Juggling two mortgages and part-time jobs, Saudi Arabian academic Abdullah finally came close to building his own home, but the kingdom’s coronavirus-triggered austerity drive has dealt a crushing blow to his dreams.
Saudi Arabia has announced a tripling of its value-added tax (VAT) from July and halted a monthly allowance to state employees from next month as oil prices collapse, while simultaneously going on a buying spree of overseas assets including an English soccer club.
The shock move underscores Saudi Crown Prince Mohammad bin Salman’s risky strategy to further erode a once-generous welfare system, leaving the mostly young population to cope with a new reality of reduced incomes, fewer jobs and a lifestyle downgrade.
Photo: AFP
The changing fortunes could fuel public resentment and pile strain on a decades-old social contract, whereby citizens were lavished with subsidies and tax-free handouts in exchange for loyalty to the absolute monarchy.
For Abdullah, a 40-year-old father of three, a 5 percent VAT introduced in 2018 and the apparent phasing out of a long-standing government policy to offer interest-free housing loans — among several subsidies whittled away in the past few years — was bad enough.
Struggling with a stagnating government salary, Abdullah took up part-time gigs, including offering plumbing services and working for a ride-hailing app, as he took out a second mortgage to build a home on the outskirts of the capital, Riyadh.
Now, a three-fold VAT increase — which would raise the cost of all construction items, from cement to bricks and rebar — has set him back even further.
“Expensive construction material has become more costly with triple VAT,” said Abdullah, who was uncertain whether his house would ever be built.
He requested his real name be withheld for fear of government retribution.
Few Saudi Arabians are likely to openly speak out amid growing nationalism and a strident crackdown on dissent.
However, many citizens are nostalgic for what Saudi expert Karen Young calls the “magic decade” between 2003 and 2014, when the kingdom accrued spectacular oil wealth that funded a generous welfare state.
Scaling back the state largesse is likely to reduce consumption, with businesses predicting depressed sales of everything — from vehicles to cosmetics and home appliances.
“For the average Saudi household, the cost of living just got a lot higher. The spillover effects will ... [hurt] private-sector business growth,” said Young, an academic at the American Enterprise Institute. “VAT increases household expenditure — from food to housing, water, electricity, restaurant bills, transport, education, health.”
The kingdom also risks becoming less competitive compared with other Persian Gulf states, which introduced VAT at the same time, but have so far refrained from raising it beyond 5 percent.
However, Saudi Arabia has limited options, as state finances are battered by sliding oil revenue as well as the COVID-19 pandemic, which has practically shut down the local economy.
State oil giant Saudi Arabian Oil Co — the kingdom’s cash cow — posted a 25 percent drop in profit for the first quarter and the rest of this year could be even bleaker.
The US$27 billion austerity measures would only partially rein in a yawning budget deficit, forecast to rise to a record US$112 billion this year.
However, the government is careful not to cut public jobs and salaries amid already high youth unemployment.
Nearly two-thirds of all Saudi Arabians are employed by the government, and the public sector wage bill accounts for about half of all government expenditure.
While it has cut the “cost of living” allowance for state employees, the Saudi government is preserving another monthly handout known as “citizen’s account,” which benefits about 12 million Saudis and costs billions of US dollars annually.
“Cutting subsidies as people reel from economic pain is a risky move,” said Quentin de Pimodan, from the Research Institute for European and American Studies. “To avoid a backlash, Saudi is cutting one allowance, but preserving the other even though it can ill-afford either.”
The austerity drive has led some, such as Abdullah, to question the government’s lavish spending on entertainment and sporting extravaganzas, part of a slow, but costly economic diversification.
Also under the scanner is the Saudi Public Investment Fund’s reported spending spree.
That includes a proposed US$372 million for soccer club Newcastle United, a US$775 million stake in the cruise operator Carnival Corp and US$450 million investment in Hollywood events promoter Live Nation.
The fund did not respond to requests for comment.
“Buying distressed assets at bargain prices might make some strategic sense” for the fund, De Pimodan said. “But in times of painful cuts at home they would be inclined to keep their shopping spree discreet.”
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