metadata: authors: 0: author: Rodriguez Takeuchi,Laura Kiku
1: author: Wai-Poi,Matthew Grant
count: Jordan
docna: 0: docna: Fiscal Policy, Poverty and Inequality in
            Jordan : The Role of Taxes and Public Spending
docty: Policy Research Working Paper
theme: Public Expenditure Management,Economic Policy,Public Finance Management,Fiscal Policy,Public Sector Management,Tax policy,Public Expenditure Policy
abstracts: cdata!: Analysing who benefits from different
            taxes and spending is important to understand how fiscal
            policy is affecting poverty and inequality in Jordan. This
            study traces how the Jordanian fiscal system affects
            different households, while paying income tax and GST and
            benefiting from social assistance, and services, such as,
            cash transfers, electricity and water subsidies, education
            and health. The study finds that Jordan&#x2019;s current
            fiscal system is modestly progressive, but more could be
            achieved. Inequality, as measured by the Gini Index, falls
            5.8 points between household market incomes and post-fiscal
            incomes (after paying income and consumption taxes as well
            as receiving government transfers and subsidized services).
            When considering only monetary taxes and benefits (that is,
            excluding non-cash education and health services),
            inequality falls by only 2.6 points and poverty would be
            almost the same as the official poverty rate. Nonetheless,
            the recent expansion of social assistance programs is making
            Jordan&#x2019;s fiscal policies more equalizing and
            there is scope for other reforms which would both close the
            fiscal gap while further reducing poverty and inequality.
display_title: Fiscal Policy, Poverty and
            Inequality in Jordan : The Role of Taxes and Public Spending
listing_relative_url: /research/2024/03/34286293/fiscal-policy-poverty-inequality-jordan-role-taxes-public-spending
topicv3: Fiscal Policy and Inequality m1326226 1120,Government Expenditure m1326649 1112,Poverty and Social Impact Analysis
            m1327421 709,Income Inequality m1503891 2668
publishtoextweb_dt: 2024-03-21T00:00:00Z
dois: 10.1596/1813-9450-10732
origu: Off of Sr VP Dev Econ/Chief Econ (DECVP)
no_of_pages: 54
author_keys: 0: author_key: 1816488
1: author_key: 905143
model_extractions: Policy Research Working Paper 10732 Fiscal Policy, Poverty and Inequality in Jordan The Role of Taxes and Public Spending _Laura Rodriguez Matthew Wai-Poi_ Poverty and Equity Global Practice March 2024
Policy Research Working Paper 10732

# **Abstract**

Analysing who benefits from different taxes and spending is important to understand how fiscal policy is affecting poverty and inequality in Jordan. This study traces how the Jordanian fiscal system affects different households, while paying income tax and GST and benefiting from social assistance, and services, such as, cash transfers, electricity and water subsidies, education and health. The study finds that Jordan’s current fiscal system is modestly progressive, but more could be achieved. Inequality, as measured by the Gini Index, falls 5.8 points between household market incomes and post-fiscal incomes (after paying income and consumption taxes as well as receiving government transfers and subsidized services). When considering only monetary taxes and benefits (that is, excluding non-cash education and health services), inequality falls by only 2.6 points and poverty would be almost the same as the official poverty rate. Nonetheless, the recent expansion of social assistance programs is making Jordan’s fiscal policies more equalizing and there is scope for other reforms which would both close the fiscal gap while further reducing poverty and inequality.

This paper is a product of the Poverty and Equity Global Practice. It is part of a larger effort by the World Bank to provide open access to its research and make a contribution to development policy discussions around the world. Policy Research Working Papers are also posted on the Web at http://www.worldbank.org/prwp. The authors may be contacted at lrodrigueztak@worldbank.org and mwaipoi@worldbank.org.

_The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent._ Produced by the Research Support Team
**Fiscal Policy, Poverty and Inequality in Jordan** The Role of Taxes and Public Spending<sup>1</sup>

Laura Rodriguez and Matthew Wai-Poi

**JEL:** D31, H22, I38

1 Laura Rodriguez (lrodrigueztak@worldbank.org, Economist, Poverty and Equity Global Practice) and Matthew Wai-Poi (mwaipoi@worldbank.org, Lead Economist, Poverty and Equity Global Practice). The authors are grateful for peer review comments from Vibhuti Mendiratta, Sailesh Tiwari and Marijn Verhoeven, as well as from Jaime de Piniés on behalf of MNADE Quality Team.

This paper was prepared as a technical background paper for the Jordan Fiscal Public Expenditure Review and accompanies the - policy summary published as Rodriguez and Wai-Poi (2021): https://documents.worldbank.org/en/publication/documents <u>reports/documentdetail/113451615905549990/fiscal-policy-poverty-and-inequality-in-jordan-the-role-of-taxes-and-public-</u> - - <u>spending policy summary</u>
# **Executive Summary**

**Fiscal policy is potentially one of the most powerful tools governments have for reducing poverty and inequality, but not all households are affected in the same way.** Fiscal policy—how public revenue is generated through different taxes and how it is spent—can generate sizeable impacts on poverty and inequality. How much income tax a worker pays depends upon how much they earn, what deductions they can claim and often their household composition. How much GST they pay depends upon what they spend upon. And the price of what they buy depends upon the taxes on the inputs to production. At the same time, poorer and more vulnerable households may benefit from social protection but less from investments in tertiary education which their children may not attend. Analysing who benefits from different taxes and spending is important to understand how fiscal policy is affecting poverty and inequality in Jordan. This study traces how the Jordanian fiscal system affects different households, while paying income tax and GST and benefiting from social assistance, and services, such as, electricity and water subsidies and education and health.

**Jordan’s current fiscal system is modestly progressive, but more could be achieved.** We compare household inequality based on their market incomes only with post-fiscal incomes (after paying income and consumption taxes as well as receiving government transfers and subsidised services). On this basis, inequality falls 5.8 points as measured by the Gini Index, from 35.1 to 29.5 points. When we consider only monetary taxes and benefits (that is, excluding non-cash education and health services), inequality falls by only 2.6 points. Moreover, poverty would be almost the same as the official poverty rate if consumption taxes and indirect subsidies were considered. We also examine a database of 47 countries with the degree of inequality reduction from fiscal policy and find that Jordan is ranked in the bottom half, being 25<sup>th</sup> from the top considering only cash taxes and benefits and in the same rank if we also include education and health.

**Nonetheless, the recent expansion of social assistance programs is making Jordan’s fiscal policies more equalising.** In 2019, Jordan introduced a complementary program (Takaful) to the main social assistance program (National Aid Fund or NAF). Takaful expanded in 2020 and will reach 85,000 households by 2021. The impact of the new program is estimated to reduce inequality by 0.7 points and poverty by 1.4 percentage points. The subsequent planned transition of the current NAF to a more poverty-targeted approach could reduce inequality and poverty by an additional 0.4 and 0.4 points respectively.

**Fiscal reforms are necessary in Jordan.** In 2019, Jordan’s public debt to GDP ratio was almost 99 percent, including arrears (World Bank, 2020). The need for fiscal consolidation existed before the pandemic due to limited fiscal space. Moreover, emergency COVID-19 spending to support vulnerable households and businesses along with lower revenues due to the economic shock will make fiscal reforms even more important in a post-COVID world.

**However, there is scope for reforms which would both close the fiscal gap while further reducing poverty and inequality.** The paper looks at three reforms: (i) GST; (ii) electricity tariffs; and (iii) social protection reforms. Taken together, they reduce poverty by 1.7 percentage points and inequality by 1.3 points while closing the fiscal gap by JOD 115 million. The GST reform eliminates lower rates and exemptions on various goods and services; 60 percent of these foregone revenues go to the richest 30 percent of households. Electricity tariffs are set at the cost of production for the richest 40 percent of households (increasing some tariffs and reducing others) but unchanged or reduced for the majority of Jordanians, reducing both poverty and inequality. The continued expansion of Takaful and recertification of NAF come at some fiscal cost but reduce poverty further. There are further opportunities to close the fiscal gap or reduce poverty or inequality without increasing spending. The current bread subsidy compensation payments are received by nearly 80 percent of Jordanian households; this spending could
be redirected to increase health insurance coverage for current NAF and Takaful beneficiaries, or reduced in coverage with commensurate fiscal savings.
# 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>
In international context, Jordan’s fiscal policy performs poorly in terms of reducing poverty and inequality. In 2018, Jordan’s fiscal policy reduced inequality by 2.6 points in monetary terms (25<sup>th</sup> out of 47) and 5.8 points including health and education (28<sup>th</sup> ). In 2010, the reductions were 1.6 points (35<sup>th</sup> ) and 2.3 points (3<sup>rd</sup> worst), although as we mentioned the 2010 and 2018 results are not comparable for a variety of technical reasons. Jordan’s poverty reduction impact (1.5 points) is modest in comparison with countries that achieve poverty reduction through their fiscal systems, although this discounts that in many countries the fiscal system actually increases poverty.

Over the last few years Jordan has experienced sluggish economic growth and weak fiscal performance, by the end of December 2019, owing primarily to weak domestic resource mobilisation, the debt-to-GDP ratio including arrears rose to reach 99 percent of GDP (WB, 2020). Jordan’s revenue and spending as a percentage of GDP is relatively high at the aggregate level compared to other countries in the CEQ database. However, the composition of both has historically been less progressive than elsewhere. Fiscal reforms of the last decade have been positive – a move away from food and fuel subsidies and an increase in poverty-targeted direct transfers – but remain far from the international best practice. A key driver of these results is Jordan’s reliance on less progressive sources of revenue and forms of expenditure. Personal income tax (PIT) and targeted direct cash transfers such as NAF or the new Takaful programme perform much better in terms of progressivity than indirect taxes and subsidies, respectively. However, because direct taxes and transfers represent relatively small contributions to total revenues and expenditures, they have a limited impact on poverty and inequality reduction. For example, revenue from personal income taxes are about 9 percent of revenue from GST. Almost three times as much is spent on regressive electricity and water subsidies than in progressive direct transfers, and even within direct transfers, 75 percent more is spent on the bread subsidy cash compensation which is much less targeted to poorer households than NAF and Takaful. Inequality only falls 1.7 points after direct taxes and transfers and only a further 0.9 point once indirect taxes and transfers are included. As a consequence, the fiscal system falls short of its potential equalising and poverty reducing impact.

The COVID-19 crisis is expected to pose a significant risk to the near-term growth prospect and to poverty and inequality (Refaqat _et al_ . 2019). In this context, the need for fiscal reforms to raise additional revenues without affecting the poor and vulnerable is more pressing. We discuss potential reform scenarios that could help achieve such objectives. These include the expansion of direct cash transfers through Takaful (a policy being currently implemented), the elimination of the bread compensation scheme, a reform of the electricity residential tariff system and the elimination of the exceptions under the GST. Taken together, we estimate that the fiscal system could become more progressive while generating significant fiscal savings.

We begin by presenting the main fiscal instruments and their budgetary allocations. Section 3 describes the methodology by which we allocate fiscal instruments to household data. Section 4 presents the distributional assessment of the current fiscal system in Jordan; Section 5 puts the results in international context; section 6 presents some potential reform scenarios; section 7 concludes.

# 2. Fiscal Instruments

This section provides an overview of Jordan’s taxes and expenditures in 2018. Although 2019 data are available, the household survey used to determine which households pay different taxes and benefit
from different spending was collected from mid-2017 to mid-2018, so we have matched it to the 2018 fiscal data.

# Taxes

Tax revenues account for about 15 percent of GDP in 2018 (Table 1). The lines in bold type are included in this study. Indirect general taxes on goods and services are by far the largest component, with personal and corporate income taxes making up most of the rest. In this study we do not analyse corporate income tax, the incidence of which cannot usually be allocated out to households.<sup>3</sup> We also do not include taxes on the commercial sector. We similarly exclude indirect taxes on the commercial sector. As a result, we only capture just over half of total tax revenues.

Jordan’s GST standard rate is 16 percent, and there are reduced 4 percent and 0 percent rates, as well as items exempted from GST. Exempt items do not have GST charged, but there is an indirect ‘tax’ paid by consumers as producers cannot recover the GST paid on the inputs used to produce them, the cost of which is passed on to consumers. A Special Sales Tax (SST) applies to cigarettes and tobacco,<sup>4</sup> mobile phone subscriptions,<sup>5</sup> soft drinks,<sup>6</sup> and alcohol<sup>7</sup> based on the quantity purchased. We cannot distinguish between taxes charged to domestic and imported goods in household consumption and so apply the same rates to both.

PIT in 2018 was levied on gross income from all sources less exemptions and deductions.<sup>8</sup> The income tax rate is progressive on the income level: the first 12,000 Jordanian dinars (JOD) of an individual’s income is exempt; income between JOD 12,000 and JOD 24,000 is taxed at 7 percent; income between JOD 24,000 and 36,000 is taxed at 14 percent; anything above is taxed at 20 percent. There is a single deduction for dependents of an additional JOD 12,000. PIT is entirely borne by the worker.

**_Table 1. Jordan government revenues, 2018_**

|||**2018**<br>**Percent of total**||
|---|---|---|---|
||**JOD Million**|<br>**revenues**|**Percent of GDP**|
|_Total Domestic Revenues_|6,945|100|23|
|_Tax Revenues_|4,536|65|15|
|1 - Taxes on income and profits, of which:|965|14|3|
|**Individuals**|**53**|**1**|**0.2**|
|**Salaried Employees**|**150**|**2**|**0.5**|
|Income Tax from Companies & Projects|762|11|3|
|2 - Taxes on Financial Transactions (real estate’s tax)|93|1|0|

3 One exception where the household survey data allow this is Chile (see World Bank 2014).

4 The SST schedule for cigarettes is based on the number of cigarette packs purchased. Other types of tobacco products (cigar, aarghile, etc.) are subject to a tax per gram of tobacco. We assume that one cigar has approx. 2g, a pack of tombak is 40g and aarghileh 40g.

5 26 percent rate. 6 10 percent rate.

7 2.5 fils/lit for beer and 5.5 fils/lit for other types of alcohol. We assume one bottle of beer has 330 liters and one bottle of other alcoholic beverages, 700 liters.

8 The personal income tax law was revised in October 2018 to take force at the beginning of 2019. We will discuss these changes later.
|3 - General Taxes on Goods and Services:|3,185|46|11|
|---|---|---|---|
|**Sales Tax on Imported Goods**|**972**|**14**|**3**|
|**Sales Tax on Domestic Goods**|**805**|**12**|**3**|
|**Sales Tax on Services**|**522**|**8**|**2**|
|Sales Tax on Commercial Sector|885|13|3|
|4 - Taxes on International Trade & Transactions|293|4|1|
|Customs Duties and Fees|266|4|1|
|Customs Fines|27|0|0|
|_Non-tax Revenues_|2,409|35|8|

Note: Lines in bold are included in the analysis Source: Ministry of finance/ General Government Bulletin: <u>https://mof.gov.jo/enus/datacenter/financialbulletins/generalgovernmentfinancebulletins/generalgovernmentbulletins2018.aspx</u>

# Expenditures

Jordan’s total government spending in 2018 was JOD 8.9 billion (around 30 percent of GDP). Of this, 8.7 percent of GDP was spent on the various categories of social and non-social spending included in this study. The largest budgets are in the education and indirect subsidies (electricity and water), followed by health and lastly direct cash transfer programmes. Table 2 further breaks out the spending included in the analysis. The water and electricity subsidies are not on the central government budget but are implicitly public spending as the state-owned utility companies finance the gap between tariffs and the cost of delivery; see table notes for details of how they are estimated.

**_Table 2 Jordan central government expenditures, 2018_**

|||**2018**|**Percent of total**|
|---|---|---|---|
||**JOD Million**|**Percent of GDP**|**analysed**<br>**spending**|
|**_Total government spending_**<sup>a</sup>|8,912|29.7||
|**_Primary government spending_**<sup>b</sup>|7,564|25.2||
|**_Social and non-social spending analysed_**|2,609|8.7|100.0|
|**_Direct Transfers_**|277|0.9|9.2|
|NAF|104|0.3|3.5|
|Bread compensation scheme|171|0.6|5.7|
|Zakat fund cash transfer|2|0.0|0.1|
|**_Education_**|1,015|3.4|33.7|
|Preschool|4|0.0|0.1|
|Basic|717|2.4|23.8|
|Secondary|102|0.3|3.4|
|Vocational|25|0.1|0.8|
|Tertiary|116|0.4|3.9|
|Administrative|50|0.2|1.7|
|**_Health_**|763|2.5|25.3|
|Inpatient|711|2.4|23.6|
|Outpatient|38|0.1|1.3|
|Other|14|0.0|0.5|
|---|---|---|---|
|CIP|N\A|N/A|N/A|
|**_Subsidies_**<sup>_c_</sup>|957|3.2|31.8|
|Electricity<sup>d</sup>|445|1.5|14.8|
|Water<sup>e</sup>|512|1.7|17.0|
|**_Other_**||||
|Contributory pensions|N\A|N\A|N\A|

Sources: Education- Ministry of Education budget (2018); Health - BOOST; Electricity - NEPCO sales (2019); NAF – Ministry of Social Development budget (2018); Bread compensation- Ministry of Finance, may include budget for other small components (2018); Zakat fund annual report. Water – WAJ. Notes: a and b. Total government spending = primary government spending plus interest payments on debt plus use of cash adjustment.

c. Subsidies are not included in the central government budget but are still government liabilities. For example, electricity losses incurred by NEPCO (National Electricity Production Company) have been financed not from the government’s budget but from debt raised and guaranteed by the government on behalf of NEPCO (World Bank 2012).

d. We estimate the total cost of both residential subsidies (JD 300m official estimate) and commercial tariff subsidies which go to consumers through cheaper final goods and services (JD 145m based on modeling of indirect consumption in HEIS survey; not an official estimate).

e. We estimate the total cost of both residential subsidies (JD 549m official estimate) less commercial tariff cross-subsidies which go to consumers through more expensive final goods and services (JD 37m based on modeling of indirect consumption in HEIS survey; not an official estimate).

There are various social assistance programmes in Jordan. The main cash transfer programme in Jordan is the _National Aid Fund (NAF)_ .<sup>9</sup> It is an unconditional transfer that has as main target beneficiaries poor individuals without income and people belonging to especially vulnerable groups (e.g. families taking care of orphaned children, elderly individuals, persons with disability, families headed by divorced or abandoned women, women with young children, families whose breadwinner is in prison). NAF covered (in 2018) about 101,000 families who receive a monthly cash transfer of approximately JOD 45 per person (up to JOD 180 per family) depending on income, assets and family characteristics. Since 2018, NAF has expanded the reach of their cash transfers; a new transfer program for the poor—Takaful—launched in May 2019 alongside Jordan’s National Social Protection Strategy for 2019-2025, planning to add a total of 85,000 households by 2021.<sup>10</sup> In addition, the Zakat fund is a small unconditional cash transfer providing JOD 30 per household per month plus JOD 5 per household member for households living on an income below the extreme poverty line (Roth, Nimeh and Hagen-Zanker 2017). Finally, there has been a cash compensation scheme (‘bread compensation’) in operation since January 2018. A flour subsidy was removed and replaced with a small cash transfer of JOD 27 per person per year given to Jordanian households with earnings under

> 9 This list of programmes is not exhaustive but covers the largest components.

> 10 In 2019, 25,000 households were added, 30,000 more were added in 2020, and further 30,000 more were planned for 2021, first enrolling the ‘poorest’ (according to the Takaful targeting methodology) who were not already benefiting from NAF monthly cash transfer programs. The selection of Takaful beneficiaries is made based on a combination of formal/informal earnings and asset ownership filters, and then on a ranking of households on a poverty score. The benefit level per household is also determined based on a formula score, being around JOD 100 on average.
JOD 18,000 per year or to NAF beneficiaries (for whom the transfer was JOD 33 per person). This transfer reaches nearly 80 percent of the population.

Residential water and electricity bills are subsidised in Jordan. The subsidy received depends on the level of household consumption of the utility (kilowatts per hour or cubic metres) according to a tariff structure. For electricity, the lower consumption slabs receive a subsidy while there is a tax imposed on the higher consumption slabs (see appendix 2). The proportion of household consumption in brackets with tariffs below the cost of delivery for electricity (120 fils/kwh) and water (JOD 2.19/m3 for water) are subsidised,<sup>11</sup> while the proportion above is effectively taxed. The water bill also varies depending on the governorate of residence<sup>12</sup> and by whether the household is connected to sewage, in which case the bill also includes a charge for this service. The electricity bill also includes a fuel adjustment cost (FAC) of 10 fils, which is charged to households whose overall consumption is above 300 kw/month.<sup>13</sup> In addition to the incidence of water and electricity subsidies through residential tariffs, there are subsidies and levies on the industrial and commercial sectors. The extent of cross-subsidisations would be reflected in higher consumer prices as water and electricity are important inputs in the production of many goods and services in the economy. The industrial tariff for water is uniform, except for the agricultural sector, which pays a lower tariff cross-subsidised by the cost in other industries. On the other hand, Jordan has a complex industrial electricity tariff structure; the tariffs, and hence the indirect household impact of these, differ widely by sector of economic activity, with some sectors being subsidised and some paying cross-subsidies.

Public education and health<sup>14</sup> expenditures included here account for about 6 percent of GDP in 2018. Early childhood education (KG1 and KG2) starts at age 4. Basic schooling (primary and middle school) is free and education is compulsory for all children in this cycle (between the ages of 6 and 15) (Abu-Ghaida, 2016). Enrolment rates in this basic cycle are close to universal, except for children in the bottom decile, 8 percent of whom are not enrolled in school. Most children at this level attend public schools, over 70 percent in deciles 1 to 7 and still a sizeable share, 53 and 35 percent respectively, in the top two deciles. Secondary schooling lasts 2 years and has a vocational and an academic track, the latter being followed by tertiary education (Abu-Ghaida 2016).

According to figures from the 2015 census, 68 percent of Jordanians are covered by health insurance (High Health Council 2016). Jordan provides public insurance through the Ministry of Health (MOH), as well as through the Royal Military Service and the University Hospitals (Halasa-Rappel _et al._ 2019). The Civil Insurance Program (CIP), managed by MOH and which has a contributory and a subsidised component. CIP covers mostly civil servants and their dependents, who contribute 3 percent of their monthly salary up to a maximum contribution of JOD 30 per month, as well as children under six years old, older adults above 60 years old and those affiliated to NAF and other poor households being referred to by the MoSD, whose premiums are fully subsidised by the government. Those insured under CIP can receive mostly free

> 11 For water, these estimates represent the full cost-recovery reflecting the production costs after taking into account all other losses. Estimates are from the World Bank Water team based on Water Authority of Jordan audited financials.

> 12 The Water Authority of Jordan (WAJ) is the main entity responsible for the water supply in the country. Amman, Aqaba, Irbid, Jerash, Aljoun, Mafraq and Zarqa are served by subsidiary water companies. 13 Fuel prices adjusted monthly since discontinuation of fuel subsidies.

> 14 Not accounting for CIP premiums transferred by NAF to the MoH.
care at public facilities but have to pay a 20 percent coinsurance rate for care at private facilities (HalasaRappel _et al._ 2019). In addition to the insured, the subsidised MOH services can also be accessed by uninsured individuals with a 20 percent co-payment.

The public pension system in Jordan is a mandatory contributory pension system managed by the Social Security Corporation. It covers private sector workers, government employees, as well as army officers.<sup>15</sup> The contribution rate is 17.5 percent of the employee’s salary, of which 6.5 percent is paid by the employee and the rest by the employer. Self-employed workers pay the entirety of the contribution. Pensionable age is 60 years old for men and 55 for women, with at least 180 months of contributions (paid or purchased). However, around 60 percent of the people retire before the legal age.

# 3. Data and Methodology

## Data

The work follows the ‘CEQ ‘methodology, an internationally recognised fiscal incidence diagnostic method developed by the Commitment to Equity Institute. This approach uses standard incidence analysis for each tax and transfer. The taxes and transfers from the fiscal accounts are allocated out to households based on the information in national representative household surveys, which include information on household employment and income (determining PIT and receipt of social assistance benefits) and expenditures (indirect taxes and subsidies) as well as use of social services such as health and education. The innovation of the CEQ approach is to combine the sectoral incidence analysis to model the net impact of Jordan’s taxes and transfers on households and determine their welfare and distributional impacts.

The primary data source for households is the 2017-18 HEIS (Household Expenditure and Income Survey) conducted by Jordan’s Department of Statistics. It contains detailed data on household expenditure and income, as well as on direct transfers and household use of education services. There data are also the base for the country’s most recent official poverty estimates. The HEIS is representative of Jordanian households with close to 16,000 households interviewed over the course of a year, from August 2017 to July 2018. We also use administrative and national accounts data from 2018, which broadly coincide with the timeframe of the household survey.

Income concepts and the values of taxes and transfers are reported in per capita Jordanian dinars per year. Per capita values are obtained by dividing total value by the total number of permanent household members. To calculate the indirect burden of indirect consumption taxes and of subsidies we use a 23 sector Input / Output (IO) table from 2010 uprated to 2016.<sup>16</sup>

## Income concepts before and after fiscal interventions

A CEQ assessment uses eight different income concepts starting from ‘pre-fiscal’ or ‘market income’; that is, the income before all fiscal interventions (see Lustig, 2018). This includes all incomes from work (salaries and self-employed income), capital, self-provision of goods and services, remittances and other

> 15 Government employees recruited before 1995 are in the Civil Pension system and armed forces members recruited before 2002 are in the Military Pension system, both of which are being phased out.

> 16 Constructed in Refaqat _et al_ . (2020).
private transfers, private pensions income and the value of imputed rent.<sup>17</sup> Under the CEQ approach, there are two options for treating pensions. Here we treat Pensions as Deferred Income (PDI), which uses _market income plus pensions_<sup>18</sup> (hereafter simply referred to as ‘ _market income_ ’) as the starting point of the assessment. This treats contributions to pensions made during working-years as mandatory savings that would be enjoyed later in life; during retirement the income from contributory pensions are considered part of the pre-fiscal income. An alternative is to treat the income from pensions as a government transfer (PGT) and the contributions as direct taxes.<sup>19</sup> The movement from one income concept to the next is done by iteratively assigning taxes and transfers as seen in Figure 1 until reaching ‘final’, or ‘post-fiscal income’. ‘Disposable income’ is that resulting from adding direct government cash and near-cash transfers and subtracting direct taxes and contributions to market income. ‘Consumable income’ then subtracts indirect taxes and adds indirect subsidies. ‘Final Income’ adds the public cost of providing in-kind transfers (services which are not received as cash benefits, namely health and education).

HEIS contains information on household income and consumption and the official poverty measurement uses consumption as the welfare aggregate. Following standard methodology (Lustig 2018), this means that in practical terms the calculation of the income concepts begins by equating household consumption to disposable income and then working backward (subtract direct transfers and add direct taxes) to construct market income.

To assess the impact of the fiscal instruments on poverty we use the national poverty line. Impacts across deciles of the consumption distribution and the Gini coefficient are used to capture the distributional impacts. We model the following fiscal instruments: Personal income tax (PIT), benefits from NAF, the bread subsidy compensation scheme and other cash transfers, sales taxes (GST and SST), water and electricity subsidies, and health and education in-kind benefits. The allocation of the fiscal instruments to households is done primarily based on the reported information in the household survey, making some adjustments to reconcile administrative figures when necessary. This means that the analysis already incorporates inclusion and exclusion errors in the allocation of different interventions.

> 17 A house owned by the household can be rented out or resided in. To compare across households making different decisions, the foregone rent for those who live in houses they own is estimated and added to household income.

> 18 Where income from pensions is added to factor income and contributions to old-age contributory pensions are subtracted from factor income.

> 19 Pension status is not recorded in HEIS. Instead, we use the self-reported income and expenditure information in HEIS to determine the amount of pension income received, and the contributions made to the pension system. We show the results from this sensitivity assessment in Appendix 2.
**_Figure 1. Definition of CEQ Income Concepts and Fiscal Interventions in Jordan_**

<!-- Start of picture text --> Contributory social insurance<br>old-age pensions (net of<br>contributions)<br><!-- End of picture text --> <!-- Start of picture text --> Direct cash transfers: NAF;<br>bread compensation scheme,<br>Zakat, non-contributory<br>pensions, others.<br>Indirect subsidies (direct and<br>indirect impacts): electricity;<br>water<br><!-- End of picture text --> <!-- Start of picture text --> In-kind transfers net of user<br>fees: health; education<br><!-- End of picture text --> <!-- Start of picture text --> MARKET<br>INCOME<br>(PGT scenario)<br><!-- End of picture text --> <!-- Start of picture text --> MARKET INCOME<br>PLUS PENSIONS<br>(PRE-FISCAL INCOME)<br><!-- End of picture text --> <!-- Start of picture text --> NET MARKET<br>INCOME<br><!-- End of picture text --> <!-- Start of picture text --> DISPOSABLE<br>INCOME<br><!-- End of picture text --> <!-- Start of picture text --> CONSUMABLE<br>INCOME<br><!-- End of picture text --> <!-- Start of picture text --> FINAL<br>INCOME<br><!-- End of picture text --> <!-- Start of picture text --> Direct taxes: PIT, property tax,<br>border tax<br><!-- End of picture text --> <!-- Start of picture text --> Indirect taxes: GST; SST<br>(tobacco, alcohol, sodas,<br>mobile phones)<br><!-- End of picture text --> Source: Adapted from Lustig (2018).

# Allocating direct taxes: Personal income tax (PIT)

We compare two methods to estimate the PIT paid by households. The first method simply takes selfreported information on PIT payments. The second method imputes the expected household PIT burden for the corresponding incomes using a recursive methodology (World Bank 2020b).<sup>20</sup> This imputation works as follows: to start, we estimate the PIT that each household would pay under the statutory rates and the self-reported household incomes. A difficulty arises because the net-market income calculated from the survey is post-PIT, rendering an inaccurate estimate of the value of the tax paid. To solve this simultaneity problem between income and PIT, we calculate the household rate of statutory PIT and use it to estimate what the pre-PIT market income would be (net market income*). Then, we calculate the statutory PIT paid (in JOD) based on the pre-PIT market income.<sup>21</sup> Both the direct measure and the imputation of PIT paid underestimate the government income receipts from PIT, although the underestimation is lower in the self-reported case. We use the self-reported PIT paid for those households who report it, and the estimated statutory PIT for households that should be 20 This mirrors the method used in Indonesia (Jellema, Wai-Poi and Afkar, 2017). 21 P p = (N N )⁄(1 – P ) ; where N N p PP p NN mmppm ppi iimmNN ∗ P PPmmppN PPmmppN NN mmppm ppi iimmNN = ddppiiddppd NN ppi iimmNN – p mmNNiiNN NNmmppiiddttNNmmdd.
paying PIT, but do not report doing so. Nonetheless, we are only able to identify about 24 percent of the government revenue figures (a gap of JOD 89 million<sup>22</sup> ), likely due to the richest households not appearing in the survey.<sup>23</sup> We allocate the missing PIT to those households that we had found pay this tax in HEIS and the amount allocated is proportional to their income. We do not have disaggregated administrative records of PIT payers across the distribution to allocate missing taxpayers by decile or income level.

# Allocating indirect taxes: General (GST) and special (SST) sales taxes

To estimate the impact of GST and SST we match the rates to the various expenditure categories in the household survey. If an item is not specifically listed in the GST codes annex, we use a rate that applies to similar items (for instance, guavas and pomegranates are not listed in the GST code but we assign them the tax rate applicable to other fruits). If no similar items appear in the tax code, we apply the general rate of 16 percent. Because the level of disaggregation in HEIS and the GST codes is not the same, there are a few occasions where two GST categories apply to one HEIS item. In this case, we divide household expenditures equally and apply each GST rate to each half. Taxes are only calculated for items that are part of the consumption aggregate except for purchases made outside of the country, which are not taxed nationally, housing rent (actual or imputed), for which we assume a zero GST rate. Because the flow-value of durable goods is included in the consumption aggregate to estimate poverty, we also estimate the value of the tax that would be paid for this value.

The direct household burden of the tax is estimated by multiplying total household expenditures (excluding self-production and gifts<sup>24</sup> ) by the effective tax.<sup>25</sup> We make no further adjustments, for example, to account for informality or evasion. For items where GST and SST apply, we calculate each tax separately and add the totals. For GST-exempt items we calculate the indirect effect using an IO table uprated to 2016 and a cost-push model, where the higher producer prices will be pushed to consumers in the final sale price of the product. The amount of tax collected from GST and SST is scaled to match the effective tax rate in national accounts.<sup>26</sup>

# Allocating cash transfers from social assistance

In the first instance, we use the household self-reported information in HEIS about receiving NAF or cash assistance from the Ministry of Social Development (MoSD) to determine who is obtaining this benefit.<sup>27</sup> This identifies 77 percent of the households receiving NAF benefits in 2018 according to the administrative data. To assign the remaining beneficiaries from NAF, we use a simple prediction model based on

> 22 This gap is estimated with respect to the scaled budget (as a share of private consumption).

> 23 This is a common problem in surveys around the world. For example, in an earlier HEIS, every household in West Amman, an affluent neighbourhood, refused to participate (Department of Statistics, Ministry of Planning and International Cooperation and World Bank, 2012).

> 24 For non-food items, it is not possible to discriminate between the expenditure corresponding to purchases, and the estimated value of non-purchased ones. If the entirety of the item was obtained as a gift, we do not calculate any tax. If a household obtained the item with a combination of methods (purchases and gifts), we calculate the tax on the full value as if it was all purchased.

> 25 p 26 The effective tax rate is total tax collections over total private consumption. 27 mm<sup>= (NNTTppNNiip</sup> mm<sup>∗ NNppTT mmppN</sup> mm<sup>)/ (1 + NNppTT mmppN</sup> mm<sup>).</sup> We identified beneficiaries as those who reported receiving incomes from NAF or from the MoSD, which are PPppTT p<sup>NNeemmNN</sup> asked about separately in HEIS. Because MoSD operates NAF some NAF beneficiaries may consider income from NAF as MoSD payments. Moreover, MoSD did not operate other significant programs at the time.
household demographic characteristics<sup>28</sup> and designate those with a higher likelihood of receiving NAF as ‘predicted beneficiaries’ until we reach the levels reported in the administrative records.<sup>29</sup> The value of the transfer received corresponds to the household report of NAF or MoSD cash income<sup>30</sup> in HEIS for the directly identified households and for the predicted beneficiaries who reported MoSD cash income.<sup>31</sup> For the remaining predicted beneficiaries, the benefit is calculated as JOD 45 per person per month up to a maximum of JOD 180, which corresponds to NAF’s basic benefit.

HEIS does not inquire directly about income from the bread compensation scheme transfer as the scheme was introduced in the middle of the survey collection,<sup>32</sup> so it is not possible to follow a direct identification method in this case. According to government figures, the bread compensation transfer reached 5.2 million Jordanian households, which corresponds to 75 percent of the households in the census. We allocate the bread compensation transfer to the poorest 75 percent of households in HEIS (ranked on their per capita expenditure), making sure to include NAF beneficiaries.<sup>33</sup> We adjust the benefit levels of NAF and the bread compensation transfer to match the administrative figures in the budget.

For smaller direct cash or near-cash transfer programmes (Zakat fund and other non-identified programmes), we use direct identification to determine whether a household received the benefit and to determine the magnitude of the amount received. This also applies to other unidentified social-security dues.

Allocating indirect subsidies: Water and electricity<sup>34</sup> To estimate the subsidy received per household we estimate first the quantity used based on the household reported expenditure for the utility,<sup>35</sup> and then matching the subsidy corresponding to this quantity. Of the households, 18 percent and 14 percent do not report expenditures on water and electricity bills, respectively. We impute the estimated utility consumption for those households based on a simple 28 Governorate; rural/urban location; number of income earners; whether the household receives income from agriculture or livestock family businesses; number of elderly household members and children; whether there is a household member with a disability; household size; an indicator for female-headed households; an indicator for whether the household reports receiving cash income from the Ministry of Social Development. 29 As the administrative number of beneficiaries is believed to be accurate (that is, there is no leakage in the system), the missing beneficiaries are imputed. This is a standard approach within CEQ. However, imputation can influence results when the gap between directly identified beneficiaries in the survey and administrative numbers is wide (although not the case here). See forthcoming technical note by Phadera, Rodriguez and Wai-Poi.

30 Capped at JOD 200, NAF’s maximum benefit (JOD 180, but some households can receive a top-up, up to JOD 200). 31 This is possible as income questions are asked separately from social assistance questions in HEIS.

32 Analysis of HEIS indicates that households were reporting this compensation transfer as part of 'other MoSD government transfers' received, as there was a sharp spike in households reporting such transfers for households interviewed in the third quarter of survey collection (starting in February 2018; the compensation was introduced in January 2018). Nonetheless, the amounts reported in HEIS for this “other MoSD” transfer were significantly higher than the bread compensations should be, and consequently we preferred to simulate the transfer amount according to the administrative procedures.

33 For a programme reaching such a large proportion of the population, there is little value in trying to simulate the exact targeting as most of the bottom half of the distribution will receive it.

34 Water and electricity subsidy allocations and reform scenarios are not final; the figures presented here still need reconciliation with administrative records.

35 Electricity figures include a preliminary adjustment to match the share of households in each consumption block reported in administrative data.
model that includes household size, location and housing infrastructure characteristics. Although the bills might not be paid directly,<sup>36</sup> the households still use electricity and water and so benefit from the subsidies, thus, we add the estimated un-paid bill to the total subsidy received.

We a cost-push model to determine the indirect tax or subsidy that consumers pay through the industrial tariffs.<sup>37</sup> For the electricity industrial and commercial tariffs, if there is an explicit tariff rate that applies to a particular sector listed in the IO table, we take this rate. For sectors where two tariffs could plausibly apply, we use a weighted average of the two, where the weight is the share of electricity consumption in the sector. For industrial sectors without a specific tariff we average the rates that apply to small, medium and large industries, weighted by share of electricity consumption for each size of firms. We apply the single water industrial tariff rate, which is marginally above the cost of production, to estimate the indirect household burden of industrial cross-subsidization of water tariffs.

# Allocating in-kind benefits: Education

The monetary value of public education is given by the unit cost per level of education (pre-school, basic, secondary, vocational, higher education) calculated from administrative budget data. This is a _government cost_ approach, in which the use-value to in-kind benefits is given by the average cost of service provision per beneficiary. This represents what the household would have to pay to use the service at the government’s cost. Budget information is taken from the Ministry of Education and the Ministry of Higher Education.<sup>38</sup> The estimated cost per beneficiary includes capital expenditure of JOD 50 million, which is allocated to each education level depending on the share of the budget spent in each level. Benefits are assigned to households who have members attending a government school, as reported in HEIS. We present benefits net of user fees, which are the self-reported household expenditures in education services in government facilities. This means that fees are treated as a tax paid to the public provision system on the service acquired.

However, households may not value these services at the cost of provision. For example, poor quality services may mean that households do not benefit as much and equally from ostensible services provided. Compared to the amount spent, Jordan’s achievements in education and health are substandard (Rabie _et al.,_ 2017; Abu-Ghaida, 2016). In both sectors, workforce performance (teachers and health professionals) does not meet standards of effort (Rabie _et al.,_ 2017). In education, overcrowded classrooms, high student-teacher ratios, low performance in international learning tests have also driven richer households towards private education (Abu-Ghaida, 2016). In the health sector, the absence of a national policy for quality improvement and patient safety, the lack of performance-based indicators for monitoring, benchmarking and accreditation, among others, limit recent efforts to improve quality of service provision (El-Jardali and Fadlallah, 2017). In a sensitivity analysis, we introduce a value-tohousehold adjustment which accounts for within-country differences in education and health outcomes across socioeconomic status. We use information from the Socioeconomically Disaggregated Human

> 36 Some cost might be included in the monthly rent, or the service might be provided as part of employer-supplied housing, for instance.

> 37 Electricity and water inputs to the production of final goods and services means consumers pay higher or lower prices depending on whether the utility tariffs to the producers are higher or lower than the cost of production. The difference is an implicit or indirect tax or subsidy.

> 38 The administrative data includes non-Jordanian students. Syrian children are mostly integrated into Jordanian schools (Abu-Ghaida, 2016).
Capital Index (S-HCI) (D’Souza, Gatti and Kraay, 2019), which captures the expected future human capital of children born today for children of different parts of the income distribution. Households with better outcomes from human capital development are considered to receive a higher-value public service than those with lower outcomes. We adjust the education benefits to account for the income quintile gradient in learning-adjusted years of school, which combines information the quality and quantity of education that a child can be expected to obtain.

# Allocating in-kind benefits: Health

To estimate the monetary value of health services we also follow a government cost approach and allocate benefits to those that _use_ public health services. The unit cost for inpatient and outpatient services is estimated with the sectoral budget from BOOST. To determine the number of users, we take inpatient and outpatient usage rates from the 2017 Demographic and Health Survey (DHS)<sup>39</sup> and apply these to the 2015 Census Jordanian population. Although the budget data may include the cost of providing health services to non-Jordanian households, including refugees, this share may be declining since 2014 when health subsidies for refugees were substantially reduced (Conway _et al_ ., forthcoming).<sup>40</sup> This means that our calculations are an upper-end estimate as costs per person where the total number of users includes non-Jordanians and refugees are lower. Because HEIS does not have information on the use of health care services, we randomly allocate the usage rates from the DHS to households in HEIS. Use rates vary by insurance status,<sup>41</sup> location (urban or rural), and socioeconomic status when possible,<sup>42</sup> and apply specific usage rates for these breakdowns. We also adjust for differences in household size between each household allocated to receive health benefits and the national average, as well as between all the households that are allocated to receive health services (inpatient or outpatient) and the national average. The estimate of the value of in-kind benefits is limited by the information available. For instance, a limitation of this approach is that we are unable to capture differences in the value of simple and complex health care interventions and services, nor to fully account for other variations in health care use patterns of different types of households.

These benefits should be net of user fees. However, anyone covered by health insurance is unlikely to have to make such payments, and even those uninsured pay minimal fees when visiting a public hospital. The uninsured pay 20 percent of the cost for the service and thus we assume that the benefit they receive is 80 percent of the total. We also deduct any insurance premium paid for households who use health services and report making such payments.<sup>43</sup> As with in-kind education benefits, we also present quality-

> 39 Tables 16.1 and 16.3 in the DHS report.

> 40 In November 2014, Syrians who were registered with UNHCR stopped receiving free access to Ministry of Health primary health care centers and hospitals. Syrians were since required to pay as much as non-insured Jordanian citizens, or approximately 35-60 percent of costs. In February 2018, the GoJ once again cut health subsidies to Syrians and costs increased to 80 percent (Conway _et al_ ., forthcoming).

> 41 Uninsured, Ministry of Health, Royal Medical Services or University Hospital, private insurance or others. These insurance categories are matched in DHS and HEIS.

> 42 Socioeconomic status is proxied by wealth quintiles in DHS and by expenditure per capita quintiles in HEIS. For inpatient care, we do not disaggregate by socioeconomic status as the number of observations would be too low. 43 We assign 95 percent of the insurance premium as a cost to inpatient benefits and 5 percent as a cost for outpatient benefits. These percentages are based on the share of the inpatient/outpatient government expenditure.
adjusted health benefits using information from the S-HDI (D’Souza, Gatti and Kraay, 2019). We adjust health benefits to account for the income quintile gradient in under-five stunting rates.

In a second sensitivity scenario, we follow an _insurance approach_ to allocate health in-kind benefits. While typically in-kind benefits are assigned based on service utilisation, it can be argued that being able to access those services, even if they are not needed, is what matters to both households and for fiscal incidence analysis. This coverage is provided by health insurance, as it is in principle a mechanism to smooth the risk associated with the possibility of illness and unexpected costs for treatment. Thus, public health insurance is a valuable service independent of the actual use of health care services. We thus conduct an alternative scenario where we allocate health in-kind benefits to individuals that are publicly insured in the CIP and thus would be able to access health care if they need it. In Jordan, the uninsured are also de-facto covered, as they can receive treatment in public facilities at a fraction of the cost.

The benefit level is allocated using a unit cost approach, dividing the total public cost of health care provision (inpatient and outpatient) over the total number of people (Jordanians). Health insurance withholdings are deducted from the benefit for those who report making monthly contributions from their salary. As uninsured individuals also receive care from public health care providers but must pay small co-payments, they are allocated a discounted benefit (80 percent of the benefit accrued by insured individuals and without any deductions for contributions).

Insurance information is obtained from HEIS, as is information on health insurance withholdings. To distinguish the subsidised component of CIP in HEIS we use primarily information on participation in social assistance programmes as NAF beneficiaries are referred to the Ministry of Health to obtain an insurance card. In addition, poor uninsured households can apply to the Ministry of Social Development for referral; we simulate the conditions of eligibility<sup>44</sup> and randomly allocate among those the number that were benefitting from CIP through MoSD (15 thousand households). Insurance information is assigned at the household level based on the insurance status of the head or, if the head is older than 60 years old, based on the insurance status of the eldest household member (under 60 years old). According to this definition of insurance, 72 percent of Jordanians have some health insurance coverage. The Ministry of Health’s Civil Insurance Program (CIP) covers 33 percent of individuals, 3 percent of which are subsidised, the Royal Medical Services and the University Hospital cover another 28 percent or the population, 11 percent are privately insured or insured under other insurance providers.<sup>45</sup>

> 44 Household eligibility criteria used are: Jordanian; not benefiting from another health insurance program; total household income below JOP 300 per month; the household does not own more than one private use car, which should not be 7 or more years old; the household does not own livestock or animals with annual revenue of JOD 300; the household does not receive income from real state rental or shares and profits from firms. In addition, the household must have at least one eligible individual: children between 6-18 years old; students up to 25 years old in colleges/university; single non-working daughters; male sons above 18 years old who have a disability.

> 45 Using the individual report of insurance, 32 percent are uninsured, 32 percent are in the CIP and 27 percent in the Royal Medical Services or in the University Hospital, 10 percent are in private or other type of insurance.
# 4. Overall Results

Impact of taxes and transfers for households across the income distribution This paper sets out to estimate which households pay different taxes (and how much) and which benefit from different social spending (and by how much). It also asks what the net impact on households is when all taxes and transfers are taken into account. Figure 2 and Figure 3 summarise the results across the income distribution. Households are ranked according to market income and allocated to deciles. The poorest 10 percent are Decile 1, the next poorest 10 percent Decile 2 up to the richest 10 percent (Decile 10). Figure 2 shows in JOD terms how much is paid and received across the income distribution, while Figure 3 shows how much is paid and received as a percentage of market income.

In absolute terms, the fiscal system is progressive when the value of in-kind transfers is taken into account. The net benefit of taxes and transfers—that is, the value of the benefits (including non-cash health and education) received less the payments in taxes (‘Total Impact’ dot line on charts)—is greatest for poorer individuals in the lowest deciles and declines as households get richer. The poorest 80 percent of the population are net beneficiaries to the system—that is, they receive more benefits from the public spending analysed than they pay in taxes and user fees—and those in the top 10 percent are net contributors.<sup>46</sup> Breaking out the different taxes and cash spending we can see the absolute incidence of each fiscal instrument across the income distribution.<sup>47</sup> Direct taxes are paid far more by richer households. Although in a less pronounced way, indirect taxes (GST and SST) are also paid more heavily by the top deciles; this is because this type of tax depends on overall consumption and as richer households consume more, they pay more indirect taxes on their consumption than poorer households who consume less. Individuals in the bottom decile receive more in direct transfers than those at the top, and the top three deciles obtain only a small amount of direct transfers. However, the absolute amount received in direct transfers by deciles 2 to 7 is almost flat, meaning that many middle-income households receive nearly as much in direct transfer benefits than poorer households. Residential subsidies in water and electricity are received in similar absolute amounts across deciles 1 to 8 in the income distribution, reflecting the fact that these subsidies are not targeted to the poor but based solely on the amount of electricity or water consumed; since households in the top two deciles tend to consume slightly more, they also receive more benefits in indirect subsidies. The indirect impact of electricity and water subsidies – that is, the cascading impact of cross-subsidies to the industrial and commercial sectors – grows as income increases. Like indirect taxes, the amount of subsidy received indirectly depends on overall consumption and as richer households consume more, they receive more in subsidies. Health spending benefits are accrued in similar amounts by individuals across the distribution. When health benefits are modelled using the insurance approach (Figure 31), the poorest two deciles receive slightly more benefits than the rest but overall, the benefit distribution remains relatively flat. On the other hand, education benefits are highly progressive. The value of the education benefits received is greater for poorer than for richer households, reflecting their greater number of children in the household and the significant use of private education by richer

> 46 Individuals in Decile 9 receive nearly as much as they contribute to the fiscal system.

> 47 Figure 18 to Figure 23 in the Appendix present the absolute and relative incidence of each type of fiscal instrument separately.
households.<sup>48</sup> The value of health and especially education spending benefits for households in the bottom deciles falls once we adjust for the lower quality of service that people at the bottom receive (Figure 4 and Figure 5), but this results in a small change in the share of the total benefits received by the bottom forty percent of households or the progressivity of in-kind spending overall.

In fact, much of the progressivity of the fiscal system in Jordan comes from non-cash benefits, especially education spending. If we exclude these in-kind or non-cash benefits (‘Total Cash Impact’ triangle line in Figure 2), only individuals in the bottom forty percent of the distribution are net beneficiaries of fiscal policy, the next three deciles are basically neutral, while the rest of the population on average pays more into the budget than they receive (although net contributions to the system remain higher for those in the highest deciles). We present the cash-only impact on households in addition to the aggregate impact because health and education in the CEQ methodology are valued at the cost of providing these services for the government. However, households may not value these services at the cost of provision. For example, in some countries, poor quality services—teacher absenteeism or lack of diagnostic equipment—may mean that households do not benefit from ostensible services provided.

Another way of thinking about the impact of the fiscal system on households is not in terms of how much they pay in taxes or receive in benefits in absolute terms, but relative to their income. Paying JOD 100 in GST is a much greater burden to households with low incomes than for those with high incomes; similarly, the value of a JD 100 transfer received means more to those with lower incomes. When considered relative to household market incomes, the impact of the fiscal system changes (Figure 3). The poorest decile receives cash transfers worth 26 percent of their market income, and cash and non-cash benefits equal to 68 percent. However, while the richest 20 percent are by far the largest net contributors to the fiscal system in absolute terms, their net contributions represent only about 8 percent of their market income. Furthermore, the net cash fiscal contribution as a share of market income increases only modestly from Deciles 6 (0.1 percent) to 10 (7.6 percent), indicating that the pattern of taxes and spending could be made to benefit the poor and middle class further.

Most of the fiscal instruments are better distributed in relative terms than they are in absolute. Relative to their income, direct taxes are paid in greater shares by richer households, but still represent a small share of market income, less than 3 percent, for the top decile. Indirect taxes, on the other hand, are regressive in relative terms, meaning that they represent a greater burden on poorer households relative to what they can afford. Direct transfers represent 22 percent of market income for the poorest decile, a 48 Education and public health spending are broken down by level (primary, secondary and tertiary) and type (inand out-patient). Average costs per student and health visit are allocated to households with children enrolled at that level or individuals using that particular health service. Because we estimate the allocation of in-kind transfers depending on the use rates of the services provided, and because the value of those services is assumed to be the average cost to the government of providing them, the allocation of these transfers is driven by the distribution of use and by the relative cost of the services used by the poor compared to those used by the rich.

For education, at the basic level, use of public schools is greater in the lower and middle deciles, with over 60 percent of students coming from the bottom half of the market income distribution (Figure 28 in the appendix). Because some students from richer households still attend public basic school, and because many more attend public higher education, education benefits are allocated across the distribution, though as a share of the total poorer households still receive a greater share. The use of public health care services is slightly higher for the bottom deciles, but this driven by the use of cheaper outpatient services (Figure 29 in the appendix). Because the use of more expensive inpatient services is flatter, the overall absolute incidence of health benefits received is similar across the distribution.
share that falls rapidly moving up the income distribution. Indirect subsidies are progressive; the bottom decile receives an amount corresponding to 17 percent of their market income, while the top decile receives only the equivalent of 3 percent. This progressivity comes mostly from the direct effect of residential water and electricity subsidies, indicating the potential adverse impacts if removed without mitigating measures; this result is common in most countries. Finally, in-kind health and education benefits are highly progressive and represent a large share of market income for households at the bottom of the income distribution; the bottom decile receives the equivalent of 42 percent of market income, most of which is from education spending, while the top decile receives the equivalent of only 2 percent of their market income. The progressivity of the different fiscal interventions with respect to the distribution of market income is summarised in the Kakwani coefficients (Table 4). These confirm that direct taxes are progressive while indirect taxes are slightly regressive. All direct transfers are progressive, as are electricity and water subsidies.<sup>49</sup> In-kind education and health spending also have positive Kakwani coefficients, a reflection of their progressivity.

> 49 Although indirect industrial water cross-subsidies are not progressive.
**_Figure 2 Payments of Taxes and Benefits of Public Spending by Household Market Income Decile (Million JOD)_**

<!-- Start of picture text --> 400<br>300<br>200<br>100<br>0<br>-100<br>-200<br>-300<br>-400<br>-500<br>Decile 1 2 3 4 5 6 7 8 9 Decile 10<br>Household per capita market income decile<br>Direct Taxes Indirect Taxes – direct Indirect Taxes – indirect<br>Direct Transfers Total Indirect Subsidies – direct Total Indirect Subsidies – indirect<br>In-kind Spending (education) In-kind Spending (health) Total Impact<br>Figure 3 Payments of Taxes and Benefits of Public Spending by Household by Household Market Income Decile<br>(Percentage of Market Income)<br>100<br>80<br>60<br>40<br>20<br>0<br>-20<br>Decile 1 2 3 4 5 6 7 8 9 Decile 10<br>Household per capita market income decile<br>Direct Taxes Indirect Taxes – direct Indirect Taxes – indirect<br>Direct Transfers Indirect Subsidies – direct Indirect Subsidies – indirect<br>In-kind Spending (education) In-kind Spending (health) Total Impact<br>Millions<br>Fiscal Revenue / Expenditure (JD)<br>Income)<br>Fiscal Revenue / Expenditure (Percentage of Market<br><!-- End of picture text --> Notes: Households are grouped into per capita market income deciles. Direct taxes include personal income tax, property tax and border exit tax. Indirect taxes include GST and SST. Indirect taxes-indirect is the cascading indirect effect of GST exemptions on selected goods and services. It has been modelled using the 2010 IO table uprated to 2016. Direct transfers include NAF, bread subsidy compensation and other government transfers. Indirect subsidies include electricity and water. Indirect subsidies -indirect is the cascading impact of commercial and industrial tariffs on households. In-kind spending includes health and education, net of costs or user fees. In-kind spending on health based on use of inpatient and outpatient health care. Contributory pension contributions and receipts are treated as deferred savings and income. Total Cash Impact excludes in-kind benefits.
<!-- Start of picture text --> Figure 4. Quality-adjusted Education Benefits (JOD million) Figure 5 Quality-adjusted Health Benefits (JOD million) by<br>by Market Income Decile Market Income Decile<br>140 700<br>120 600<br>100 500<br>80 400<br>60 300<br>40 200<br>20 100<br>0 0<br>Household per capita market income decile Household per capita market income decile<br>Net benefits Quality-adjusted benefits Net benefits Quality-adjusted benefits<br>Note: Households are grouped into per capita market Note: Households are grouped into per capita market income<br>income deciles. Net benefits are those estimated in the deciles. Net benefits are those estimated in the baseline<br>baseline scenario. Quality-adjusted benefits are adjusted scenario. Quality-adjusted benefits are adjusted according to<br>according to learning outcomes in the S-HCI by decile. under-five stunting in the S-HCI by decile.<br><!-- End of picture text -->

# Impact on measured inequality and poverty

In cash and non-cash terms, Jordan’s fiscal policy appears modestly progressive; the poorest households receive more benefits than they pay while other households pay more into the system at a rate which slowly increases as they get richer. How does this impact inequality, as commonly measured by the Gini Index, and what is the effect on poverty?

Jordan’s inequality (Gini) is measured in the HEIS at 35.1 points based on market income—before the fiscal system affects households—and at 29.3 points based on final income—after accounting for all fiscal policy (Figure 6.).<sup>50</sup> This indicates that overall fiscal policy reduces inequality in Jordan by 5.8 points. The largest fall is observed between consumable and final income, which is when in-kind transfers (health and education) are included. In purely cash terms, inequality falls modestly by 2.6 points from market to consumable income.

50 The Gini Index is the most commonly used measure of income or consumption inequality. It ranges from 0 (perfect equality) to 100 (perfect inequality where one household has all income). In international context, a Gini less than 30 is quite equal, from 30 to 50 increasingly less equal, and above 50 quite unequal.
As we discussed in the previous section and was summarised by the Kakwani coefficients, most fiscal interventions in Jordan are progressive when considered separately and with respect to the pre-fiscal income. But to assess whether an intervention increases or reduces inequality one must take the whole fiscal system into account, that is, whether it is progressive relative to the income generated with all the other fiscal interventions (Inchauste and Lustig, 2017).<sup>51</sup> With this purpose we assess the marginal contributions to the changes in the Gini coefficient. In-kind health and education benefits reduce inequality by 3.1 points. After in-kind benefits, direct transfers are the most equalising spending (reducing inequality by 1.2 points). The significantly large expenditures on water and electricity subsidies reduce inequality by a similar amount (1.4 points). On the revenue side, direct taxes (PIT) marginally decrease inequality (0.1 points) while indirect taxes (GST and SST) increase inequality (0.5 points).

Official poverty is measured using the household per capita consumption aggregate and results in a poverty rate for Jordanians of 15.7 percent. In the CEQ framework this is equivalent to disposable income.<sup>52</sup> When measured with the national poverty line but based on market income, poverty is 18.2 percent. That is, the combination of direct taxes and direct transfers reduces poverty by 2.6 percentage points. When indirect subsidies and indirect taxes, which have a disproportionate burden on the poorest, are considered, poverty measured at consumable income would rise slightly to 15.8 percent. That is, while poorer households do pay indirect taxes (12 percent of market income for Decile 1), this is compensated by the benefit from indirect subsidies (equivalent to 17 percent of market income for Decile 1). Nonetheless, there are a number of vulnerable households who live just above the poverty line, so the net impact on the cost of living from indirect taxes affects poverty (as felt by households if not measured officially). As is standard practice, we do not report the poverty impact of in-kind transfers, since these benefits are not cash (as all the taxes and other spending benefits are), nor are they considered when constructing the poverty line.<sup>53</sup> Even a progressive fiscal system does not necessarily imply net positive transfers for all poor households. The Fiscal impoverishment indicator quantifies how many people were pre-fiscal poor and made poorer by the fiscal system or were non-poor and made poor. Excluding in-kind transfers in health and education and using the national poverty line as benchmark, 4.2 percent of individuals have been impoverished by fiscal policy. In other words, they were poor to begin with and were made poorer because they paid more in taxes than they have received in direct or indirect transfers, or their market income was above the poverty line but their consumable income fell below. Jordan’s fiscal impoverishment rate is low among middle-income developing countries. Using the international poverty line for lower-middle-income countries at Purchasing Power Parity (PPP) ($ 3.2), the fiscal impoverishment rate of Jordan (0.2 percent) is close to that in Chile and Brazil (see Lustig and Higgins, 2017).<sup>54</sup> On the other hand, close to 15 percent of individuals were made richer by fiscal policy, that is they were lifted above the poverty line because received more in cash or near cash benefits than they paid in taxes and contributions, or, even if they remained poor, they were better off after taxes and transfers.

> 51 We measure marginal contributions to consumable income, except for in-kind benefits, for which the marginal contributions are measured with respect to final income.

> 52 Poverty at disposable income is 15.5 percent. The small difference arises from the adjustment made in a small number of cases to prevent negative net market income values.

> 53 This is standard under the CEQ approach.

> 54 Although the numbers are not strictly comparable to the work by Lustig and Higgins (2017) because the fiscal impoverishment indicator is measured with respect to the PPP $2.5 international poverty line.
<!-- Start of picture text --> Figure 6. Poverty and inequality change between income<br>concepts<br><!-- End of picture text --> <!-- Start of picture text --> Figure 7. Change in inequality between fiscal Interventions<br>and previous income concept<br><!-- End of picture text --> <!-- Start of picture text --> 1<br><!-- End of picture text --> <!-- Start of picture text --> 45<br><!-- End of picture text --> <!-- Start of picture text --> Poverty (national)<br><!-- End of picture text --> <!-- Start of picture text --> Inequality (Gini)<br><!-- End of picture text --> <!-- Start of picture text --> 40<br>35<br>30<br>25<br>20<br>15<br>10<br>5<br>0<br>Percent<br><!-- End of picture text --> <!-- Start of picture text --> 0<br><!-- End of picture text --> <!-- Start of picture text -->
-1<br><!-- End of picture text -->

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<!-- Start of picture text --> Market<br>Income<br><!-- End of picture text --> <!-- Start of picture text --> Disposable Consumable Final Income<br><!-- End of picture text --> <!-- Start of picture text --> Income<br><!-- End of picture text --> <!-- Start of picture text --> Income<br><!-- End of picture text --> Note: Poverty is measured at the national poverty line. Inequality is measured by the Gini Index. Market income includes all income from wages and earnings, capital incomes and rents, and private remittances. Disposable income subtracts direct taxes and adds direct transfers. Consumable income subtracts indirect taxes and adds indirect subsidies. Final income adds in-kind health and education spending.

**_Table 3. Fiscal Loss or Gain at Consumable Income by Poverty Line_**

||**Fiscal Impoverishment**|**Fiscal Gains**|
|---|---|---|
||Post-fiscal losers<br>(percent total<br>population)|Post-fiscal gainers<br>(percent total<br>population)|
|_At consumable income_|||
|PPP $1.9|0.0|0.7|
|PPP $3.2|0.2|2.6|
|PPP $5.5|3.1|12.7|
|Nationalpovertyline|4.2|14.7|

Note: The table shows loss and gains based on households’ consumable income, which is defined as market income – direct and indirect tax payments + direct transfers. It excludes in-kind transfers (for education or health care). PPP = purchasing power parity, in 2011 U.S. dollars. a. “Fiscal impoverishment” is the extent to which fiscal system (of taxes and transfers) either (a) make a substantial portion of the poor even poorer, of (b) make the nonpoor poor. In other words, if the poor pay more in taxes than they receive in transfers, they are fiscally impoverished (Higgins and Lustig 2016). b. “Fiscal gains to the poor” is the opposite of fiscal impoverishment, representing more in gains from transfers than they pay in taxes (Higgins and Lustig 2016).
# Effectiveness of taxes and transfers at reducing inequality

The previous section estimates how much different fiscal instruments increase or reduce inequality in Jordan. However, the _effectiveness_ of different fiscal instruments in reducing inequality depends not just upon this impact but also on how much they cost (in the case of spending) or revenues they bring in (in the case of taxes). Table 4 summarises these impacts across the distribution as marginal changes to inequality (measured by the Gini Index) along with the magnitude of tax revenues collected or transfer expenditures made. For example, considering revenues, PIT has only a very small progressive marginal contribution to inequality, reducing the Gini by 0.1 points (marginal contributions are expressed in terms of points of Gini _reduced_ ), while indirect taxes (GST and SST) make a significant negative marginal contribution, increasing inequality by 0.5 points. Despite being highly progressive, PIT has little impact on inequality because it collects so little revenue relative to indirect taxes. This is captured in Figure 8, which shows the proceeds collected from taxes or spent on different items (blue bar) as well as the costeffectiveness of each as a tool for redistribution, given as the change in Gini Index divided by the total revenue or expenditure (orange dot); that is, how much inequality goes up or down for each dinar collected or spent. Since PIT is very progressive, it has a high effectiveness rating, but since so little of it is collected, its marginal contribution in Table 4 is very small. Indirect taxes, by contrast, represent by far the largest revenues. Even though their effectiveness indicator is only modestly negative (-0.5), the heavy reliance on them means they have a large negative overall contribution.

On the spending side, compared with water and electricity subsidies, direct transfers have a much lower budget allocation but provide a similar contribution to inequality reduction. Total direct transfers reduce inequality by 1.2 points compared to 1.4 points from electricity and water subsidies. Households benefit from both direct (lower consumer electricity prices reduce inequality by 0.5 points) and indirect electricity subsidies (lower producer electricity prices and so lower cost of final goods and services, reducing inequality by a further 0.2 points). Subsidised consumer water prices reduce the Gini by 0.8 points and the small cross-subsidisation of industrial water tariffs has almost null effect on inequality.

Within direct transfers, the bread subsidy compensation and NAF perform similarly in terms of effectiveness in reducing inequality, although bread subsidy expenditures were significantly higher than NAF’s in 2018. Although they have comparable performances, it is for different reasons. NAF is categorically targeted (for example, to widows or families looking after orphans), which does cover a number or poorer families but excludes many others and does reach many households higher up the distribution. The bread payment, on the other hand, covers roughly 80 percent of households, so very few households in the bottom half are excluded, and while many richer households also receive it, the flat benefit level represents a significantly higher share of market income for poorer households, meaning inequality is reduced. Finally, Takaful, a poverty-targeted cash transfer program, was only launched in 2019, expanded in 2020 to 55,000 households and will reach 85,000 by 2021. We have simulated this expansion including the targeting methodology and included it for reference in the table and figure. At a similar budget to NAF and less than the bread subsidy compensation, Takaful is projected to reduce inequality by 0.7 points, making it by far the most effective inequality reducing program.

Finally, although their intention is not to redistribute but to develop human capital for all, education benefits are the most equalising of any tax or spending, albeit expensive. Together, they reduce inequality by 3.1 points, which for the money spent makes them more effective at reducing inequality than subsidies
but less effective than direct transfers. Health spending is much more neutral, reducing inequality only by 0.3 points.

**_Table 4 Kakwani Coefficient and Marginal Contribution of Main Taxes and Transfers_**

**_Figure 8 Budget (JOD m) and Effectiveness of Main Taxes and Transfers_**

||Kakwani<br>Coefficient<sup>a</sup>|Marginal<br>Contribution<sup>b</sup>|2,000<br>million||8<br>Effective|
|---|---|---|---|---|---|
|Main taxes|||1,500<br>JOD||6<br>ness|
|PIT|0.6|0.1||||
|GST and SST|-0.2|-0.5|1,000||4|
|Direct transfers||||||
|NAF|0.7|0.4||||
|Bread subsidy|||500||2|
|compensation|0.6|0.7||||
|Other direct transfers|1.9|0.0|0||0|
|_Total Direct transfers_|3.2|1.2||||
|Estimated Takaful<br>(2021)|0.9|0.7|-500|IT<br>ST<br>rs<br>ad<br>AF<br>ul<br>er<br>dy<br>dy|nd<br>on<br>th<br>-2|
|Indirect transfers||||P<br>T + S<br>nsfe<br>Bre<br>N<br>akaf<br>Oth<br>ubsi<br>ubsi|n-ki<br>cati<br>Heal|
|Electricity total||||GS<br>Tra<br>T<br>ty S<br>er S|tal I<br>Edu<br>|
|subsidy|1.7|0.7||otal<br>rici<br>at|To<br>|
|Water total subsidy|1.2|0.8||T<br>lect<br>W||
|_Total Subsidies_|2.9|1.4||E<br><br> <br>||
|||||Taxes<br>Direct Transfers<br>Indirect|In-kind|
|In-kind transfers||||Subsidies|Benefits|
|Education net benefits|0.5|2.8||||
|Health net benefits|0.4|0.3||Budget (LHS)<br> Effectiveness (|RHS)|

Notes:

- a. Kakwani coefficients measure whether a fiscal intervention exercises an equalizing or unequalising force. It is measured as the difference in the concentration curve of the tax and the Gini for market income (or the inverse in the case of transfers). Progressive interventions have positive Kakwani coefficients, and regressive ones have negative coefficients.

- b. Marginal contribution is the points which the Gini Index is reduced between market income and consumable income, or between Consumable and Final income (for in-kind transfers); a positive contribution is a reduction in Gini, negative contribution is an increase in Gini.

Budget Is the budget identified in the survey. Effectiveness is marginal contribution / budget. GST and SST include the cascading indirect effect of GST exemptions. Total electricity and water subsidies include residential subsidies and the indirect effect of commercial and industrial (cross) subsidies.

Source: 2017-18 HIES, 2018 Government Budget, administrative data and World Bank analysis.

# Results in International Context

In this section we compare Jordan’s performance to other countries in terms of fiscal space and distributional impact (all data are included in an appendix). The database we use is from the CEQ Institute and includes 42 different countries, some with multiple years of studies. We begin by looking at the overall progressivity of Jordan’s fiscal system relative to other countries. Figure 9 presents the extent to which fiscal policy in 42 countries (with five countries having two entries) reduces inequality as measured by the Gini Index. It shows both the reduction in Gini when moving from market income to consumable income— that is, taking only cash taxes and benefits into account (upper panel)—and from market income to final income—that is, including public spending on health and education (lower panel). The charts are ranked from most inequality reducing to least. Whether we consider inequality in strictly monetary terms or also
# ny nt

<!-- Start of picture text --> ny<br><!-- End of picture text --> <!-- Start of picture text --> nt<br><!-- End of picture text -->
reduction through their fiscal systems, Jordan’s performance (6<sup>th</sup> out of 14) is mid-range as well but less than half of that in the top three performing countries, Mexico (2012), Panama and Uruguay.

**_Figure 10_** _Fiscal Impact on Monetary Poverty (points reduction in poverty headcount, PPP $3.2)_

<!-- Start of picture text --> 6<br>4<br>2<br>0<br>-2<br>-4<br>-6<br>-8<br>Tanzania (2011) Ghana (2012) Armenia (2011) Sri Lanka (2009) Brazil (2008) Namibia (2009) Peru (2011) El Salvador (2011) Dominican Republic (2006) Colombia (2010) Russia (2010) Colombia (2014) Paraguay (2014) Chile (2013) Jordan (2018) Romania (2016) Mexico (2014) Mexico (2012) Panama (2016) Uruguay (2009)<br><!-- End of picture text --> Source: CEQ Institute database (as of May 2020) Why does Jordan’s fiscal policy not have as much impact on equity and in poverty as in many other countries? Jordan’s revenue and spending as a percentage of GDP is relatively high at the aggregate level compared to other countries in the CEQ database. However, the composition of both has historically been less progressive than elsewhere. We first look at the revenue levels and composition. In terms of total fiscal revenue as a percentage of GDP, Jordan performs in the middle of the database; at 24.8 percent of GDP in 2010, it was 18<sup>th</sup> best of the 49 country-years, although that had fallen to 26<sup>th</sup> by 2018. However, this masks Jordan’s significant reliance on non-tax revenue. In terms of total tax revenues, Jordan was 25<sup>th</sup> (2010) and 28<sup>th</sup> (2018) at 15.7 percent and 15.0 percent respectively. Finally, at less than 1 percent of GDP (Figure 11), Jordan’s revenue collection from PIT—the most progressive revenue mechanism—is particularly low, while its dependence on indirect taxes (around 10.5 percent of GDP) is relatively high (Figure 12).

On the spending side, Jordan’s central public expenditures in 2018 were 18<sup>th</sup> out of 46 country-years observations almost the same as 2010 (15<sup>th</sup> ) as a percent of GDP. However, considering in-kind expenditures on health and education where Jordan achieves the greatest absolute inequality reduction and for which the income gradient in HCI is flatter than in most countries for which we have data, total education spending was still only 33<sup>rd</sup> out of 47 in 2018 (38<sup>th</sup> in 2010), and 32<sup>nd</sup> (2018) and 24<sup>th</sup> (2010) out of 48.<sup>56</sup> Nonetheless, significant policy changes in social protection spending between 2010 and 2018 (mostly in the last couple of years) have had a material impact. In 2010, total direct transfer spending (generally the most progressive type of spending) was 30<sup>th</sup> out of 43; by 2018 it was 17<sup>th</sup> . Once Takaful expansion is completed in 2021, it would be 11<sup>th</sup> . Moreover, the poverty-targeted approach of Takaful compared to the less progressive NAF categorical targeting and near-universal bread subsidy compensation benefits means the impact on inequality has also been increasing. The impact of direct transfers on inequality was only 30th out of 43 country-years, reducing inequality by only 0.7 points (Figure 13). By 2018 it was 20th (1.2 points) and our projections for 2021 once the full Takaful expansion is taken into account is 11th (2.4 points), meaning inequality is reduced by direct transfers alone by 2.4 points.

56 Not all fiscal components are reported for all countries in the CEQ database, so the denominator varies by item.
<!-- Start of picture text --> Belarus (2015)<br>Croatia (2014)<br>Argentina (2012)<br>Brazil (2008)<br>Georgia (2013)<br>Albania (2015)<br>Tunisia (2010)<br>Uruguay (2009)<br>Armenia (2011)<br>Guinea (2012)<br>Bolivia (2009)<br>Poland (2014)<br>Burkina Faso (2014)<br>Jordan (2018)<br>Jordan (2010)<br>South Africa (2010)<br>El Salvador (2011)<br>Paraguay (2014)<br>Peru (2011)<br>Chile (2013)<br>Tanzania (2011)<br>Honduras (2011)<br>Costa Rica (2010)<br>Venezuela (2013)<br>Nicaragua (2009)<br>Mongolia (2016)<br>Dominican Republic...<br>Kenya (2015)<br>Ghana (2012)<br>Ethiopia (2010)<br>Russia (2010)<br>Uganda (2012)<br>Peru (2009)<br>Ecuador (2011)<br>Guatemala (2011)<br>Colombia (2014)<br>Colombia (2010)<br>Namibia (2009)<br>Egypt (2015)<br>Indonesia (2012)<br>Sri Lanka (2009)<br>Mexico (2014)<br>Panama (2016)<br>Mexico (2010)<br>Mexico (2012)<br>Iran (2011)<br>0 2 4 6 8 10 12 14 16 18<br><!-- End of picture text -->

|0<br>Sour|18<br>16<br>14<br>12<br>10<br>8<br>6<br>4<br>2|**_Figur_**<br>9%<br>8%<br>7%<br>6%<br>5%<br>4%<br>3%<br>2%<br>1%<br>0%<br>Sour<br>**_Figur_**|
|---|---|---|
|Belarus (2015)<br> <br>ce: C||South Africa (2010)<br>**_e 11_**<br>ce: C<br>**_e 12_**|
|Croatia (2014)<br>E||Georgia (2013)<br>**_._**<br>E<br>**_._**|
|<br>Argentina (2012)<br>Q||<br>Namibia (2009)<br>**_To_**<br>Q<br>**_To_**|
|<br>Brazil (2008)<br>Georgia (2013)<br>Institu||<br>Ukraine (2016)<br>Poland (2014)<br>**_tal Pe_**<br>Institu<br>**_tal In_**|
|Albania (2015)<br>te||Belarus (2015)<br>**_rso_**<br>te<br>**_dir_**|
|Tunisia (2010)<br>da||Kenya (2015)<br>**_na_**<br>da<br>**_ect_**|
|Uruguay (2009)<br>Armenia (2011)<br>taba||Tunisia (2010)<br>Russia (2010)<br>**_l Inc_**<br>taba<br>**_Taxe_**|
|Guinea (2012)<br>se||Croatia (2014)<br>**_om_**<br>se<br>**_s (_**|
|Bolivia (2009)<br>(as||Romania (2016)<br>**_e_**<br>(as<br>**_pe_**|
|Poland (2014)<br>at||Tanzania (2011)<br>**_Ta_**<br>at<br>**_rc_**|
|Burkina Faso (2014)<br>M||Ghana (2012)<br>**_xes_**<br>M<br>**_ent_**|
|Jordan (2018)<br>ay||Mexico (2014)<br>**_(p_**<br>ay<br>**_o_**|
|<br>2||El Sldr (2011)<br>**_e_**<br>2<br>**_f_**|
|Jordan (2010)<br>0||avao<br>**_r_**<br>0<br>**_G_**|
|South Africa (2010)<br>El Salvador (2011)<br>20)||Mexico (2012)<br>Mongolia (2016)<br>**_cent_**<br>20)<br>**_DP)_**|
|Paraguay (2014)||Uruguay (2009)<br>**_of_**|
|Peru (2011)||Mexico (2010)<br>**_GD_**|
|Chile (2013)||Albania (2015)<br>**_P)_**|
|<br>Tanzania (2011)||Armenia (2011)<br>|
|<br>Honduras (2011)||Argentina (2012)|
|<br>Costa Rica (2010)<br>||Brazil (2008)<br>Ud 2012|
|Venezuela (2013)||gana ()|
|<br>Nicaragua (2009)||Egypt (2015)|
|<br>Mongolia (2016)||Peru (2011)|
|<br>Dominican Republic...<br>Kenya (2015)||Peru (2009)<br>Chile (2013)<br>bl|
|Ghana (2012)||Dominican Repuic...<br>|
|Ethiopia (2010)||Indonesia (2012)<br>|
|Ri (2010)||Ethiopia (2010)|
|ussa<br>Ud 2012||Colombia (2014)|
|gana ()|||
|2||Nicaragua (2009)|
|Peru (009)<br>||Costa Rica (2010)|
|Ecuador (2011)|||
|Guatemala (2011)<br>||Iran (2011)<br>Jordan (2010)|
|Colombia (2014)|||
|Colombia (2010)<br>||Jordan (2018)<br>Venezuela (2013)|
|Namibia (2009)|||
|Egypt (2015)<br>||Guatemala (2011)<br>Ecuador (2011)|
|Indonesia (2012)|||
|<br>Sri Lanka (2009)<br>||Sri Lanka (2009)<br>Bolivia (2009)|
|Mexico (2014)<br>||Colombia (2010)|
|Panama (2016)||Burkina Faso (2014)|
|Mexico (2010)||Paraguay (2014)|
|Mexico (2012)||Honduras (2011)|
|Iran (2011)||Panama (2016)|

<!-- Start of picture text --> South Africa (2010)<br>Georgia (2013)<br>Namibia (2009)<br>Ukraine (2016)<br>Poland (2014)<br>Belarus (2015)<br>Kenya (2015)<br>Tunisia (2010)<br>Russia (2010)<br>Croatia (2014)<br>Romania (2016)<br>Tanzania (2011)<br>Ghana (2012)<br>Mexico (2014)<br>El Salvador (2011)<br>Mexico (2012)<br>Mongolia (2016)<br>Uruguay (2009)<br>Mexico (2010)<br>Albania (2015)<br>Armenia (2011)<br>Argentina (2012)<br>Brazil (2008)<br>Uganda (2012)<br>Egypt (2015)<br>Peru (2011)<br>Peru (2009)<br>Chile (2013)<br>Dominican Republic...<br>Indonesia (2012)<br>Ethiopia (2010)<br>Colombia (2014)<br>Nicaragua (2009)<br>Costa Rica (2010)<br>Iran (2011)<br>Jordan (2010)<br>Jordan (2018)<br>Venezuela (2013)<br>Guatemala (2011)<br>Ecuador (2011)<br>Sri Lanka (2009)<br>Bolivia (2009)<br>Colombia (2010)<br>Burkina Faso (2014)<br>Paraguay (2014)<br>Honduras (2011)<br>Panama (2016)<br>0% 1% 2% 3% 4% 5% 6% 7% 8% 9%<br><!-- End of picture text -->
# ~~7~~
The revenues and budget allocations for the main taxes and transfers have only had minor changes since 2010 as a share of GDP (Table 5), barring two important policy changes: the food (wheat and barley) and fuel subsidies existing in 2010 have been eliminated, and social safety nets have been expanded, partly when wheat subsidies were eliminated in January 2018 and replaced with a semi-targeted cash payment—the bread compensation scheme—, and partly with the expansion of NAF, which is expected to continue into 2021 (see reform discussion and assessment of impacts in the next section). Other minor changes were modest reforms to the electricity tariff system, a short-lived cash transfer to compensate households for the increased price of oil<sup>58</sup> and some amendments to sales taxes in 2017.<sup>59</sup> In December 2018 a new income tax law was signed; it proposed modest reductions in income tax exemptions and changes to the tax rates.

The new income tax law does not affect the comparison with the results here as its introduction was posterior to our analysis. A simulation analysis of the new law (World Bank, 2019) indicates that the impacts of the reform would large fall on the richest 10 percent of households. The broadening of the tax base concentrated in the richest households would bring a small reduction in inequality (0.8 points reduction in the Gini), but there would also be a small increase in poverty (1.1 points) reflecting households with large incomes but many dependents paying more tax (World Bank, 2019).<sup>60</sup> The introduction of the bread compensation transfer and the expansion in NAF, both of which we assess would be poverty and inequality reducing, can help explain the better performance of direct transfers in 2018 compared to 2010 (change in poverty and inequality from market to disposable income).

It is difficult to disentangle the reasons behind the persistence of the almost null change in inequality between disposable and consumable income and the increase in poverty in 2018 compared to 2010 as there are various policy and methodological changes in the interventions involved that would be consistent with such pattern, but the information in the 2010 study is not enough to assess marginal contributions separately for each fiscal intervention. Still, we can have a sense of the expected direction of change of some of the policy reforms that would affect consumable income. The most significant policy change was the removal of fuel and food subsidies, which were progressive in 2010 although very small (they represented each less than 1.5 percent of market income for the poorest decile). Still, their removal could certainly explain lower indirect subsidies received by the bottom of the distribution contributing to an increase in poverty; in the case of fuel subsidy, Atamanov _et al_ . (2017) estimate that the unmitigated removal would have stronger negative impacts in the consumption of the poorest quintile and would increase poverty and inequality. On the one hand, small changes to electricity subsidies and sales taxes could have added or subtracted from a potential increase in inequality, depending on the distribution of 58 Regional political unrest disrupted the supply of natural gas from the Arab Republic of Egypt to Jordan in 2011, leading to large increases in the cost of providing fuel subsidies and increasing the cost of producing electricity in Jordan. Various reforms, particularly the elimination of fuel subsidies and some increases in electricity tariffs, were introduced in an attempt to reduce Jordan’s dependence on energy imports and phase out subsidies to improve fiscal stability and reduce the country’s vulnerability to exogenous shocks. In 2014 a cash compensation scheme pegged to the price of oil was introduced to compensate households for the fuel price increases. As international oil prices fell, this cash compensation scheme was soon out of operation.

59 These include introduction of an SST levy to soft drinks and changes mobile phones and cigarettes SST, the movement of some items from the 0 percent and the reduced 4 percent rates to the general 16 percent rate, as well as from the 8 percent reduced rate to the general 16 percent rate.

60 Although these changes are under a scenario of full compliance with the tax law and are thus likely to be upperbound estimates.
the reforms. On the other hand, the methodological change in the measurement of indirect taxes, particularly accounting for special taxes to tobacco, alcohol, sodas and mobile phones, and the addition of the indirect effect of GST would more likely contribute to an increase in poverty and inequality in consumable income. The inclusion of the indirect effect of electricity subsidies, which we found to be progressive and marginally equalising, could have counterbalanced some of the negative impacts mentioned above, at least for inequality. Finally, since Jordan did not have any major education or health reform between 2010 and 2018, we believe the difference in final income inequality across studies is more likely a product of methodological changes in the treatment of health expenditures between the two studies.

**_Table 5. Selected Revenues and Expenditures 2010 and 2018 (Percent of GDP)_**

**_Figure 14. Poverty and Inequality Change between Income Concepts in Fiscal Incidence Analysis for 2010_**

||**2010**<br>**Percent**<br>**of GDP**|**2018**<br>**Percent**<br>**of GDP**|45<br>40||
|---|---|---|---|---|
|Personal Income Tax|0.8|0.7|35||
|GST (Sales Tax on Domestic Goods|4.6|4.4|30||
|and on Services)|||nt<br>25||
|Total Cash transfers|0.7|0.9|<br><br>rce||
|NAF|0.4|0.3|Pe<br>20||
|Bread compensation scheme|0|0.6|15||
|Total in-kind transfers|7.4|5.9|10||
|Education|3.2|3.4|5||
|Health|3.1|2.5|0||
|Total residential subsidies||||Market<br>Disposable Consumable Final Income|
|Electricity<sup>61</sup>|1.0|1.5||Income<br>Income<br>Income|
|Water|N/A|1.7||Poverty<br>Inequality|
|Food and fuel|1.0|0||<br>|

Source: for 2018 budget see Table 1 and Table 2. 2010 numbers from Alam _et al._ 2017.

# 5. Potential Reforms

We have seen that Jordan’s current fiscal system, despite some improvements, does relatively little to reduce poverty and inequality. At the same time, pre-COVID fiscal pressures combined with COVID-related pressures mean that fiscal reforms are necessary. The need for such reforms presents both a challenge and an opportunity. The challenge is how to increase revenues and reduce or redirect spending in a manner which least affects the poor and vulnerable. The opportunity is that such reforms may be politically feasible in the shadow of the COVID-19 crisis and, furthermore, that they can potentially be done in a distributionally neutral or even progressive manner.

Building upon this paper, a microsimulation tool is being developed which will allow policy makers to run various fiscal reform scenarios and assess both the impact on the fiscal deficit as well as the impact on poverty and inequality. In this closing section, we do not attempt to examine all options or even the most ambitious but present three feasible reforms.

> 61 In 2011, electricity subsidies rose to 5.5 percent of GDP as political unrest disrupted the supply of natural gas from the Arab Republic of Egypt (Alam _et al_ . 2017).
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.
**_Figure 15. Distribution of Households by Final Electricity Consumption Block by Market Income per Capita Decile_**<sup>**_66_**</sup>

<!-- Start of picture text --> 100<br>90<br>80<br>70<br>60<br>50<br>40<br>30<br>20<br>10<br>0<br>Household market income decile<br>1-160 161-300 301-500 501-600<br>601-750 751-1000 1001+<br>Percent<br><!-- End of picture text --> <!-- Start of picture text --> Note: Deciles of market income. The share of households per final<br>consumption block in HEIS has been adjusted to preliminary figures from<br>administrative data.<br>Source: HEIS 2017-18 and World Bank calculations.<br><!-- End of picture text --> Although PIT is the most progressive form of revenue generation and collections are particularly low in Jordan by international standards, the recent history of PIT reform suggests that efforts directed to increased compliance are more politically feasible in the short-term; in the longer-term greater reliance on direct taxation will be needed to increase public revenues in a progressive manner. Indirect taxes, however, can be simplified and significant revenue raised by eliminating GST exemptions and lower rates and unifying the sales tax rates for all items. Under this scenario, we assess the potential impact of using a unified single GST rate of 16 percent for all items.<sup>67</sup> While this raises the tax rate for some items with reduced tax rates and thus the direct impact of taxes, it also eliminates the cascading effects caused by exemptions, which were accounted for around 10 percent of the total GST collections in the baseline. Overall, this reform has only small poverty and distributional effects, increasing inequality by only 0.1 points as the increase in direct prices is offset by the decrease in prices when producers of previously GSTexempt goods and services can now claim GST on their inputs. This reform could raise an additional 5 percent of indirect taxes (about JOD 120 million), which can be used to fund progressive expenditures to compensate for the small increase in poverty (0.2 points) or to close the fiscal gap. In reality, purchases of goods at informal locations which do not charge GST mean that the impact on poverty and inequality would be even less, although so too may be the impact on revenues.<sup>68</sup> Preserving the zero-rates for some items may additionally provide relief for low-income households, but despite a potentially modest poverty mitigation effect, the fiscal cost could be great.

Finally, we assess reforms to social assistance which are currently being implemented. The current Takaful expansion is not included in the baseline of this study as it began after 2018. Also, since the programmed started after the HEIS data was collected, there is no information about beneficiaries in the survey. Thus,

> 66 This analysis is based on self-reported consumption of electricity from HEIS. This does differ from administrative NEPCO data.

> 67 Leaving STT rates (for mobile phones, sodas, alcohol and tobacco) unchanged.

> 68 This is because poor households tend to make more of their purchases in the informal non-tax paying sector than richer households (Bachas _et al._ 2020).
we simulate this expansion until 2021 based on Takaful targeting and benefits rules in HEIS.<sup>69</sup> Figure 16 shows that the distribution of benefits under Takaful is highly progressive, with nearly half of the benefits received by the bottom decile and over 70 percent by the bottom two deciles. This is significantly better than that achieved by NAF or the bready subsidy compensation. The overall impact of the Takaful expansion is to reduce poverty and inequality by 1.3 and 0.7 points respectively. Moreover, existing NAF beneficiaries are planned to be recertified using the Takaful targeting once the current Takaful expansion is complete.<sup>70</sup> As Figure 16 indicates, this could potentially lead to further reductions in poverty and inequality without additional expenditures. The marginal contribution to poverty and inequality of the recertified NAF is 1.2 and 0.8 points respectively. Compared to the current contributions of NAF (0.9 and 0.4 points for poverty and inequality, respectively) the better targeting of NAF would reduce poverty by an additional 0.4 points and inequality by 0.4 points. We estimate the combined impact of these social protection reforms as an additional 1.7 and 1.3 points reductions in poverty and inequality. Finally, removing the bread compensation scheme would have negative poverty and inequality impacts but, although not modelled here, the budget allocated to this transfer, while broad in coverage by design, could be used in a targeted fashion—such as extending subsidised health insurance coverage for the poor—to achieve better equalising and poverty reducing effects, or considering the Takaful expansion already underway, kept as fiscal savings.

# **_Box 1. The household impacts and social protection response to the COVID-19 pandemic in Jordan_**

The COVID-19 outbreak spread rapidly across the world. To varying degrees, countries introduced measures to contain and mitigate health emergency, including restrictions on individual mobility and economic activity in addition to public health measures. In Jordan, schools and borders were closed in mid-March 2020, and a nationwide curfew was set on March 21. The global pandemic and measures taken to contain it brought supply and demand shocks to the economy; Jordan’s economy was hit hard exacerbating pre-existing challenges for growth, labour markets and household welfare. The Government of Jordan (GoJ) introduced measures to protect formal workers and households, limiting layoffs and wage cuts. It also launched a World Bank supported program to provide cash support to poor and vulnerable households whose employment and incomes were not protected by formal instruments. This support included (i) temporary (6 month) cash transfers to 190,000 vulnerable households; (ii) additional funds to the Takaful budget to continue its 2020 expansion; and (iii) temporary (6 month) benefit top-ups for NAF and Takaful beneficiaries whose benefits were below a certain threshold.

The potential impact of the economic shock and the mitigating effect of the social protection response on household welfare were estimated through a microsimulation model (modelled in July 2020). First, household consumption was decreased from the baseline through the loss of domestic and international remittances, as well as labour income falls, which varied by the household’s sector of employment and whether they work informally. Consumption is then increased for the recipients of targeted cash transfers as part of the official emergency response. Real consumption is also affected by changes in the cost of living due to inflation or deflation resulting from the crisis (estimates of which come from a CGE model). Each of these channels was allowed to vary by month and household consumption and poverty was projected out monthly from the start of the crisis in March for 22 months to the end of 2021.

69 Conducted by the World Bank Social Protection team. This means that the results should be interpreted as if implementation was as envisioned by the targeting system. Though problems of implementation could reduce Takaful’s effectiveness we are not able to account for potential inclusion or exclusion errors in the targeting. An evaluation of the actual targeting performance of Takaful has not yet been completed.

70 We simulate this re-certification by allocating NAF based on the Takaful ranking score. Since we do not find enough households that would pass the Takaful assets and income filters, we keep the additional 31,000 poorest NAF households in the re-certified programme, even if they did not meet the eligibility criteria.
<!-- Start of picture text --> These simulations reveal a sharp immediate impact of the lost labour and remittance incomes for households,<br>with the poverty rate rising by 11 percentage points. While the government assistance mitigates less than half of<br>the initial shock in the early months, as the economy begins to reopen, incomes recover and inflation recedes,<br>the government assistance is able to push the poverty rate near where it would have been without the crisis by<br>the end of the six months of temporary payments. The mitigating impact of social assistance is time bound and<br>poverty may jump-up again when the temporary payments are scheduled to finish and if a second wave of<br>infections, lockdowns and economic restrictions delay the economic recovery in the country.<br><!-- End of picture text --> These simulations reveal a sharp immediate impact of the lost labour and remittance incomes for households, with the poverty rate rising by 11 percentage points. While the government assistance mitigates less than half of the initial shock in the early months, as the economy begins to reopen, incomes recover and inflation recedes, the government assistance is able to push the poverty rate near where it would have been without the crisis by the end of the six months of temporary payments. The mitigating impact of social assistance is time bound and poverty may jump-up again when the temporary payments are scheduled to finish and if a second wave of infections, lockdowns and economic restrictions delay the economic recovery in the country.

<!-- Start of picture text --> 30<br>25<br>20<br>15<br>10<br>5<br>0<br><!-- End of picture text --> <!-- Start of picture text --> After social assistance response<br><!-- End of picture text --> <!-- Start of picture text --> + After (de)inflation<br><!-- End of picture text --> <!-- Start of picture text --> Income shock<br><!-- End of picture text --> <!-- Start of picture text --> Counterfactual<br><!-- End of picture text --> Source: Refaqat _et al_ . (forthcoming) Taken together these three reforms, reducing electricity subsidies for higher consuming households, imposing a flat GST tax rate without exemptions and redirecting and expanding existing and planned social assistance spending, would mean increased fiscal space of JOD 115 million while reducing poverty by 1.7 points and reducing inequality by 1.3 points in comparison to the current fiscal system. An additional JOD 110 million of the 2020 bread subsidy compensation budget could either be redirected to povertytargeted programs, further reducing inequality and poverty at no additional cost to the budget or used to close the fiscal gap. This would come at some cost to poverty and inequality, although it would be less than the reductions estimated under the three reform scenarios.
**_Figure 16. Incidence of Main Direct Transfers by Household Market Income Decile_**

**_Table 6. Fiscal and Distributional Impacts of Potential Reforms_**

|70||**Change i**<br>**contri**|**n marginal**<br>**bution***|**Estimated budget**<br>**savings**|
|---|---|---|---|---|
|ure<br>60||Poverty|Inequality|JOD m|
|endit<br>50|GST reform|-0.2|-0.1|120|
|t of Total Exp<br>40<br>30|Electricity<br>residential<br>tariff reform|0.2|0.3|95|
|cen<br>20|Takaful<br>|1.4|0.7|-100|
|Per<br>10<br>0|expansion<br>NAF re-<br>certification|0.4|0.4|0|
||All reforms|1.7|1.3|115|
|NAF<br>Bread Subsidy Compensation|With bread<br>savings**|-0.1|0.5|225|
|NAF (Re-certified)<br>Takaful|||||
|Notes: Deciles of per capita market income. Takaful<br>includes full expansion to 2021.<br>Source: HEIS 2017-18 and World Bank calculations.|*Marginal contri<br>poverty headcou<br>consumable inco<br>Gini/poverty, ne<br>The change is th<br>contribution bef<br>The budget chan<br>percentage chan<br>administrative b<br>**Approximate b<br>Source: HEIS 201|bution is the<br>nt is reduced<br>me; a positiv<br>gative contri<br>e difference<br>ore the refor<br>ge in JOD is<br>ge in the ‘sur<br>udget.<br>read subsidy<br>7-18 and Wo|points which t<br>between mar<br>e contribution<br>bution is an incr<br>with respect to<br>m.<br>estimated by a<br>vey-budget’ to<br>compensation<br>rld Bank calcul|he Gini Index/<br>ket income and<br>is a reduction in<br>ease in Gini/poverty.<br>the marginal<br>pplying the<br>the actual<br>budget for 2020.<br>ations.|

# 6. Conclusions

In this paper we analysed the impact of Jordan’s main fiscal policies on poverty and inequality applying the CEQ methodology to data from the 2018 HEIS. We covered the key fiscal policies: personal income taxes, GST and SST (indirect taxes), direct transfers from NAF, the bread subsidy compensation scheme and the recent Takaful expansion, indirect subsidies to electricity and water and in-kind benefits for education and health. Our results show that the fiscal system in Jordan is only modestly progressive, but more could be achieved to further its poverty reducing and equalising impact.

In the middle of 2020, Jordan faced extraordinary challenges. While swift action by the government avoided the health crisis, the pandemic was wreaking global economic havoc and Jordan was no different. Moreover, Jordan, like many other countries, was under significant fiscal pressure before the crisis. The crisis is in turn exacerbated that pressure, particularly through a lack of fiscal space to run countercyclical fiscal policy as was needed. At the same time, poverty rates in Jordan have been stagnant
over the last decade and current fiscal policies have not done as much to reduce poverty or inequality compared to many other countries.

The COVID-19 crisis represents both a need for fiscal reform and an opportunity to “build back better”, with more revenue collected in a neutral or even progressive manner, less spending on subsidies for richer households and redirecting of existing social spending to reduce poverty and inequality at no fiscal cost. The fiscal system could be enhanced by reducing the reliance on indirect taxes, which have a disproportional impact on the poorest relative to their capacity to afford them, and by better targeting indirect subsidies, which although progressive are also unnecessarily benefitting middle- and high-income households. Further, the recent expansion of social assistance programs is making Jordan’s fiscal policies more equalising and continuing to expand the more progressive direct taxes and transfers are steps in the right direction.