Oil prices will not return to their peak level over the next few years so the Gulf Cooperation Council (GCC) countries are likely to take further action, according to a new report.
The “Economic Insight: Middle East Q4 2016”, produced by Oxford Economics, partner and economic forecaster of Institute of Chartered Accountants in England and Wales (ICAEW), warned that Brent crude is expected to average $50.3 per barrel in 2017 and remain below $60 per barrel until 2019, a far cry from the oil boom when prices hit more than $100 and revenues poured into government coffers.
In order to close the huge fiscal gap, the GCC states may need to introduce broader taxes, lower outgoings and freeze the salaries and recruitment in the public sector. The report, however, said it is unlikely that personal income taxes would be applied unilaterally.
“The work of putting public finances on a more sustainable long-term footing has to begin, and is likely to include substantial tax rises as well as subsidy reform, spending cuts and freezes on public sector recruitment and pay,” the report said.
The price of oil has dropped by more than half since 2014. As of Wednesday, 3am (UAE time), oil was trading at $49.71 per barrel. In 2008, oil reached as high as $127 per barrel.
Michael Armstrong, FCA and ICAEW regional director for the Middle East, Africa and South Asia, said that companies in the region must therefore prepare for further government action to raise revenues.
“Businesses in the GCC need to brace themselves for a long-term effort by governments to close fiscal deficits and raise more substantial revenues from the non-oil economy,” said Armstrong.
A region-wide implementation of 5 per cent value-added tax (VAT) is scheduled to take effect from 2018. The move is forecast to raise additional revenues equivalent to as much as 1.5 per cent to 2 per cent of the GDP across the region.
Alp Eke, senior economist at the National Bank of Abu Dhabi, however, said that implementing additional tax reforms isn’t the only solution to fill the revenue gap. “The gap in budget will be financed by multiple measures,” Eke told Gulf News.
He noted that several fiscal measures have already been introduced towards the end of 2015 and during 2016, and as a result, the budget deficit is expected to decline from around 12 per cent of the GDP in 2015 to 8 per cent next year.
“Public spending has been reduced and subsidies have been gradually removed. Other sources of revenues to support the budget will be gradually introduced. Fees for public services were increased, bonds for international market were introduced, plans for privatising government entities (airports, hospitals, Aramco) are announced. A 5 per cent VAT will be introduced in 2018,” Eke pointed out.
“All these measures, especially fiscal consolidation, have improved the situation but still fiscal break-even levels are higher than the year to date average. In 2016, year-to-date Brent average is $45. GCC nations have low debt-to-GDP ratios and comfortable level of foreign asset positions (1.8 times the GDP), but additional measures are necessary.”
The budget deficit this year is expected to be around 10 per cent of the GDP. “In 2017, Brent average is expected to be between $50 and $55 and with more and more measures in effect, the budget deficit is expected to decline to 8 per cent of GDP in 2017,” Eke said.
The report, however, warned that the introduction of VAT could increase the cost of living and fuel higher wage demands. “Moreover, it would clearly impact on consumer spending, particularly in the economies with lower incomes (or more unequal income distribution).
The report suggested, among other things, the “broader application” of corporation or profits tax.
“The highly-regulated nature of several GCC economies means that profits in some sectors are higher than in comparable economies. A broader application of this type of tax is therefore an obvious source of additional government revenue.”