# 1. Introduction

Fiscal policy can be used to provide public goods and services, for macroeconomic stabilisation, helping to dampen the impact of adverse shocks, to stimulate economic growth and to aid poverty reduction (Horton and El-Ganainy 2020). Here we focus on the implications of the structure of government revenues and expenditures for the welfare of households. Fiscal policies can be changed relatively quickly and can generate large short-term effects on poverty and inequality. Therefore, an assessment of who receives government transfers (implicitly or explicitly) and who pays taxes (directly or indirectly), including how much they receive or pay overall, is necessary to understand the effects of fiscal policies on inequality and poverty. Moreover, it is the net impact of all fiscal policy which should be taken into account. While specific taxes and services benefit different households in different manners, the aggregate impact on households of all taxes and spending is what matters. Which households pay more into the fiscal system than they receive, and which ones receive more? How much do they pay or receive relative to their income?

Using an internationally recognized methodology developed by the Commitment to Equity Institute<sup>2</sup> and household survey and administrative data from 2017-18, a comprehensive analysis of the benefits and burdens of Jordan’s key fiscal policies—taxes and transfers—was conducted to evaluate its welfare and distributional impacts. The analysis starts with pre-fiscal or market income, and allocates the following fiscal interventions: direct taxes (personal income taxes); indirect taxes (general and special sales taxes and excises); direct social transfers (NAF and the bread compensation scheme); indirect subsidies (electricity and water); and in-kind benefits (education and health). We assess the distribution of each fiscal intervention independently as well as the overall performance of the system.

Methodologically, this work introduces two innovations with respect to standard fiscal incidence analyses. First, while it is common to account for the cascading impact of exemptions in indirect taxes such as GST, it is not usual to consider the indirect impact on households of industrial and commercial crosssubsidisation of water and electricity tariffs when they act as an indirect tax rather than subsidy. We assess these effects by using a cost-push model similar to that applied to GST, where higher (lower) prices in the industrial sectors resulting from the tariff structure are passed-on to consumers as higher (lower) prices for the final goods and services that use electricity as inputs of production. The second innovation is an alternative treatment of in-kind benefits from public spending on health and education. Traditionally, these are valued at the government’s cost of delivery. We introduce a value-to-household adjustment which accounts for differences in health and education outcomes across the household per capita consumption distribution; households with better outcomes from human capital development are considered to value those public services more.

In absolute terms, Jordan’s overall fiscal system is modestly progressive, with the poorest deciles being net beneficiaries and the richest deciles net contributors to the system, which is reflected in a small fall in inequality when comparing market income to the post-fiscal final income. However, if in-kind benefits from health and education services are excluded, the system appears much less progressive and the fall in inequality from the starting market income is much smaller. Furthermore, even when considering inkind spending, the relative contributions of each income decile to the system are similar throughout the distribution.

> 2 See <u>www.commitmenttoequity.org</u>