In The Media

Saudi Arabia's safety-net spending wipes out new tax gains

Written by Staff

Saudi Arabia’s efforts to ease the burden on ordinary citizens from its promised economic overhaul are taking a toll on its balance sheet.

The increase in the kingdom’s spending on wages and social benefits during the first quarter exceeded what it accrued through higher taxes and lower subsidies, driving the deficit higher to 34.3 billion riyals ($9.2 billion), from 26.2 billion riyals a year ago, according to a quarterly Finance Ministry report.

Officials are trying to ease the economy’s addiction to oil exports by finding alternate revenue sources, while shrinking the deficit by reshaping one of the world’s most generous welfare schemes.

The plan is part of Crown Prince Mohammed Bin Salman’s blueprint to prepare his country for a post-oil era, which also includes selling stakes in state-owned companies, including up to 5 percent of oil giant Aramco.

But the government isn’t being as aggressive as some had predicted. In January, it cut energy subsidies and introduced a 5 percent value-added tax.

A few days later, it handed out about 50 billion riyals of new benefits, including cost-of-living allowances for soldiers and civil servants.

The caution is spurring uncertainty about the kingdom’s proposals.

“It remains to be seen whether the rise in wages will be a recurring feature of the budget, or just a one-off event to ease the impact of the reforms on the population,” said Mohamed Abu Basha, head of macro analysis at regional investment bank EFG-Hermes.

Oil is king

Even with the growth in other revenues, oil still made up nearly 70 percent of the kingdom’s income in the first quarter.

The impact of higher oil prices didn’t show in the first quarter because of “a switch to quarterly dividends” but it will figure in later reports, the Finance Ministry said in a statement, without elaborating.

An increase in oil revenue could allow authorities to spend more comfortably on projects to stimulate economic growth. The government – either directly or through its sovereign wealth fund – will be the main driver of investment expansion in 2018, Monica Malik, chief economist at Abu Dhabi Commercial Bank, said in a report.

Private-sector investment will “remain soft with the muted domestic demand and the impact of fiscal reforms” on companies, she said.

The first quarter saw an 11 percent decline in capital spending as it will “take time for the promised capital spending to materialize,” Abu Basha said.

The government also boosted spending on the military and security. A Saudi-led coalition is waging a war in Yemen against the country’s Shiite Houthi rebels, who still hold the capital of Sana’a after more than three years of fighting. The war has plunged Yemen into a humanitarian disaster.

Saudi military spending rose 21 percent in the first quarter compared to the same period last year, while security and regional administration expenditure rose 11 percent.

Health and social development spending more than doubled, while funding for municipal services fell 46 percent and that for education dropped 6 percent.

Original Article