GCC countries must substantially raise non-oil government revenues, according to a new report titled ‘Economic Insight: Middle East Q4 2016’ by from Oxford Economics in association with Institute of Chartered Accountants England and Wales (ICAEW).
The report says that given the weak outlook for oil prices — mainly driven by the uncertainty for the world economy in 2017 — imposing tax measures, along with subsidy reforms, spending cuts, and a freeze on public sector recruitment and pay, will help to close the fiscal gap.
The report warns oil prices will not return close to the US$100 per barrel averaged in 2010–2014. Brent crude is forecast to average $50.3 per barrel in 2017 and remain below US$60 per barrel until 2019.
The Middle-East Q4 2016 report notes that while the Gulf Cooperation Council (GCC) countries can cover the revenue shortfall in the near term by borrowing as well as drawing down sovereign wealth funds and foreign exchange reserves, they will not be able to do so in the long term without raising taxes.
The projected 2016 breakeven prices at which oil must sell in order to balance the budget put Qatar and UAE in the most preferable position at $44 and $57 per barrel respectively, followed by Kuwait at $60 and KSA at $77 . Oman and Bahrain are under the greatest pressure with breakeven prices at $104 and $97 per barrel respectively.
The need to significantly increase non-oil government revenues to maintain financial steadiness is clear. A GCC-wide VAT of 5 percent is already due to be implemented in 2018 and IMF estimates suggest this could raise GDP as much as 1.5 – 2 percent across the region. While this presents a start to addressing deficits, it also contributes to a rise in cost of living, which in turn could raise wage demands and thereby undermine organizations’ competitiveness.
Other possible tax measures include the broader application of corporation or profits tax, or personal income tax, the latter of which is typically the major contributor to government revenues in high-income economies. However, since social security systems treat nationals and non-nationals differently, it seems unlikely in the near term that personal income tax would be applied unilaterally.
Meanwhile, the report cautions that businesses in the GCC need to brace themselves for a long-term effort by governments to close fiscal deficits and raise much more substantial revenues from the non-oil economy. In addition, they can expect the implementation of other offsetting populist policies like the drive to increase the national share of the workforce, especially in the private sector.
Pressure on oil prices is also a key worry for business from the perspective of exchange rate stability. Beyond Kuwait which manages its rate against a basket of other currencies, all GCC economies operate a pegged exchange rate regime. While across the GCC weaker exchange rates look to be a necessary part of any longer-term plan for diversification, any depreciation will have a short-to-medium term impact on business costs, output prices, and ultimately household spending power.
According to the report, the GDP in GCC+5 (Egypt, Iran, Iraq, Jordan and Lebanon) is expected to grow 2.6percent in 2016, improving very modestly to 2.7 percent in 2017 due to weak oil prices and associated fiscal consolidation programs.
Government investment, continued employment growth and subsidy cuts should see overall GDP in Kuwait to grow by 2.8 percent in 2016 says the report. This compares with Bahrain’s 2.9 percent GDP growth in 2016, Oman’s 2.3 percent, Qatar’s 2.6 percent, 1.2 percent in Saudi Arabia and 2.3 percent in UAE.