First, we look at residential electricity tariffs and examine the fiscal and distributional impacts if the richest 40 percent of households had a flat tariff which covered the cost-of-service delivery while tariffs for the rest of the population remained unchanged. Second, we look at the impact of removing all GST preferential rates and exemptions. Finally, we examine the current social protection strategy of expanding Takaful and recertifying NAF and assess its likely mitigation of any impacts on poverty and inequality from the GST reforms.

The current electricity tariff structure heavily subsidises initial consumption (the first 160 kwh) for all households regardless of their total consumption or place in the income distribution. This means that there are some, especially large, poorer households who are paying a ‘tax’ on their electricity consumption at the higher brackets, and richer households are being subsidised for the lower brackets of electricity consumption when they do not need it (Figure 15). The top two deciles receive almost a quarter of the electricity subsidies and the next two deciles an additional similar amount; that is up to a total of JOD 115 million. We simulate an alternative tariff structure: the highest tariff rates (consumption over 600kWh/month) for all households are lowered to cost recovery while the richest 40 percent of households are no longer subsidised for their consumption at lower brackets. This type of affluence testing is increasingly used internationally (see Grosh, Leite and Wai-Poi, forthcoming) and Jordan has experience with this approach.<sup>62</sup> Poor and middle-income households (in in the bottom 60 percent of the welfare distribution) retain the current subsidised tariffs for lower consumption brackets.<sup>63</sup> Even with poor and middle-income households receiving more subsidies than before and the highest tariff becoming cheaper, the proposed pricing structure would see significant savings, all coming from the richest 40 percent of households (JOD 95 million annually even assuming current levels of non-payment of bills, which, if addressed, could add another JOD 17 million to 60 million<sup>64</sup> ). The richest 20 percent would contribute 65 percent to the total savings. Overall poverty would decrease by 0.2 points while inequality would be reduced by 0.3 points compared to the baseline marginal impact of electricity residential tariffs.<sup>65</sup> 62 When the country removed the fuel subsidies in 2012 and food subsidies in 2018, it implemented cash schemes to compensate households for the increases in price (compensation for the fuel subsidy removal is not included in the current analysis since it is provided only when international oil prices exceed USD 100 per barrel, which they did not in 2018, and have not since 2014). To allocate the benefits, instead of targeting at the bottom, they used a combination of criteria to exclude clearly rich and thus non-eligible households. In the first case, the richest 30 percent of households were trimmed using a combination of self-reported income and ownership of cars, property and financial assets. In the case of the bread compensation scheme, about 20 percent of richest households were excluded using similar information. This was achieved by using a combination of self-reported information matched with information from administrative databases available at the time. New administrative data sources and the National Unified Registry (NUR) mean that the capacity to better implement such affluence testing is even greater now.

63 See current and reform scenario tariff structure in Appendix Table 9. We assume an inelastic demand, which means that the quantity of electricity purchased remains fixed as in the base scenario (no behavioural impacts). 64 Potential savings are estimated by applying the percentage change in the ‘survey’-budget, before and after the reform, to the administrative budget. Additional bill recovery from non-paying households in the top 40 percent of the distribution would yield extra revenues of approximately JOD 17 million. Full bill-recovery from all households would increase revenues by JOD 60 million in total. These estimates are based on self-reported zero-bill households in HEIS and may differ from administrative data.

65 Some households with higher incomes nonetheless are large households and are thus relatively poor (in per capita terms), so lowering the tariffs for the highest consumption blocks reduces poverty by a small amount.