Saudi Arabia is introducing significant austerity measures amid increasing expectations that the global oil market's full recovery from the COVID-19 crisis is likely years off, if ever. On May 10, Riyadh announced three specific measures that Saudi Minister of Finance Mohammed al-Jadaan said were necessary to get its public finances under control for the long and painful road ahead:

• Saudi Arabia will cut or delay spending totaling 100 billion Saudi riyals ($26.6 billion), which is roughly equivalent to 10 percent of Saudi Arabia's planned 1020 billion riyal ($271.5 billion) 2020 budget. It is not clear how much of the spending cuts and delays will take place in 2020. 
• Beginning July 1, Saudi Arabia will triple its value-added tax (VAT), taking it from 5 percent to 15 percent. 
• Saudi Arabia will also end a program introduced in 2018 that allows government workers to receive a 1000 Saudi riyal ($267) monthly stipend. The stipend was intended as a cost of living adjustment to offset the economic impact of the VAT, which was first introduced in 2018. 

Due to the global economic fallout from COVID-19, the Saudi government's finances are in the middle of a major adjustment and remain unlikely to improve in the short-term. Despite a slight recovery in May, the price of Brent crude oil remains around $30 per barrel. The global economy is also now not expected to fully recover from COVID-19 until at least 2022, highlighting the severity and length of Saudi Arabia's financial crisis.

• In the first quarter of 2020, Saudi Arabia's government revenue was just 192 billion Saudi riyals ($51.1 billion), a 22 percent decline year-over-year (YoY).  
• Oil revenue also declined by 24 percent YoY to 129 billion riyals ($34.3 billion), but non-oil revenue also plunged by 17 percent, highlighting the pervasive nature of the Saudi government's collapsing sources of revenue. 

The impact on the Saudi economy in the second quarter of 2020 will likely be even greater. Prior to Riyadh's announcement of the new austerity measures, Jadwa Investment calculated that Saudi Arabia's budget deficit was already 15 percent of the country's GDP in 2020. 

• With oil prices bottoming out in April, Saudi Arabia has reduced its oil production to 18-year lows in the hopes of managing the market.
• The increase in government revenue from the higher VAT rates won't kick in until July. 
• According to al-Jadaan, the kingdom also plans to raise 220 billion riyals this year to plug gaps in its budget, which is equivalent to roughly 8 percent of GDP. 

While it may help initially ease Saudi Arabia's budget deficit, the dramatic VAT increase will eventually stymie overall private sector spending and could provoke political unrest. The VAT has proven controversial since it was introduced as part of a Gulf Cooperation Council-wide initiative in 2018. For this reason, Kuwait and Oman have delayed the introduction of their VATs. Despite also suffering from the economic fallout from COVID-19, the United Arab Emirates also recently stated it has no plans to follow Saudi Arabia's lead by increasing its rate from 5 percent. 

• Saudi Arabia's social contract has long shunned significant direct taxation of the population and had a high level of social spending in exchange for political support of the government. 
• Saudi Arabia's VAT is already hitting its poorer population the hardest due to it being regressive and based on consumption. 
• A substantial taxation of Saudi Arabia's consumers will reduce consumer buying power, which will translate into reduced consumer spending in the private sector, further undermining Saudi Arabia's Vision 2030's goal of boosting private industry.  
• But despite these risks, Saudi Arabia is unlikely to reverse course and reduce the VAT back to its original levels once the crisis is over due to the long-term challenges in boosting non-oil revenue.