How Oil Shapes Gulf Government Budgets

Why Gulf governments watch the oil price so closely, what a fiscal breakeven price is, and how they cushion themselves against price swings.

In most countries, governments raise money mainly by taxing people and businesses. In the Gulf, much government revenue has come directly from selling oil and gas. Economists sometimes call such countries rentier states, because the state lives largely on “rent” from natural resources rather than on taxes.

The fiscal breakeven price

A key number for each Gulf government is its fiscal breakeven oil price: the oil price at which the budget balances, with revenue equal to spending. The International Monetary Fund publishes estimates. In recent years, Qatar’s breakeven has been relatively low, while Saudi Arabia’s has often been estimated well above that of its neighbours, partly because of its large population and ambitious spending plans. When market prices are below the breakeven, the government runs a deficit.

Cushions against price swings

Gulf governments cushion themselves by:

Saving in good years in sovereign wealth funds.
Borrowing in international bond markets when prices fall.
Cutting or delaying spending, especially on big projects.
Adding non-oil taxes, such as the value added tax introduced in Saudi Arabia and the UAE in 2018, and corporate income tax in the UAE from 2023.

Why few taxes

For decades, Gulf citizens paid little or no income tax. Some political economists argue this shaped a social contract: citizens received benefits and jobs, and in return governments faced less pressure for political participation. Introducing new taxes can change this relationship, which is one reason reforms have been cautious.

Two budgets, one price

Suppose one Gulf state balances its budget at an oil price of 50 dollars a barrel and another needs 90 dollars. If oil trades at 70 dollars, the first runs a surplus it can save, while the second runs a deficit and must borrow or cut spending. The same market price can mean comfort for one government and strain for another.

Thinking high oil prices solve all budget problems

High prices bring surpluses, but governments often expand spending in booms, raising their breakeven price. When prices fall again, the higher spending becomes hard to cut. Managing booms carefully matters as much as the booms themselves.

Key takeaways

Gulf governments rely heavily on oil and gas revenue, making them rentier states.
The fiscal breakeven oil price is the price at which a budget balances.
Savings, borrowing, spending cuts and new taxes like VAT cushion price swings.
Low taxes have shaped a distinctive social contract between rulers and citizens.