Why the shock news of austerity in Saudi Arabia should raise questions for us all

Alberto Asquer of SOAS, University of London is lead educator on the free online course Understanding Public Financial Management: How Is Your Money Spent? In this post, he discusses the shock news of financial austerity in Saudi Arabia and why it should raise questions for us all.

New Year’s celebrations somehow always seem to be followed by thoughts of “tightening our belts”. This year was no different, and celebrations had hardly finished when a fairly unusual story hit the international press. The Kingdom of Saudi Arabia announced in its 2016 budget that the country had embarked on a series of austerity measures, introducing a raft of public spending cuts and an increase in utilities prices.

Talk of austerity may be nothing new for many of us here in the UK, but this was certainly disturbing news for Saudi residents more used to  the Kingdom’s more generous fiscal policies of the past. And this news might have attracted little attention outside the country were it not signalling a “new era” of unprecedented low oil prices in the world market.

Why does austerity in Saudi Arabia matter to the rest of us?

Natural resources (such as oil, gas and minerals) provide an important source of revenue for the public sector in many countries. In Saudi Arabia, for example, oil revenues used to account for about three quarters of the state budget – a gracious natural endowment that enabled the country to fund a generous welfare system.

The sharp reduction of oil revenue in 2015, however, resulted in a deficit of about 15.9% of GDP and led the government to reconsider the financial sustainability of established patterns of public expenditures. The 2016 budget has now introduced more stringent controls on public spending and sets the course for attaining medium-term fiscal consolidation in the future.

Governments should not fully rely on a unique revenue source

The state of Saudi Arabia’s finances also suggests that country governments should not fully rely on a unique revenue source. By diversifying revenue sources – for example, through direct taxes, indirect taxes, and user charges and fees for public services – governments can better buffer their financial systems from external shocks such as a fall in the prices of natural resources.

In part, Saudi Arabia had already taken measures to reform the financial management of the public sector – for example, by introducing user charges for some health and educational services. In the future, the country will need to find ways to be less dependent on oil revenues, specifically by stimulating the diversification of the national economy into different sectors.

The news from Saudi Arabia raises questions for us all

The Saudi government is not alone in facing of issues austerity and this news raises questions for us all. How have the challenges of sustainability, diversification and financial reform affected other countries? What do austerity measures really mean for other countries, including your own? Why are austerity measures taken? And how do they affect the management of the public sector?

For the answers to these questions – and to find out how the financial management of the public sector affects us all – join the free online course Understanding Public Financial Management: How is Your Money Spent? now.