Fiscal Policy Responses to Oil Price Volatility in an Oil-Based Economy

Mohamed Abdelbasset Chemingui and Mohammed Hajeeh
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Mohamed Abdelbasset Chemingui: Economic Development and NEPAD Division, UN Economic Commission for Africa, Addis Ababa, Ethiopia, mohamed_chemingui@yahoo.fr
Mohammed Hajeeh: Techno-economics Division, Kuwait Institute for Scientific Research, Safat, Kuwait, mhajeeh@kisr.edu.kw

Public Finance Review, 2011, vol. 39, issue 2, 288-308

Abstract: Oil prices increased from 2004 to historic highs in mid-2008 but have fallen precipitously since then. What are the effects of this volatility on an oil-based economy like Kuwait? This article examines options for policy responses from an oil-based economy perspective. The impact of changes in domestic tax and subsidy policies on the Kuwaiti economy is estimated using a computable general equilibrium (CGE) model. Results show that for a set of scenarios aimed at raising government savings via tax increases or subsidy cuts, the least negative impact on household welfare is for the subsidy-reducing scenario, a reflection of efficiency gains due to reduced price distortions. The most negative effects follow from raising government savings via increases in price-distorting import tariffs and the introduction of a nonuniform value-added tax (VAT). Given the small share of non-oil activities in Kuwait’s non-oil gross domestic product (GDP), the introduction of the VAT on non-oil activities does not generate a significant increase in government revenues.

Keywords: subsidy; oil prices; general equilibrium model; Kuwait (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:sae:pubfin:v:39:y:2011:i:2:p:288-308

DOI: 10.1177/1091142110389601

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