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The Economy-Wide Impact of Subsidy Reform: A CGE Analysis

Elizabeth Roos and Philip Adams ()

Centre of Policy Studies/IMPACT Centre Working Papers from Victoria University, Centre of Policy Studies/IMPACT Centre

Abstract: Oil prices fell from around $US110 per barrel in 2014 to less than $US50 per barrel at the start of 2017. This put enormous pressure on government budgets within the Gulf Cooperation Council (GCC) region. The focus of GCC economic policies quickly shifted to fiscal reform, including the removal of domestic subsidies on energy products. In this paper we use a dynamic Computable General Equilibrium (CGE) model to investigate the economic impact of the gradual removal of subsidies on refined petroleum and electricity, with specific reference to the Kingdom of Saudi Arabia (KSA). Our study shows that removing subsidies eliminates a large distortion in the economy. This improves the efficiency of resource use, so that even though employment and capital in most years fall relative to baseline levels, real GDP rises. In addition, we show that fully-funded compensation payments offset the increases in energy prices, leaving economic welfare of the Saudi-national population little affected. Removing the energy subsidies leads to an improvement in the net volume of trade, while leading to a mixed outcome for industries.

Keywords: Computable General Equilibrium (CGE) models; Energy Subsidies; Trade (search for similar items in EconPapers)
JEL-codes: C68 D58 E63 O53 (search for similar items in EconPapers)
Date: 2019-05
New Economics Papers: this item is included in nep-ara, nep-cmp, nep-ene and nep-mac
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Journal Article: The Economy-Wide Impact of Subsidy Reform: A CGE Analysis (2020) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:cop:wpaper:g-293

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