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Saudis reel from austerity drive after oil-rich 'magic decade'

Saudi Arabia has announced a tripling of its value added tax from July and halted a monthly allowance to state employees from next month as oil prices collapse
Saudi Arabia has announced a tripling of its value added tax from July and halted a monthly allowance to state employees from next month as oil prices collapse RANIA SANJAR AFP/File
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Riyadh (AFP)

Juggling two mortgages and part-time jobs, Saudi 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 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 football club.

The shock move underscores Crown Prince Mohammed 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.

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 five percent VAT introduced in 2018 and the apparent phasing out of a longstanding government policy to offer interest-free housing loans -- among several subsidies whittled away in recent 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 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 is now uncertain whether his house will ever be built.

He requested his real name be withheld for fear of government retribution.

Few Saudis are likely to openly speak out amid growing nationalism and a strident crackdown on dissent.

- 'Magic decade' -

But 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 cars 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, a scholar 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 to other Gulf states which introduced VAT at the same time but have so far refrained from raising it beyond five percent.

Saudi Arabia, however, has limited options, as state finances are battered by sliding oil revenue as well as the coronavirus crisis, which has practically shut down the local economy.

State oil giant Aramco -- Saudi Arabia's cash cow -- posted a 25 percent drop in profits for the first quarter, and the rest of 2020 could be even bleaker.

The $27-billion austerity measures will only partially rein in a yawning budget deficit, forecast to rise to a record $112 billion this year.

But the government is careful not to cut public jobs and salaries amid already high youth unemployment.

Nearly two-thirds of all Saudis are employed by the government, and the public sector wage bill accounts for roughly half of all government expenditure.

- 'Shopping spree' -

While it has cut the "cost of living" allowance for state employees, the government is preserving another monthly handout known as "Citizen's Account", which benefits around 12 million Saudis and costs billions of 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 pro-government Okaz newspaper said the austerity measures include an $8 billion cut to "Vision 2030", Prince Mohammed's ambitious blueprint to pivot the economy away from oil.

But it remains unclear whether that will include his dream project, the $500 billion NEOM megacity on the kingdom's western coast.

The austerity drive has led some like 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 recent reported spending spree.

That includes a proposed $372 million for football club Newcastle United, a $775 million stake in the cruise operator Carnival and $450 million investment in Hollywood events promoter Live Nation.

The PIF did not respond to requests for comment.

"Buying distressed assets at bargain prices might make some strategic sense for PIF," said de Pimodan.

"But in times of painful cuts at home they would be inclined to keep their shopping spree discreet."

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