assessments

A Spending Spree as a Means of Fulfilling the Saudi Vision

9 MINS READJan 4, 2018 | 08:00 GMT
Saudi Finance Minister Mohammed al-Jadaan (R), Minister of Economy and Planning Mohammed al-Tuwaijri (C) and Saudi Arabian Monetary Agency Governor Ahmed al- Khulaifi (L) announce the state budget for 2018 on Dec. 19, 2017.
(FAYEZ NURELDINE/AFP/Getty Images)

Saudi Finance Minister Mohammed al-Jadaan (R), Minister of Economy and Planning Mohammed al-Tuwaijri (C) and Saudi Arabian Monetary Agency (SAMA) Governor Ahmed al- Khulaifi (L) take part in a press conference during which officials announced the state budget for 2018, in Riyadh, on December 19, 2017.

Highlights
  • Saudi Arabia's 2018 budget calls for spending a record amount of money, and based on precedent, actual spending will likely eclipse that figure.
  • About 20 percent of the budget is devoted to military spending, but it also includes a substantial increase in spending on programs benefiting the populace.
  • The careful introduction of new tax measures and a levy on expatriate workers are part of the government's unprecedented push to expand non-oil revenue.

 

Saudi Arabia laid out the biggest spending plan in the kingdom's history in absolute terms when the government published its 2018 budget in late December. After two years of austerity measures and budget deficits following the oil price dive in 2014, the sizable amount of slated expenditures for this year could seem counterintuitive. Yet the amount of planned spending fits with the current turning point for the Saudi economy, which ranks as the world's 20th largest in terms of gross domestic product, and meshes with plans laid out by Crown Prince Mohammed bin Salman for the country's long-term economic future. But the budget also extends state support to Saudi citizens even though weaning its citizenry from their reliance on subsidies is a long-term reform goal. Moreover, to pay for its spending plan, the government is counting on untested new revenue sources, including newly instated taxes.

A Familiar Spending Strategy

The 2018 budget follows familiar patterns of heavy state-backed development, which has been the story of Saudi Arabia's economic growth since the 1950s. As in the past, the 2018 plan calls for high government expenditures relative to GDP, with a total projected outlay of 978 billion riyals ($261 billion). And if the usual practice holds, actual expenditures are guaranteed to eclipse the budgeted amount. The major breakdown of projected spending reveals a pattern that could also have been expected in previous decades. In 1970, the year Saudi Arabia first published a five-year economic development plan and began to take a strategic approach to its budgets, it spent the most on defense, public utilities, education and transportation investments. Similarly, defense spending, at 21 percent of total expenditures, represents the largest slice of the 2018 plan. In addition, the kingdom is increasing the amount of money spent on infrastructure by 86 percent and is boosting the amount devoted to municipal services. Even in the midst of aggressive economic reform, Saudi Arabia is spending big.

Saudi Arabia: Spending Estimates by Sector

The government in Riyadh continues to view its spending as a necessary bridge to keep the economy moving and spur growth until it can lean more on the private sector. While the budget expansion may be expensive today, the state views it as a logical investment in developing the non-oil sectors of its economy with an eye toward culling the budget deficit by 2023. The spending plan relies on the assumption that oil prices will remain stable enough through 2018 to enable the government to funnel oil and non-oil revenue into developing industries such as manufacturing, mining, tourism, finance and technology. Its goal also includes shoring up state-backed enterprises like the postal service, airports and utility companies, all with an eye toward a privatization push beginning over the next year.

An Optimistic Commitment to Reform

Saudi Arabia's willingness to spend big signals optimism that its economic reform efforts so far are working. The kingdom managed to reduce its budget deficit in 2017 to 230 billion riyals (8.9 percent of its 2017 GDP) from the 2016 shortfall of 297 billion riyals, which represented 12.8 percent of GDP. The projected deficit for 2018, 195 million riyals, would represent a further drop. The shrinking deficits help make the goal of erasing budget deficits by 2023 more realistic, though this will, of course, depend on the price of oil. Price increases over the past year and the stability offered by the OPEC production deal helped Saudi oil revenue reach 440 billion riyals in 2017, a trend that Saudi Arabia is confident will continue. Although the goal of its economic reform plan is to decrease the kingdom's dependence on its oil industry, oil revenue will remain a key component of the Saudi economy for many years to come.

Saudi Arabia's Proposed Aggressive Deficit Reduction

Similarly, 2017 achievements with respect to non-oil revenue helps make 2018 goals seem more realistic. In achieving revenue of 256 billion riyals in 2017, Saudi Arabia exceeded its goal for non-oil income by roughly 30 percent. Growth in that area is expected to continue in 2018, with projected non-oil revenue of 291 billion riyals. Even if it doesn't hit that level, continuing growth in non-oil sectors will be crucial for Saudi Arabia to be able to moderate the rate that it must spend its foreign exchange reserves. The initial public offering of Saudi Aramco, expected to occur later this year or in 2019, will be another means by which Saudi Arabia hopes to increase non-oil revenue. The proceeds of the sale are destined to swell the coffers of one of the country's sovereign wealth funds, the Public Investment Fund, eventually enabling it to generate even more non-oil revenue. But significant returns on non-oil investments made by the fund could take years to materialize.

Prioritizing Saudi Citizens

One major way Saudi Arabia hopes that big spending will pay off is in maintaining and deepening the population's trust in the government. Programs benefiting its citizens in 2018 include a 32 billion riyal cash transfer program designed to offset the cost of new taxes for lower- and middle-income families, and a 169 percent increase in spending on economic resources and public programs. Saudi Arabia will carefully communicate to its citizens which austerity measures it will stick with and which will be repealed or adjusted — another familiar aspect of Saudi budgeting. Based on past reactions, government officials are wary of the social unrest that could result from reducing welfare programs too fast, despite their steep price tag.

Saudi leaders are also sensitive to public perception of government spending priorities, especially since the amount it has budgeted for defense in comparison to what it plans to spend on other domestic needs, like education, risks upsetting Saudis. The total bill for the Saudi-led military intervention in Yemen is unknown, but it's part of the reason that Saudi Arabia continues to divert at least a fifth of total government expenditures to the military. As the Yemen conflict gradually grows more unpopular, so too does the likelihood that Saudi citizens will find ways to decry their government's spending plans.

New (and Risky) Measures

An increasing reliance on tax revenue represents an area in which Saudi authorities are breaking from the budgetary norm, presenting the risk that they could be moving too swiftly to achieve their goals. The country will seek to double the amount of non-oil revenue derived from taxes from 97 billion riyals today to 189 billion riyals by 2020. The issue of taxation, however, is so sensitive in Saudi Arabia that the Ministry of Finance has taken care to promise "no new taxes" over the remainder of 2018 beyond those it has already announced. While an income tax isn't part of the plan, a 5 percent value-added tax and new excise taxes took effect Jan. 1. The government's careful approach to the issue stems in part from the fact that the introduction of any new taxes shifts citizens' expectations of their government and introduces the issue of government accountability in a way that Saudi leaders haven't had to deal with before.

It's clear that the government doesn't want to hit its own citizens with too many financial burdens even though it's willing to squeeze expatriates for money.

One other source of new non-oil revenue will come from a levy imposed on Saudi businesses that employ workers from other countries. That income stream is a pillar of what the Saudi government terms "maximizing government revenues." The levy is essentially a monthly tax on businesses that will increase annually. The rates that the businesses will be charged fluctuate depending on the ratio of expatriate employees to Saudi ones and are designed to bring in tens of millions of riyals in revenue in its first year, increasing to hundreds of millions in future years. Beyond revenue, the levy represents an effort to increase employment of Saudis and reduce the country's unemployment rates from 12.6 percent currently to 10.6 percent by 2020. The effort to counter austerity measures with heavy spending only extends to Saudi nationals, not to expatriates. It's clear that the government doesn't want to hit its own citizens with too many financial burdens even though it is willing to squeeze expatriates for money, knowing they have less leverage to demand anything in return from the government. The new levy could backfire if it quickly reduces Saudi businesses' willingness to hire expatriates or stokes expatriate flight from the kingdom. Unless Saudi citizens possess the job skills to replace foreign workers who leave private companies, private sector productivity could drop at companies struggling to balance employment ratios.

Another new and risky aspect of this year's budget is its emphasis on public-private partnerships. Saudi Arabia aims to increase private sector's contribution to the kingdom's GDP from current levels of around 40 percent to 65 percent by 2030. This will require significant cooperation between private sector businesses and the government. The extent to which those businesses will buy into in the government's plan and trust what it's doing is unknown, but cash incentives promised by Riyadh will certainly help persuade them to cooperate. The government, however, has failed to issue clear regulations, instructions or guidelines for exactly how the private sector is expected to use the cash. It hasn't addressed exactly how international investors can participate, either. The uncertainty introduces risk: Because private sector businesses don't know how to move forward, privatization plans are likely to hit snags as companies struggle to adapt.

Between managing domestic, social and political changes and pursuing an aggressive foreign policy, Saudi leaders have their work cut out for them. The country's large economy gives them the ability to pursue so many projects at the same time. Because the kingdom is a mover and shaker in the Middle East, it's critical to follow where its economy succeeds, and where it falters. An examination of the spending laid out in its 2018 budget shows that although Saudi Arabia is making progress toward shifting the onus of its economy to the private sector, the state is still the primary engine of growth and will remain so for a long time to come.

Article Search

Copyright © Stratfor Enterprises, LLC. All rights reserved.

Stratfor Worldview

OUR COMMITMENT

To empower members to confidently understand and navigate a continuously changing and complex global environment.

GET THE MOBILE APPGoogle Play