The Eid feast and its joys have elapsed and it is time to get back to discussing the hardships of life, such as the erosion of the middle class in Saudi Arabia.
The Saudi newspaper Asharq threw a bombshell on this at the end of July. The paper based its report on a study done by economic professor at the King Fahad University in Dahran, Dr. Abd el-Qahab al-Qahtani. Soon after the report was published, several writers started to comment on it.
The study might be exaggerated. How could the middle class erode in an oil wealthy state like Saudi Arabia? My colleague Jameel al-Diaby raised a similar question in a column that was published here several weeks ago. Diaby was commenting on the study; he raised his question but he did not receive an answer from the ministry of economy and planning, which was supposed to comment on a matter like this.
The ministry neither commented on the newspaper suggestion that pointed out to a 30 percent shrinking of the Saudi middle class, which is supposed to be no less than 60 percent of the society, if this should be a sound society. The more the middle class expands, the better the economic conditions become, according to experts, because the middle class is what drives the economic cycle. The middle class is the biggest tax paying social class and is, therefore, the main source for state revenues.
But in Saudi Arabia, we do not pay taxes and is this why the ministry of economy and planning did not take notice of declining economic health of the Saudi middle class? But still, the middle class, even if it does not pay taxes, is the main driver of spending. It will likely be a burden on the state if it shrinks as its members increasingly fall into the poor class. If this happens, billions of dollars more would be spent on the social welfare program. Last year, $5.33 billion (20 billion riyals) were spent on the program and the amount appears to be rising (indicating that the middle class is shrinking) and prompting King Abdullah to order more funds for the program. The last of it was made during Ramadan in June.
It is obvious that the total reliance is on oil revenue and the fact that the Saudi economy is not based on taxes has contributed to the lack of attention to the statues of the Saudi working capital, which is supposed to be an indicator of the success or failure of the government’s economic policy.
This appears even more clearly when we search for non-petroleum products in the website of the Saudi Arabian Monetary Agency (SAMA). We barely find anything about this among the Petroleum and Petrochemical productions that make up the tremendous revenues which will be added to other modest non-oil revenues that will total the Gross Domestic Product (GDP). But this GDP is not the real production of the Saudi citizens. It is a wealth that comes from underground in the form of oil that transforms with no real additional value. It is then converted into the main figure in the GDP that is “theoretically” divided on the Saudi population.
The outcome of this division gives an unrealistic figure about the income of the individual, who did not participate in producing this wealth and thus does not get his share, except in services such as education, health, infrastructure, welfare, and food subsidies, which also benefit the 30 percent foreign expats in Saudi Arabia. They too do not pay taxes, except some fees related to their visas. They transfer the bulk of their savings abroad. Last year alone about $26.6 billion (100 billion riyal) were transferred abroad and the state did not tax these funds a dime. So neither, the expats nor the Saudi nationals make up any meaningful productive figures that can be added to the domestic product. They are simple consumers and beneficiaries in varying degrees.
So has the lack of taxes in Saudi Arabia reduced citizens in the kingdom to the role of receivers only? Meaning they are only a burden on the state and that is why no one pays attention to their economic performance, which is why the middle class eroded without anyone having paid attention.
If this is the case, then maybe not paying taxes is a curse, not a blessing. A poor person has no privileges in a country where citizens are spared taxes.
Last year Ministry of Social affair admitted that no less 600,000 Saudi families are receiving welfare.
Six hundred families make up 3 million citizens (more than 20 percent of the total population). Many Saudi officials should be alarmed when they are informed that a little less than a quarter of the kingdom’s population lives in poverty or near poverty.
Neither State donations will eradicate poverty nor unnecessary employment, which raises the burdens on government's bureaucracy . The solution is also not in the multi-billion social welfare program; it is in work and nothing but work. Real jobs are in the free market and in the re-construction of the small and medium business that are based on the hardworking people of the nation.
No one likes to pay taxes, but how can the state provide for its middle class and its economic situation without taxation? If taxes were being collected, the Secretary of Finance will know if citizens are prosperous or not based on the amount of taxes collected. This is the real economy that functions according to a complete cycle from the citizen to the state to the citizen again.
The Saudi economic cycle today is in one direction only: from the state to the citizen, by much or by little, with just distribution or not; the important thing is that it is not a complete cycle and this is what produced a distorted economy.
What makes things worse is the number of foreign expats who occupy most jobs and badly distorts the country’s economy and the culture of work and production. This is also a reason for the shrinking of the middle class.
(Jamal Khashoggi is as a Saudi writer. This article first appeared in al-Hayat daily on August 27, 2012.)