Tax hikes could be beneficial for short term but harmful later, analysts say

AMMAN — Although the government’s latest economic measures will “discipline” consumption habits, they could have a negative impact on businesses and budget revenues in the long run, economists said on Thursday.

The Council of Ministers on Wednesday endorsed a set of economic measures that included hiking taxes on cigarettes, soft drinks and telecom services, fees to issue passports and duties on imported commodities.

The measures also included raising the minimum wage from JD180 to JD220, amending regulations governing work permits and cutting on expenses.

Former finance minister Mohammad Abu Hammour said the government had to enact the recent economic measures in order to secure the needed JD450 million to help narrow the budget deficit and reduce the Kingdom’s need for external financing, which will ultimately reduce indebtedness.

Although he did not provide an estimate of revenues, he said the government must have studied the efficiency measures, including the increases of some fees and taxes, on investments, business sectors and living standards.

But economist Wajdi Makhamreh disagreed, describing the decisions as “haphazard”, arguing that they were not based on efficient studies or polls.

“The government follows the shock style in increasing taxes and fees, without conducting studies or consulting independent research centres,” he charged in a phone interview with The Jordan Times. 

Abu Hammour said the new decision will encourage average people to rethink their consumption habits and reduce spending, while — on the other hand — this drop in demand could have a negative impact on businesses, such as telecom companies.

“The short term impact of the decisions will be positive, but the medium and long term impacts will depend on the influence of these decisions on economic sectors,” he said.

Ad-Dustour’s economic columnist Khaled Zubaidi expected the measures to “secure and exceed” the needed JD450 million, saying the decisions are the latest in “harmful” recent hikes, citing the rise in fuel prices. 

Additional fuel price hikes in the near future will to worsen the situation, Zubaidi suggested.

He explained that increasing prices of basic commodities, including fuel, raises production costs for businesses and industries, a matter that harms the competiveness of local products and opportunities for economic recovery.

The biggest loser is the telecom sector, whose revenues are expected to drop due to the tax hike, which will consequently reduce its contribution to the gross domestic product, the economist added.

The ICT contributes about 14 per cent annually to the Kingdom’s gross domestic product (GDP).

Responding to a question on whether imposing a 5 per cent customs duty on imported commodities will undermine the competitiveness of the Aqaba Special Zone, Makhamreh said there will be an impact, but the move could be a bid to stop tax evasions.

Meanwhile, he argued that hiking tobacco prices is unlikely to reduce consumption, as smokers will still buy their needs.

In the meantime, the government’s current expenses reach 40 per cent of the GDP, when internationally the figure is between 4 and 5 per cent, according to Zubaidi, who said there are no substantial efforts to address the oversized public sector within the economic measures.

He criticised the JD30 raise of the minimum wage, describing it as “throwing dust in people’s eyes”, adding that repealing old exemptions on reinforced steel will increase production costs in the housing and construction sectors, and — subsequently — the prices of apartments.

Makhamreh agreed with Zubeidi on “the futility of the minimum wage rise”, charging that the government is not serious about cutting down expenses. 

He claimed that “extremely high” salaries of many government consultants did not undergo any reductions, with reductions being implemented to some agencies only.  

Earlier this month, the Cabinet decided to deduct 10 per cent of any sum above JD2,000 in monthly salaries of civil servants, and set a cap of JD3,500 on public sector salaries.

The funds collected, which apply to the prime minister and ministers, among other top-ranking officials as of February 1, will go to support the Treasury.

Moreover, Prime Minister Hani Mulki has directed Finance Minister Omar Malhas to review the amount of money paid to government representatives for their membership on boards of directors of state-owned companies.

The premier called for identifying a maximum allowance for such members, to be considered by the ministry, and to return the surplus money to the Treasury.

The Cabinet has also decided to transfer all allowances and bonuses received by government officials for representing the state on the boards of companies to a special fund at the Finance Ministry.

The collected amount will be distributed evenly among all representatives, even when a certain official represents the government on more than one company board.

However, Makhamreh said the government should have focused on amending the income tax law to endorse a progressive income tax in order to protect the middle class and families with low incomes.

In addition, the mechanism for bread subsidies should have been reviewed to benefit Jordanians only, he added.