Jordan's budget deficit more than halved in the first five months of the year as the government maintained a freeze on non-essential capital spending, finance ministry sources said on Wednesday.

They said the shortfall shrank to JD137 million ($193 million) from JD348.3 million in the same period of 2009 - a year which ended with a record deficit of nine percent of gross domestic product (GDP).

The authorities have scaled down tens of millions of dollars worth of non-essential capital projects as part of austerity measures to slash its deficit to 6.3 per cent of GDP this year and help its economy ride out the global downturn.

Total expenditure, mainly civil service pay and debt servicing, fell 8.3 per cent to JD2.144 billion until May against JD2.338 billion in the same period last year, according to the official data obtained by Reuters.

Last year the aid-dependent country ran up a record budget deficit of JD1.45 billion or 9 per cent of GDP, much bigger than expected, as public finances came under strain after the global downturn hurt domestic demand and foreign cash flows, including remittances from expatriates in the Gulf.

The International Monetary Fund (IMF) and major donors have expressed concern at the high level of government spending relative to the size of the economy. It accounts for more than 45 per cent of the country's GDP.

Most of the savings came from a sharp 45 percent drop in capital expenditure by JD224 million in the first five months of 2010 against the same period 2009, the data showed.

As part of the public spending cuts the government is offering major infrastructure projects through private-public partnerships under lucrative terms that attract foreign investors.

The finance ministry data showed total state revenues, which include general sales tax, income taxes and foreign grants, rose a marginal 0.8 per cent to JD2.007 billion against JD1.990 billion in the same period last year.

The latest figures include a rise in foreign aid to JD129 million in grants from major Western donors -- the US, the European Union and Japan -- from JD95.9 million.

The government has since January undertaken two rounds of hefty tax hikes, including on gasoline, to offset lower revenues due to the double impact of the global downturn and major personal tax breaks to spur investments and domestic consumption.

Top economic policymakers pin their hopes of boosting revenues on an improved business climate that attracts more capital inflows as the economy begins to recover from the downturn.

Officials say they expect in 2010 nearly $1 billion in grants and loans from major Western donors and Gulf Arab states -- almost double last year's levels.

Foreign aid has long cushioned Jordan's economy from disruptions and helped finance almost half of its budget deficit. A sharp decrease in aid contributed to the budget deficit spiralling to record levels in 2009, officials say. – Reuters