Gulf taxation plans will not plug fiscal deficits

Subject

Taxation in the Gulf.

Significance

The emergence of government deficits in the Gulf Cooperation Council (GCC) states in 2015 has led to a surprisingly open debate about fiscal reforms, including subsidy reductions and the introduction of new taxes. While the new willingness to overcome political resistance is positive, spending needs of local governments are huge, and there are structural limits to raising local income without hurting Gulf economies and triggering capital flight.

Impacts

• Unless ever-increasing state employment is rolled back, taxes will only postpone, not prevent fiscal crisis and currency devaluation.
• New revenue raising measures will exhaust some of the political goodwill that GCC leaders still enjoy among citizens.
• Saudi Arabia's target of achieving 530 billion riyals (141 billion dollars) in non-oil revenue by 2020 is unrealistic.
• Subsidy reforms, VAT and general service fees may well be watered down, while new taxes and fees on business are likely to go ahead.
• Too much taxation on business would encourage capital flight.