LONDON: Higher taxes on savings could help to boost consumer spending and relieve deflationary pressures on the Saudi economy, according to a report from KPMG Al Fozan & Partners.
It is one of the potential measures to spur growth cited in the study which analyzes inflationary trends in the Kingdom dating from 1964 to the present day.
While the introduction of value added tax (VAT) in the Kingdom at the start of 2018 lifted the annual inflation rate to 2.5 percent from minus 0.9 percent the previous year, the effect was only temporary as Saudi consumers spent less to compensate for the added expense on their weekly budgets.
The retreat in consumer spending was mirrored in neighboring UAE, which introduced VAT at the same time. Other Gulf states are also deploying sales taxes for the first time, including Bahrain this year, with Oman expected to follow this year and Kuwait in 2021.
That post-VAT change in Saudi consumption is reflected in the point-of-sale transactions in the Kingdom, which spiked in December 2017 at SR20.2 billion ($5.3 billion), but dropped to SR16.4 billion by January 2018.
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Saudi Arabia introduced value added tax in January 2018.
“As the government gradually moves toward accomplishing its goal of fiscal balance by 2023, increasing capital expenditure, a greater focus on its fiscal policy, Vision 2030 programs andCitizen’s Account Program could help to pull out the Kingdom from the current state of prices deflation and into the usual and healthy levels of inflation,” said Hussain Abusaaq, chief economist and head of research at KPMGAl Fozan & Partners. The International Monetary Fund expects consumer prices to drop to minus 1.1 percent this year before stabilizing at 2.2 percent in 2020.
Increased government spending is helping to raise aggregate demand and boost the economy, KPMG Al Fozan & Partners said.
“Government programs and incentives that encourage an increase in consumption and overall demand could help as well. In addition, new policies could include the implementation of higher taxes on savings, which in turn might lead to an increase in consumption and overall demand,” the report added.
Deflationary pressures are emerging worldwide with the current US-China trade war among the main drivers for the slump in consumer activity, say economists.
Bank of America Merrill Lynch (BAML) this week warned that “global inflation could collapse to levels not seen in at least a decade.”
“While hard to measure, our analysis suggests that tariff hikes are highly deflationary,” BAML said in a report. “Since a tariff is a tax and a tax is a form of fiscal tightening, global rates may head lower as long as the tit-for-tat tariff war keeps escalating.”
