Rethinking Fiscal Policy in Oil-Exporting Countries

Abstract

We examine the existing fiscal policy paradigm in commodity-exporting countries. First, we argue that its centerpiece-the permanent income hypothesis (PIH)-is not consistent with either intergenerational equity or long-term sustainability in the presence of uncertainty. Policies to achieve these goals need to be more prudent and better anchored than the PIH. Second, we point out the presence of a volatility tradeoff between government spending and wealth and reassess long-held views on the appropriate fiscal anchors, the vice of procyclicality, and the (im)possibility of simultaneously smoothing consumption and ensuring intergenerational equity and sustainability. Finally, we propose what we call a prudent wealth stabilization policy that would be more consistent with long-term fiscal policy goals, yet relatively simple to implement and communicate.

The Future of Oil and Fiscal Sustainability in the GCC Region

“…It ultimately reflects preferences of the current generation and the various socioeconomic challenges it faces. Whatever the circumstances, some (however subjective) notion of the level of wealth (debt) that a country is aiming to leave to future generations would help anchor its long-term fiscal strategy (Mirzoev and Zhu 2019).…”

“…Mirzoev and Zhu (2019) discuss limitations of the PIH in the presence of uncertainty. 4 This traditional approach is followed for the lack of a better alternative while recognizing its two problematic features.…”