Fiscal Reform – Aid or Hindrance: A Computable General Equilibrium (CGE) Analysis for Saudi Arabia

The oil price fell from around $US110 per barrel in 2014 to less than $US50per barrel at the start of 2017. This put enormous pressure on government budgets within the Gulf Cooperation Council (GCC) region, especially the budgets of oil exporting countries. The focus of GCC economic policies quickly shifted to fiscal reform. In this paper we use a dynamic CGE model to investigate the economic impact of introducing a 5 per cent Value Added Tax (VAT and a tax on business profit, with specific reference to the Kingdom of Saudi Arabia (KSA).   Our study shows that although the introduction of new taxes improves government tax revenue, markets are distorted lowering economic efficiency and production due to a tax. In all simulations, real GDP, real investment and capital stock falls in the long-run. This highlights the importance of (1) understanding the potential harm caused to economic efficiency and production due to taxes, and (2) fiscal reform includes both government expenditure reform and identifying non-oil revenue sources. This allows for the design of an optimal tax system that meets all future requirements for each of the individual Gulf States.