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VAT, higher crude may boost GCC states' public spendings

Higher oil prices and surge in non-oil revenue following the introduction of tax reforms are prompting Gulf economies to ponder a shift away from austerity, economists and analysts said.
On top of the increased oil revenues, the introduction of five per cent value-added tax (VAT) by two GCC countries, Saudi Arabia and the UAE, from January is expected to drastically boost the government revenues, analysts said.
While the UAE is expected to raise around $3.3 billion from VAT, which was rolled out from January 1, 2018, Saudi Arabia, which unveiled the biggest budget in its history, plans to spend $261 billion this fiscal year as the government forecasts a boost in revenue from VAT. As part of economic diversification efforts, the kingdom is broadening its investment base and boosting other non-oil income.
Two months before the introduction of VAT, Saudi Arabia and the UAE imposed a 100 per cent tax on tobacco products and energy drinks, and a 50 per cent tax on soft drinks.
The price oil of a barrel of Brent crude hit $69.37 in January, the highest amount since December 2014. In the GCC, which accounts for a major share of the global crude supply, the impact of higher oil prices has been reflected through higher spending plans being unveiled by some governments.
Earlier last month, Saudi Arabia announced a raft of bonuses for public sector workers, while Bahrain's government has put any further austerity measures on hold.
For 2018, most GCC countries announced their largest ever budgeted spending for despite oil price still faring way below the booming year averages. "Governments shifted their strategy to expansionary budgets after exercising belt tightening in last couple of year, said Hettish Karmani, head of Research at U Capital.
"With almost all countries (excluding Bahrain) announcing the budgets, overall budgeted spending of the GCC stands at $430 billion compared to $411 billion in 2017, growth of seven. Revenue budgeted stands at $345 billion versus $311 billion in 2017, up by 11 per cent. Growth in revenue has been largely because of higher oil price estimated this year compared to 2017. In 2018, oil price assumed by most of the countries stand at $50/bbl.
Despite expansionary budgets, deficit is expected to drop by 6.6 per cent to $84 billion. Deficit to nominal GDP of GCC is expected to drop to 5.6 per cent compared to 6.4 per cent in 2017.
"To a degree, this is justified. After all, if prices remain at their current level of $70 throughout this year, we estimate that this will provide a $100 billion, equivalent to five per cent of GDP, fillip to the GCC's oil export revenues and a 4.5 per cent of GDP boost to budget revenues compared with 2017," said Jason Tuvey, Middle East Economist at Capital Economics.
Tuvey argued that as a result of the price surge, budget and current account shortfalls will narrow - most countries would return to posting twin surpluses.
"Even if oil prices fall back, as we expect, balance sheets will still be stronger than they were last year. Higher oil prices aren't good news for all of the Middle East and North Africa though. In particular, fragile balance of payments positions in the region's oil-importing economies will come under renewed pressure. Tunisia is one of the most vulnerable economies on this front and these pressures come at the same time that the country is facing a renewed bout of social unrest," said Tuvey.
The VAT introduction was in line with the recommendation of the International Monetary Fund to Gulf oil-exporting countries to introduce taxes as one way to raise non-oil revenue. The IMF also recommends Gulf countries to introduce or expand taxes on business profits.
In 2017, to cope with 2016's budget deficit of $97 billion Saudi Arabia, the world's biggest oil exporter and the largest economy in the Arab region, froze major building projects, cut cabinet ministers' salaries and imposed a wage freeze on civil servants. It also made unprecedented cuts to fuel and utilities subsidies. It aims to balance its budget by 2020.
Capital Economics said in its report that preliminary estimates show that Saudi Arabia's economy contracted last year for the first time since the global financial crisis. The weakness was concentrated in the oil sector, which more than offset a recovery in the rest of the economy.
Oil output cuts also weighed on the UAE's economy last year and the latest signs suggest that the non-oil economy lost a bit of momentum in the final months of 2017, the report said.
However, after outpacing the rest of the GCC in economic growth in 2017, the UAE is set to almost double its expansion rate in 2018, the latest report by a panel of economists reveals. The joint report by the Institute of Chartered Accountants in England and Wales (ICAEW) and Oxford Economics says that the UAE will record an accelerated growth in 2018 to 3.6 per cent from 1.7 per cent in 2017. The momentum will further gain pace in 2019 to post 3.6 per cent growth.
- issacjohn@khaleejtimes.com