The 2024 Budget: New Accounts With the Same Old Challenges
The article is published in JPS Magazine
The general budget is widely considered to be a credible document that a government produces in a year. Typically, the general budget shows revenue collected (tax efforts) from the taxpayers either directly or indirectly. The budget also presents governments’ priorities mirrored in how the collected revenue is dispersed.
Historically, Jordan has attempted to develop a fiscal policy framework that improves budget performance. Quite recently (27th January 2024) Jordan adopted the 2024 budget with expenditures estimated at JOD 12.3 billion and revenues estimated at JOD 10.3 billion, leaving the budget with a deficit of nearly JOD 2.065 billion, equivalent to 5.4% of GDP. Such a deficit will be financed through borrowing either from the domestic or international markets.
The features of the new budget are similar to other budgets adopted in the recent past; high and rigid current expenditures including wages and pension, high interest payments on public debt, and a miniature allocation to capital expenditures. Together these items represent more than 80% of the total public spending.
This article reviews the main parameters of the budget and the primary challenges surrounding the implementation of the 2024 budget. In the conclusion, this article will also outline recommendations for how Jordan can move forward in light of these challenges.
Saliant Features
The budget lacks flexibility and has a narrow fiscal space to maneuver. The budget includes little resources that can boost growth in what is known as “pro-cyclical” spending in the Keynesian sense; however, it adds more pressure on the private sector by increasing the tax burden under the slogan of improving tax collection. Such dynamics leave insufficient resources to improve the infrastructure or advance initiatives that would promote growth. On the social front, the budget allocated nearly JOD 818 million to subsidies, strategic commodities, and support for limited income groups. This is an increase of 16% percent for these items compared to 2023.
While the government acknowledges that there is a need to address the difficulties facing households in Jordan, it can only allocate that much to meet the increasing pressure facing in particularly middle and low income groups.
Reducing public spending is not a realistic option for political and social reasons. Consequently, the budget continues to run a deficit and must borrow from the domestic and international markets to fill in the gap. In the 2024 budget, debt service is expected to reach almost JOD 2 billion making it the largest item in the current expenditures, (18.6% of the current expenditures) close to what is being spent on education and more than what is spent on the health sector. It’s expected that debt service will increase by JOD 277 million in 2024 budget (16%) as a result of the increase in the level of debt and interest rate.
Moreover, if the government accesses the credit market domestically, it threatens to result in the “crowding out effect,” limiting private sector access to the limited domestic credit market. An increase in the cost of borrowing as a result of government competition for loans will impede private sector-led growth.
Gaza War and its implications
The estimates of the 2024 budget were built on the assumption that the actual GDP growth will be 2.8%. As such projections regarding revenue have been built assuming that growth rate will be achieved. However, the Jordanian economy has been adversely affected by the ongoing war in Gaza. There are four main channels through which the war in Gaza has and will affect the Jordanian economy: first, in sectors such as tourism and hospitality. It is estimated that this sector, which generated USD 6.8 billion as foreign income representing 13.8% of GDP in 2023, has witnessed decline of 50% across the board, with hotel booking in locations such as Petra dropping even more. As a result of this hit, all activities related to tourism, such as transportation, restaurants entrainments witnessed a drop by varying degrees.
The second channel has been through the implementation (I would not use the implementation….rather the activation or enforcement) of the boycott. The boycott has affected activities, products, and services that are perceived as “western products,” associated or produced in countries whereby their government sided with Israeli. These products have been subjected to a form of informal boycott which has lowered private consumption.
The third channel is the uncertainty that surrounds the scene in the region, especially on the side of the private sector. Several investors have postponed or canceled investments, anticipating how the situation will unfold regionally and what the final outcome of the ongoing atrocities by Israel will be. Adding to this, the increase in shipping cost through the Red Sea with 30% of Jordan’s foreign trade passing through that route according to a recent report published by Jordan Strategy Forum. [1]
The fourth channel is very much related to the budget, given the heightened security concerns. The increase in the budget’s allocation to enhance security is aimed at maintaining internal stability in the context of heightened emotions and regular protests that have been taking place in Jordan since the 7th of October. Furthermore, the budget aims to bolster security in response to the targeting of Jordan from its North and Eastern borders, with several recent attempts to infiltrate Jordan and stir instability and chaos in the country.
The Way Forward
There are several estimates surrounding the impacts of Gaza war on the Jordanian economy. The IMF’s recent MENA Outlook has revised its projection to the growth in the region including Jordan. According to the report, “[t]he outlook for the MENA region (including Jordan) is highly uncertain, and downside risks are resurgent. An escalation or spread of the conflict beyond Gaza and Israel, as well as an intensification of the disruptions in the Red Sea, could have a severe economic impact, including on trade and tourism”. [2]
This downside will adversely affect the projected public revenues which were expected to grow at 8.9% in 2024. The expected decline will exacerbate public finance challenges in 2024 and beyond.
To avoid a worsening slowdown in growth, the government may resort to fiscal incentives such as tax breaks, subsidized loans, or a mix of policies similar to the measures adopted during the COVID-19 pandemic when the government utilized several measures to maintain the economy and assist the private sector in navigating through the economic effects of shutdowns and COVID-19 restrictions.
The government should also consider how to improve public spending efficiency, particularly in the health and education sectors, which take in sizable portions of public expenditures. Add to this incentives to motivate the private sector to partner with the government by mobilizing private sector own resources through a clear and transparent contractual arrangement specially with the recent amendments of the Public Private Partner (PPP) law.
In the long run, Jordan should consistently pursue its reform agenda articulated in the modernization program, with special emphasis on areas that have cascading economic and social effects, such as improvements in governance and transparency.
Jordan should consider raising public revenues by de-emphasizing regressive indirect taxes, such as the sales tax, and instead focus more on property taxes and capital gains which are currently trivial. Moreover, Jordan should enact a pension reform to ensure sustainability while adopting poverty targeted assistance in place of arbitrary subsidies that often miss their targeted groups. [3]
[1]The Impact of the Skirmishes in the Bab-El-Mandeb on Jordanian Trade Flows, Jordan Strategy Forum, December 2023, https://jsf.org/uploads/The%20Impact%20of%20the%20Skirmishes%20in%20the%20Bab-El-Mandeb%20on%20Jordanian%20Trade%20Flows__.pdf
[2] Middle East and Central Asia, IMF, April 2024, https://www.imf.org/en/Publications/REO/MECA
[3] More details on this issue can be accesses in a recent paper that have been published by the Economic research forum. https://erf.org.eg/publications/fiscal-policy-private-sector-development-and-social-outcomes-in-an-indebted-arab-country-balancing-austerity-with-pro-growth-policies-in-jordan/
PS: The views and opinions expressed in the article are those of the author and do not necessarily reflect the views or positions of PSI.