income. The corresponding expenditure amounted to MDH 276 million in 1995. A World Bank study on CIH data from 1992 (World Bank, 1995) showed that the tax expenditure for CIH loans only was Mdh 115 million, out of MDH 277 million of deductible interests. This corresponded to an average subsidy rate of 41% on mortgage interests. The subsidy rate, corresponding to the marginal tax rate, was increasing in income. Households with income above MDH 60,000 per year (the highest three deciles of the income distribution), which represented 62% of the CIH mortgagers in 1992, benefited from 68% of the tax expenditure. Thus, the provision was highly regressive.

- For civil servants, the ability to deduct payments from the mortgage principal and interest from taxable income, without a ceiling, provided the dwelling is worth less than MDH 500,000. The cost of this provision is not known for 1995. However, this provision, which still applies today, is particularly inequitable, since it benefits only a specific household category, which is on average wealthier than most, and thus has easy access to funds because of their job security.

The combination of these two provisions was thus poorly targeted, with a redistribution pattern favoring the wealthy over those benefiting from interest rates subsidies. This pattern also suffered from the same coverage problems (only households to access housing finance covered), exacerbated by the income tax schedule, which resulted in the majority of interest rate subsidies being distributed to those in higher tax brackets.

Although this type of subsidy exists in many countries, it can be highly inefficient (see Skinner, 1996). In Morocco, another problem arises: when combined with interest rate subsidies, this scheme resulted in very low mortgages under the _régime général_ , without any proven effect on housing supply, since most of the subsidy was distributed to segments of the population already served by the market.

Sustainability of this type of subsidy is also limited. Tax expenditures remained relatively low as long as access to mortgage is limited, but would automatically increase relative to the overall mortgage debt in the country. Moreover, the corresponding revenue losses are drawn directly from income tax revenues, which represent one of the pillars of the tax system Regarding the other criteria, the administrative simplicity was very satisfactory (the subsidy is part of general income tax procedures), and transparency was also good. The procedure indirectly provided an incentive for filing tax returns, and was thus at the most neutral as concerns tax revenue generation for the State. Although flexibility was theoretically high, (a simple provision in the Finance Law for any given year could have suppressed this advantage), the provision was never seriously challenged, whereas others generated annual disagreements during the budget arbitrage process. This illustrates the low visibility of this measure. In contrast, sustainability of this type of subsidy was limited. Tax expenditures remained low as long as access to mortgages was limited, but would automatically increase according to the overall mortgage debt in the country. Moreover, the corresponding resources were drawn directly from income taxes.

34