Stimulus to help Saudi households drive growth revival

Last Friday, Saudi Arabia announced details of a new financial package to help citizens cope with the higher price of energy. On the first day of the year, energy prices were significantly raised in an effort to reduce runaway domestic oil consumption and lessen the heavy burden of price supports. While serving as an antidote to the rise in prices for individuals, the package will also stimulate the wider economy and reduce the contractionary effects of the new prices. 
The new package announced on Friday has several components: It provides government employees with additional cost-of-living stipends of about SR1,000 ($267) a month, and $134 to retirees and social welfare recipients. It also includes a 10 percent increase in stipends paid to an estimated 1.75 million university students. 
In a similar step, on Dec. 21, the “Citizens Account” started providing cash support for citizens on limited and middle incomes, enabling them to cope with the introduction of value added tax (VAT) on Jan. 1. According to the 2018 budget statement, more than SR2.5 billion per month or SR32 billion annually (about 1.4 percent of GDP) will be earmarked for the Citizens Account program.
The main purpose of these programs is to help families with limited income cope with higher energy prices and new taxes. Equally important is that they will act as a financial stimulus to counter the effects of reduced disposable income caused by the new price changes. As is well known, when taxes are raised, the disposable income of consumers is reduced, causing a drag on growth, or contraction, reducing consumer multiplier effects. Taxes and increases in energy costs can act as headwinds to consumption and investment growth. As such, the new financial infusions, in addition to the Citizens Account, can offset those effects by providing cash transfers to lower- and middle-income families.
After the introduction of VAT last week and excise taxes in mid-2017, there have been calls for additional taxes, including income and corporate taxes. The calls came out of concerns about equity and fiscal sustainability. However, policymakers should resist such temptations because taxes have an inevitable negative impact on growth. Such effects would be multiplied during recessions, as taxes would be procyclical and could deepen the downturn. 
Timing is a key factor: Taxes are best introduced during upswings to slow down a heated economy, not during recession, when they would make it worse. 
In addition, we should dispose of the myth that Gulf Cooperation Council (GCC) countries are tax-free and, as such, more taxes can be introduced with little negative drag. In fact, long before VAT was introduced, there existed scores of taxes, levies, fees and excises. They include corporate profit taxes (about 20 percent, but up to 85 percent for oil and gas) and property taxes that could reach 2.5 percent of a firm’s net worth. Some of those taxes, imposed a long time ago, are regressive and some are merely “nuisance taxes” that impose a heavy administrative burden without producing much revenue. 
In sum, before thinking about new taxes we should revisit the existing tax system and modernize it. We should also choose the right time to introduce new taxes if they are needed.
As we have seen over the past few weeks, the Saudi government was aware of these limitations and was quick to act to counter the contractionary effects of new taxes and energy prices by introducing generous cash programs, which serve a double purpose — to help families directly and stimulate economic growth in the process.
Another major step to counter the effects of new taxes and higher energy prices was taken on Dec. 19, when Saudi Arabia released an expansionary budget for 2018. While government spending had been cut for three consecutive years (2015-2017), it is set to increase by about 6 percent in 2018. 
The 2018 budget is the largest ever at nearly $296 billion, and includes a stimulus package for both families and the private sector. In addition to the Citizens Account and new cash program, a program worth SR72 billion was announced to stimulate private sector growth as part of a four-year stimulus package. The package includes 16 initiatives directed toward a number of sectors, such as housing, exports and manufacturing. The package includes SR21 billion for residential housing loans, and SR14 billion for efficient building technologies projects. It also includes SR5 billion to stimulate exports and SR2.8 billion for small and medium enterprise venture capital projects.
The expansionary budget, plus the Citizens Account and the cash programs for families and private businesses, are clearly aimed at helping low and middle-income families and businesses cope with the new measures, but also to stimulate the economy. With the new packages, it is expected that the Saudi economy will resume robust positive growth in 2018, after the negative growth of 2017. However, any new taxes could jeopardize those prospects.