DUBAI (Reuters) - Saudi Arabia on Monday cancelled and put on hold some operating and capital expenditures for some government agencies, and cut allocations for a number of its Vision 2030 reform with a total value of 100 billion riyals ($26.6 billion).
It also plans to triple its value-added tax rate and suspend a cost of living allowance for state employees, as it seeks to shore up finances hit hard by low oil prices and a coronavirus-driven slowdown.
These are radical measures that underscore the gravity of the challenges facing the Kingdom. The big surprise was the tripling of VAT, which I don’t think was on anyone’s radar. VAT takings were likely to slide sharply this year, given the hit to retail from Covid-19. With the increase in the rate, an annual gain of around 10 billion riyals ($2.7 billion) is in prospect, or a “swing” of around 50 billion riyals.
The removal of the cost of living allowance and, I suspect, annual allowances, will provide a similar boost to government coffers of about 45 billion riyals.
Overall, we now see a government budget deficit this year of around 263 billion riyals or 9.4% of GDP. This is still very large but is a considerable improvement on the 13% of GDP deficit that the government was facing previously.
MOHAMED ABU BASHA, HEAD OF MACROECONOMIC ANALYSIS AT EFG HERMES
These are very bold measures necessitated by the sharp deterioration in the government’s fiscal balances. Ahead of these announcements we were projecting sizable fiscal deficits of 16% and 8% of GDP in this year and next and that’s including spending cuts of at least 11% this year. The size of the deficits definitely required some measures by the government to put the fiscal trajectory on a more sustainable path.
The hike in VAT provides a straightforward way for the government to increase money. It will obviously come at the expense of economic growth, as it will negatively impact consumption, but that’s the tradeoff Saudi has to face these days, like it did back in 2014/15, given the collapse of oil prices
The VAT increase could add about SAR 90-100b of additional non-oil fiscal revenue.
Amid salary cuts and job losses this crushes consumer spending further. But the VAT increase is a necessary step towards fiscal sustainability. The old model of fiscal largesse during downturns is finally exhausting. But that model was not sustainable. There will be other changes eventually, including public sector wages and subsidies. However, measures to mitigate the impact on the poorest citizen households are also likely.
This move should not be that shocking given the Covid-19 and oil crises. Also recall that the IMF advised a doubling of the rate and has warned on the depletion of sovereign wealth because of persistent fiscal deficits.
JOHN SFAKIANAKIS, GULF EXPERT AT THE UNIVERSITY OF CAMBRIDGE
Tripling the VAT will test the limits of the balance between revenues and consumption as the economy dives into a deep recession. The move will impact consumption and could also lower the expected revenues.
These are pro-austerity and pro-revenue moves rather than pro-growth ones.
The reforms are positive from a fiscal side as greater adjustment is essential.
However, the tripling of VAT is unlikely to help that much in 2020 revenue wise with the expected fall in consumption.
($1 = 3.7555 riyals)
Reporting by Davide Barbuscia and Saeed Azhar, editing by Larry King