Last Sunday, Bahrain pushed a zero-deficit target back by two years to 2024 from 2022 and increased value-added tax to 10% from 5%.
A government statement said the updated fiscal balance program also included reducing expenditure and project spend, and streamlining the distribution of cash subsidies to citizens.
Kuwait, Saudi, and the UAE, which in 2018 extended a $10 billion aid package to Bahrain, last month reiterated support for Manama’s budget plans.
Bahrain’s public debt climbed to 133% of GDP last year from 102% in 2019, and its economy is estimated to have shrunk by 5.4% last year, the International Monetary Fund (IMF) said.
The government also announced a strategic projects plan that would catalyze over $30 bn of investments and a regulatory reform package aimed at supporting $2.5 bn of foreign direct investment by 2023.
The country aims to support annual growth of 5% in the non-oil sector by 2022 (3.9% in 2021), it added and planned labor market reforms that would help create 20,000 jobs for Bahraini citizens.
Bahrain also aims to train 10,000 citizens through its Tamkeen program.
“The swift healthcare and economic action taken by the government throughout COVID-19 secured the foundations of recovery, as evidenced by the real year-on-year growth of 5.7% in the second quarter of this year,” said Sheikh Salman bin Khalifa Al Khalifa, Bahrain’s Minister of Finance and National Economy.
Bahrain is expected to expand its economy by 3.3% this year owing to its quick policy response to minimize the effects of the pandemic, according to the IMF.
Bahrain is also taking steps to simplify the process of business licensing approvals and will roll out an online portal that details investment opportunities within the kingdom.
It will also launch a residency program to attract talent but did not provide details of this.
How VAT plays out in the Gulf
Saudi tripled its VAT to 15% last year while the UAE and Oman imposed a 5% VAT under a common 2018 framework by the GCC. Kuwait and Qatar have yet to implement the tax. Bahrain just doubled it.
Excise duties on harmful goods like cigarettes are applied everywhere except Kuwait.
The tripling of VAT in Saudi Arabia in July 2020 and the launch of VAT in Oman in April should see the take double again to about $47 billion in 2021, nearly half of all GCC taxation.
Consulting giant PricewaterhouseCoopers (PwC) noted recently that “…there are risks that the increasing cost and complexity of taxes could weigh on local businesses, particularly during… recovery from the pandemic.”
VAT and excise tax accounted for more than a quarter of total tax revenues at $24 billion in 2019. In Saudi, expat levies phased in since 2017 raised around $15 billion in 2019.
A rise in VAT would improve a government’s finances and allow them either to borrow less or perhaps spend more on improving public services.
But, an add-on VAT would be shifted forward to consumers through higher consumer prices. Fortunately, most VAT laws in the Gulf region provide for a broad scope of products that are basic necessities such as certain food items, medicines, rental of residential properties, healthcare, education, and local transportation.
General consumption taxes like VAT do not affect people’s decisions about whether or not to work, while a progressive income tax system makes people reluctant to work since a higher tax rate will be imposed when people work harder and earn more.
While temporarily impacting consumption trends, in the long run, VAT introductions and increases reduce the economy’s budget deficit and allow the government to use the additional revenue to stimulate the economy where deemed necessary, helping citizens and residents alike improve living standards.