Renegotiating the Ruling Bargain: Selling Fiscal Reform in the GCC

Built upon depletable reservoirs of oil and natural gas, the petro-states of the Arab Gulf have, since their beginning, always had one eye fixated on the end: the exhaustion of their life-giving natural resources, and the radical economic and potentially political transformations that promise as a result. For decades, the steady countdown of this doomsday clock has both framed and impelled government efforts to guarantee a more ordered transition to the post-oil era, including via economic diversification, labor market reforms, spending on tertiary education, and investment through sovereign wealth funds. Now, however, depressed oil prices and a changing strategic environment are working to upend this long-term time horizon, and with it the basic economic-cum-political calculus underpinning the Gulf state model. No longer is the task of leaders to shepherd in a viable system for the days after oil, but to sustain the existing rentier system under new fiscal and geopolitical realities. And to that end Gulf rulers have begun to exercise once-unthinkable policy options that could fundamentally alter their relationships with each other, their citizens, and the imported labor upon which their economies depend.

Faced with immense budget shortfalls amounting to between 30% and 80% of total state revenues (see Figure I), all six members of the Gulf Cooperation Council (GCC) have moved to curb public spending while simultaneously exploring untapped sources of income to supplement diminishing resource revenues. Yet, unlike during past periods of austerity born of low oil prices, GCC governments are not targeting cuts to infrastructure and other capital spending.¹ Instead, they are reducing the generous and financially onerous welfare benefits and economic subsidies conferred to citizens as part of the implicit social contract binding subjects and rulers in the Gulf monarchies. In the span of less than a year, the Gulf states have moved to end tens of billions of dollars worth of subsidies on fuel, electricity, water, and even meat and fish, with promises of still more radical changes to come.

In July 2015, the United Arab Emirates became the first GCC state to eliminate transport subsidies when it announced it would link fuel prices to global oil and gas markets in a mere week’s time.² Saudi Arabia, Bahrain, Oman, and Qatar soon followed suit, increasing gasoline prices by 50%, 60%, 25%, and 30%, respectively. (A similar proposal in Kuwait was rejected by parliament.) Despite boasting the world’s highest gross domestic product (GDP) per capita, Qatar also doubled water and electricity prices with no prior notification, and suspended its public health care scheme for citizens.³ In a speech delivered in November 2015, Qatar’s emir, Shaykh Tamim bin Hamad Al Thani, summed up the message delivered almost in unison by Gulf rulers when he declared that citizens could no longer be dependent upon the state “to provide for everything.”⁴

Figure I.

Fiscal Defecit/Surplus of GCC States as a Proportion of Revenues

Source: International Monetary Fund, World Economic Outlook, October 2015; 2015/16 projections for Kuwait, Qatar, and the United Arab Emirates updated with more recent official figures

At the same time that they have moved to reign in state largesse, moreover, Gulf decision-makers have signaled a previously unseen willingness to levy taxes on businesses, foreign workers, and ordinary citizens. In December 2015, GCC finance ministers agreed in principle on a plan to implement a common value-added tax (VAT) within three years. Parliamentarians in both Bahrain and Kuwait have proposed legislation (ultimately rejected in Kuwait) imposing taxes on worker remittances, and the UAE has said publicly that it is also studying the idea. Oman’s advisory Shura Council has approved a 3% hike on corporate profits, and the UAE again is considering a similar increase.⁵ In a January 2016 interview with The Economist, Saudi Arabia’s de facto ruler, Deputy Crown Prince Muhammad bin Salman alluded to “new taxes or fees that are supported by the citizen, including the [pan-GCC] VAT and the sin tax.” Together, these and other initiatives...