The Saudi reel of the austerity campaign after the oil-rich ‘magic decade’

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The shock movement underscores Crown Prince Mohammed bin Salman’s risky strategy to further erode a once-generous welfare system, leaving the majority young population to cope with a new reality of reduced incomes, fewer jobs and a degradation of lifestyle.

The shifting fortune could fuel public resentment and create tension in a decades-old social contract whereby citizens were lavished with tax-free subsidies and pamphlets in exchange for loyalty to the absolute monarchy.

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For Abdullah, a father of three 40-year-olds, 5% VAT introduced in 2018 and the phasing out of a long-standing government policy to offer interest-free home loans, among several reduced subsidies in recent years, was bad enough.

Struggling with a stagnation in the government salary, Abdullah took part-time concerts, including plumbing services and a job for a transport application while taking out a second mortgage to build a house on the outskirts of Riyadh.

Now, a triple VAT hike, which would raise the cost of all construction supplies, from cement to bricks and rebar, has further delayed it.

“The expensive building material has become more expensive with triple VAT,” said Abdullah, who is now unsure if his house will ever be built.

He requested that his real name be hidden for fear of government retaliation.

Few Saudis are likely to speak openly amid growing nationalism and strident crackdown on dissent.

“MAGIC DECADE”

But many citizens are homesick for what Saudi expert Karen Young calls the “magic decade” between 2003 and 2014, when the kingdom amassed spectacular oil wealth that funded a generous welfare state.

Reducing the state’s bounty is likely to reduce consumption, as companies predict depressed sales of everything from cars to cosmetics and appliances.

“For the average Saudi household, the cost of living increased much more. The spillover effects … (will hurt) private sector business growth,” said Young, an academic at the American Enterprise Institute.

“VAT increases household spending: from food to housing, water, electricity, restaurant bills, transportation, education, health.”

The kingdom also runs the risk of becoming less competitive compared to other Gulf states that introduced VAT at the same time, but have so far refrained from increasing it by more than five percent.

Saudi Arabia, however, has limited options, as state finances are affected by falling oil revenues and the coronavirus crisis, which has virtually closed the local economy.

State-owned oil giant Aramco, Saudi Arabia’s revenue source, recorded a 25 percent drop in profits during the first quarter, and the rest of 2020 could be even bleaker.

The $ 27 billion austerity measures will only partially curb a huge budget deficit, which is expected to rise to a record $ 112 billion this year.

But the government is careful not to cut public jobs and wages amid already high youth unemployment.

Almost two-thirds of all Saudis are employed by the government, and the public sector wage bill represents about half of all government spending.

“SHOPPING”

While it has reduced the “cost of living” allocation for state employees, the government is preserving another monthly brochure known as the “Citizen Account,” which benefits about 12 million Saudis and costs billions of dollars annually.

“Reducing subsidies as people recover from economic pain is a risky move,” said Quentin de Pimodan of the Research Institute for European and American Studies.

“To avoid a backlash, Saudi Arabia is cutting one subsidy but preserving the other even though it cannot pay it either.”

The pro-Okaz newspaper said the austerity measures include a $ 8 billion cut to “Vision 2030,” Prince Mohammed’s ambitious plan to alienate the oil economy.

But it is unclear whether that will include his dream project, the $ 500 billion NEOM megacity on the kingdom’s west coast.

The austerity campaign has led some, like Abdullah, to question the government’s generous spending on entertainment and sports extravagances, part of a slow but costly economic diversification.

Also under the scanner is the recent wave of reported spending from the Saudi Arabian Public Investment Fund.

That includes a $ 372 million proposal for Newcastle United football club, a $ 775 million stake in cruise ship operator Carnival and a $ 450 million investment in event promoter at Hollywood Live Nation.

PIF did not respond to requests for comment.

“Buying distressed assets at bargain prices could make some strategic sense for PIF,” de Pimodan said.

“But in times of painful cuts at home, they would be inclined to keep their purchases discreet.”