Economics 101: Why state budgets are harder in the GCC

The Arab Gulf countries’ plentiful oil confers many benefits upon their citizens, but the Opec meeting on May 25 reminds us of one of the key downsides: long-term budgetary planning is fiendishly difficult when your finances are at the mercy of the “black gold”. Why is that the case?

When governments draft budgets, they do so with an eye on four major goals: robust economic growth; low unemployment; low inflation; and sustainable government finances, by balancing the budget and keeping public debt low. Successful budgeting typically combines prudent investment in strategically important areas, with a lean and efficient civil service that allows the private sector to be the economy’s key driver.

Citizens also hate volatility in things such as unemployment and inflation, resulting in the added short-term goal of maintaining stability in the economy. This is typically achieved by relaxing the constraint that the government balance its books; instead, economic policies are usually deployed counter-cyclically to try to dampen the business cycle, by loosening the government’s purse strings during recessions, and tightening them during booms.

In conventional economies, the business cycle is typically mean-reverting, meaning that when the economy is growing faster than average, it will predictably and organically slow down, and vice versa. This is because a key driver of modern business cycles is temporary misallocations of resources, such as financial bubbles, rather than changes in the fundamental structure of the economy. The business cycle’s mean-reversion underlies the proposed effectiveness of counter-cyclical fiscal policy: recessions tend to be followed by booms, and so you can afford a short-term deficit because there will be an opportunity to run a surplus in the not-too-distant future.

In the GCC, oil changes the rules of the game, because oil income is not mean-reverting – it does not oscillate around a predictable average. Instead, oil prices (and…

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