Gulf Cooperation Council: How Can Growth-Friendlier Expenditure-Based Fiscal Adjustment be Achieved in the GCC?

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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 decade to 2014, which now stands high by international standards.
This 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.
High current spending keeps overall spending above levels consistent with long-term fiscal sustainability and intergenerational equity.

Growth outcomes improve when fiscal adjustments are:
- sustained as part of credible multi-year fiscal plans;
- reliant on expenditure more than revenue adjustment;
- accompanied by improvements in expenditure composition (away from current outlays to more productive spending);
- accompanied by improvements in the structure of revenue (away from direct to indirect taxation).
Successful fiscal adjustments also tend to be part of wider structural reforms that support growth.

Prioritize expenditure-based consolidation over revenue-based adjustments to support growth outcomes.
Implement credible multi-year fiscal plans to sustain adjustments and improve credibility.
Rebalance spending toward more productive outlays and away from large current spending items such as compensation of employees.
Shift revenue structures away from direct taxation toward indirect taxation, while integrating fiscal consolidation with broader structural reforms to enhance growth.

Gulf Cooperation Council: How Can Growth-Friendlier Expenditure-Based Fiscal Adjustment be Achieved in the GCC? — December 14, 2017