2017’s real GDP growth estimate to be revised higher to 5.0%-5.5% (vs. 4.3%-4.8%) given a robust performance of 5.7% in 1H2017. For 2018, we expect government to target a higher growth of 5.0%-6.0% (UOB: 5.0%).
According to the document, the budget deficit in 2017 is expected to reach8.9% of GDP, a significant decrease from the budget deficit in 2016 whichamounted to 12.8% of GDP. Revenue is expected to increase by 34% to reachSAR 696bn as a result of the increase in oil and non-oil revenues, while publicexpenditure rose by 11.6% to reach 926 billion riyals.
On the inflation front, the lower tax rate for these commodities will likelyimply about a 30-40bp reduction in inflation if the entire impact is passedthrough to the consumer. Moreover, majority of the goods which have movedto a lower tax rate lie in the core inflation component, which has been stickyaround 4.5% levels.
Government revenues will be enhanced by broadening the tax base to include foreign digital service providers and increasing taxcompliance and enforcement efforts. Higher oil and commodity prices will also help buffer revenues.
The 2018 budget includes an increase in public expenditure by 5.6% and anincrease in revenues by 13% compared to 2017. A main driver of the increasein government spending is capital expenditure which is due to the increase by13.6% to finance the vision project as well as state projects targeting residentialconstruction and infrastructure. On the revenue side, although tax collectionswould only contribute about 18% to revenues it is expected to increase by 46% in2018 on YoY basis driven mainly by taxes on goods and services (81% increase).
For FY18, we retain our growth estimate of 6.7%YoY vs 7.1% in FY17.
Budget 2018 themed “Negaraku Shaping The Future” will be tabled on 27 October.
The Kingdom has unveiled an expansionary budget aimed at boosting growthfollowing this year's output contraction; delaying fiscal neutrality by three yearsto 2023.
Risk of fiscal slippage in FY18 rises: The government’s decision to lowerthe tax rate for 178 goods (to 18% from 28% earlier) is estimated to lead to arevenue loss of INR 200bn (~0.1% of GDP) on an annualized basis. Over themedium term, though, the impact of revenue loss should be nullified withhigher tax compliance and widening of tax net. This implies ~0.05% of GDPimpact for the remainder of FY18. Recall, the government also cut fuel taxeson petrol and diesel in Oct ’17, which is expected to lower tax revenue by INR130bn (0.1% of GDP) for FY18. This loss in revenue along with indirect taxrevenue collections which are tracking lower than budgeted growth, lowerthan expected transfer of dividend from RBI and fiscal deficit which is alreadyat 91.3% of full-year target, implies higher risk of fiscal slippage in the currentyear. The pressure on the government to meet the fiscal deficit target isevident with the contraction in spending in Aug and Sep. We believe thegovernment will likely cut back on spending in order to meet the fiscal deficittarget of 3.2% of GDP in FY18.
A combination of higher revenue and targeted spending will allow the government to target a narrower fiscal deficit -2.9% of GDPin 2018 (-3.0% in 2017), which marks nine years of deficit reduction.
In the light of government growth targets and to stimulate the economy after ayear of recession (-0.5% real output contraction), the revisions made to publicfinances would delay achieving financial balance in 2023 instead of 2020.
What about RBI policy response? The RBI may be more focused on thefiscal impact of the changes in tax rate given the potential risk of fiscalslippage in FY18. Moreover, the recent spike in vegetable prices and oilprices may also keep upside pressure on near-term inflation. We expect CPIinflation for Oct (to be released today) around the 3.3% mark. In this context,we believe the chances of a rate cut in the Dec policy review are now low (wewere expecting a rate cut) as the central bank could remain more focused onupside risks to inflation from the recent spike in vegetable & oil prices and rising risk of fiscal slippage in FY18.
Given that this is the final budget before the next general elections, we expect an expansionary budget with focus on the lowerand middle income segments, addressing cost of living, affordable housing issues, and new technology to spur growth.
The budget also reveals that the current account recorded a surplus of about14.4 billion riyals (USD 3.85bn) or equivalent to 0.5% of nominal domestic outputduring the first half of 2017, and is expected to achieve a higher surplus duringthe second half of this year with the surplus to continue in 2018 on the back ofhigher oil prices.
However, any cut-back in fiscal spending which may be necessitated to meetthe fiscal deficit target could be a dampener on overall consumption growth.
The budget will sustain the momentum of core infrastructure spending as project awards and announcements are reaffirmed.
Although the fiscal loosening still remains modest but the government expectsan improvement in real macroeconomic indicators for the next year on the backof more capital expenditure and economic reforms. The budget forecasts anambitious growth rate for 2018, a real GDP growth of 2.7%. The Kingdom expectsan increase in the non-oil sector's growth to 3.7% with the private sector actingas the main driver (see figure 3 below).
On the growth front, the lower tax rates will at the margin support privateconsumption, which has been the main driver of the growth recovery.
In the 2018 budget, the government aims to reduce the budget deficit to about7.3% of GDP. The YoY increase in the total revenues in the budget of 2018 isestimated at 12.6%. Non-oil revenues are expected to increase by about 14%.
Major rationalization in GST with pruning of the goods taxed at 28%bracket and simplifying filing rules: The GST Council on 10 Novemberannounced a major rationalization of goods taxed at the highest tax bracket of28% and also took steps to simplify return filing to reduce the complianceburden. The GST council decided to keep only 50 luxury and sin goods in thehighest tax bracket (vs 228 goods earlier) and also rationalize some goods inother tax brackets, with a total of 210 goods moving to lower tax rates. TheGST council also announced measures with respect to simplifying the filingprocess and increase in threshold for the composition scheme. All thechanged rules, except for the higher composition scheme turnover threshold,will be applicable prospectively from November 15. See appendix for detailson list of changes in tax rates of various goods and changes with respect tofiling procedures.