Prince Mohammed bin Salman in Jeddah, Saudi Arabia on September 18, 2019. [State Department photo by Ron Przysucha]
Will Saudi Arabia cut funding to MbS’s costly misadventures?

When finance ministers from countries that make up the Gulf Cooperation Council (GCC) agreed a region-wide value-added tax (VAT) of 5 percent in June 2016, they reassured wary citizens that the once-unthinkable introduction of taxation would help safeguard the long-term stability of Gulf states in the wake of the 2014 oil crash, which saw prices drop from above $100 per barrel to below $30.

The VAT was one element of a larger fiscal reform package that included reductions in fuel, water, and other subsidies, privatization of state assets, and cuts to government jobs and benefits. By enacting relatively modest if still unwelcome economic changes today, the logic went, Gulf citizens could preserve the larger rentier welfare model that has sustained them for generations.

The public messaging campaign surrounding the VAT and wider reform agenda was by all measures a success. Despite some popular pushback in Bahrain and Kuwait, the region did not see sustained political mobilizations against the new policies. Yet many Gulf citizens and residents, particularly those of less wealthy GCC countries, were left to wonder whether this initial round of austerity would prove only the first step down a slippery slope ending in a more fundamental dismantling of the generous Gulf welfare system.

Saudi Arabia’s announcement this week that it would triple the VAT to 15 percent, and also cut citizens’ cost-of-living allowance, may be a signal that the slope is already giving way. The decision comes a week after the kingdom’s finance minister warned in unusually bleak terms of “painful” government spending cuts needed to balance a Saudi budget busted by a self-inflicted oil war with Russia, a never-ending actual war in Yemen, and the effects of the global economic shutdown over COVID-19.

The news is not all bad for Saudi Arabia, however. Recent research by myself and colleagues reveals that Gulf citizens are unexpectedly open to the VAT, and to taxation generally, as a means of balancing the state budget. When asked in a survey experiment to choose between competing fiscal policies, Gulf respondents were far more likely to select a VAT than cuts to government jobs, benefits, or even free water and electricity. This implies that Gulf citizens are not opposed in principle to taxes, despite the common refrain that a lack of taxation is an essential pillar of the Gulf social contract.

Moreover, the study finds that it is wealthier rather than poorer citizens who are most supportive of the VAT as a fiscal austerity measure. This may be because the VAT is a generally regressive tax that disproportionately impacts poorer people. Alternatively, wealthier Gulf citizens may tend to prefer a VAT because they are more confident in their ability to recoup their lost tax income via privileged access to the channels of economic distribution.

Whatever the explanation, the finding suggests that less wealthy citizens and Gulf publics may be especially supportive of a progressive, income-based tax in which wealthier individuals would bear a greater burden. Improved overall transparency in state spending, or an explicit mechanism for citizen oversight of tax revenue (separate from resource revenue), would likely bolster public support for taxation across the board.

Other results should invite more worry from Saudi decision-makers. Indeed, the most consistent finding observed throughout our study is that perceptions of economic inequality are the driving force behind Gulf citizens’ fiscal reform preferences. Opinion data show that citizens are highly attuned and highly averse to unsupervised state spending, especially spending on foreign policy and investments that are not perceived to be of direct public benefit, at a time when the government is demanding economic sacrifices of ordinary people.

Yet unchecked, wasteful foreign spending has been a hallmark of the initiatives spearheaded by de facto Saudi ruler Mohammad bin Salman (MbS) since his ascension to power in 2015. The string of ill-fated and highly costly decisions includes the disastrous Yemen war, a needless ongoing economic embargo of Qatar, loss-making speculative investments via a personally controlled sovereign wealth fund, and most recently a 10-day oil price war with Russia that tanked oil markets to levels not seen in two decades. Other massive financial outflows from Saudi Arabia have gone to support parties in external political conflicts — in Syria, in Egypt, in Lebanon, and now in Libya.

The Yemen war alone was estimated two years ago to have cost the Saudi state some $100 billion, bleeding the kingdom financially at a rate of $5-6 billion per month. This puts the current total estimated cost of the long-stalemated conflict at more than $200 billion.

Data compiled by the authoritative Stockholm International Peace Research Institute put overall Saudi military spending from 2015 to 2019 at $364 billion. This makes Saudi Arabia the world’s largest military spender over this period in relative terms, with military expenditure accounting for more than 10 percent of GDP and a staggering 27 percent of all government spending. By comparison, the country’s projected 2020 budget deficit, which Saudi leaders say demands “painful” new economic concessions from citizens, is $61 billion.

Thus, as ordinary Saudis come under renewed pressure to forgo customary welfare benefits for the greater good of the kingdom, one wonders whether members of society, or the House of Sa‘ud, might begin to ask for cuts to MbS’s seemingly unlimited budget.

The trouble for Saudi Arabia is that winding down its various foreign entanglements raises a political Catch-22. As Saudi scholar Madawi Al-Rasheed and others have persuasively argued, since the popular Arab uprisings of 2011 the Saudi state has cultivated and relied on popular legitimacy from its claimed protection of citizens from internal enemies with external sponsors. These Saudi fifth columnists were, first, Shi‘a citizens who organized anti-government protests in the early days of the Arab Spring, with ostensible support from a belligerent Iran; and, later, members of the now-outlawed Muslim Brotherhood movement with purported links to regional rival Qatar.

MbS’s foreign adventures are directly tied to these narratives: the former to Saudi involvement in Yemen, Syria, and Lebanon; and the latter to the Qatar embargo and Saudi patronage of anti-Qatar/anti-Muslim Brotherhood factions in Egypt and Libya. Exiting these political and military theaters would certainly free up cash and perhaps obviate the need for deeper welfare cuts, thereby buoying (or preserving) popular support based on economic provision. On the other hand, a shift away from the hyper-nationalistic war footing that Saudi Arabia has maintained since the Arab Spring and especially under MbS, would undermine a decade of successful protection-racket politics emphasizing the state’s role in providing security and stability in a region beset by chaos.

If the country no longer needs to devote extraordinary resources to defending Saudis against existential threats at home and abroad, then Saudi Arabia becomes, by regional standards, but an increasingly poor oil exporter that can no longer meet citizens’ economic expectations or, in turn, honor the implicit Gulf social contract of financial patronage in return for political allegiance. And, for MbS and the Saudi ruling family, such a bare image would likely appear far worse than that of a fiscally careless interventionist policy.