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Optimising efficiency of public capital expenditure

Sep 27,2017 - Last updated at Sep 27,2017

The unveiled features of the proposed income tax reforms stirred discussions in the media and on social platforms in Jordan.

The over $35 billion economy is afflicted with excessive fiscal burdens and chronic external imbalances, leaving policy makers with no choice but to introduce new fiscal consolidation measures.

On the other hand, limited-income Jordanians, who represent the broadest segment of the society, are struggling to maintain basic living standards, and are thus opposing all means of fiscal austerity that will adversely affect their incomes and purchasing power.

Columnists and activists also criticised the new income tax proposal with arguments that either spotlight deficiencies in historical economic policies or propose new alternatives for generating revenues, like fighting tax evasion or imposing more taxes on promising and excelling business sectors.

The missed angle of the prevailing discussions relates to the left side of the government’s budget, exemplified by public expenditures.

While it is widely known that current expenditures in Jordan are mostly untouchable due to sensitive social implications, capital expenditures remain, unjustifiably, away from public opinion’s attention.

This negligence of fiscal savings that can be achieved by downsizing capital expenditures is mainly traced by the misconception that such expenditures are perfectly correlated with economic growth levels.

The equation of higher capital spending/higher growth rates does not prove to be accurate either in theory or in empirical evidence.

In theory, the contribution of capital expenditures to economic growth is affected by various variables, including reliance on imported goods and foreign labour, and the extent to which capital projects are aligned with economic priorities.

Historical economic data also shows the imperfect correlation between disbursed capital expenditures and economic growth, as clearly shown by relevant indicators in 2012 and 2013.

In those two consecutive years, capital expenditures increased by nearly JD350 million, equivalent to 1.6 per cent of GDP, but real GDP growth increased by an insignificant 0.1 per cent, from 2.7 per cent to 2.8 per cent.

Accordingly, it can be concluded that optimising efficiency and better prioritising capital expenditures will most likely lead to fiscal savings without weighing in a tangible manner on economic growth levels.

In addition, that will help avoid a direct cut to Jordanians’ incomes and purchasing power in such critical times.

A government retreat with the aim of reducing capital expenditures in 2018 by 10-20 per cent through enhanced efficiency, and better prioritisation will represent one step in the right direction.

Capital projects heavily reliant on imported goods and projects employing the least domestic labour should be the main potential downsizing targets.

Moreover, a concise study should be prepared about the volume of variation orders of capital projects, the rationality of such orders and the suggested measures to prevent the irrational utilisation or exploitation of this overlapping spending window.

The outcomes of this study may help policy makers and legislators to better understand the inelasticity of Jordan’s capital expenditures since the major drop in oil and commodities prices in the summer of 2014.

Although no material evidence is available, variation orders may become subject to exploitation in downwards cycles of commodities, with irrational expansionary activities not being translated into budget breaches. 

Lastly, it is vital to highlight the role that can be played by the newly implemented Decentralisation Law in boosting the efficiency of capital expenditures and providing extra room for fiscal savings.

With each governorate now responsible for its own capital expenditures priorities, projects are supposed to become more reflective of local societies’ demands. 

This may implicitly mean that the new decentralised budgeting mechanism is capable of maintaining the same level of public services within a lower amount of allocated funding.

 

 

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

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