(Bloomberg) -- Saudi Arabia said it will ease the austerity drive that battered economic growth over the past two years, as the government enters a critical 12 months for Crown Prince Mohammed bin Salman’s plan to prepare the kingdom for the post-oil era.
Top officials rolled out plans to increase public spending next year to help offset measures to raise non-oil revenue, such as the introduction of value-added taxation and a levy paid by companies on expat workers. Growth is expected to rebound to 2.7 percent after lower oil prices drove a 0.5 percent contraction in 2017.
The kingdom plans to boost total spending to 1.1 trillion riyals ($293 billion) compared with 926 billion riyals in 2017. Non-oil revenue is expected to rise to 291 billion riyals from 256 billion riyals, with total receipts up 12.5 percent to 783 billion riyals. The government expects the budget deficit to narrow to about 7.3 percent of gross domestic product from almost 9 percent this year.
Read More: Key Figures in Saudi Arabia’s 2018 Budget, 2017 Fiscal Data
After two years of austerity, officials are shifting attention to growth as they try to balance the need to rebuild state coffers while avoiding crippling private businesses. An expanding economy could make it easier to push key elements in the prince’s long-term plan in 2018, including selling a stake in state-run oil giant Aramco to help create the world’s largest sovereign wealth fund.
This year, the kingdom “found it appropriate to move to a more optimistic scenario” in its fiscal planning, Economy Minister Mohammad Al Tuwaijri told a news conference in Riyadh. “We’re very satisfied with what happened in 2017, and we’ll continue on this journey.”
Read More: Saudi Arabia Sees Higher Oil Revenue as OPEC Cuts Boost Prices
The government earmarked 210 billion riyals for defense spending in 2018, less than last year but the largest component in the new budget -- surpassing education.
The government, chaired by King Salman, approved the budget shortly after Saudi forces said they intercepted a ballistic missile fired by pro-Iranian Yemeni rebels at the main royal palace, a sign of Saudi Arabia’s growing entanglement in regional conflicts as Prince Mohammed seeks to curb rising Iranian influence in the Middle East.
Other highlights from the budget release include:
- Target for achieving fiscal balance delayed to 2023 from an initial target of 2019
- Government’s spending plan includes 83 billion riyals from the sovereign wealth fund and 50 billion riyals from national development funds, in addition to 978 billion riyals allocated in the budget
- Inflation is expected to reach 5.7 percent, from a negative rate at the end of 2017
- Government expects to spend 32 billion riyals in 2018 on a cash-transfer program designed to protect middle- and lower-income Saudi families from planned increase in fuel and electricity prices
“The non-oil revenue, especially the tax revenue, looks optimistic especially since we think non-oil activity will not see the same boost as projected in the budget,” said Monica Malik, chief economist at Abu Dhabi Commercial Bank. “In fact, we think there could be a moderate decrease in real non-oil GDP growth with the introduction of VAT and the increase in electricity prices.”
The economy contracted in 2017 after the kingdom led efforts by OPEC and non-OPEC members to cut crude production to boost prices, and austerity measures weighed on non-oil industries, which expanded 1.5 percent.
Last week, the government announced a 72 billion-riyal stimulus package to be spent over the next few years. Officials have indicated that they will raise domestic fuel prices at a slower pace than previously targeted.
