What's going on?
With coronavirus having left Saudi Arabia’s finances looking somewhat disheveled, the country took matters into its own hands by announcing new austerity measures that cut a little close to the skin.
What does this mean?
Saudi Arabia has more than just coronavirus to worry about: the oil price has fallen by more than 50% since March, impacting the income the country makes from the slippery elixir. So it now plans to find an extra $27 billion, and to use it to support healthcare efforts and troubled businesses. Yep, “find” it – in the pockets of its own citizens.
The $266 monthly living allowance for Saudi Arabia’s 1.2 million government workers will be scrapped from June, and the country’s value-added tax will triple from 5% to 15% in July (tweet this). That’ll make buying goods and services more expensive for everyone, but it’ll help line the government’s pockets in the process.
Why should I care?
For markets: A cut below the rest.
The Saudi Arabian stock market fell 3% on Monday, as investors perhaps worried that higher taxes – and the lost income for government workers – would curb consumer spending. And with government spending on major infrastructure also slowing down, industries like the country’s all-important oil sector will probably suffer an earnings hit too. What’s more, some economists have questioned Saudi Arabia’s wisdom in trying to save money when most other governments are decidedly spending their way out of the crisis.
The bigger picture: A cut ahead of the rest.
With some $8 trillion already committed to the coronavirus response globally, Nervous Nellies and Debbie Downers have started to wonder how it’ll all be paid for. And like it or not, Saudi Arabia has offered an answer: governments might find they’re forced to increase taxes and lower their spending to balance their budgets. That’d make times tough for everyone, sure, but it’d be tougher still for those people and businesses who depend on government programs in their day-to-day lives.