A Fiscal Fix for the GCC

ABU DHABI – Supported by strong oil revenues and spurred by unrest in neighboring countries, the Gulf oil exporters – especially Saudi Arabia, the United Arab Emirates, Kuwait, Qatar, Oman, and Bahrain, which form the Gulf Cooperation Council (GCC) – have lately ramped up public social and investment spending. The business-intelligence publication MEED estimates that the value of projects that are planned or underway is nearing $2.46 trillion – more than 150% of these countries’ combined GDP (up from 128% a year ago).

Given this, it is not surprising that the International Monetary Fund sounded cautious in its latest economic outlook for the Middle East, urging the governments of the oil-exporting countries to rein in hard-to-reverse expenditures and pursue high-quality capital investments and social programs. After all, fiscal management is a particularly delicate problem in resource-rich countries, with a few key considerations determining success.

First, policymakers must aim for “intergenerational equity.” They cannot simply do what is best for their country today; they must also consider the implications of their choices – how much oil wealth they consume, how much to invest in human and physical capital, and how much to save – for future generations.

It is of course tricky to establish the level of government spending that is consistent with intergenerational equity, owing to uncertainty about oil reserves, future oil prices, and investment returns. But the IMF has attempted to do so – and reckons that spending in most GCC countries is too high.