It’s time for the Gulf to start taxing its citizens, Christine Lagarde told an audience of finance ministers at the Arab Fiscal Forum in Abu Dhabi today.
Calling tax powers “the lifeblood of modern states”, Ms Lagarde called on Gulf states to bring in VAT, place a “greater emphasis” on corporation tax, property tax, and excise duties. The region should also ready itself for personal income taxes, she said.
“Higher government revenues would create much-needed fiscal room for manoeuvre, and allow for more spending on … infrastructure, healthcare and education,” Ms Lagarde said.
Gulf budgets have been hit as oil prices declined from above $110 per barrel in June 2014 to less than $30 per barrel in January this year. This has led to Gulf states, which continue to depend on the sale of oil for a majority of their revenues, running double-digit fiscal deficits. Of the Gulf states, only Kuwait and Qatar ran deficits below 10 per cent of GDP last year.
That has led the IMF to call for Gulf states to increase taxes and cut public spending, as the region struggles to get its finances in order.
“The size and likely persistence of this external shock means that all oil exporters will have to adjust by reducing spending and increasing revenue,” Ms Lagarde said. “Most members of the GCC are in a position where they can pace their adjustment over several years, and therefore limit their impact on growth.”
“It is worth remembering that GCC economies have made large fiscal adjustments in the past – and I am confident that they can do it again,” she said. In the 1980s, a global collapse in oil prices led Gulf states to cut capital spending in a bid to shore up their financial positions.
IMF managing director
Gulf states are in negotiations over the terms of a region-wide introduction of VAT, which a UAE minister said would likely be introduced in “two to three years”. The tax would include exemptions for basic food items, education and healthcare. The UAE would need to introduce new legislation in order to levy the tax, which would not be collected until 18 months after the passage of the new law.
While most analysts agree that the Gulf should proceed with taxes and slowing public spending, a number have previously pointed out that cutting capital spending could hinder the country’s diversification efforts.
“Ideally a country would continue with its capital spending but cut down on its current spending,” Jason Tuvey, emerging markets economist at Capital Economics, said earlier this month. “But the politics of the Gulf are such that it is always the capital spending that gets cut first. It’s much easier to cancel projects than it is to cut the government wage bill.”
“Past policy choices exacerbated the negative shock from oil price falls: lower government spending led to a shrinking of the non-oil sector, compounding the contraction in the oil sector and leading to a fall in overall growth,” Nasser Saidi, Lebanon’s former economy minister, wrote in a recent editorial.
“Instead of a pro-cyclical policy option, GCC countries need to adjust spending programmes gradually and reduce the size of government to the extent that the decline in oil prices is more likely to be permanent.”
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