Riyadh puts brakes on austerity as it unveils largest-ever government budget

December 24, 2017
Saudi Finance Minister Mohammed al-Jadaan takes part in a news conference during which officials announced the state budget for 2018 in Riyadh, on December 19. (AFP)

Washington - The Saudi government un­veiled a record-breaking budget for 2018, signal­ling its intention to boost spending to resuscitate an anaemic economy and putting the brakes for the time being on eco­nomic reforms that could further hit Saudi citizens in their pocketbooks. Riyadh is heeding advice from the International Monetary Fund (IMF) by delaying balancing its budget until 2023.

In its 2018 budget, the govern­ment of Saudi King Salman bin Abdulaziz Al Saud announced its largest level of annual spending ever — $261 billion — up from $247 billion in 2017. Another $30 billion of spending is to come from the kingdom’s sovereign wealth fund and national development fund, for total expected expenditures of more than $290 billion.

Much of the budgeted spending reportedly will go towards infra­structure projects to benefit private companies. The government has budgeted $8.5 billion for a cash-transfer programme to protect mid­dle- and lower-class Saudi families from the effects of increased ener­gy-related prices.

The massive spending is Riyadh’s effort to pull out of the recession it dipped into this year, when the economy contracted 0.5%, as well as to make good on its pledge to di­versify the economy from depend­ency on oil-derived income as part of Crown Prince Mohammed bin Salman bin Abdulaziz’s major fis­cal overhaul programme known as Saudi Vision 2030.

It is a departure from the past two years of austerity budgets the kingdom was forced to implement as it dealt with sustained low oil prices. Riyadh is betting that the large spending focused particularly on the private sector will prompt the Saudi economy to grow 2.7% in 2018.

King Salman’s government an­ticipates a 2018 budget deficit of $52 billion — 7.3% of GDP — with $209 billion expected in revenues. Oil income is predicted to account for $131 billion of state earnings, up from $117 billion in 2017 because of higher oil prices, while the Saudi government anticipates non-oil in­come to rise to $77.6 billion from $68 billion.

Saudi Finance Minister Moham­med al-Jadaan said Riyadh fore­casts its non-oil income to double the 2017 rate by growing “north of 3%,” in 2018. The Saudi budget deficit in 2017 totalled $61 billion — 8.9% of GDP — up from a forecasted deficit of $52.8 billion.

Over the past several years, the Saudi government has been test­ing the temperature of its citizenry for accepting austerity measures that have included reduced energy-related subsidies and benefits and new taxes. In April, facing a public backlash, the Saudi monarch re­stored allowances and bonuses for state employees that had been cut the previous September. Similarly, the Saudi public protested huge increases in water bills that took ef­fect in late 2015, resulting in the fir­ing of the minister of electricity and water in April 2016 and improved water pricing.

Other measures, including in­creased petrol and electricity prices, have stuck. The once un­heard-of idea of taxes is also no longer just a consideration. In June, for example, Saudi Arabia was the first Gulf Cooperation Council country to introduce a “sin” tax, doubling the cost of tobacco and energy drinks and raising the price of soft drinks 50%.

More controversial is the Saudi government’s implementation of the wide-ranging 5% value added tax (VAT) on goods and services that goes into effect January 1 but the government took the time and resources to educate its citizenry on the tax and no one expects a huge outcry when it goes into effect. The Saudi government expects to earn as much as $6 billion from the VAT in 2018.

The “sin” tax and the VAT appear to be the last major austerity moves the Saudi government intends to implement for the time being as it looks towards an expansionary budget with greater spending to stimulate the economy. It is again listening to the IMF, which warned Riyadh that pushing too many eco­nomic reforms too quickly could have a disastrous effect on its econ­omy.

Some observers view 2018 as a make-or-break year for the Saudi Vision 2030 programme, which is still in its infancy and not a lot of substantive successes to show so far. Much is, of course, riding on the highly anticipated initial public of­fering (IPO) of an up to 5% stake in state oil giant Saudi Aramco that the Saudis have insisted will go forward in the latter part of 2018.

The IPO is critical to Vision 2030 as the government is relying on pro­ceeds from the sale to fund strategic investments to build up the king­dom’s private sector and develop new industries in a drive to create non-government jobs and reduce dependency on oil income.