Third International IPR-MENA Social Policy Conference on
A new social contract for MENA countries:
Experiences from Development and Social Policies
Bonn, German Development Institute, Germany, 05-06 December 2016
United Nations Economic and Social Commission for Western Asia
Effectiveness of Fiscal Policy in Jordan: Impact on
Growth, Poverty and Inequality
Niranjan Sarangi
Economic Development and Integration Division
All opinions expressed are those of the author(s) and can not be attributed to ESCWA
Context
 Macro-fiscal trends
 Poverty and inequality trends
 Impact of government expenditure on growth:
Fiscal multipliers
 Impact of redistributive fiscal policy on poverty
and inequality: Fiscal incidence
 Findings and policy implications
Page 2
© Copyright 2014 ESCWA. All rights reserved. No part of this presentation in all its property may be used or reproduced in any form without a written permission
1. Macro-fiscal trends
Page 3
© Copyright 2014 ESCWA. All rights reserved. No part of this presentation in all its property may be used or reproduced in any form without a written permission
Per capita income trends: Jordan and
other sub-regions in the Arab world
GDP per capita, US$ (constant 2005 prices)
10.000
9.000
8.000
7.000
6.000
5.000
4.000
3.000
2.000
1.000
OR-HMICs
•
Page 4
OP-MICs
LICs
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
0
Jordan
Oil-rich high and middle income countries (OR-HMICs); Oil-poor middle
income countries (OP-MICs); Low income countries (LICs)
© Copyright 2014 ESCWA. All rights reserved. No part of this presentation in all its property may be used or reproduced in any form without a written permission
Jordan: Economic growth has
remain highly volatile and subdued
Real GDP growth (%)
9,00
8,00
7,00
6,00
5,00
4,00
3,00
2,00
1,00
0,00
2000
Page 5
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
© Copyright 2014 ESCWA. All rights reserved. No part of this presentation in all its property may be used or reproduced in any form without a written permission
2014
2015
Fiscal balances (% of GDP): A major
macroeconomic concern
2,00
0,00
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
General government net
lending/borrowing (%GDP)
-2,00
-4,00
General government
primary net
lending/borrowing (%GDP)
-6,00
-8,00
-10,00
Page 6
© Copyright 2014 ESCWA. All rights reserved. No part of this presentation in all its property may be used or reproduced in any form without a written permission
Government expenditure (% of GDP)
shows a consistently declining trend
50,00
45,00
40,00
General government
revenue (%GDP)
35,00
30,00
25,00
20,00
General government
expenditure (%GDP)
15,00
10,00
5,00
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
0,00
Page 7
© Copyright 2014 ESCWA. All rights reserved. No part of this presentation in all its property may be used or reproduced in any form without a written permission
Major social expenditure components (% of
GDP) show a declining trend
25,0%
Subsidies
20,0%
Social benefits
% of GDP
Health
15,0%
Education
Social protection
10,0%
Housing &
community amenities
Total social spending
5,0%
0,0%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Note: Total social spending=sum of expenditure on health, education, housing and community amenities and social protection
Source: IMF GFS
Page 8
© Copyright 2014 ESCWA. All rights reserved. No part of this presentation in all its property may be used or reproduced in any form without a written permission
IMF medium term macroeconomic outlook for Jordan
GDP, constant prices (% change)
Total investment (% of GDP)
Gross national savings (% of GDP)
Gov. revenue (% of GDP)
Gov. total expenditure (% of GDP)
Gov. net lending/borrowing (% of GDP)
Gov. Primary net lending/borrowing (% of GDP)
Gov. gross debt (% of GDP)
Current account balance (% of GDP)
2016
2017
2018
2019
2020
2.8
3.3
3.8
4.0
4.0
19.5
20.1
20.8
21.7
21.8
10.4
11.2
13.4
15.5
15.6
25.8
26.3
26.2
25.9
25.6
29.6
30.3
30.4
29.9
29.7
-3.8
-4.0
-4.2
-4.1
-4.1
-0.6
-0.8
-1.0
-1.0
-1.0
94.4
94.0
91.0
86.3
81.7
-9.0
-8.9
-7.5
-6.2
-6.2
Source: IMF
Page 9
© Copyright 2014 ESCWA. All rights reserved. No part of this presentation in all its property may be used or reproduced in any form without a written permission
2. Poverty and inequality trends
Page 10
© Copyright 2014 ESCWA. All rights reserved. No part of this presentation in all its property may be used or reproduced in any form without a written permission
Poverty and Inequality
Poverty headcount rates (NPL)
Gini Coefficient
44
20,0
42
14,5
15,0
13,7
14,4
40
11,9
38
10,0
36
34
5,0
32
30
0,0
2002
Page 11
2006
2008
2010
1990
1995
2000
© Copyright 2014 ESCWA. All rights reserved. No part of this presentation in all its property may be used or reproduced in any form without a written permission
2005
2010
Alternate estimates show high and increasing gap
between ‘rich’ and ‘poor’
Rich pfce/ Poor pce
Rich pfce/ vulnerable pce
14,9
15,0
14,3
13,7
13,0
11,3
11,0
9,2
9,0
7,4
7,1
1,1
2,6
2,0
1,1
6,1
6,1
5,8
3,1
2,6
1,0
8,0
7,3
5,0
4,6
4,5
3,0
9,0
7,7
5,7
3,4
2,11,5
11,0
10,1
9,6
8,9
7,4
7,0
3,0
Rich pfce /Affluent pce
16,2
17,0
5,0
Rich pfce/ Middle class pce
3,4
2,9
1,2
1,4
4,7
4,3
2,2
1,8
4,3
3,8
1,4
1,4
1,0
0,7
-1,0
1998
2006
Yemen
2000
2011
Egypt
1997
2007
Syria
2002
2010
Jordan
2000
2010
Oman
Source: Arab Middle Class report 2014
Page 12
© Copyright 2014 ESCWA. All rights reserved. No part of this presentation in all its property may be used or reproduced in any form without a written permission
2005
2010
Tunisia
3. Impact of public expenditure
on growth: Fiscal multipliers
Page 13
© Copyright 2014 ESCWA. All rights reserved. No part of this presentation in all its property may be used or reproduced in any form without a written permission
Fiscal multiplier - methodology
• A 3-variable SVAR model
• The restrictions are given on the unobserved structural
innovations parameters which are derived from the observed
residuals from each equation.
•This can be written as:
etG = u1G
etY = C21u1G + utY
etR = C32u1G + utR
where G, Y, and R denote government expenditure, output and
government revenues respectively, while u’s are observed residuals
from three equations while e’s are unobserved innovations that are
derived from SVAR model after imposing the above restrictions.
Page 14
© Copyright 2014 ESCWA. All rights reserved. No part of this presentation in all its property may be used or reproduced in any form without a written permission
Fiscal multiplier - Results
Type of expenditures
Aggregate public expenditure 1.15
Peak multiplier (peak year
in the brackets )
1.15(1)
Current expenditure
Capital expenditure
Use of goods and services
Compensation of employees
Interest
Social benefits
Subsidies
Government grants
2.45(1)
5.82(3)
0.96(3)
0.90(1)
0.07(1)
1.25(2)
2.85(1)
-0.03(1)
Page 15
Impact multiplier
2.45
0.90
0.33
0.90
0.07
0.21
2.85
-0.03
© Copyright 2014 ESCWA. All rights reserved. No part of this presentation in all its property may be used or reproduced in any form without a written permission
3. Impact of redistributive fiscal
policy on poverty and inequality:
Fiscal incidence
Page 16
© Copyright 2014 ESCWA. All rights reserved. No part of this presentation in all its property may be used or reproduced in any form without a written permission
Fiscal incidence analysis
Transfers
Market Income (Ym):
Wages and salaries, income from capital, private transfers
(remittances, private pensions, etc) before taxes, social security
contributions and government transfers AND contributory social
insurance old age pensions ONLY in the case in which pensions are
treated as deferred income
Net Market Income (Yn)
Taxes
Personal income taxes AND
employee contributions to social
security (DT+SS):
ONLY in the case that contributory
pensions are treated as transfers
Direct near cash transfers (T):
Conditional and unconditional cash
transfers, school feeding programs,
free food ct cash and transfers, etc
Disposable Income (Yd)
Indirect subsidies (IS):
Energy, food and other general
or targeted price subsidies
Indirect taxes (IT):
VAT, excise taxes and other
indirect taxes
Post-fiscal (or consumable ) Income (Ypf)
In-kind transfers:
Free or subsidized government
services in education and health
Co Payments, user free
Final Income
Page 17
© Copyright 2014 ESCWA. All rights reserved. No part of this presentation in all its property may be used or reproduced in any form without a written permission
Source: Lustig and Higgins (2013)
Fiscal incidence: Methodology
Following Lustig and Higgins (2013), the income
concepts used in this exercise are as follows:
 Market income: Ym = W + IC + SC + IR + RT + P
 Net Market income: Yn = Ym – DT – SS
 Disposable income: Yd = Yn + T
 Post-fiscal income: Ypf = Yd + IS – IT
Where,
W = gross (pre-tax) wages and salaries
IC = income from capital
SC = self-consumption from own
production
IR = imputed rent for owner occupied
housing
RT = Remittances
P = pensions from contributory social
security system
DT = direct taxes on all income sources
SS = Contributions to social security
T = direct transfers from government
IS = Indirect subsidies (food, fuel prices
and so on)
IT = Indirect taxes
The effectiveness of transfers (or other indicators) was calculated by using the formula:
G(yn)-G(yd)/(T/GDP)
Where,
G(yn) – gini of net market income
G(yd) – gini of disposable income
T – direct transfers from government
GDP – gross domestic product at current price w.r.t the year of survey
Page 18
© Copyright 2014 ESCWA. All rights reserved. No part of this presentation in all its property may be used or reproduced in any form without a written permission
Data issues and sensitivity analysis
Issues:
Indirect Taxes – Effective tax rates were computed
Indirect subsidies – Not calculated due to lack of evidence. However, the downward bias
of post-fiscal income tends to be applicable to all households in the sample, not just the
poor households, given the pattern of incidence of food and fuel subsidies
The estimates of transfers from incidence analysis nearly matches that from financial
statistics, except for 2010 at a higher side.
Taxes (direct and indirect) are consistently underestimated in the incidence analysis than
that appears in the financial statistics.
Sensitivity analysis:
Transfers without pensions (benchmark case)
Transfers with pensions (sensitivity analysis)
#Remittances from abroad were treated as regular income, not as transfers
Page 19
© Copyright 2014 ESCWA. All rights reserved. No part of this presentation in all its property may be used or reproduced in any form without a written permission
Fiscal policy: Impact on poverty
30,00
-50,00
-46,86
-46,24
-44,43
25,00
-40,00
-35,18
-33,74
20,00
-30,00
-26,65
Market income
Net Market income
15,00
-20,00
Disposable income
Post-fiscal income
Change in yni
10,00
-10,00
Change in yd
Change in ypf
5,00
4,25
5,95
5,36
0,00
10,00
2006
Page 20
0,00
2008
2010
© Copyright 2014 ESCWA. All rights reserved. No part of this presentation in all its property may be used or reproduced in any form without a written permission
Fiscal policy: Impact on inequality
0,48
-14,00
-11,56
-10,78
-11,42
-11,85
0,46
-9,84
-10,02
-12,00
-10,00
Market income
0,44
-8,00
0,42
-6,00
-4,00
0,40
-2,00
0,38
-0,30
0,00
0,13
0,36
Disposable income
Post-fiscal income
Change in yni
Change in yd
Change in ypf
0,00
2,00
2006
Page 21
Net Market income
2008
2010
© Copyright 2014 ESCWA. All rights reserved. No part of this presentation in all its property may be used or reproduced in any form without a written permission
Incidence of direct and indirect taxes
across income deciles (Market income)
Incidence of direct tax across deciles
Incidence of indirect tax across declies
35,0
6,0
30,0
4,0
25,0
20,0
2,0
15,0
0,0
10,0
1
2
3
4
5
6
7
8
9
10
5,0
-2,0
0,0
1
Direct taxes and contributions 2010
-4,0
Direct taxes and contributions 2008
-6,0
Direct taxes and contributions 2006
Page 22
2
3
4
5
Indirect taxes 2010
6
7
8
9
Indirect taxes 2008
Indirect taxes 2006
© Copyright 2014 ESCWA. All rights reserved. No part of this presentation in all its property may be used or reproduced in any form without a written permission
10
Composition of tax revenue: Indirect tax has a
dominant and increasing share in total tax
revenue in Jordan
100%
90%
1,4
10,8
0,0
7,1
7,4
0,0
80%
0,0
0,0
8,4
0,0
20,2
0,0
13,3
0,0
6,0
0,0
0,0
4,3
0,0
0,0
0,0
48,3
70%
43,8
41,2
41,6
60%
55,3
59,7
Property
70,0
50%
40%
0,0
4,3
0,0
Trade
62,6
13,0
Excise
12,9
24,6
30%
Goods and Services
21,8
Individual Income
25,8
18,1
20%
31,0
31,0
Corporate Income
5,2
5,2
10%
16,4
11,9
20,8
25,6
16,2
14,7
2005
2015
0%
2005
2015
Egypt
Page 23
2005
2015
Jordan
2005
2015
Morocco
Tunisia
© Copyright 2014 ESCWA. All rights reserved. No part of this presentation in all its property may be used or reproduced in any form without a written permission
Incidence of transfers by income
deciles (Market income)
300,0
250,0
200,0
Transfers 2010
150,0
Transfers 2008
The social assistance programmes
seems to be relatively better
targeted in Jordan, where 43 per
cent of the people in the poorest
quintile benefit from such
programmes as against 6 per cent in
the richest quintile.
Transfers 2006
100,0
50,0
0,0
1
Page 24
2
3
4
5
6
7
8
9
10
In fact, in Jordan, the benefit
incidence of such programmes
among the poorest quintile is larger
than that in other Arab countries,
and than that of the world average
(33 per cent). World Bank (2013)
© Copyright 2014 ESCWA. All rights reserved. No part of this presentation in all its property may be used or reproduced in any form without a written permission
3. Findings and policy
implications
Page 25
© Copyright 2014 ESCWA. All rights reserved. No part of this presentation in all its property may be used or reproduced in any form without a written permission
Findings and policy implications
• The aggregate fiscal multiplier is 1.2; the current expenditure
multiplier is high but capital expenditure multiplier shows the highest
impact on growth in a lag of three years. The role of public
expenditure is therefore important for boosting growth in short and
long term.
• The transfers played an important role in reducing poverty and
inequality during 2006 to 2010. By adding pensions into transfers
(sensitivity analysis), the impact gets more strengthened.
• The incidence of transfers shows an impressively progressive
pattern. The incidence of indirect taxes is more regressive. The
direct taxes show mild progressivity but, in particular, the highest
income decile tends to pay less tax than the middle income deciles,
which needs to be looked into more carefully with detail fiscal
records.
Page 26
© Copyright 2014 ESCWA. All rights reserved. No part of this presentation in all its property may be used or reproduced in any form without a written permission
Findings and policy implications
The study of LACs also confirms that:
Redistributive success depends upon primarily
by the amount of resources devoted to
(collected from) direct transfers (direct taxes)
and their progressivity, and the presence of
unequalizing net indirect taxes (Lustig 2015).
Page 27
© Copyright 2014 ESCWA. All rights reserved. No part of this presentation in all its property may be used or reproduced in any form without a written permission
Findings and policy implications
• Overall, real GDP growth in Jordan remain subdued and macroeconomic imbalances remain persistent, and unemployment is high
especially for the youth, along with pressing social demands
• Applying fiscal consolidation policies since 2013, with a focus on
reduction in public expenditure during 2014 and 2015, has somewhat
improved key fiscal balances, but it has not helped in improving growth
and employment, rather both rates declined during 2014-15. This may
not be seen as a surprise but as a consequence of one sided policy, as
explained in the paper.
• A more comprehensive and well strategized macro-fiscal framework
is needed for Jordan. There is a need for increasing public expenditure
for raising aggregate demand, short-term growth, generation of jobs,
and for progressing toward achieving the SDGs. That requires
enhancing fiscal space, particularly raising domestic public resources
through reforms in taxation systems in addition to rationalizing
subsidies.
Page 28
© Copyright 2014 ESCWA. All rights reserved. No part of this presentation in all its property may be used or reproduced in any form without a written permission
Thank you!
The paper can be accessed at:
https://www.unescwa.org/publications/
effectiveness-fiscal-policy-jordan
Page 29
© Copyright 2014 ESCWA. All rights reserved. No part of this presentation in all its property may be used or reproduced in any form without a written permission
Impulse responses: For current expenditure
Response to Structural One S.D. Innovations ± 2 S.E.
Response of DLOG(GECURR) to Shock1
Response of DLOG(GECURR) to Shock2
Response of DLOG(GECURR) to Shock3
.4
.4
.4
.2
.2
.2
.0
.0
.0
-. 2
-. 2
-. 2
-. 4
-. 4
1
2
3
4
5
6
7
8
9
10
-. 4
1
Response of DLOG(YT O) to Shock1
2
3
4
5
6
7
8
9
10
1
Response of DLOG(YT O) to Shock2
.04
.04
.02
.02
.02
.00
.00
.00
-. 02
-. 02
-. 02
-. 04
1
2
3
4
5
6
7
8
9
10
3
4
5
6
7
8
9
10
1
Response of DLOG(GRT O) to Shock2
.2
.1
.1
.1
.0
.0
.0
-. 1
-. 1
-. 1
-. 2
2
3
4
5
6
7
8
9
10
5
6
7
8
9
10
2
3
4
5
6
7
8
9
10
Response of DLOG(GRT O) to Shock3
.2
1
Page 30
2
.2
-. 2
4
-. 04
1
Response of DLOG(GRT O) to Shock1
3
Response of DLOG(YT O) to Shock3
.04
-. 04
2
-. 2
1
2
3
4
5
6
7
8
9
10
1
2
3
4
5
6
7
8
9
© Copyright 2014 ESCWA. All rights reserved. No part of this presentation in all its property may be used or reproduced in any form without a written permission
10
Impulse responses: For capital expenditure
Response to Cholesky One S.D. Innovations ± 2 S.E.
Response of DLOG(GECAPEX) to DLOG(GECAPEX)
Response of DLOG(GECAPEX) to DLOG(GRTO)
.6
.6
.4
.4
.4
.2
.2
.2
.0
.0
.0
-.2
-.2
-.2
-.4
-.4
1
2
3
4
5
6
7
8
9
10
Response of DLOG(Y TO) to DLOG(GECAPEX)
-.4
1
2
3
4
5
6
7
8
9
10
Response of DLOG(Y TO) to DLOG(Y TO)
1
.04
.04
.02
.02
.02
.00
.00
.00
-.02
-.02
-.02
-.04
1
2
3
4
5
6
7
8
9
10
Response of DLOG(GRTO) to DLOG(GECAPEX)
2
3
4
5
6
7
8
9
10
Response of DLOG(GRTO) to DLOG(Y TO)
1
.08
.04
.04
.04
.00
.00
.00
-.04
-.04
-.04
-.08
2
3
4
5
6
7
8
9
10
4
5
6
7
8
9
10
2
3
4
5
6
7
8
9
10
Response of DLOG(GRTO) to DLOG(GRTO)
.08
1
3
-.04
1
.08
-.08
2
Response of DLOG(Y TO) to DLOG(GRTO)
.04
-.04
Page 31
Response of DLOG(GECAPEX) to DLOG(Y TO)
.6
-.08
1
2
3
4
5
6
7
8
9
10
1
2
3
4
5
6
7
8
9
10
© Copyright 2014 ESCWA. All rights reserved. No part of this presentation in all its property may be used or reproduced in any form without a written permission