Viewpoint : Christine Lagarde

The global economic recovery has strengthened, and a growth rate of 3.9% has returned in 2018 and 2019, with 75% of the world economy sharing in the upturn. Yet this tide is not lifting this region enough. Of course, there are differences among countries. For oil exporters, oil prices have rebounded to halfway between their lows and their highs from a few years ago, which is still putting significant pressure on fiscal balances. This calls for a different economic model. The bottom line is that unless fiscal policy is on a sustainable path, rising debt will weigh on already overburdened young people, and there will not be space to fund the spending needed for inclusive growth. Many countries have undertaken important reforms on the revenue side, including the recent introduction of a value-added tax in Saudi Arabia and the UAE. This is an important step towards diversifying revenue and building tax capacity.

There is, of course, scope to do more, as domestic revenues are very low, averaging only 10% of GDP. Equity and fairness are key, as both are conditions for the acceptability of taxation.

Here I will focus on the other side of the coin, namely, expenditures. Revenue and expenditure policies complement each other and should be evaluated jointly as a package to achieve fiscal, economic and social objectives. Spending tends to be quite high in the region, especially among the GCC countries, where it is significantly above the emerging economy average: approaching 55% of GDP in some countries. While the size of government depends on societal preferences, a high level of spending can easily outstrip the capacity to raise revenue.

Many countries are indeed taking steps to contain spending. But this is too often based on across-the-board reductions or ad hoc cuts. A more strategic approach is preferred, one which protects the poor and the productive capacity of the economy. The priorities for sustainable and inclusive growth include public investment, but also areas such as health, education and social protection – fields where spending tends to be low in the Arab countries. In other areas, such as energy subsidies and public wage bills, spending is high. There is really no excuse for the continued use of energy subsidies. They are extremely costly, averaging 4.5% of GDP among oil exporters and 3% of GDP among oil importers, despite lower oil prices. They lack transparency, as subsidies are often implicit and off-budget. They are vastly inequitable, favouring the wealthy who consume a lot of energy. Perhaps worst of all, they are subsidising environmental harm at a time when we need to go in the opposite direction and protect the planet and peoples’ lives, health and futures.

Another important topic is the public wage bill. I appreciate that government jobs can serve as a significant social “safety valve”. Yet when the public sector supports every fifth job, this comes with tremendous costs, for fiscal sustainability, for the development of a dynamic private sector and for governance. Such challenges are not unique to the Middle East. Many countries around the world have faced the need to reform their large or rapidly growing public wage bills. For example, careful design of reforms allowed Ireland to reduce its public wage bill by four percentage points of GDP. We look forward to Robert Watt, one of the key architects of the Irish reform, sharing its lessons.

Remember, the Arab nations once led the world in the pursuit of knowledge, in scientific innovation and indeed in the idea that inclusion, fairness and decency are the hallmarks of civilization. I believe firmly that this is not only your legacy, but also your destiny, so that the legitimate aspirations of your young people might find legitimate expression in an economy that works for all.

This is an excerpt from a speech delivered in Dubai, UAE on February 10, 2018.