Reforming fiscal reforms

According to the budget law for the year 2017, the government pledged to undertake two major fiscal reforms. The first was to raise JD450 million in fresh revenues through new measures, in consultation with the parliament and the International Monetary Fund; the second was to pay back JD350 million of overdue financial arrears to private contractors and individuals.

However, the fiscal figures published by the Ministry of Finance for the first three quarters of 2017 show a significant shortfall in meeting both targets.

On the revenues side, harsh measures undertaken since the beginning of March have merely raised JD125 million, just below 50 per cent of the annually adjusted target.

In addition, this increase was significantly offset by lower income taxes, which decreased by around JD50 million compared to the same period of 2016.

The expenditure side of the budget does not draw a brighter picture.

Until the end of September 2017, the Ministry of Finance figures indicate that the government did not clear any overdue financial arrears to contractors and individuals, as originally stipulated by the budget.

This means, on the one hand, that arrears have started to pile up again, at least by the 9 per cent annual penalty the government incurs on late payments.

On the other, it means that according to the budget plan, the government deficit must have been JD350 million higher than the deficit figure reported by the Ministry of Finance.

If the budgeted arrears repayments are added to the government expenditure in the first three quarters of the year, the government deficit will register JD1,240 million, a remarkable 51 per cent increase over the deficit registered in the same period last year.

According to this analysis, it can be concluded that the government economic manifesto expressed in the annual budget law has failed remarkably in delivering targeted outcomes.

Such failure should spur the government and the parliament to investigate the factors that triggered such astonishing discrepancy between planned and realised outcomes.

It may prove that the old-school methodology of building budget estimates and the arbitrary process under which new revenue-enhancing measures are selected, can no more achieve envisaged results, given the stretched economic situation and the resulting higher price elasticity of demand.

In this regard, the government should overhaul the process by which it makes outstanding estimates and consider the establishment of a specialised unit at the Ministry of Finance to evaluate the economic and financial impacts of new proposed fiscal reforms.

In addition, the government should steer part of its focus towards the expenditure side of the budget, mainly by considering possible savings in capital expenditures through better prioritisation of projects and efficiency-optimisation measures.

On the financial arrears front, the government should not default on meeting its obligations, according to the agreed-upon schedule.

By paying back arrears, the government will fuel economic activity through injecting new liquidity into the market. Additionally, it will save a net of 4 per cent annually on the disbursed amounts, which represents the difference between its official borrowing cost (around 5 per cent) and the 9 per cent legal charge on accumulated arrears.

Moreover, the government should seriously consider reducing the 9 per cent legal penalty on arrears to match market risk-free interest rates, and should, at the same time, enhance the transparency of reporting arrears in its periodical publications.

Another step that can help the government better communicate the future impact of adopted fiscal reforms is to start explicitly reporting deficit figures before and after arrears as per the agreed-upon repayment schedule.

Reforming the fiscal reform programme is the name of the game.

Replicating the same experience of imposing new tax burdens on households and damaging the government’s popularity in return for no tangible fiscal outcome is no joke.

The writer, an economist and columnist, contributed this article to The Jordan Times.