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

Published online by Cambridge University Press:  10 September 2020

Elizabeth L. Roos  and
Philip D. Adams
Elizabeth L. Roos*
Affiliation:
Centre of Policy Studies, Victoria University, Melbourne, Australia
Philip D. Adams
Affiliation:
Centre of Policy Studies, Victoria University, Melbourne, Australia
*
*Corresponding author email: louise.roos@vu.edu.au
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Abstract

Oil prices fell from around $US110 per barrel in 2014 to less than $US50per 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) modelsEnergy SubsidiesTrade

JEL classification

E63: Comparative or Joint Analysis of Fiscal and Monetary Policy • Stabilization • Treasury Policy C68: Computable General Equilibrium Models D58: Computable and Other Applied General Equilibrium Models O53: Asia including Middle East
Type
Research Article
Information
World Trade Review , Volume 19 , Special Issue S1: The Trade Impacts of Fossil Fuel Subsidies , July 2020 , pp. s18 - s38
Copyright
Copyright © The Author(s), 2020. Published by Cambridge University Press

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Footnotes

The work described in this paper was carried out at the Centre of Policy Studies. The views expressed are those of the authors.

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