capital spending

Austerity isn’t the answer

The latest round of tax hikes and subsidy cuts of austerity will unlikely have much of an impact on the underlining challenges facing Jordan’s economy.

The government’s main justification for recently passing broad new austerity measures was to try to raise some JD540 million to cover this year’s fiscal deficit. Ministers say we need to rectify all economic distortions, especially those related to the fact that subsidies should be directed to those genuinely in need.

However, even after reconfiguring these subsidies, can we really be confident that we’ll be significantly better off in the long-run? Has the likelihood of having to deal with another budget deficit next year been greatly reduced? Knowing the answers will be negative, and that the fiscal deficit will still be there—it may even be much bigger than this year’s, as austerity programs bring less revenue to governments than monetary expansion policies—it’s worth asking exactly what we are going to do in 2019 or for the 2019 budget.

Are we going to move from lifting subsidies on bread to imposing taxes on each loaf of bread a person consumes in Jordan? Or will we just bump up VAT? Successive surveys show Jordan is already one of the costliest places to live in the region, as well as having one of the highest tax burdens. Unemployment has officially passed 18 percent. Public debt is now over 96 percent of GDP, and with a real growth rate at an unspectacular 2 percent, many doubt the recent belt tightening will have a great impact on the health of the country’s economy.

The stringent fiscal economic policies and the austerity program that the government is following can only bring more sluggish growth, more unemployment, more tax evasion and less economic growth.

Between annual debt services of more than JD1 billion, a public pension bill of over JD1 billion, and a public wages bill of around JD2 billion, no one can claim that we can evade or reduce any of those built-in economic distortions that were accumulated over a long history of mismanaging the public sector and public spending.

The way out is through three interrelated policies that should have been started four years ago. But it’s never too late. The current government has to start looking into those options today.

First and foremost, the government needs to admit that its attempts at attracting foreign investors have failed. The second needed action is the creation of a genuine national investment fund that finances young entrepreneurs all over the country and especially in areas outside of the capital. Finally, we need to find some concessional plan to reschedule our debt under which we postpone payment and debt services for the coming five years at least.

It is clear that nobody is going to bail us out of our mounting debts. So the only way out is by depending on expanding the economic supply side of the economy through genuine investments, and by opening new markets for our traditional industrial and agricultural products—emerging markets, especially in the Far East, could be an option. Supporting SMEs is vital for reducing youth unemployment. This for sure will help bringing more revenue to the government, create real growth, and it will help reduce our staggering-high debt to GDP ratio.