Saudi triples VAT rate in austerity push to counter oil slump, virus

Economy & Business
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2021-01-27

Saudi Arabia will triple value added tax and suspend a cost of living allowance for state workers, it said on Monday, seeking to shore up finances hit by low oil prices as the coronavirus pandemic pummels global demand for its lifeline export.

Historic oil output cuts agreed by Riyadh and other major producers have given only limited support to prices after they sank on oversupply caused by a war for petroleum market share between the kingdom and its fellow oil titan Russia.

Saudi Arabia, the world’s largest oil exporter, is also being hit hard by measures to fight the new coronavirus, which are likely to curb the pace and scale of economic reforms launched by Crown Prince Mohammed bin Salman.

“The cost of living allowance will be suspended as of June 1, and the value added tax will be increased to 15% from 5% as of July 1,” said Finance Minister Mohammed al-Jadaan.

“These measures are painful but necessary to maintain financial and economic stability over the medium to long term…and to overcome the unprecedented coronavirus crisis with the least damage possible,” he added in a statement.

The minister said non-oil revenues were affected by the suspension and decline in economic activity, while spending had risen due to unplanned strains on the healthcare sector and the initiatives taken to support the economy.

“All these challenges have cut state revenues, pressured public finances to a level that is hard to deal with going forward without affecting the overall economy in the medium to long term, which requires more spending cuts and measures to support non-oil revenues stability,” he added.

In a country without elections and with political legitimacy resting partly on distribution of oil revenue, the ability of citizens to adapt to such reforms is crucial for stability.

“Tripling the VAT will test the limits of the balance between revenues and consumption as the economy dives into a deep recession. The move will impact consumption and could also lower the expected revenues,” said John Sfakianakis, a Gulf expert at the University of Cambridge.

“These are pro-austerity and pro-revenue moves rather than pro-growth ones,” he said.

Today's Vocabulary

1. austerity (n)
the condition of living without unnecessary things and without comfort, with limited money or goods, or a practice, habit, or experience that is typical of this

2. pummels (v)
to hit someone or something repeatedly, especially with your fists (= closed hands)

3. titan (n)
a person who is very important, powerful, strong, big, clever, etc.

4. curb (v) 
to control or limit something that is not wanted

5. recession (n)
a period when the economy of a country is not successful and conditions for business are bad

6. unprecedented (adj.)
never having happened or existed in the past

QUESTIONS
  1. By how many times will Saudi Arabia’s value added tax increase?

  2. Is the world’s largest oil exporter?

  3. Who said consumption would be impacted by the move?

  4. What will be suspended as of June 1 according to the article?

  5. How have Saudi Arabia’s finances been hit by the coronavirus pandemic?
DISCUSSION
  1. How is your country’s economy doing?

  2. What do you think of VAT?

  3. What do governments do with the VAT they collect?

  4. How would a tripling of VAT affect your life?

  5. Are plummeting oil prices a good or bad thing?