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What challenges face Saudi’s biggest budget to date in 2018?

There is no doubt that Saudi is onto a big agenda for 2018, having announced the largest budget in the history of the kingdom, but a closer look at this reveals that some unresolved issues need to be addressed.

Following the crash of oil prices from $100 in 2014, the kingdom implemented austerity measures that began with slowing down or completely annulling mega projects that did not directly affect citizens’ earning potentials and living standards.

Government ministries cut spending on contracts by 5% in 2016, but 2017 growth was stagnant with IMF predicting it around 1%, but end year results showed a 0.5% contraction, meaning a recession.

A push is needed, so what did King Salman say in announcing the new budget?

Read: Saudi budget 2017: The numbers and what they mean

Ambitious steps forward

According to the Saudi gazette, Saudi King Salman said that a dozen programs have been launched to realize the goals of Vision 2030 in diversifying the economic base and empowering the private sector to play a major role with sustaining expenditure efficiency.

“All these are aimed at realizing appropriate economic growth rates, mitigating the burden on citizens and tackle possible impacts, in addition to supporting the private sector.”

The King said that the 2017 budget deficit was 25% less compared to 2016, despite an increase in expenditure, and added a target to decrease the 2018 deficit further to less than 8% of GDP, while keeping Saudi debt to GDP below 30%.

“We have directed ministers and all officials to raise the level of performance, as well as to improve government services and enhance the efficiency of expenditure and transparency to meet the aspirations and realize satisfaction of the citizens in the services provided to them,” the King said.

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The 2018 budget in numbers

The announced Saudi budget is $261 billion, higher than the country’s 2017 budget of $250bn, and forecasts revenues of $209bn, aiming to increase these gradually and balance the budget in 6 years or by 2023.

Saudi expects revenues to total $222bn, meaning a deficit of nearly $40bn.

A spending increase will not prevent the government from going ahead with gasoline price increases, set rise by 80% in January 2018, according to Reuters.

Also, Saudi Arabia, which began collecting Excise tax this year, will in January collect a 5% VAT where it expects to generate revenues of some $23bn, according to the Saudi Gazette.

Reuters said there are also additional fees on expats working in the kingdom and potential additional costs imposed on foreign businesses. “However, new taxes and fees are not likely to increase revenue so much without also stalling economic growth or worse,” said Reuters.

In 2017, the kingdom’s non-oil sector grew by 1.5% and the kingdom has recently pledged a $19.2bn stimulus package to support the non-oil economy including subsidised loans for home buyers and developers, fee waivers for small businesses, and other stimulus initiatives.

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Challenges faced

According to the Financial Times (FT), the International Monetary Fund urged the government to scale back the pace of austerity measures to boost growth.

It said the Saudi finance ministry forecasted growth would bounce back to 2.7 per cent next year.

“The government has decided that now it can spend more while keeping the deficit within the targeted limit and that it can achieve more non-oil revenue,” Mohammed al-Jadaan, the finance minister, told reporters.

“That’s why balancing the budget has been postponed to 2023. We are not in a hurry.”

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FT said the government plans to spend an additional 83bn riyals ($22.7bn) from the Public Investment Fund (PIF) and 50bn riyals ($13.6bn) from other state agencies, bringing total expenditure to more than 1tn riyals ($273bn)  in 2018.

“The kingdom expects non-oil GDP growth to be 3.7% next year, which may be more aspirational than realistic,” said Reuters.

The news agency said that the kingdom may have $48bn in foreign reserves to spend in 2018.

Saudi foreign reserves shrank from a record high of $737bn in August 2014 to $529 bn at the end of 2016 as the government liquidated some assets to cover the huge budget deficit caused by the fall in oil prices, according to Reuters, in addition to having to seek billions in local lending and international debt issuances.

“Despite the giveaways this year, there will be little room for the government to provide significant support to the economy over the next five years,” Reuters reported Capital Economics as saying.

“Unless oil prices rise significantly rise, further fiscal consolidation measures will still be needed if the authorities want to hit their target.”