Jobs in GCC public sector: Why it makes sense to pay citizens to stay at home

Even if oil prices had remained above $100, the fiscal situation of GCC countries would have become unsustainable in a few years. In 2014 the IMF warned Saudi Arabia that, with oil at $100, the country would face a fiscal deficit in 2015, and that, if oil was to fall to $75, reserves could be depleted by 2018. Oil at $40 has simply accelerated the process.

The problem lies on the expenditure side. Decades ago, governments chose to distribute the proceedings of oil through subsidies and public sector jobs. Now they are realizing that they can’t maintain that system for much longer. Saudi Arabia and Oman spend more than 50 percent of their budget in salaries and Kuwait spends 73 percent, including subsidies. Dubai and Qatar spend comparatively less, in line with international standards, although public sector wages expenditure is rising rapidly. For decades, the IMF has been recommending the gradual elimination of subsidies and a reduction in the number of civil servants to address the problem. However, this proposal shows a poor understanding of the political reality of the region, ignoring the existing social contract between governments and citizens and the phenomenal opposition that implementing those recommendations would stir. A bolder alternative was put forward by Steffen Hertog, a Gulf expert from the London School of Economics. The government could pay a universal income - a salary - to every national of working age, regardless of whether they are working or not. In exchange, subsidies would be removed and the government would not offer new jobs in the public sector. This universal salary would be funded, at least partially, with the money saved from subsidies. Later, as civil servants retire without being replaced, savings from a decreasing wage bill would kick in, making the model viable.

The proposal beats the IMF alternative in numerous aspects. To start with, it provides authorities with a tool to compensate citizens for a lost benefit. Increasingly popular populist policy-makers could also support it, arguing that, compared to the current situation, this approach would concentrate spending on nationals: energy subsidies were available to expats, but only national citizens would receive the income. Compared to other policies, the distortion in the labour market would be smaller: given that the income does not depend on whether the beneficiary is working or not, the incentive to look for a job - in the private sector - that would complement the salary would still be there. Finally, and most importantly, it gives governments the chance to enter a path of long term fiscal sustainability. Of course, this income should be set at a low enough rate to ensure such sustainability, and to avoid discouraging nationals from working altogether.

Sustainability

Unfortunately, the implementation of any measure preventing Gulf citizens from accessing public sector jobs, even after throwing in the universal salary ‘candy’, is likely to find strong opposition. Governments are still concerned about recent instability in the region, and, when forced to choose between fiscal unsustainability and social instability, will probably choose to guarantee stability.

The most probable scenario is one of gradual but not profound change over the next years. Some subsidies will be eliminated. Authorities will try to reduce the pressure on the public sector by stepping up existing employment nationalization policies, trying to force the private sector to replace expats with nationals. This will meet with little success, because the private sector can’t match public sector conditions without losing a lot of competitiveness. The wage bill will continue to expand, and governments will try to compensate by reducing capital projects - we are already seeing numerous cancellations - which will reduce long term growth. Over time, budget expenditure will become almost exclusively recurrent. With fiscal deficits increasing, governments would use a combination of reserves (tapping also those managed by sovereign wealth funds, if needed) and debt issuance. Moody’s estimates the debt-to-GDP ratio to increase by 35 percentage points in Bahrain, 18 in Oman, 15 in Saudi and between 11 and 13 in the rest of the GCC in 2016 alone. Abandoning the peg would also relieve part of the pressure, but the move is unlikely because central banks fear unintended consequences. A soft peg, following the Kuwaiti model, might happen, but the relief would be limited, and it would be hard to convince investors that the change is a one-off. There is a silver lining to low oil prices: if the trend persists long enough, the adequate mindset to adopt bolder measures might gradually emerge. Doing nothing would, in the words of Hertog, “egyptianize” the region, with a large and inefficient public sector that would absorb all the resources, preventing the smaller private sector from developing.