## pp121417gcc-expenditure-based-fiscal-adjustement

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### Executive summary — key messages
- After years of rapid spending growth, GCC governments have begun significant fiscal consolidation, but further adjustment is needed to ensure long-term fiscal sustainability and intergenerational equity.
- Expenditure is dominated by compensation of employees and other current spending, high relative to Emerging Market (EM) countries and other oil exporters.
- Recommended design of fiscal adjustment (based on international experience):
  - Be sustained as part of credible multi-year fiscal plans.
  - Rely more on expenditure than revenue adjustment.
  - Improve expenditure composition (away from current outlays toward more productive spending).
  - Improve revenue structure (away from direct to indirect taxation).
  - Be part of wider structural reforms supporting growth.

### Introduction and recent fiscal shock
- Oil-related context and shock:
  - Fiscal break-even oil price: $32 a barrel in 2005 rising to $63 a barrel in 2014.
  - The region lost annual fiscal oil revenue of about $240 billion between 2014 and 2015.
  - Average fiscal break-even oil price declined to $52 a barrel in 2016.
- Policy response:
  - Sizeable fiscal consolidation since 2014 improved the non-oil primary balance.
  - The paper focuses on expenditure reforms (non-oil revenue reforms are not covered here).

### The need for further expenditure adjustment — quantitative facts
- Aggregate and cross-country indicators:
  - Expenditure as a share of GDP: 41 percent of GDP in 2016, versus 32 percent in EMs and 26 percent for a group of oil-exporting countries.
  - Expenditure above 50 percent of GDP in Kuwait and Oman.
  - Expenditure to non-oil GDP averaged 58 percent in 2016, ranging from 37 percent in the UAE to 94 percent in Kuwait.
  - Non-oil revenue covers less than a quarter of total spending in the GCC; in other oil-exporting countries non-oil revenue covers about 50 percent of expenditure.
  - Capital spending in the GCC is close to 9 percent of GDP.
  - The non-oil fiscal deficit is projected to be about 10 percent of non-oil GDP larger than what is consistent with the Permanent Income Hypothesis (PIH) in 2022, after announced measures.
- Measures implemented in 2015–16:
  - Expenditure was reduced by close to 10 percent in 2015–16 across a broad range of categories (wage and employment freezes, cuts in allowances and benefits, prioritization/pruning of capital spending, subsidy reductions or eliminations, cuts to transfers and non-essential spending).
  - Together with non-oil revenue improvements these measures reduced the non-oil fiscal deficit by around 17 percentage points of non-oil GDP since 2014.

### Structural and institutional drivers of rising expenditure
- Key drivers:
  - Correlation between government spending growth and oil prices during 2000–2016: 0.7.
  - Lack of medium-term fiscal frameworks delinking spending from oil cycles.
  - Rising demand and costs for government services (Wagner’s law; Baumol’s cost disease).
  - Demographics and labor market structure: population increased more than six-fold since the 1970s; public sector is primary employer of nationals, pressuring the wage bill.
  - Inefficiencies in public spending and public investment management.
  - Large state ownership with dependent entities receiving transfers.
  - Generous, often untargeted social welfare programs lacking means testing.

### Fiscal sustainability, intergenerational equity, and recommended adjustment sizes
- Risks of continuation: public debt will rise and financial buffers will be depleted under continuation of recent policies; none of the GCC countries are accumulating sufficient resources to meet intergenerational equity as indicated by the gap to PIH-consistent non-oil primary balance.
- Staff estimates of additional recommended adjustment (beyond measures underway and planned):
  - Bahrain: additional adjustment of over 10 percent of non-oil GDP; the adjustment should be frontloaded.
  - Oman: additional adjustment of over 6 percent of non-oil GDP; larger buffers allow a more gradual pace.
  - Saudi Arabia: additional 1.5 percent of non-oil GDP relative to staff baseline is recommended to balance the budget by 2022.
  - Kuwait, Qatar, UAE: debt sustainability not an issue given larger buffers; adjustments can be anchored by intergenerational equity (PIH gap) and phased in over longer horizons.

### Expenditure adjustment, external sustainability, and competitiveness
- Government spending is a main driver of import demand because of its large share in aggregate demand and high import content; controlling spending reduces balance-of-payments pressures.
- Controlling growth of public wages is crucial to protect competitiveness under a pegged exchange rate regime.
- For less diversified oil exporters, the external position is more closely linked to government spending adjustments than to exchange rate changes.

### Experience of fiscal adjustment and implications for growth
- International empirical evidence:
  - IMF study (1975–2013): per capita growth in the long term is estimated at about ¾ percentage points higher following fiscal reforms in advanced countries and almost 2½ percentage points higher in developing countries.
  - Short-term adverse impacts depend on design: lower when adjustments are gradual, expenditure-focused, and supported by institutions and structural reforms.
- GCC historical experience:
  - Large fiscal adjustments have occurred frequently; 14 adjustment cases identified where cumulative improvement in the non-oil primary balance (NOPB) was at least 5 percent over two consecutive years.
  - Median size of adjustment: about 7 percent annually (or about 6.5 percent of non-oil GDP annually).
  - Median contribution to NOPB change: 89.3 percent from expenditure and 10.7 percent from revenue.
  - Median duration: 3.0 years.
  - Adjustments historically represented about half of the decline in oil revenue across episodes and were often sustained beyond the downturn.
  - Past GCC consolidations relied primarily on expenditure cuts—on average expenditure accounted for about 90 percent of NOPB improvement in adjustment periods.
  - Composition by period:
    - 1980s: large cuts in capital expenditure (capital spending more than halved between 1982–86; contributed 60 percent of total decline).
    - 1990s/2000s: smaller, shorter-lived adjustments with greater reliance on current spending in some cases.
    - 2015–16: median expenditure consolidation (excluding Bahrain) about 7 percent in nominal terms and 11 percent of non-oil GDP annually; capital spending protected in some countries while current spending bore most of the adjustment; Saudi Arabia included significant capital spending reductions.
  - Large consolidations associated with slower economic growth; non-oil sector growth slowed from about 6 percent in 2013–14 to 3.5 percent in 2015–16.
- Declining expenditure multipliers (Box 1):
  - Previous short-term estimates: current and capital spending multipliers in the range of 0.2–0.4.
  - Previous long-term estimates: current spending multiplier between 0.3–1.2; capital spending multiplier between 0.6–1.4.
  - Updated estimates indicate fiscal multipliers have declined after 2008.
  - Implication: fiscal consolidation in the GCC could be less costly for growth than before, subject to caveats on spending efficiency, external openness, and labor market rigidity.

### Compensation, public employment, and labor-market implications
- Public sector wage bill:
  - Increased from an average of 7.6 percent of GDP to 12.2 percent of GDP in 2016 (about 60 percent nominal increase on average across the GCC).
  - Highest increases in Oman, Kuwait, and Bahrain.
- Public employment:
  - Public employment of nationals ranges from 35 percent in Bahrain to close to 90 percent in Qatar.
  - Large public-sector wage gaps incentivize nationals, especially low-skilled, to prefer public employment.
- Demographics and future pressures:
  - Share of population ages 0–24: 33 percent on average across GCC countries; Saudi Arabia 40 percent; UAE 25 percent.
- Reform options:
  - Performance-based remuneration within caps on annual wage bill growth.
  - Across-the-board wage freezes/reductions may be unsustainable without structural civil service reforms.
  - Hiring limits and attrition-based reductions; functional public-sector reviews; active labor-market policies (job search/matching services, wage subsidies).

### Education and health — efficiency and reform priorities
- Education:
  - Education spending per student is higher than in OECD and EMs while outcomes lag and graduates lack needed skills.
  - Staff compensation is a much larger share of education recurrent expenditure than in OECD countries.
  - Average teacher-student ratio (TSR, per 100 students) in GCC is around 9; OECD ~7; EMs ~6.
  - Non-teaching staff shares can be high (e.g., close to a third in Oman).
  - Recommendations:
    - Reduce teacher and non-teaching headcounts; redirect savings to teacher performance and materials while keeping TSR close to OECD levels.
    - Consider per-student financing formulas to align wage costs with student numbers.
    - Reallocate resources toward teacher training and quality-enhancing inputs.
- Health:
  - Life expectancy improved and infant mortality reduced; infant mortality gap with OECD narrowed; life expectancy gap remains broadly unchanged.
  - Healthy life expectancy (HALE) in the GCC region is close to 67 years.
  - Per capita health spending (PPP adjusted) varies across GCC countries and lies below efficiency frontier—scope for savings without compromising outcomes.
  - Out-of-pocket health spending: 13 percent of total health spending on average (except Bahrain) and below EM and OECD averages.
  - Recommendations:
    - Review staff needs and compensation systems to identify inefficiencies.
    - Increase private sector involvement through competition, privatization, and PPPs while assessing fiscal and contingent liability implications.

### Energy subsidies, social benefits, and price reform
- Scale and distribution:
  - GCC accounts for almost a quarter of global energy subsidies.
  - 2015 estimate: energy subsidies on fuel and electricity by the GCC were $94 billion out of $432 billion worldwide (or about 6 percent of their GDP).
  - Explicit subsidies in the GCC (excluding Saudi Arabia) accounted for about 3 percent of GDP in 2015 and were particularly high in Kuwait and Bahrain.
  - Subsidies disproportionately benefit the well-off and crowd out broader-benefit spending.
  - Bahrain and Kuwait spent more on subsidies than on capital spending in 2014.
- Progress in reforms:
  - Gasoline and diesel subsidies largely eliminated in the UAE and Oman.
  - Significant price increases in Kuwait, Saudi Arabia, Qatar and Bahrain, though fuel prices remain below international levels.
  - Electricity and water price increases underway in Bahrain and Saudi Arabia; Kuwait and Oman increased electricity prices for businesses and big consumers in early 2017.
  - Some countries plan to rationalize water prices to cost recovery (e.g., Saudi Arabia).
- Recommended approach:
  - Formula-based pricing or full liberalization with means-tested support for vulnerable households.
  - Automatic price mechanisms to depoliticize reform and reduce reversal risk (Qatar has an automatic mechanism).
  - Well-targeted, income-tested compensation schemes introduced gradually and clearly communicated.

### Public investment, PPPs, and public investment management
- Public investment facts:
  - Average public investment in last decade: 22 percent of total government spending.
  - Public investment as percent of non-oil GDP declined from 15 percent to 13 percent since end-2014 but remains high internationally.
  - Average country loses about 30 percent of the value of public investment to inefficiencies (IMF, 2015b).
  - Public capital stock is large and infrastructure quality is on par with OECD averages on average (variation across countries; capital stock highest in Oman, followed by UAE and Saudi Arabia; quality ranking: UAE, Qatar, Bahrain).
- Recommendations for improving investment efficiency:
  - Review project appraisal, selection, evaluation and ex-post assessment.
  - Align project selection with development plans; include consistent cost-benefit analysis and consideration of recurrent costs.
  - Periodically review existing projects to identify savings and reprioritize.
  - Use IMF’s Public Investment Management Assessment (PIMA) framework.
  - Consider PPPs where appropriate, with strong legal/institutional frameworks to manage fiscal risks.

### Strengthening expenditure management frameworks (MTEFs) and sequencing
- Rationale and design:
  - Medium-term expenditure frameworks (MTEFs) can help delink spending from oil volatility and integrate top-down macro objectives with bottom-up sector programs.
  - Recommended sequencing:
    - Strengthen the annual budget process first.
    - Begin multi-year planning with a simple medium-term fiscal framework (MTFF).
    - Move to full MTEFs when institutional capacity allows.
  - Areas for annual budget process improvement:
    - Strengthen capacity to cost policies.
    - Avoid expenditure overruns; adhere to adopted budgets.
    - Enhance fiscal reporting frequency, timeliness, and analysis.
    - Use more realistic oil price assumptions.
  - Develop rolling MTFFs with 3–5 year fiscal objectives and quantitative targets; link annual budgets to indicative multi-year spending envelopes, later moving to binding ceilings.

### Public expenditure reviews and transparency
- Conduct comprehensive public expenditure reviews (PERs) to evaluate effectiveness, consistency with policy priorities, and identify efficiency gains across central government operations, extra-budgetary institutions and state-owned enterprises.

### Conclusions and consolidated policy recommendations
- Need for further consolidation:
  - GCC countries must consolidate further to adapt to lower oil prices; projections point to large medium-term fiscal deficits and elevated public debt in some countries without additional measures.
- Design and sequencing:
  - Size and pace of adjustment should reflect country circumstances and fiscal space, balancing sustainability with short-term growth and employment.
  - Expenditure-based consolidation tends to be less costly for growth than revenue measures; mixing expenditure consolidation with revenue reforms (especially indirect taxes) produces better outcomes in low-tax countries.
  - Mitigate distributional consequences through well-designed compensation and targeted social safety nets.
  - Protect growth and jobs by focusing adjustments on current outlays, adopting sustained and gradual approaches, underpinning adjustment with strong medium-term fiscal frameworks, and implementing structural reforms to support job creation and diversification.
- Specific reform priorities:
  - Reduce the government wage bill via phased tightening of allowances, attrition-based headcount reductions, and civil service reform linked to education and labor-market reforms.
  - Increase efficiency and private-sector participation in health and education.
  - Close the gap between domestic and international energy prices, move to automatic adjustment mechanisms, and use targeted compensation.
  - Replace untargeted transfers and benefits with income-tested social safety nets.
  - Streamline capital spending based on robust public investment management to limit short-term growth costs.
  - Introduce multi-year expenditure frameworks starting with realistic annual budgeting and moving to MTEFs.

*International Monetary Fund — GCC Expenditure Reform (pp121417gcc-expenditure-based-fiscal-adjustement)*

### EXECUTIVE SUMMARY __________________________________________________________________________ 3

### EXECUTIVE SUMMARY

### Introduction and context
- After years of rapid growth in expenditure, GCC governments have started to implement significant fiscal consolidation measures, but more needs to be done.
- Rapid population growth and booming oil revenues led to large increases in government spending in the GCC in the decade to 2014, which now stands high by international standards.
- Expenditure is dominated by compensation of employees and other current spending which are large in percent of GDP compared to Emerging Market (EM) countries and other oil exporters.
- Current spending levels keep overall spending above levels consistent with long-term fiscal sustainability and intergenerational equity.

### Lessons from international experience with fiscal adjustment
- International experience suggests growth outcomes improve when fiscal adjustments:
  - Are sustained as part of credible multi-year fiscal plans.
  - Rely on expenditure more than revenue adjustment.
  - Lead to improvements in expenditure composition (away from current outlays to more productive spending).
  - Lead to improvements in the structure of revenue (away from direct to indirect taxation).
  - Are part of wider structural reforms that support growth.

### GCC historical experience with fiscal adjustment
- Large fiscal adjustments are nothing new in the GCC countries.
- The size and duration of past adjustments depended on the magnitude and persistence of the oil revenue shock.
- Past fiscal adjustments in the region relied primarily on expenditure cuts as non-oil revenues were constrained by the underdeveloped tax system and narrow tax base.
- Fiscal consolidation episodes were associated with slower economic growth.

### Core challenges going forward
- The challenge is to design and implement further fiscal consolidation in a way that best supports growth and jobs.

### Policy recommendations and reform priorities
- Social transfers and subsidies:
  - Reform social transfers and reduce subsidies to ensure spending is better directed to those most in need.
  - Subsidy reform should be gradual and accompanied with targeted compensation to lower-income households.
- Public investment:
  - Streamline public investment.
  - Improve investment efficiency by reviewing project appraisal, selection, and evaluation processes to ensure robustness and focus on improving access to essential infrastructure and competitiveness of the private sector.
- Public sector employment and compensation:
  - Reform public sector employment and compensation policies to reduce the wage bill and address labor market rigidities.
  - Incentivize private sector employment of nationals.
- Education and health:
  - Improve spending efficiency in the education and health sectors, where potential gains from efficiency improvements could be significant.
- Fiscal institutions and frameworks:
  - Put in place strong medium-term fiscal frameworks.
  - Priority should be given to strengthening the annual budget process and introducing a medium-term fiscal framework to underpin and sustain the fiscal adjustment.

*GCC EXPENDITURE REFORM, INTERNATIONAL MONETARY FUND*

### Introduction

### pp121417gcc-expenditure-based-fiscal-adjustement - Introduction

### Introduction: context and recent fiscal shock
- For most of the decade to 2014, rising oil prices fueled a large expansion of government expenditure in the GCC.  
- The fiscal break-even oil price increased on average for the GCC from $32 a barrel in 2005 to $63 a barrel in 2014.  
- With the sharp and abrupt decline in oil prices since late 2014, the region lost annual fiscal oil revenue of about $240 billion between 2014 and 2015.  
- Fiscal deficits have emerged in most GCC countries.  
- Sizeable fiscal consolidation since 2014 has helped improve the non-oil primary balance and contain the deterioration in the overall fiscal balance.  
- The average fiscal break-even oil price declined to $52 a barrel in 2016.  
- This paper focuses on expenditure reforms and does not cover the non-oil revenue reforms ongoing in the region.

### The need for further expenditure adjustment
- Government expenditure in the GCC remains high by international standards and well above levels consistent with long-term fiscal sustainability and intergenerational equity.  
- Expenditure was reduced by close to 10 percent in 2015-16 spanning a broad range of spending categories.  
- Measures implemented included: wage and employment freezes in most countries; cuts in allowance and benefits (Oman); prioritization of capital spending with significant cuts in Saudi Arabia; reduction or elimination of subsidies on fuel, water and electricity (ranging from full elimination of fuel subsidy in the UAE to significant price increases in other countries); and cuts to transfers and non-essential spending (all countries).  
- Saudi Arabia established the Bureau of Spending Rationalization to identify savings in capital and operational expenditures of key line ministries (Housing, Health, and Education).  
- Together with improvements in non-oil revenue (notably in Saudi Arabia), these measures reduced the non-oil fiscal deficit by around 17 percentage points of non-oil GDP since 2014.  
- Expenditure as a share of GDP stood at 41 percent of GDP in 2016, versus 32 percent in emerging markets (EMs) and 26 percent for a group of oil-exporting countries.  
- Expenditure was above 50 percent of GDP in Kuwait and Oman.  
- The ratio of expenditure to non-oil GDP averaged 58 percent in 2016, ranging from 37 percent in the UAE to 94 percent in Kuwait.  
- Non-oil revenue covers less than a quarter of total spending in the GCC; in other oil-exporting countries, non-oil revenue covers about 50 percent of expenditure.  
- Capital spending in the GCC is close to 9 percent of GDP.  
- The non-oil fiscal deficit in the GCC countries is still projected to be about 10 percent of non-oil GDP larger than what is consistent with the Permanent Income Hypothesis (PIH) in 2022, after factoring in measures announced by authorities.

### Structural and institutional drivers of rising expenditure
- Correlation between growth in government spending and growth in oil prices during 2000-2016 was 0.7.  
- Lack of medium-term fiscal frameworks that could delink spending from oil price cycles.  
- Rising demand for and costs of government services: Wagner’s law and Baumol’s cost disease imply rising public spending as incomes increase.  
- Demographics and labor market structure: population of the GCC has increased more than six-fold since the 1970s, increasing pressure on infrastructure and demand for government services; public sector is the main employer of nationals, pressuring the government wage bill.  
- Inefficiencies of public spending: evidence of substantial room to improve public investment efficiency in GCC countries.  
- Large state ownership: state holds large stakes in banking, manufacturing, telecommunication, transportation, and utilities; many entities remain dependent on government support through transfers.  
- Generous social welfare systems: wide range of programs including free health and education, subsidized energy, and generous untargeted support for housing and employment; some programs not well targeted in absence of means testing.

### Fiscal sustainability, intergenerational equity, and recommended adjustment sizes
- Continuation of current expenditure policies in the lower oil price environment would increase risks to fiscal sustainability and make intergenerational equity harder to attain.  
- Staff estimates of additional recommended adjustment (beyond measures underway and planned):  
  - Bahrain: additional adjustment of over 10 percent of non-oil GDP; the adjustment should be frontloaded.  
  - Oman: additional adjustment of over 6 percent of non-oil GDP; larger buffers allow a more gradual pace.  
  - Saudi Arabia: additional 1.5 percent of non-oil GDP relative to staff baseline is recommended to balance the budget by 2022.  
  - Kuwait, Qatar, UAE: debt sustainability is not an issue given larger buffers; adjustments can be anchored by intergenerational equity (PIH gap) and phased in over longer horizons.  
- Public debt will increase in all GCC countries and financial buffers will be further depleted under continuation of recent policies.  
- None of the GCC countries are accumulating sufficient resources to ensure future generations are not worse off once hydrocarbon resources are exhausted—indicated by the gap between actual non-oil primary balance and PIH-consistent non-oil primary balance.

### Expenditure adjustment, external sustainability, and competitiveness
- Government spending is a main driver of import demand in the GCC because of its large share in aggregate demand and high import content; controlling spending reduces pressures on the balance of payments.  
- Expenditure policy, especially controlling growth of public wages, is crucial to protect competitiveness under a pegged exchange rate regime.  
- For less diversified oil-exporting countries, the external position is more closely linked to adjustments in government spending than to changes in the exchange rate.

### Experience of fiscal adjustment and impact on growth: international and GCC evidence
- Fiscal adjustments can have favorable long-term macroeconomic impact by addressing imbalances, reducing inflation and debt, and enabling growth-enhancing spending. An IMF empirical study (1975–2013) shows per capita growth in the long term is estimated at about ¾ percentage points higher following fiscal reforms in advanced countries and almost 2½ percentage points higher in developing countries.  
- Short-term adverse impact depends on design: lower when adjustments are gradual, focused on expenditure, and supported by strong fiscal institutions and structural reforms.  
- Empirical findings indicate better growth outcomes when adjustments:  
  - are sustained and part of a credible multi-year fiscal plan;  
  - rely on expenditure more than revenue (with caveats about revenue structure and tax burden); and  
  - improve structure of revenue (away from direct to indirect taxation) and expenditure composition (away from current outlays such as wages and subsidies to more productive spending).  
- Distributional consequences can be mitigated by design—e.g., using proceeds from regressive but growth-enhancing tax reforms to finance higher health and education spending, targeted transfers, and training. Malaysia’s 1980s example: a spending cut of about 10 percent of GDP was accompanied by measures that reduced inequality and poverty.  
- Supporting fiscal institutions and implementing structural reforms (labor and product markets, business environment, privatization, PFM improvements) are important for durability of adjustment and favorable growth outcomes.  
- GCC historical episodes: fiscal policies and outcomes shaped by oil price cycles since the 1980s—large deficits in early 1980s, persistent deficits in 1990s, large surpluses during the decade to mid-2014, and return to deficits during current oil price decline.  
- Net financial buffers vary across countries: from negative 50 percent of GDP in Bahrain to positive 460 percent of GDP in Kuwait.  
- Large fiscal adjustments have occurred frequently in the past; adjustments defined as a cumulative improvement in the non-oil primary balance of at least 5 percent over two consecutive years: 14 adjustment cases identified across periods.  
  - Median size of adjustment was about 7 percent annually (or about 6.5 percent of non-oil GDP annually).  
  - Median contribution to NOPB change: 89.3 percent from expenditure and 10.7 percent from revenue.  
  - Median duration: 3.0 years.  
- Adjustments historically represented about half of the decline in oil revenue across episodes; adjustments were sustained beyond the oil price downturn in many cases.  
- GCC adjustments have relied primarily on expenditure cuts because revenue measures are constrained by underdeveloped tax systems and narrow tax bases—on average, expenditure accounted for about 90 percent of the total improvement in the NOPB in adjustment periods.  
- Composition of past adjustments:  
  - 1980s: large cuts in capital expenditure (on average capital spending was more than halved between 1982–86 and contributed 60 percent of the total decline in expenditure).  
  - 1990s/2000s: smaller, shorter-lived adjustments and greater reliance on current spending in some countries.  
  - 2015-16: median expenditure consolidation (excluding Bahrain) about 7 percent in nominal terms and 11 percent of non-oil GDP annually; in some countries capital spending was protected while current spending bore most adjustment; in Saudi Arabia current cuts included significant capital spending reductions.  
- Large fiscal consolidation episodes have been associated with slower economic growth; the adverse impact on non-oil GDP was more pronounced in the 1980s (e.g., Saudi Arabia) when adjustment was sharp and fell largely on capital expenditure. During the current episode, non-oil sector growth slowed from about 6 percent in 2013–14 to 3.5 percent in 2015–16.  
- The relationship between government spending and growth has weakened in the GCC since the 2008 financial crisis, likely reflecting higher import content and low spending efficiency.

*International Monetary Fund — GCC Expenditure Reform (Introduction section)*

### Box 1).

### Box 1. Declining Expenditure Multipliers and Expenditure Reform Considerations in the GCC

### Scope to improve the design and composition of fiscal adjustment
- GCC fiscal consolidation since 2014 has used a mix of expenditure and revenue measures, but:
  - Emphasis on revenue generation has been relatively modest and non-oil revenue lags far behind, even compared with other oil exporting countries.
  - Despite cuts, current and capital spending remain significantly higher than comparator countries.
  - Reductions in spending can help ensure fiscal sustainability, restore intergenerational equity, minimize adverse impact on growth, support structural reform agendas across the GCC, and strengthen social safety nets.
- Credible medium-term consolidation plans are needed to reduce macroeconomic uncertainty and boost confidence.
- Countries with high fiscal deficits may gain from large, frontloaded adjustment by lowering macroeconomic uncertainty and crowding in private investment; front-loaded consolidation may have a relatively small adverse—or even a net positive—impact on growth where fiscal sustainability gains are significant.
- Countries with fiscal space (Kuwait, Qatar, Saudi Arabia, and the UAE) can reduce negative growth impacts by adjusting gradually and setting out credible medium-term plans to restore intergenerational equity and build policy credibility.

### Declining expenditure multipliers
- Determinants and behavior of multipliers:
  - Multipliers are lower when exchange rates are flexible, public debt levels are high, and public expenditure management and revenue administration are weak; they are higher when labor markets are rigid.
  - Multipliers are also affected by trade openness, state of the business cycle, monetary accommodation, and type and quality of adjustment.
  - Fiscal consolidation may dampen aggregate demand but can be mitigated or reversed where consolidation lowers risk premia, crowds in private financing, and enhances credibility.
- Updated estimates and ranges:
  - Previous short-term estimates: current and capital spending multipliers in the range of 0.2–0.4.
  - Previous long-term estimates: current spending multiplier between 0.3–1.2; capital spending multiplier between 0.6–1.4.
  - Updated estimations indicate fiscal multipliers have declined after 2008 (Fouejieu, Rodriguez & Shahid, 2017, forthcoming).
- Implications:
  - The decline suggests fiscal consolidation in the GCC could be less costly for growth than before.
  - Decline may reflect falling efficiency of fiscal spending, crowding out of private sector employment and investment, or increased private saving as fiscal surpluses shrank.

### Compensation and public employment policies
- Magnitude and recent change:
  - Public sector wage bills increased from an average of 7.6 percent of GDP to 12.2 percent of GDP in 2016 (about 60 percent nominal increase on average across the GCC), with the highest increases recorded in Oman, Kuwait, and Bahrain.
- Drivers and labor market effects:
  - Policies to ensure low unemployment among nationals via public employment and pressures to raise wages during oil price booms increased the wage bill.
  - High public-sector wage bills reflect both higher public sector employment as a percent of total national labor force and generous compensation.
  - Large public sector wage gaps provide an incentive for nationals—especially the low skilled—to prefer public employment (public employment of nationals ranges from 35 percent in Bahrain to close to 90 percent in Qatar).
  - The private sector mostly employs low-skilled expatriates at significantly lower wages, creating duality and discouraging national movement to the private sector.
- Future pressures:
  - The wage bill is likely to increase absent policy measures because of a young and growing national population and rising labor force participation.
  - World Development Indicators (World Bank-2016): the share of population between ages 0-24 is 33 percent, on average, among all the GCC countries; Saudi Arabia has the highest share of 40 percent of total population, while the UAE has the lowest share of 25 percent.
- Reform options and considerations:
  - Performance-based remuneration measures that incorporate effective incentives within a specified cap on annual wage bill growth.
  - Across-the-board wage freezes or reductions can deliver immediate savings but may be unsustainable without accompanying structural and civil service reforms.
  - Consolidate employment levels by limiting new hiring and relying on attrition-based reductions in overstaffed areas.
  - Restructuring should be preceded by a functional review of the public sector and be implemented gradually with efforts to increase private sector employment of nationals.
  - Active labor market policies (job search and matching services, wage subsidies) can play a key role.

### Reforms to compensation schemes and public sector restructuring
- Measures and expected benefits:
  - Reducing and consolidating allowances and bonuses into base pay can improve wage bill management, simplify wage bargaining, improve employer-worker matching, and strengthen transparency and fairness.
  - Tightening eligibility and reducing the number and size of allowances over time in a phased manner can mitigate social and financial impacts and lead to a reduction in the wage premium to facilitate private sector employment.
- Implementation caveats:
  - Reforms require adequate administrative capacity, time for planning, and political will.
  - Savings from restructuring materialize over the medium term; downsizing should be gradual to avoid increasing unemployment.

### Increasing spending efficiency in education and health
- Education sector findings and recommendations (Box 2):
  - Education spending per student in the GCC is higher than in OECD and EMs, but education outcomes lag and graduates often lack needed skills.
  - Staff compensation represents a much larger share of education recurrent expenditure compared to the OECD average; high staff levels likely explain relatively high per-student costs.
  - Average teacher-student ratio (TSR, per 100 students) for GCC countries is around 9, while in OECD and EM countries the ratio is around 7 and 6, respectively.
  - Non-teaching staff shares can be high (e.g., close to a third of staff in Oman are non-teaching staff).
  - Recommendations:
    - Reduce teacher and non-teaching staff headcount and redirect savings toward improving teacher performance and quality of educational materials while keeping TSR close to OECD levels.
    - Consider per-student financing formulas to align wage costs with student numbers.
    - Reallocate resources toward quality-enhancing inputs such as teacher training and teaching and learning materials.
- Health sector findings and recommendations (Box 3):
  - GCC countries have improved life expectancy and reduced infant mortality substantially; infant mortality gap with OECD narrowed, life expectancy gap remains broadly unchanged.
  - Per capita health spending has trended upward and spending as percent of GDP has recently picked up in most GCC countries, but both indicators remain substantially below OECD averages.
  - Healthy life expectancy (HALE) in the GCC region is close to 67 years, marginally above the average for EMs and below OECD.
  - Total per capita health spending (PPP adjusted) varies across GCC countries; all fall below the efficiency frontier, indicating scope for savings without compromising outcomes.
  - Recommendations:
    - Review staff needs and compensation systems in health to identify inefficiencies and potential savings.
    - Increase private sector involvement through competition, privatization programs, and Public-Private Partnerships (PPPs), while carefully assessing short- and long-term fiscal impacts and contingent liabilities.

*International Monetary Fund — pp121417gcc-expenditure-based-fiscal-adjustement (Box 1) — content excerpt*

### Box 3. Health Sector Reforms (concluded)

### Box 3. Health Sector Reforms (concluded)

### Health sector structure and pressures
- Health systems in GCC countries are dominated by the public sector and provide strong financial protection for nationals.
- Out-of-pocket health spending accounts on average for 13 percent of total health spending.
- Except for Bahrain, out-of-pocket spending is below both emerging market and OECD averages and below the range of 15–20 percent that some studies have suggested as a threshold in terms of excessive financial burden on households (WHO 2010).
- An aging population will increase demand for more costly health care services in the future.
- Leading health-related risk factors in GCC countries are linked primarily to unhealthy diets and physical inactivity (Aljefree et al., 2015), problems that will become more acute as populations age and may create additional cost pressures.
- Introduction of excises on tobacco and carbonated/energy drinks will help to reduce consumption of harmful products.

### Energy subsidies, social benefits and transfers
- GCC countries account for almost a quarter of global energy subsidies.
- In 2015, energy subsidies on fuel and electricity by the GCC were estimated to be at $94 billion out of $432 billion total world-wide (or about 6 percent of their GDP).
- The total cost of the subsidy includes both explicit expenditure outlays in the budgets and implicit subsidies arising from forgone revenue and profits from energy companies (oil, gas, and electricity).
- Explicit subsidies in the GCC (excluding Saudi Arabia) accounted for about 3 percent of GDP in 2015 and were particularly high in Kuwait and Bahrain.
- Energy subsidies—whether explicit or implicit—tend to disproportionately benefit the well-off and crowd out spending with broader and fairer benefits (infrastructure, social spending, paying down public debt, pro-poor spending).
- Bahrain and Kuwait were spending more on subsidies than on capital spending in 2014.
- The generous system of social benefits and transfers is not well targeted, is expensive, and likely results in a disproportionately small share reaching those most in need; it may also have an adverse impact on incentives for nationals to work.

### Progress and remaining gaps in energy price reforms
- Removal of subsidies in GCC countries can have a growth enhancing impact over the long-term (IMF, 2017 and IMF 2015c).
- Gasoline and diesel subsidies have been largely eliminated in the UAE and Oman as their prices were brought close to the international level.
- Significant price increases have taken place in Kuwait, Saudi Arabia, Qatar and Bahrain, but fuel prices remain well below international levels.
- Electricity and water prices are being increased in Bahrain and Saudi Arabia under multi-year plans; Kuwait and Oman increased electricity prices for businesses and other big consumers in the first half of 2017.
- Bahrain, Qatar, and Saudi Arabia increased water prices during 2015–16; Kuwait increased the rates in 2017 for businesses and expatriate workers.
- Some countries plan to further rationalize water prices to cost recovery over the medium-term (e.g., Saudi Arabia).

### Recommended approach to subsidy and price reforms
- Key further steps include a formula-based approach or a complete liberalization of energy prices and introducing a means-testing approach to support a robust social safety net.
- Automatic price mechanisms help depoliticize the reform process, help avoid reform reversal, and facilitate the transition to a fully liberalized pricing system (IMF, 2017). (An automatic price mechanism is already in place in Qatar.)
- The costs and benefits of reforms should be clearly explained and communicated.
- To build public support, design mitigating measures to protect the most vulnerable households from the impact of reforms to the extensive system of subsidies, social benefits and transfers.
- Such schemes should be income-tested and well targeted (as are being designed in Oman and Saudi Arabia).
- Reforms should be introduced in a gradual manner to make them more durable.

### Streamlining capital expenditure while safeguarding growth
- Public investment can raise productive capacity and growth potential, but not all public investment creates productive capital.
- IMF (2015b) finds that the average country in the study sample loses about 30 percent of the value of its public investment to inefficiencies in the investment process.
- Every capital investment generates its own current spending in the short and long term.
- Public investment in GCC countries has been positively correlated with oil prices; average investment as a share of non-oil GDP was almost 4 percentage points lower during 1991–2002 than during 2003–14.
- Average public investment during the last decade has amounted to 22 percent of total government spending.
- Since end-2014, public investment as percent of non-oil GDP has declined from 15 percent to 13 percent, but remains high by international standards.
- GCC countries have built a relatively large public capital stock and the quality of infrastructure is on par with OECD countries on average, though there is notable variation across countries (capital stock highest in Oman, followed by UAE and Saudi Arabia; quality: UAE first, followed by Qatar and Bahrain).
- Curtailing some public investment projects could be appropriate and may have limited impact on domestic activity and long-term growth if their efficiency is low (Danforth et al., 2016).

### Improving public investment management and use of PPPs
- Governments should review project appraisal, selection, and evaluation processes to ensure primary objectives are met in the most cost-effective way:
  - Project selection better aligned with development plans.
  - More robust appraisal including consistently applied cost-benefit analysis and careful consideration of recurrent costs.
  - Regular ex-post assessment of investment projects to inform future selection and implementation.
  - Periodic review of existing projects to check alignment with development goals and identify savings.
- The IMF’s Public Investment Management Assessment (PIMA) framework could be useful for governments in the GCC countries.
- Public-Private Partnerships (PPPs) can generate efficiency gains and offer greater value for money, but have been underutilized in the GCC; well-designed PPPs require strong legal and institutional frameworks to limit and manage fiscal risks.

### Strengthening expenditure management frameworks (MTEFs)
- Medium-term expenditure frameworks (MTEFs) can help the GCC have better control on expenditure and delink it from oil revenue volatility.
- MTEFs integrate top-down macro-fiscal objectives with bottom-up sector programs and multi-year expenditure plans.
- GCC exposure to oil price volatility has led to high expenditure and growth volatility; an MTEF is particularly important to delink spending decisions from short-term oil price movements and address exhaustibility of the oil resource.
- Recent steps: Saudi Arabia announced medium-term fiscal objectives under the Fiscal Balance Program; Kuwait approved three year rolling expenditure ceilings; creation/strengthening of macro fiscal units (Kuwait, Oman, Qatar, Saudi Arabia, UAE) and public debt management offices (Bahrain, Kuwait, Oman, Saudi Arabia, UAE).

### Phased introduction and sequencing of MTEFs
- Priority should be given to strengthening the annual budget process and expenditure management systems, then:
  - Start multi-year planning with a simple medium term fiscal framework.
  - Move eventually to medium-term expenditure frameworks.
- Requirements and sequencing:
  - Strong annual budget process as the starting point; GCC annual budgets are currently a relatively poor guide to actual fiscal outcomes because spending outcomes are typically far above initial estimates (some improvement since 2014).
  - Areas for improvement in the budget process:
    ➢ Strengthening the capacity to cost existing and new policies so the budget reflects expected costs.
    ➢ Avoiding expenditure overruns by adherence to the adopted budget if oil prices turn out to be higher than budgeted.
    ➢ Enhanced fiscal reporting (frequency, timeliness, and analysis) on in-year budget outturns.
  - Using more realistic oil price assumptions would enhance policy planning and budget transparency.
  - Develop rolling MTFFs by setting overall fiscal objectives for three to five years with quantitative targets for main fiscal aggregates.
  - Establish the link with the annual budget through a simple multi-year budgeting process by providing guidelines (envelopes) to line ministries; treat subsequent years’ spending ceilings as indicative targets until capacity allows more binding frameworks.
  - Final stage: develop comprehensive MTEFs with organizational adaptability and technical capacity across the ministry of finance and other agencies, supported by sound public financial management practices.

### Public expenditure reviews
- Conducting comprehensive public expenditure reviews (PERs) would help evaluate effectiveness of public finances and develop more effective and transparent budget allocations.
- PERs analyze government expenditures over years to assess consistency with policy priorities and results achieved, covering central government operations as well as extra-budgetary institutions and state-owned enterprises.
- PERs can identify where there is room to increase efficiency or rationalize spending for fiscal savings.

### Conclusions and policy recommendations
- GCC countries need to consolidate fiscal positions further to adjust to the new environment of lower oil prices.
- Despite sizeable consolidation so far, projections point to large medium term fiscal deficits and elevated levels of public debt in some GCC countries, implying a need for additional consolidation measures.
- The size and pace of adjustment should depend on country circumstances and available fiscal space, balancing fiscal sustainability with short-term growth and employment considerations.
- Fiscal consolidation efforts may have adverse distributional consequences and should be mitigated by appropriately designing the reform strategy.
- To make fiscal adjustment most effective, it should be coupled with growth-enhancing structural reforms.

Policy guidance and priorities:
- Expenditure-based consolidation has generally tended to be less costly for growth than revenue measures; mixing expenditure consolidation with revenue reforms produces better outcomes in countries with a low tax burden, especially when revenue reforms focus on increasing indirect taxation.
- Past GCC consolidations were largely expenditure-based; negative impact on growth was more pronounced when adjustments targeted cuts to capital spending.
- Going forward, additional fiscal consolidation should be based on a balance of revenue and expenditure measures.
- Mitigating adverse impacts of adjustment on growth and jobs:
  - Focus expenditure reforms on current outlays.
  - Adopt a sustained and gradual approach to adjustment.
  - Underpin adjustment by strong medium term fiscal frameworks.
  - Implement broader structural reforms to support job creation and disperse growth benefits across society.
- A sustained expenditure adjustment requires comprehensive review of underlying factors shaping expenditure policy; expenditure pressures will likely rise owing to economic, demographic, and labor market factors.
- Revisit the traditional role of government as provider of jobs and services and implement broader reforms to diversify the economy and address labor market distortions.

Specific areas for expenditure and efficiency gains:
- Wage bill:
  - The government wage bill in the GCC is among the highest in the world and should be reduced to address fiscal vulnerabilities and labor market distortions, and to ensure government spending benefits reach all society.
  - Initial reductions can come from tightening eligibility for allowances and reducing staff size by natural attrition.
  - Restructuring through civil service reforms should be gradual and linked to education and labor market reforms to increase employment opportunities for nationals in the private sector.
- Health and education:
  - Support reforms and larger private sector involvement to improve outcomes and reduce public outlays.
- Energy pricing:
  - Further close the gap between international and domestic prices of fuel and electricity and move to automatic adjustment mechanisms accompanied by well-targeted compensation systems.
- Untargeted transfers and benefits:
  - Conduct a comprehensive review of untargeted and costly transfers and benefits (free domestic health and education services, education stipend and medical treatment abroad, free and subsided housing, untargeted wage subsidies).
  - Replace programs with a better targeted social safety net using an efficient means-testing system.
  - Reductions in social transfers should be well-designed, well-communicated, and sequenced to limit impact on low-income households.
- Capital spending:
  - Streamline capital spending based on robust public investment management frameworks to mitigate the short-term impact of consolidation on growth.
- Introduce multi-year expenditure frameworks:
  - Strengthen the annual budget process and introduce a simple medium-term fiscal framework that lays out clear fiscal objectives for 3 to 5 years and follows a top-down sequencing to derive annual spending envelopes.

*International Monetary Fund — GCC Expenditure Reform (Box 3. Health Sector Reforms, concluded).*

### References

### References

### Fiscal adjustments, expenditure reform, and fiscal policy literature
- Albino-War, M., and others, 2014, “Making the Most of Public Investment in MENA and CCA Oil-Exporting Countries.” IMF Staff Discussion Note 14/10, (Washington: International Monetary Fund).
- Alesina, A. and S. Ardagna, 2013, “The Design of Fiscal Adjustments”, NBER Chapters, in: Tax Policy and the Economy, Volume 27, pages 19-67 National Bureau of Economic Research, Inc.
- Alesina, A., and others, 2016. "Is it the "How" or the "When" that Matters in Fiscal Adjustments?," NBER Working Papers 22863, National Bureau of Economic Research, Inc.
- Behar, A., and A. Fouejieu, 2016, “External Adjustment in Oil Exporters: The Role of Fiscal Policy and the Exchange Rate”, Working Paper no. WP/16/107, (Washington: International Monetary Fund).
- Danforth, J., A. Medas, and V. Salins, 2016, “How to adjust to a large fall in commodity prices,” Fiscal Affairs Department, (Washington: International Monetary Fund).
- Escolano, J., and others, 2014, “How Much is A Lot? Historical Evidence on the Size of Fiscal Adjustments,” Working Paper no. WP/14/179, (Washington: International Monetary Fund).
- Fouejieu, A., S. Rodriguez, and S. Shahid, 2017, “Fiscal Adjustment in the Gulf Countries: Less Costly than Previously Thought,” Forthcoming, IMF Working Paper.
- Giavazzi, F., and M. Pagano, 1990, “Can Severe Fiscal Contractions be Expansionary? Tales of Two Small European Countries,” NBER Working Paper No. 3372 (Cambridge: National Bureau of Economic Research).
- Giavazzi, F., T. Jappelli, and M. Pagano, 2000, “Searching for Non-Linear Effects of Fiscal Policy: Evidence from Industrial and Developing Countries”, European Economic Review, Vol. 44, No. 7, pp. 1259–89.
- Gupta, S., 2005, "Fiscal policy, expenditure composition, and growth in low-income countries", Journal of International Money and Finance, Elsevier, vol. 24(3), pages 441-463.
- Hauptmeier, S., M. Heipertz, and L. Schuknecht, 2006, “Expenditure Reform in Industrialized Countries: A Case Study Approach,” ECB Working Paper, No. 634 (Brussels: European Central Bank).
- Hemming, R., M. Kell, and S. Mahfouz, 2002, “The Effectiveness of Fiscal Policy in Stimulating Economic Activity—A review of the literature”, IMF Working Paper WP/02/208, (Washington: International Monetary Fund).
- Tsibouris, G., and others, 2006, “Experience with large Fiscal Adjustments”, IMF Occasional Paper No. 246, (Washington: International Monetary Fund).

### IMF policy papers, technical notes, and regional GCC-focused work
- International Monetary Fund (IMF), 2013a, “Taxing Times,” Fiscal Monitor, October (Washington).
- International Monetary Fund (IMF), 2013b, “Reassessing the Role and Modalities of Fiscal Policy in Advanced Countries”, Policy paper (Washington).
- International Monetary Fund (IMF), 2014, “Fiscal Multipliers: Size, Determinants, and Use in Macroeconomic Projections,” Technical Notes and Manuals, Fiscal Affairs Department (Washington).
- International Monetary Fund (IMF), 2015a, “Fiscal Policy and Long-term Growth”, IMF Policy Paper, (Washington).
- International Monetary Fund (IMF), 2015b, “Making Public Investment More Efficient”, IMF Policy Paper, (Washington).
- International Monetary Fund (IMF), 2015c, “Energy Price Reform in the GCC—What Can Be Learned from International Experience?” Annual GCC Meeting of Ministers of Finance and Central Bank Governors, (Washington).
- International Monetary Fund (IMF), 2015d, “Tax Policy Reforms in the GCC Countries–Now and How?” Annual GCC Meeting of Ministers of Finance and Central Bank Governors, (Washington).
- International Monetary Fund (IMF), 2016a, “Investment and Growth in the Arab World—A Scoping Note,” Staff Paper, (Washington).
- International Monetary Fund (IMF), 2016b, “Economic Prospects and Challenges for the GCC Countries”, Annual GCC Meeting of Ministers of Finance and Central Bank Governors, (Washington).
- International Monetary Fund (IMF), 2016c, “More Bang for the Buck in the GCC: Structural Reform Priorities to Power Growth in a Low Oil Price Environment”, Annual GCC Meeting of Ministers of Finance and Central Bank Governors, (Washington).
- International Monetary Fund (IMF), 2016d, “Diversifying Government Revenue in the GCC: Next Steps”, Annual GCC Meeting of Ministers of Finance and Central Bank Governors, (Washington).
- International Monetary Fund (IMF), 2017a, “If Not Now, When? Energy Price Reform in Arab Countries”, Annual Meeting of Arab Ministers of Finance, Rabat, April 18–19, (Washington).
- International Monetary Fund (IMF), 2017b, “Managing Public Wage Bills in the Middle East and Central Asia Region”, (Washington (forthcoming)).

### Education, health, and region-specific studies
- Alfadala, A., 2015, “K-12 Reform in the Gulf Cooperation Council (GCC) Countries: Challenges and Policy Recommendations”, The World Innovation Summit for Education.
- Aljefree, N., and F. Ahmed, 2015, “Prevalence of Cardiovascular Disease and Associated Risk Factors among Adult Population in the Gulf Region: A Systematic Review”, Advances in Public Health, Volume 2015, Article ID 235101.
- World Health Organization (WHO), 2010, “Exploring the thresholds of health expenditure for protection against ­financial risk,” 2010 World Health Report Background Paper, No 19.

_References list from pp121417gcc-expenditure-based-fiscal-adjustement - References (source PDF)._

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_Source: https://www.imf.org/-/media/files/publications/pp/2017/pp121417gcc-expenditure-based-fiscal-adjustement.pdf_