The draft law for the government’s 2024 budget is out.
Here is the current snapshot of the 2024 estimate budget compared to 2023:
Basically, government estimates Domestic Revenues to go up by 9.3% while Foreign Grants are expected to be less 9.7%. Public Expenditure will go up by only 8.2% giving a budget deficit that is 11.1% larger than 2023’s estimate.
I want to dive deeper in the Revenue side of the budget, look at the good, bad, and ugly parts, as there are many aspects missed by those who drafted the current budget. The Financing budget and Expenditure side would be interesting for a later time but I always followed the 1st law of economics: “one man’s spending is another man’s income” (a ramp up in capital expenditure in sustainable projects will deliver higher multipliers).
The Ugly: Income Tax
Government expects an increase of 20% in Income Tax. Income tax is calculated based on profits made in the previous tax year (2023 in this case).
Being a small country, it is relatively easy to quantify the economy.
For the period January till May of 2023, the government saw an increase in tax revenue1 of around 12% compared to the same period in 2022, an increase of 416 mil JODs. Of those, 250 mil JODs came from an increase in income tax.
The reason was simple: 2022 was what economists called a windfall year. The Russian invasion of Ukraine caused commodity prices to skyrocket, leading to higher income for the local Potash and Phosphate mining companies.
In fact, 5 publicly listed companies contributed around 800 mil JODs to the treasury alone.
Unfortunately, 2023 was not kind to fertiliser prices. Both the Potash and Phosphate company saw their profits fall 48% for the first 9 months. As is, there will be a deficit of 240 mil JODs in income tax.
Could this be recouped by the banking sector which saw an increase in profits of 38% in the same period?
Despite having one of the highest tax rates on income, banks will pay an estimated 170 mil JODs more.
Yet what bugs is how all banks paid the correct tax rate except for one that paid only 6%.
Expected difference with current budget: ~70 mil JODs (assuming salaries saw 0% increase)
To give credit, the government did say that the increase in 20% in income tax will come from increased tax audits. I just hope they don’t bully small businesses and focus instead on the big sharks.
The Bad
Lower imports is good for our trade balance deficit but bad for government as this leads to lower sales tax and customs. So far this year, imports are down 6% which means lower income for the government. The trend seems it will continue for next year (especially with all the boycotting of foreign goods and lower fuel consumption).
Another mixed bag is income from fuel. Jordan Petrol, Manaseer and Total paid around 1 billion JODs in taxes last year. So far this year, revenue from fuel taxes are up 8%. This is mostly due to higher fuel prices and not higher consumption. In fact hybrid models and electric cars are dominating imports. International oil prices have fallen drastically since last year, let’s see if government will amend the prices accordingly.
Income from real estate and stock market trading expected to be lower.
Income from cigarette tax to drop should anti-smoking campaign succeed2
The Good
Realistic growth projections (Real GDP 2.6%, Nominal: 5.1%)
Income from sales tax on goods to increase in accordance with inflation and population growth.
No new taxes for the 4th consecutive year (a stable tax environment accompanied by stable fiscal & monetary policies is of vital importance for investor sentiment).
Digitisation of invoices launched by ISTD is proving a success, cutting back on tax evasion3. Maybe in 2024 we could see the soft launch of a Digital Currency as being developed by Progressoft4. I briefly wrote about CBDCs and its positive impact when it comes to collecting taxes:
Future Outlook
What can the government do to increase income without higher taxes or adding new ones?
2024 can be the time to collect old dues and be strict when in comes to the law:
There are 2.1 million vehicles in Jordan. 12% haven’t renewed their vehicle license in over 3 years. That’s a total of: 250,000 x ~ 50 JOD license x 3 years = 37.5 mil JODs (without late fines). That’s 37% more than expected.
According to the last Audit report5, the government still expects to collect over 300 mil JODs in dues from misallocation of funds, corruption, etc. (with more to come).
Amman is turning into an ashtray with cigarettes seen everywhere on pavements and sidewalks. The number of drivers I see plucking their cigarettes while driving is immeasurable. The fine for throwing trash in nature is 50 JODs. If 30% of drivers were fined just once: Total cigarette fines = 30 mil JODs
Foreign labourers working in Jordan without a work permit are estimated to be around 300,000. Total missed income: 300,000 x 560 JODs permit = 168 mil JODs
The government can negotiate settlements for the above with fair payment periods. All 4 together are enough to cover any shortfall in the budget from lower income and sales tax .
Conclusion
The minister of finance should count his blessings. Every year was a challenging one and yet by some miraculous event, the budget was somehow saved by an unexpected sector.
2020: COVID year saved by cigarette tax6
2021: Boom in construction accompanied by revenge spending boosting tax income
2022: Windfall year across the board
2023: Record breaking year for tourism
2024?
Maybe it can be the year of cleaning up the archives and closing many past tax files long over due. It can also be the year where we see huge investments in Mega Projects as well as new large IPOs (efawateercom/Madfooatcom is long overdue; they can go full Gulf mode and only list 10%), maybe even see cash-flow positive Jordanian startups reach Unicorn status (unlike the other failed ones).