Dubai: Oil prices have improved in recent months following the Opec production cut deal, through it still hovers below the budget break even oil prices in most countries. Despite some signs of recovery it is unlikely to derail both the fiscal and structural reforms that have been initiated by regional governments; said Mark A. Weinberger, Global Chairman and CEO, EY (formerly Ernst & Young).
“A low-oil-price environment will always be a catalyst for change. We’ve seen it before in the late 1990s when the fiscal situation was getting so urgent that Gulf countries were beginning to enact serious economic reforms, only for the urgency to reduce once a second oil boom got underway in the mid-2000s. That’s not to say progress wasn’t made — only that things didn’t move as fast as it appeared they first might. But there’s a real appetite for change now,” said Weinberger.
Rather than the urgent need to avert a crisis, he sees a clear a shift in mindset across the region that comes with a genuine and deeper desire to move away from oil-price driven boom and bust cycles.
There is already a view among some economists that reform fatigue is slowly setting in at least in a few GCC economies, as public resentment and growth impact are affecting the common people. “An important way to address public scepticism, or reform fatigue, is through greater transparency and accountability. It’s important to show people how that money is being reinvested to improve things such as education, health and infrastructure,” he said.
Sustainable
Growth ultimately is the measure that will help to address scepticism. Thus it helps to introduce tax and subsidy reforms as part of a broader package. “If government can remove any existing obstacles to make it easier for people to start businesses, and foreign companies to bring in capital and expertise to be an enabler of business, this will help to increase economic growth,” said Weinberger.
Although taxes, like other forms of fiscal reforms, such as subsidy cuts and salary cuts and lower government spending, are likely to impact growth in terms of higher costs from the supply side and contraction in consumption from the demand side, Weinberger said one has to look at what’s sustainable in the longer term and see these reforms as part of a package that will help GCC economies rebalance, diversify, and become more globally competitive.
“As taxes are reinvested into the economy, it’s likely demand will rebalance as increased government spending spurs growth. What’s key is that governments use those revenues to enable new sectors and services rather than operate them,” he said.
Indirect taxes
Although there are similarities in the introduction VAT in the GCC with emerging markets like China, India and Malaysia, who are all introducing their own national-level VATs, the big difference is that these countries already had indirect taxes in various forms on either specific business sectors or on a state-by-state basis.
“The GCC is implementing VAT with no prior sales or consumer-based tax regime. So the challenges are understandably greater — both in terms of taxpayers adjusting to price impacts, and also for companies dealing with implementation. Communication, support and guidance for taxpayers and tax administrators alike will be key to its success,” said Weinberger.
