Yusuf Mansur

The government's recent decision to increase the salaries and pensions of employees and retirees earning less than JD600 per month by JD30, effective from the beginning of next year, is likely to spark considerable debate regarding its fiscal cost. Yet an equally important aspect of the discussion concerns its potential impact on economic activity, growth, and domestic demand.

The economic effects of any income increase depend largely on the group receiving it. When additional income accrues to higher-income households, a significant portion is often saved, invested, or even spent outside the local economy. By contrast, when income gains are directed toward lower-income households, most—if not all—of the increase is spent immediately on food, medicine, transportation, utilities, and other essential goods and services. For this reason, economists have long regarded targeted cash transfers to lower-income groups as one of the most effective short-term economic stimulus tools.

One particularly positive feature of the government's decision is that the increase takes the form of a fixed amount rather than a percentage of income. As a result, the relative benefit rises as income falls. For an individual earning JD600 per month, the increase represents a 5 per cent rise in income. For someone earning JD300 per month, it amounts to a 10 per cent increase. In this sense, the design of the policy is progressive and redistributive, directing proportionally greater support to those with the lowest incomes. Such an approach is widely regarded as a best practice in the design of income-support programs.

Let’s do some simple back-of-the-envelope calculations. If we assume, as some estimates suggest, that approximately 700,000 individuals will benefit from the measure, the monthly increase of JD30 translates into an additional JD 21 million injected into the economy each month, or roughly JD 252 million annually. If the median household income in Jordan is around JD 750 per month, then the JD 600 eligibility threshold indicates that the policy is aimed at households below or near the median income level—the segment most likely to spend additional income. Consequently, a beneficiary count approaching 700,000 does not appear unreasonable if the policy covers both public-sector employees and civilian and military retirees. When the family members of beneficiaries are considered, the number of people positively affected becomes substantially larger.

The economic impact, however, extends well beyond the value of the transfer itself. Every dinar spent by a beneficiary becomes income for a retailer, pharmacy, transportation provider, or local producer, who in turn spends part of that income again. This process gives rise to what economists refer to as the economic multiplier. Using a conservative multiplier ranging from 1.2 to 1.5, the additional economic activity generated by the measure could reach between JD 300 million and JD 380 million annually.

Relative to Jordan’s nominal GDP, this would amount to approximately 0.7 per cent to 0.9 per cent of total economic output. However, these figures represent a gross impact on nominal economic activity, not necessarily on real economic growth. A portion of the additional spending will leak into imports, some will substitute for expenditures that would have occurred anyway, and part may be offset by reductions in other government spending if the measure is financed through budgetary reallocations.

Consequently, the most likely net effect on nominal GDP growth may be around half a percentage point. While this may initially appear modest, it is significant in an economy where nominal GDP growth typically averages around 5 per cent per year. In effect, the measure could raise expected nominal growth by roughly 10 per cent relative to its baseline level.

Moreover, part of the additional spending will return to the government through sales taxes, fees, and other indirect taxes. If the government captures, on average, approximately 29 per cent of economic spending in the form of public revenues, nearly JD 73 million could flow back to the Treasury from the policy's total annual cost. This would reduce the net fiscal burden on the state budget.

International experience—from South Korea to Brazil and Spain—suggests that directing support toward lower-income groups produces greater economic and social returns than distributing the same amount of money uniformly across all income categories. The reason is straightforward: lower-income households spend most of what they receive, whereas higher-income households tend to save a larger share of additional income.

The importance of this measure extends beyond macroeconomic indicators. The beneficiaries are, in most cases, among the households most affected by rising living costs. As a result, the social impact of the policy may exceed its purely financial effects. By strengthening purchasing power, improving living standards, and providing greater economic security, the measure can contribute to social stability and economic resilience.

Of course, such an increase should not be viewed as a substitute for investment, structural reforms, or large-scale development projects that raise productivity and generate employment over the long term. Current spending stimulates demand, but it does not necessarily expand the productive capacity of the economy. Successful economies require a balanced mix of policies—those that support long-term growth through investment, and those that preserve purchasing power and social cohesion.

From this perspective, the thirty-dinar increase can be viewed not merely as a social policy aimed at assisting lower-income households, but also as a targeted economic stimulus package directed toward those most likely to spend every additional dinar within the Jordanian economy. Under current economic conditions, such a measure may prove to be one of the most efficient ways to stimulate local markets while simultaneously strengthening social stability and improving the well-being of a broad segment of society.

The writer is a former Jordanian Minister of State for Economic Affairs.