Saudi Arabia puts a tight lid on spending, employee allowances

Saudi Arabia has tripled its VAT (value-added tax) rate and suspended a cost of living allowance for state employees, thus, seeking to shore up finances hit hard by low oil prices and a coronavirus-driven slowdown.

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

In 2018, Saudi Arabia’s King Salman ordered a monthly payment of 1,000 riyals ($267) to every state employee to compensate them for the rising cost of living after the government hiked domestic gas prices and introduced value-added tax. About 1.5 million Saudis are employed in the government sector.

The austerity measures being introduced come after the kingdom posted a $9 billion budget deficit in the first quarter. The finance 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.

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