Macroeconomic performance and the budget deficit in Jordan: A trigger point for change in the aftermath of COVID-19

Abstract

No one doubts that COVID-19 will widen the budget deficit in most, if not all, developing countries. This development (widening public deficit) is particularly important for countries like Jordan. Indeed, since 1965, all governments have witnessed a deficit in their budgets. Within this context, the primary purpose of this paper is to examine the impact of real gross domestic product (GDP) on the fiscal deficit in the Jordanian economy. To examine the impact of real GDP on the real fiscal deficit of Jordanian government, we use annual data that covers the period 1992–2019 and use some relevant econometric techniques (stationarity test, co-integration, vector error correction model (VECM), and variance analysis) to realize the primary objective of the paper. The documented evidence indicates that the underlying long-run relationship between fiscal deficit and GDP is stable. In addition, the results indicate that real GDP takes on increasing weight in explaining the variability in the fiscal deficit over time. Considering the fact that real GDP affects (positively) the fiscal deficit, the government should use the implications of COVID-19 on the budget, as a “trigger” point for change. The government should re-examine its public spending and where possible, seek savings, and greater spending efficiency levels. The government must also re-examine the current tax law, and make the necessary changes to make the system generate not only more tax revenues but more diversified tax revenues as well.