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Fiscal Reform -- Aid or Hindrance: A Computable General Equilibrium (CGE) Analysis for Saudi Arabia

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  • Elizabeth L. Roos
  • Philip D. Adams

Abstract

The oil price fell from around $US110 per barrel in 2014 to less than $US50 per barrel at the start of 2017. This put enormous pressure on government budgets within the Gulf Cooperation Council (GCC) region, especially the budgets of oil exporting countries. The focus of GCC economic policies quickly shifted to fiscal reform. In this paper we use a dynamic CGE model to investigate the economic impact of introducing a 5 per cent Value Added Tax (VAT) and a tax on business profit, with specific reference to the Kingdom of Saudi Arabia (KSA). Our study shows that although the introduction of new taxes improves government tax revenue, markets are distorted lowering economic efficiency and production due to a tax. In all simulations, real GDP, real investment and capital stock falls in the long-run. This highlights the importance of (1) understanding the potential harm caused to economic efficiency and production due to taxes, and (2) fiscal reform includes both government expenditure reform and identifying non-oil revenue sources. This allows for the design of an optimal tax system that meets all future requirements for each of the individual Gulf States.

Suggested Citation

  • Elizabeth L. Roos & Philip D. Adams, 2019. "Fiscal Reform -- Aid or Hindrance: A Computable General Equilibrium (CGE) Analysis for Saudi Arabia," Centre of Policy Studies/IMPACT Centre Working Papers g-301, Victoria University, Centre of Policy Studies/IMPACT Centre.
    • Handle: RePEc:cop:wpaper:g-301
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    References listed on IDEAS

    as
    1. Jason Nassios & John Madden & James Giesecke & Janine Dixon & Nhi Tran & Peter Dixon & Maureen Rimmer & Philip Adams & John Freebairn, 2019. "The economic impact and efficiency of state and federal taxes in Australia," Centre of Policy Studies/IMPACT Centre Working Papers g-289, Victoria University, Centre of Policy Studies/IMPACT Centre.
    2. Arnold C. Harberger, 1962. "The Incidence of the Corporation Income Tax," Journal of Political Economy, University of Chicago Press, vol. 70(3), pages 215-215.
    3. Mark Horridge & Michael Jerie & Dean Mustakinov & Florian Schiffmann, 2019. "GEMPACK manual," Centre of Policy Studies/IMPACT Centre Working Papers gpman, Victoria University, Centre of Policy Studies/IMPACT Centre.
    4. J.M. Dixon & J. Nassios, 2016. "Modelling the Impacts of a Cut to Company Tax in Australia," Centre of Policy Studies/IMPACT Centre Working Papers g-260, Victoria University, Centre of Policy Studies/IMPACT Centre.
    5. Janine M. Dixon & Jason Nassios, 2018. "A Dynamic Economy-wide Analysis of Company Tax Cuts in Australia," Centre of Policy Studies/IMPACT Centre Working Papers g-287, Victoria University, Centre of Policy Studies/IMPACT Centre.
    6. Arnold Harberger, 1964. "Taxation, Resource Allocation, and Welfare," NBER Chapters, in: The Role of Direct and Indirect Taxes in the Federal Reserve System, pages 25-80, National Bureau of Economic Research, Inc.
    7. International Monetary Fund, 2013. "Saudi Arabia: 2013 Article IV Consultation," IMF Staff Country Reports 2013/229, International Monetary Fund.
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    Cited by:

    1. Mohammed Muneerali Thottoli & Noof Amur Rashid Al Mamari, 2022. "Determinants of Value Added Tax in Oman," Journal of Tax Reform, Graduate School of Economics and Management, Ural Federal University, vol. 8(2), pages 157-169.

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    More about this item

    Keywords

    Computable General Equilibrium (CGE) models; Saudi Arabia; Fiscal reform;
    All these keywords.

    JEL classification:

    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • O53 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Asia including Middle East

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