Saudi Arabia adopts its largest budget yet, continues cost of living allowances

The 2019 annual budget is aimed at boosting spending, viewed as the main driver of growth, even as Saudi Arabia seeks to close its budget deficit.
Wednesday 19/12/2018
People are seen in the Mall of Dhahran, Saudi Arabia, on December 17. (Reuters)
People are seen in the Mall of Dhahran, Saudi Arabia, on December 17. (Reuters)

RIYADH - Despite falling oil prices, Saudi Arabia will continue paying its citizens cost-of-living allowances, Saudi King Salman bin Abdulaziz Al Saud announced during the unveiling of an expansionary budget for 2019 on December 18.

The king issued a decree to dispense monthly allowances for a year to help lower the cost of living until social protection mechanisms are studied, sthe tate-run Saudi Press Agency reported.

The continued cost-of-living allowances, first established in January 2018 and estimated by officials to cost more than $13 billion, are intended to stimulate growth.

The royal allowances of 1,000 riyals a month ($266) are paid to civil servants and military personnel. Other allowances will continue for pensioners and those living on social security. Riyadh will also increase student benefits by 10% for the next fiscal year, the king said.

The slew of government measures will help offset the increases in the cost of energy and electricity prices as well as a 5% value-added tax (VAT) introduced at the start of the year.

In 2018, Saudi Arabia introduced reforms to diversify its income.

The value added tax was part of a reform package aimed at diversifying the kingdom’s economy and came along with a monthly levy on expat workers, plus an excise duty on products such as soft drinks and tobacco. The kingdom also plans to phase out energy subsidies. 

 These measures, however, coincided with the restoration of public sector bonuses and greater support for poorer families, which have helped offset the impact of the new taxes.

The 2019 annual budget, the kingdom’s largest, is aimed at boosting spending, viewed as the main driver of growth, even as Saudi Arabia seeks to close its budget deficit, indicating Riyadh’s priority to spur growth in an economy that has been hurt by lower oil prices.

State spending in 2019 is estimated to reach 1.106 trillion riyals ($295 billion), up 7% from the Finance Ministry’s figure of 1.030 trillion riyals for 2018.

“We are determined to go ahead with economic reform, achieving fiscal discipline, improving transparency and empowering the private sector,” the Saudi king said in a brief statement to the cabinet.

Saudi Crown Prince Mohammed bin Salman bin Abdulaziz, who is behind the Vision 2030 to reform the economy, said the government would continue to “diversify the sources of income and consolidate fiscal sustainability through boosting non-oil revenues.”

Crown Prince Mohammed said non-oil revenues increased from $34 billion in 2014 to $77 billion this year and are estimated to reach $83.5 billion or a third of total revenues. The Finance Ministry said it collected $12 billion from VAT in its first year of introduction.

The International Monetary Fund previously forecast the country’s budget deficit to shrink to less than 2% of gross domestic product (GDP) next year in the event that the allowances were scrapped. The budget deficit for 2019 will now be 4.2% of GDP, according to a government’s statement on December 18.

A pre-budget statement in September, the first of its kind in Saudi Arabia,  committed to both increasing domestic energy prices and boosting spending by more than 7% in 2019 to help stem unemployment and support growth. The pre-budget statement was, however, published when oil was around $80.

The kingdom has run a budget deficit since 2014 as a slump in oil prices lowered state income. Between 2014 and 2018, the accumulated budget deficits hit $313 billion, according to Finance Ministry figures.

A 2018 budget announcement last December predicted this year’s deficit would be 7% of GDP but it is more likely to be around 5%, September’s pre-budget statement revealed, after higher-than-anticipated oil receipts boosted state income. In November, Saudi Arabia’s oil output hit a record high of 11.1 million barrels per day. 

Nevertheless, a renewed downturn in oil prices — Brent crude has dropped from a 4-year closing high of $84.16 on October 5 to $56 on December 18 — plus a larger-than-expected oil production cut agreed by OPEC and its allies this month mean Saudi Arabia will be unlikely to reach its budget deficit target of 4.15% in 2019. Saudi Arabia aims to balance its budget by 2023.