Jordan approves austerity moves to reduce deficit
* Austerity package crucial for IMF-backed funding
* Fiscal consolidation essential to rein in budget deficit
By Suleiman Al-Khalidi
AMMAN, May 20 (Reuters) - The Jordanian cabinet approved an austerity package that includes plans to raise taxes on banks and mining firms but avoids controversial fuel and electricity price rises to hold down the rise in the budget deficit, officials said on Sunday.
They said the first package of measures, approved at a cabinet meeting late on Saturday, also included cuts in the government's operational spending and a freeze on hiring, and were expected to produce savings of around 300 million dinars ($423 million).
The state news agency Petra said the government would amend the income tax law to increase the taxes on profitable banks and on mining firms such as Arab Potash and Jordan Phosphate Mines Company <JOPH.AM >, among the world's leading producers of fertilisers.
Officials said privately that the next step would be a rise in electricity and premium gasoline prices, which the government said earlier this month was needed to stop the budget deficit from exceeding $4 billion this year and further damaging the kingdom's growth prospects.
Successive governments have adopted an expansionist fiscal policy characterized by sizable state subsidies and salary increases in response to months of protests that begn early last year, inspired by the uprisings that swept the Arab world.
In the latest sign of popular discontent, Islamist and tribal opposition groups held street protests against rising prices on Friday.
To head off greater unrest, the authorities created new state jobs in an already bloated public sector, froze gasoline prices and maintained subsidies for bread.
Officials say the new measures were needed to get International Monetary Fund (IMF) approval for further financing by donors worried about the impact of extra social spending on Jordan's fiscal and monetary stability.
Finance Minister Suleiman al-Hafez was quoted last week as saying the planned price rises and higher taxes were crucial to avoid the budget deficit soaring to 2.03 billion dinars ($2.8 billion) - after taking account of foreign aid that traditionally covers budget shortfalls.
The budget deficit could have reached a record 2.93 billion dinars if foreign aid fell and the new measures were not adopted, he said.
Last year the economy was kept afloat by a $1.4 billion cash injection from Saudi Arabia, but officials say there was no pledge of support from Saudi Arabia this year, raising concern about the budget.
The 2012 budget had set a much lower deficit target of 1.027 billion dinars, 4.6 percent of gross domestic product, after allowing for extra foreign aid and the streamlining of a subsidies package that costs over 2.3 billion dinars a year.
Officials say the government plans to impose a sales tax on a long list of luxury goods, and will not touch subsidies on bread for the poor and on cooking gas which a majority of the country's seven million low-income people depend on.
Economists said Jordan's ability to maintain a costly subsidy system and a large state bureaucracy, whose salaries consume the bulk of the $9.6 billion of state expenditure, was increasingly untenable in the absence of large foreign capital inflows or infusions of foreign aid.
(Reporting by Suleiman Al-Khalidi, editing by Tim Pearce)
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