Interpreting Middle East Economic News and Analyzing Market Trends

Here’s another sign of the unsustainable welfare system in the GCC

The welfare systems in the GCC are well-known for their generous benefits and subsidies offered to their citizens and expats alike.  In addition to offering a tax-free environment, they offer subsidizes on a wide range of staples including gas and utilities.  For their citizens, they also offer free education through university, free healthcare, subsidized housing (in many cases, free housing or land), a guaranteed public sector job and a generous pension.

 

Citizens of these countries assume this welfare system can go on forever, and expect it to do so.  However, high birth rates over the past few decades are causing severe strain on governments’ budgets.  This cannot go on forever and sooner or later, citizens will have to adjust (it will be painful).  Cracks are already emerging to reveal that this system is unsustainable, albeit small cracks, so governments are working on the painless adjustments first… targeting the expats and having them pay higher rates than citizens.

 

A well-informed government source has revealed that the government may follow the UAE in increasing the fees collected for certain services provided to expatriates. “This can be done through the bill submitted to the parliament for discussion,” the source said, noting that a comprehensive reconsideration of all service fees has to be done.

Further, the source stated that power and water tariffs would be raised in a way that would not affect citizens with limited income. “Only those citizens who are heavy consumers of such services would have to pay for the fee hikes,” the source explained.

Read the article from Kuwait Times.

 

Discussing such topics in Kuwait would have been taboo a few years ago, but as we mentioned in an earlier post here, Kuwait is also looking at implementing a Value Added Tax (VAT).  Such discussion is becoming more common, not only in Kuwait but also across the Gulf.  The UAE in particular was one of the first to implement dual utility rates; one for citizens and one for expats.  Expats in the UAE can expect to pay up to 10 times as much as citizens for water and electricity.  This has worked out well for them since expats are in no place to complain.  Citizens have their utilities subsidized by the expats who outnumber citizens many times over.

 

The UAE, which launch the first toll road in the Middle East in 2007, has also been discussing the implementation of a VAT.  It’s only a matter of time before VAT finds its way to the Gulf.  As for the bloated government budgets, taking away subsidies from expats is the easy first move.  The difficulty comes when subsidies need to be reduced or eliminated for the citizens.  When this will happen is anyone’s guess, but it will happen.