Saudi tax policy likely to influence Gulf partners

JEDDAH: The state budget released by Saudi Arabia this week is likely to mark the end of an era for lavish welfare systems, encouraging governments around the region to roll back costly handouts to people.
Trying to narrow a huge budget deficit created by low oil prices, Saudi Arabia on Monday announced government spending cuts, reforms to energy subsidies and a drive to raise revenues from taxes and privatization next year.
Gulf governments have tightened their spending plans in the past during periods of slumping oil prices. The Saudi budget included steps that may hit the purchasing power of people — in particular, raising domestic gasoline, kerosene, water and electricity prices.
It was the biggest step a Gulf state has taken so far to change an arrangement in which governments heavily subsidize fuel, water, food and other essentials for their populations in exchange for social peace.
Other Gulf governments are now expected to follow suit as they impose their own austerity programs in response to the prospect of years of shrunken oil and gas revenues.
“The initiatives announced in the Saudi budget will be game-changers in the Gulf,” said Kristian Coates Ulrichsen, a political scientist at Rice University’s Baker Institute in the United States.
“If the reforms can be implemented successfully, that would boost the political courage of governments that hitherto have been hesitant to introduce such sensitive changes.”
In postings on Twitter, ordinary citizens in the Gulf also saw the Saudi budget as signalling challenging times for the region.
Some countries had already launched reforms before Riyadh made its move.
In August, the UAE abandoned a system of fixed gasoline prices in favor of one linked to global oil prices; gasoline has barely risen, but the way is clear for it to do so in future when oil eventually recovers.
Bahrain more than doubled prices of beef and chicken in October as it removed subsidies on them, and this week the Bahraini cabinet approved a new system for diesel and kerosene that would allow prices to rise gradually in coming years.
Bigger changes are on the way.
Governments in Bahrain, Kuwait, Qatar and Oman, which face financial squeezes of varying intensity, have all said they are conducting broad reviews of their subsidy systems, though they have not yet committed to specific reforms.
But governments are likely to move cautiously; Saudi officials stressed this week that they wanted to minimize the impact on the living standards of lower- and middle-income people.
Although the Saudi price of 95 octane gasoline jumped 50 percent, it remained very low by global standards, at SR0.90 ($0.24) per liter.
Water and electricity price hikes were structured to impose most of the burden on big corporate users.
Nevertheless, Riyadh made clear that the price hikes were only the first in a series, saying it would adjust subsidies for water, electricity and petroleum products over five years.
Once governments start cutting subsidies, it may be hard for them to resist the huge savings available from more reforms. The International Monetary Fund estimates Riyadh spent $107 billion on energy subsidies this year — more than its entire budget deficit of $98 billion.
“We think that the Saudi consumer fuel price changes will be the first of many to come over the next few years” around the Gulf, said Mohamed Al-Haj, associate at investment bank EFG Hermes in Dubai.
In the wake of the Saudi budget, Kuwait’s Finance Ministry Undersecretary Khalifa Hamada told the AlQabas newspaper that his ministry would present a proposal to “rationalize” subsidies to an economic committee in the cabinet at the end of this week.
The proposal would save the government 6.2 billion dinars ($20.5 billion) over the next three years, Hamada said, estimating that without reforms, Kuwait would spend 16 billion dinars on subsidies over three years.
Saudi tax policy is also expected to influence the Gulf, because of the close ties between the region’s economies.
In its budget announcement, the Saudi Finance Ministry said it planned to introduce value-added tax in coordination with other countries in the region — a measure that would directly affect the spending power of ordinary consumers, even if it is mitigated by exemptions for items such as food.
Officials have said countries would need to introduce the tax jointly to avoid smuggling and loss of economic competitiveness, but Gulf governments have been discussing the idea inconclusively for years.
Previously, the main impetus for the tax came from the UAE; Saudi Arabia’s decision to endorse it publicly means the project looks likely to go ahead in the next few years.