Higher government spending to offset gains from VAT, says report

Manama : Benefits associated with the introduction of Value Added Tax (VAT) to Bahrain’s fiscal position are expected to be diminished by elevated government spending, according to a report. While introduction of VAT will create an additional stream of revenue for the nation, elevated government spending to limit social instability will offset any gains from VAT.

“Elevated spending, in a bid to limit social instability, will severely constrain improvements in Bahrain’s fiscal position, even as VAT is introduced,” the report stated.

The report noted that the impact of the tax will differ among GCC countries. UAE, which has the strongest retail sector, will benefit the most from the tax, the report noted. “VAT will be a bigger boost for government revenues in the UAE, given its larger consumer base and importance of retail spending for the economy, especially from overseas visitors. Moreover, with Abu Dhabi and Dubai attracting wealthy visitors, we believe that consumers will be able to absorb higher costs,” the report noted.  “In Saudi Arabia, the fiscal impact of VAT will be lower, especially as the government introduces cash transfers to the most vulnerable households to limit the negative impact of VAT,” the report stated. Saudi and UAE have already implemented VAT. Bahrain, Kuwait and Oman are yet to implement. “Kuwait will see limited fall-out from the failure to introduce VAT. The country benefits from tremendous oil reserves and financial buffers. While the limited political willingness to implement fiscal reforms in Kuwait will limit the scope to reduce exposure to fluctuations in oil prices, long-term risks are limited,” the report stated.