The two official budget announcements of recent days – from Dubai and from Saudi Arabia – are different in size, scope and scale, but they tell us pretty much all there is to know about the differing approaches to running an economy in the Arabian Gulf in the early 21st century.
Dubai has spent the past two decades diversifying from oil dependence. This was an enlightened initiative on the part of the emirate’s rulers, but was also thrust upon it by the very simple fact that Dubai never had that much of the stuff in the first place.
There was enough energy revenue to provide seed capital for the investment in infrastructure and facilities that formed the basis of the emirate’s transition into a trading, commercial and financial hub. To a great extent, Dubai is a model of how the post-oil state will look.
Saudi Arabia, on the other hand, a great deal of the black stuff. For most of the late 20th century, it was the world’s leading producer, with the biggest and most- accessible reserves.
With energy revenue climbing on the back of historically high oil prices, all the country’s governments had to do was sit back and watch the cash flow in. That is what most Saudis did too, with the result that – for all the benefits a large population brings as a spur to diversification – the economy is still overwhelmingly dependent on oil revenue.
The Dubai budget showed government income from oil amounting to 6 per cent last year; Saudis depend on oil exports for 90 per cent of state revenue, and for 40 per cent of the overall GDP.
Inevitably then, the budgets were very different. The word “austerity” is not one often used in the context of Saudi Arabia, but that is how the commentators labelled the kingdom’s plans to deal with the squeeze on its finances from the last year of drastically lower oil revenue.
The forecast deficit this year ballooned to nearly US$100 billion, or 15 per cent of GDP, forcing the government to impose spending cuts across the board.
In particular, the reduction or withdrawal of subsidies to fuel and other essential utilities, and plans – along with neighbouring members of the Gulf Cooperation Council – to introduce a sales tax, will have profound implications for the country, its society and its policies.
Those reductions stand in stark contrast to the few areas where spending has been increased, such as in the military sector and in bonus payments to civil servants.
There are signs that the Saudi energy strategy is beginning to have some effect, with the shale industry in the United States suffering, but the danger is that the policy of maintaining oil supply in a depressed global market will do more damage to the country’s economic and social fabric before an upturn in oil prices kicks in.
Dubai, on the other hand, is looking relatively comfortable. Sure, the figures are nothing like the same magnitude: the emirate’s total budget for next year – about Dh46bn – is fraction of the Saudi deficit.
But, with the necessary nod towards prudence in a region where lower oil prices have all sorts of consequences for its commercial and financial hub, the story is pretty much “business as usual”. Dubai is on a fast track to the Expo 2020 extravaganza, and cannot let a regional economic downturn stand in its way.
So, instead of Saudi cuts and austerity, Dubai is actually increasing its spending by 12 per cent, and will also turn in a small but respectable surplus on government business over the coming year.
Notably, the two biggest elements in Dubai’s spending plans are in Expo-orientated infrastructure and in the social fabric – education, schools, hospitals and other jobs and facilities for the Emirati population.
Finally, there is the “multiplier” effect of government spending. In Saudi, oil-enforced cuts in government spending will have a serious effect on the non-oil economy, further hampering diversification efforts. In Dubai increased government spending can only help the wider economy through the period of regional slowdown.
Oil-rich Saudi or (virtually) oil-free Dubai? It does not take an economic genius to know which is the better place to be at the moment.
fkane@thenational.ae
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